The City of New York v. Golden Feather Smoke Shop, Inc. et al
Filing
474
MEMORANDUM AND ORDER: Considering all these factors together, the Court concludes that a substantial penalty award against Phillips is warranted but that the maximum penalty amount requested by the City should be moderated somewhat to take into acco unt the existence of the forbearance policy, the reduced need for a deterrent effect, the City's settlement with Paschall and Smoking Arrow and Phillips's slightly diminished role at Smoking Arrow during the time period on which the penalty award is based. Accordingly, the Court awards the City $475,000 in civil penalties against defaulting defendant Tony D. Phillips. The Clerk of Court is directed to enter judgment accordingly. Ordered by Chief Judge Carol Bagley Amon on 9/30/13. (fwd for judgment) (Fernandez, Erica) (Main Document 474 replaced on 10/1/2013) (Fernandez, Erica).
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
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THE CITY OF NEW YORK,
Plaintiff,
-againstGOLDEN FEATHER SMOKE SHOP, INC., KIMO
SMOKE SHOP, INC., SMOKE AND ROLLS INC.,
SHAWN MORRISON, KIANA MORRISON, in her
individual capacity, MONIQUE'S SMOKE SHOP,
ERNESTINE WATKINS, in her individual capacity,
JESSEY WATKINS, WAYNE HARRIS, PEACE PIPE
SMOKE SHOP, RODNEY MORRISON, Sr.,
CHARLOTTE MORRISON, in her individual capacity,
RED DOT & FEATHERS SMOKE SHOP, INC.,
RAYMOND HART, in his individual capacity,
SMOKING ARROW SMOKE SHOP, DENISE
PASCHALL, in her individual capacity, TONY D.
PHILLIPS, TDM DISCOUNT CIGARETTES, and
THOMASINA MACK, in her individual capacity,
NOT FOR PUBLICATION
MEMORANDUM & ORDER
08-CV-03966 (CBA) (JMA)
Defendants.
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AMON, Chief United States District Judge.
The City of New York ("the City") initiated this action against the above-captioned
defendants, individuals and businesses engaged in the sale of cigarettes from the Poospatuck
Indian Reservation in Mastic, New York (the "Poospatuck Reservation"), where members of the
Unkechauge Indian Nation reside. The City contended principally that the defendants violated
the Contraband Cigarette Trafficking Act ("CCTA"), 18 U.S.C. § 2341 et seq., and the Cigarette
Marketing Standards Act ("CMSA"), N.Y. Tal{ Law§ 483 et seq., by engaging in bulk re-sales
of cigarettes on which State and City tal{es had not been paid ("unstamped cigarettes") to the
public, either directly or through trafficker intermediaries. On December 30,2011, the Court
granted the City's motion for a default judgment as to the direct CCTA and CMSA liability of
I
defendant Tony D. Phillips, an employee and the main operator of the Smoking Arrow Smoke
Shop ("Smoking Arrow") located on the Poospatuck Reservation. (DE #382.) In a subsequent
Memorandum and Order, the Court further determined that, "[g]iven the culpability of ...
Phillips under the CCTA, ... civil penalties [are] an appropriate form of relief against [him]."
(DE #468.) Currently before the Court is the City's request for an award of civil penalties
against Phillips in the amount of$591,330.48. (DE #461, #465.)
BACKGROUND
The Court assumes the parties' familiarity with the history of this litigation and
incorporates by reference the legal background and statement of facts set forth in this Court's
Memorandum and Order issued originally on March 29,2013 and corrected on June 20,2013.
(DE #457; DE #468.)
DISCUSSION
The CCTA authorizes municipalities bringing a civil action to "obtain any other
appropriate relief for violations of this chapter from any person ... , including civil penalties."
18 U.S.C. § 2346(b)(2). The CCTA, however, '"does not specify a penalty amount for violations
of its core prohibition on transacting in contraband cigarettes,"' and there is no legislative history
"that sheds light on this omission." See City ofNew York v. Golden Feather Smoke Shop, Inc.
("Golden Feather II"), No. 08-CV-03966, 2013 WL 3187049, at *38 (E.D.N.Y. June 20, 2013)
(quoting City of New York v. Milhelm Attea & Bros., Inc., No. 06-CV3620, 2012 WL 3579568,
at *27 (E.D.N.Y. Aug. 17, 2012)). Thus, for reasons discussed more thoroughly in the Court's
earlier decisions in this case and in the parallel proceedings against cigarette wholesalers, to
inform its award of a discretionary civil penalty here, the Court will use as guidance the penalty
provisions ofthe Prevent All Cigarette Trafficking ("PACT") Act of2010, 15 U.S.C. § 375 et.
2
seq., a statute with similar enforcement provisions and motivated by similar concerns. See
Golden Feather II, 2013 WL 3187049, at *38; Milhelm Attea, 2012 WL 3579568, at *31-*32.
Specifically, as stated previously, the Court will use PACT Act calculations as a starting point
and will "inform its determination of a civility penalty up to these amounts" by considering
'"traditional factors, including the good or bad faith of the defendant[], the injury to the public,
and the defendant['s] ability to pay," taking into account the defendant's profits from engaging
in the sales ofunstamped cigarettes. See Golden Feather II, 2013 WL 3187049, at *38; Milhelm
Atte~
2012 WL 3579568, at *33. With this framework in mind, the Court turns to the specific
circumstances that inform the penalty award against Phillips.
I. The PACT Act Starting Point
The PACT Act's penalty provision sets forth two alternative measures for determining a
penalty amount: (I) a per violation measure comprised of"$ 5,000 in the case of the first
violation, or$ 10,000 for any other violation"; and (2) "for any violation, 2 percent of the gross
sales of cigarettes ... of the delivery seller during the !-year period ending on the date of the
violation." 15 U.S.C. § 377(b)(l)(A). The evidence in this case indicates that Phillips engaged
in an enormous number of individual CCTA violations. As a result, the imposition of the PACT
Act's per violation penalty measure here would set as the starting point for this penalties
discussion an unduly high amount. Thus, the Court agrees with the City that it would be more
appropriate under the circumstances of this case to use the alternative measure. Accordingly, the
Court will impose a penalty against Phillips of up to 2% of Smoking Arrow's gross sales of
unstamped cigarettes for the year preceding a chosen violation date. 1
In choosing the violation date, the Court recognizes the suitability of a date that is after
1
Although the relevant PACT Act penalty provision provides that the penalty award is "the greater of' the two
alternative measures, 15 U.S.C. § 377(b)(l)(A), the Court sees no reason to follow that instruction here where the
City has not sought the higher penalty award.
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March 16, 2009 and accepts the City's proposed violation date of April I, 2009. On March 16,
2009, the Court issued its Order denying the defendants' motion to dismiss this action on the
grounds of sovereign immunity and allowing the City's CCTA claims to proceed, concluding
both that "state law 'requires' cigarettes sold by defendants to members of the broader public to
bear tax stamps" and that the CCTA exemption for "Indian[s] in Indian County," 18 U.S.C.
§ 2346(b)(J), was not a bar to the City's claims. City ofNew York v. Golden Feather Smoke
Shop. Inc., No. 08-CV-3966, 2009 WL 705815, at *7, *11-*12 (E.D.N.Y. Mar. 16, 2009).
Although it was not a final judgment or an injunction, the March 16, 2009 Order put the
defendants, including Phillips, on notice that they were not protected by sovereign immunity and
that any sales ofunstamped cigarettes to the public violated both state and federal law. Using a
date post-dating this Order therefore bars any suggestion by Phillips that he was simply unaware
of the possible illegality of his conduct and that his good faith belief in the legality of his
cigarette sales completely shields him from an award of civil penalties against him.
The Court thus uses as its penalty starting point, 2% of the gross sales of Smoking Arrow
for the year preceding April I, 2009. Because Smoking Arrow did not provide any sales records
in this case, its gross sales are conservatively estimated using a variety of other documents.
First, the number of cartons of unstamped cigarettes Smoking Arrow purchased at
wholesale during this period serves as a proxy for the number of cartons of unstamped cigarettes
sold during this period. These wholesale purchases are recorded in the required monthly
wholesaler reports-"Resident Agent Cigarette Tax Reports," (Form
CG-6s"~f Gutlove
&
Shirvint, Inc. and Mauro Pennisi, Inc., which lists the number of cigarettes sold by these
wholesalers to individual stores on Indian reservations. According to these reports, Smoking
Arrow purchased 1,137,174 cartons ofunstamped cigarettes from April I, 2008 through March
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31,2009. (DE #425, Proshansky Decl., Ex. 6.)
Second, the price at which Smoking Arrow sold cigarettes to undercover New York
Department of Taxation and Finance ("DTF") investigators serves as the average price at which
these cartons of cigarettes were sold. DTF investigators made three purchases at Smoking
Arrow between April I, 2008 and March 31, 2009---on June 3, 2008, August 7, 2008 and
September 5, 2008-at $26.00 per carton, $28.00 per carton and $27.25 per carton respectively.
See City ofNew York v. Golden Feather Smoke Shop. Inc. ("Golden Feather I"), No. 08-CV3966, 2009 WL 2612345, at *18 (E. D. N.Y. Aug. 25, 2009). Using the most conservative of
these prices, i.e., $26.00, 2 gross sales for Smoking Arrow in the year preceding April 1, 2009
equals $29,566,524.00 ($1, 137,174 x $26.00). The starting point for this civil penalty discussion
is thus in turn 2% ofthis gross sales amount or $591,330.48.
II. Analysis of Other Relevant Factors
As an initial matter, the Court notes that the City had originally sought its requested
$591,330.48 penalty amount jointly and severally against defendants Phillips, Smoking Arrow
and Denise Paschall, the owner of Smoking Arrow. See Golden Feather II, 2013 WL 3187049,
at *39. The City stated that it was seeking civil penalties against these defendants because they
"ha[d]largely frustrated the City's ability to calculate damages." (DE #424-1, at 41.) In doing
so, the City suggested that its main motivation in pursuing civil penalties is to recoup actual
damages that it could not otherwise prove. The City subsequently settled with Paschall and
Smoking Arrow for $10,000 and dismissed its claims against them pursuant to a consent order
dated July 11,2012. (DE #418; DE #460.) The City now seeks to impose on Phillips alone the
full $591,330.48 in civil penalties. According to the City, Phillips's managerial involvement in
2
The City points out that using an average price of$26.00 is generous in light of evidence in the record indicating
that Smoking Arrow sold cartons at much higher prices-from $28.00 to $40.00---
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