The City of New York v. Fedex Ground Package System, Inc. et al
OPINION AND ORDER: For the foregoing reasons, FedEx's motion to dismiss Plaintiffs' NYPHL and N.Y. Exec. Law claims is DENIED and Plaintiffs' request for discovery is GRANTED. In light of the fact that the current deadline for document production in FedEx II has already passed(19)(The Civil Case Discovery Plan and Scheduling Order provides that the production of all documents was to be completed by March 16, 2016 in FedEx I and by October 17, 2016 in FedEx II. Sept. 23, 2016 Order (FedEx I, Doc. 235) 8.), the parties are directed to submit a proposed amended scheduling order by March 7, 2017. The Clerk of Court is respectfully directed to terminate the motion, Doc. 209. (Signed by Judge Edgardo Ramos on 2/21/2017) (jwh)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
THE CITY OF NEW YORK and THE PEOPLE OF
THE STATE OF NEW YORK,
OPINION AND ORDER
13 Civ. 9173 (ER)
- against FEDEX GROUND PACKAGE SYSTEM, INC.,
Before the Court are FedEx’s motion to dismiss Plaintiffs’ claims under New York
Public Health Law § 1399-ll and New York Executive Law § 63(12), and Plaintiffs’ request for
certain discovery they allege is relevant to those claims. For the reasons discussed below,
FedEx’s motion to dismiss is DENIED and Plaintiffs’ request for discovery is GRANTED.
I. BACKGROUND 1
A. FedEx I and FedEx II
This consolidated suit centers on allegations that FedEx Ground Package System, Inc.
(“FedEx”) knowingly delivered, on behalf of several cigarette sellers, thousands of cartons of
unstamped cigarettes throughout the country, including New York City and State. The City of
New York (“City”) instituted the first action, 13 Civ. 9173 (ER) (“FedEx I”), on December 30,
2013, seeking damages, civil penalties, treble damages, injunctive relief, the appointment of a
special master, and attorney’s fees for FedEx’s violations of the Contraband Cigarette
This Opinion discusses only those facts necessary to decide the instant motions. Familiarity with the underlying
facts and procedural history of this matter is otherwise presumed.
Trafficking Act, 18 U.S.C. § 2341 et seq. (“CCTA”), the Prevent All Cigarette Trafficking Act,
15 U.S.C. § 375 et seq. (“PACT Act”), the Racketeer Influenced and Corrupt Organizations Act,
18 U.S.C. § 1961 et seq. (“RICO”), and New York Public Health Law (“NYPHL”) § 1399-ll, as
well as for FedEx’s creation and maintenance of a public nuisance in violation of New York law.
Compl. (FedEx I, Doc. 1) at 32–34. Initially, the City’s action focused on FedEx’s shipments
from 2005 to 2012 on behalf of only one cigarette seller. Id. ¶ 3. On March 30, 2014, the City
amended its Complaint to add the State of New York (“State”) as a plaintiff (collectively,
“Plaintiffs”), allegations related to three other cigarette sellers, and a cause of action for FedEx’s
violation of the Assurance of Compliance (“AOC”) that FedEx entered into with the New York
State Attorney General in February 2006. Am. Compl. (FedEx I, Doc. 13) ¶¶ 3, 171–174. 2
In the course of discovery, Plaintiffs allegedly learned the identities of additional
cigarette sellers for whom they believe FedEx knowingly made illegal deliveries. Plaintiffs
attempted to obtain discovery related to these entities, but their efforts stalled in October 2014,
when Magistrate Judge Fox, to whom all general pretrial matters were then assigned, issued a
ruling limiting the scope of discovery to only the four cigarette sellers named in the Amended
Complaint. Rather than seek leave to amend their Complaint a second time, on November 12,
2014, Plaintiffs instituted a second action against FedEx, 14 Civ. 8985 (ER) (“FedEx II”),
seeking the same type of relief as was sought in FedEx I. Compl. (FedEx II, Doc. 1) at 31–34.
In FedEx II, however, Plaintiffs focused on FedEx’s shipments from 2005 to 2013 on behalf of
all cigarette sellers, known and unknown, other than the four previously identified in FedEx I.
Id. ¶¶ 3, 16.
The four cigarette sellers at issue in FedEx I are Shinnecock Smoke Shop (Southampton, NY), Native Made
Tobacco (Palm Springs, CA), FOW Enterprises, Inc. (Elizabethtown, KY), and Cigarettes Direct To You
(Louisville, KY). Am. Compl. (FedEx I, Doc. 13) ¶ 3.
On April 15, 2016, the Court consolidated FedEx I and FedEx II and directed that all
future filings in the case be filed under FedEx I. Although FedEx II is now closed, the parties
maintain separate pleadings in each of the two actions.
B. The Court Dismisses Plaintiffs’ NYPHL Claim in FedEx I
On May 13, 2014, FedEx moved to dismiss Plaintiffs’ CCTA, RICO, NYPHL, and public
nuisance claims in FedEx I. By way of an Opinion and Order dated March 9, 2015, the Court
denied FedEx’s motion with respect to Plaintiffs’ CCTA and RICO claims, but granted the
motion with respect to Plaintiffs’ NYPHL and public nuisance claims. City of New York v.
FedEx Ground Package Sys., Inc., 91 F. Supp. 3d 512, 531 (S.D.N.Y. 2015). In relevant part,
the Court concluded that Plaintiffs are not authorized to sue for violations of NYPHL § 1399-ll
taking place between 2005 and 2012—the time period alleged in FedEx I—because the
September 27, 2013 amendment to the statute, which granted the City and State the authority to
enforce it, is not retroactive. Id. at 527–29; see also Gold v. N.Y. Life Ins. Co., 730 F.3d 137, 143
(2d Cir. 2013) (“Generally, ‘retroactive operation of statutes is not favored by [New York]
courts’ and it ‘takes a clear expression of the legislative purpose to justify a retroactive
application.’”) (quoting Majewski v. Broadalbin-Perth Cent. Sch. Dist., 91 N.Y.2d 577, 584
Following the Court’s decision in FedEx I, Plaintiffs amended their Complaint in
FedEx II in four material respects. Am. Compl. (FedEx II, Doc. 23). First, Plaintiffs dropped
their PACT Act and public nuisance claims. Id. Second, Plaintiffs added a claim for civil
penalties under New York Executive Law (“N.Y. Exec. Law”) § 63(12), premised on FedEx’s
repeated and persistent violations of NYPHL § 1399-ll. Id. ¶¶ 126–129. 3 Third, Plaintiffs
extended the time period of their allegations to encompass FedEx’s conduct from 2005 to the
date of the filing, May 8, 2015. Id. ¶ 63. Finally, Plaintiffs specifically named twenty-one
cigarette sellers, apart from those named in FedEx I, for whom FedEx allegedly made unlawful
deliveries. Id. Plaintiffs later agreed to pursue their claims in FedEx II with respect to only six
of those entities. See FedEx’s Feb. 18, 2016 Ltr. (FedEx II, Doc. 65). 4
C. The Court Dismisses Plaintiffs’ NYPHL and N.Y. Exec. Law Claims in FedEx II
On July 16, 2015, FedEx moved to dismiss all of Plaintiffs’ claims in FedEx II. By way
of an Opinion and Order dated March 31, 2016, the Court denied FedEx’s motion with respect to
Plaintiffs’ CCTA, RICO, and AOC claims, but granted the motion with respect to Plaintiffs’
NYPHL and N.Y. Exec. Law claims. City of New York v. FedEx Ground Package Sys., Inc., 175
F. Supp. 3d 351, 372 (S.D.N.Y. 2016). Among other things, the Court concluded that Plaintiffs’
allegations, coupled with the evidentiary record developed in FedEx I, rendered it entirely
plausible that FedEx knowingly delivered unstamped cigarettes for the named cigarette sellers.
Id. at 359–60.
The Court also found that the PACT Act preempted Plaintiffs’ NYPHL and N.Y. Exec.
Law claims. Id. at 360–64. In short, Plaintiffs may not enforce NYPHL § 1399-ll against FedEx
without proof that FedEx is not exempt from the PACT Act’s provisions, see 15 U.S.C.
§ 376a(e)(5)(C)(ii), and the PACT Act specifically exempts FedEx, but only if the AOC “is
N.Y. Exec. Law § 63(12) allows the New York State Attorney General to seek injunctive relief, restitution, or
damages against any person that has engaged in repeated fraudulent or illegal acts, including repeated violations of a
state law such as NYPHL § 1399-ll.
The six cigarette sellers at issue in FedEx II are Your Kentucky Tobacco Resource LLC (Russell, KY), Discount
Tobacco Outlet (Myrtle Beach, SC), Kee Missouri DC (Neosho, MO), Lakeside Enterprises (Seneca Falls, NY),
Shinnecock Indian Outpost (Southampton, NY), and Two Pines Enterprises (Basom, NY). See FedEx’s Feb. 18,
2016 Ltr. (FedEx II, Doc. 65).
honored throughout the United States to block illegal deliveries of cigarettes or smokeless
tobacco to consumers,” id. § 376a(e)(3). In its decision, the Court concluded that the word
“honored” in the statute means “recognized” by the states, but that “[u]ltimately, recognition by
both the states and the carrier is necessary to serve the PACT Act’s purpose of exempting a
common carrier from suit if a settlement agreement is truly nationwide in its operation.” FedEx,
175 F. Supp. 3d at 362–63 & n.11. Because Plaintiffs had not made any allegations suggesting
that the AOC did not have nationwide effect, the Court dismissed Plaintiffs’ NYPHL claim. Id.
at 363. The Court also dismissed Plaintiffs’ N.Y. Exec. Law claim, finding that, because of the
preemption issue, Plaintiffs had not adequately pleaded that FedEx could be held liable for
repeated and persistent violations of NYPHL § 1399-ll. Id. at 364. 5
D. Plaintiffs Amend Their Complaint in FedEx II a Second Time and FedEx Again
Moves to Dismiss the NYPHL and N.Y. Exec. Law Claims
Following the Court’s decision, and with the Court’s leave, Plaintiffs amended their
Complaint in FedEx II for the second time. Second Am. Compl. (FedEx II, Doc. 74). Plaintiffs
supplemented their allegations in two ways. First, Plaintiffs now allege that, on information and
belief, the AOC is not recognized by the various states to block illegal deliveries of cigarettes or
smokeless tobacco to consumers. Id. ¶¶ 103–107. Second, Plaintiffs now allege that FedEx does
not honor its agreement throughout the United States to block illegal deliveries of cigarettes to
consumers. Id. ¶ 108. Plaintiffs thus assert that the PACT Act does not preempt their NYPHL
and N.Y. Exec. Law claims. See id.
The Court also concluded that the State cannot seek civil penalties under N.Y. Exec. Law § 63(12) unless the
underlying statute being enforced expressly provides for them. FedEx, 175 F. Supp. 3d at 363–64 (“As the text [of
N.Y. Exec. Law § 63(12)] makes clear, the State is generally limited to the three enumerated remedies when
bringing actions under that provision—injunctive relief, restitution, and damages—and civil penalties are not
On June 14, 2016, FedEx moved to dismiss Plaintiffs’ NYPHL and N.Y. Exec. Law
claims. FedEx first argues that, as in FedEx I, Plaintiffs lack the authority to bring these claims,
since the specific factual allegations in the Second Amended Complaint pre-date the September
27, 2013 amendment to NYPHL § 1399-ll. FedEx’s Mem. (FedEx I, Doc. 210) at 5–8. FedEx
alternatively argues that Plaintiffs’ claims are preempted, both by the PACT Act and the Federal
Aviation Administration Authorization Act, 49 U.S.C. § 14501 et seq. (“FAAAA”). Id. at 8–17.
Plaintiffs filed an opposition to the motion, and FedEx filed a reply. Pls.’ Opp’n Mem. (FedEx I,
Doc. 224); FedEx’s Reply Mem. (FedEx I, Doc. 229).
E. Discovery Dispute
While briefing FedEx’s motion, Plaintiffs submitted a letter to the Court alleging that
FedEx improperly refused to produce certain discovery, namely: (1) “improper shipping forms” 6
related to the shipment of cigarettes or tobacco, regardless of shipper; (2) nationwide shipping
records for the shippers at issue in FedEx II; and (3) documents concerning an investigation by
the California State Attorney General’s Office related to FedEx’s shipment of cigarettes within
that state. Pls.’ July 6, 2016 Ltr. (FedEx I, Doc. 219) at 1. Plaintiffs argue that the foregoing
discovery goes to FedEx’s knowledge, or willful blindness, concerning the contents of the
packages it shipped, which will be relevant to all of their claims, as well as their request for
injunctive relief, the appointment of an outside monitor, and civil penalties. Id. at 2. Plaintiffs
also argue that the nationwide shipping records and improper shipping forms will be relevant to
determining FedEx’s entitlement to the PACT Act exemption. Id. FedEx filed a response to
Improper shipping forms are used by FedEx employees to report any issues they may discover regarding a package
as it travels through its network, including possible violations by the shipper of FedEx’s policies regarding
hazardous material, alcohol, and tobacco shipping and labeling. FedEx’s July 21, 2016 Ltr. (FedEx I, Doc. 227) at
Plaintiffs’ letter, and Plaintiffs filed a reply. FedEx’s July 21, 2016 Ltr. (FedEx I, Doc. 227);
Pls.’ July 28, 2016 Ltr. (FedEx I, Doc. 228).
In light of the relationship between Plaintiffs’ discovery requests and the issues to be
decided by the Court in ruling on FedEx’s motion to dismiss, the Court withdrew its Order of
Reference to Magistrate Judge Fox for general pretrial purposes. July 7, 2016 Order (FedEx I,
Doc. 223). Both the motion to dismiss and the discovery dispute are now ripe for review. 7
II. LEGAL STANDARD
When ruling on a motion to dismiss pursuant to Rule 12(b)(6), the Court must accept all
factual allegations in the complaint as true and draw all reasonable inferences in the plaintiff’s
favor. Nielsen v. Rabin, 746 F.3d 58, 62 (2d Cir. 2014). The Court is not, however, required to
credit “mere conclusory statements” or “threadbare recitals of the elements of a cause of action.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555
(2007)); see also id. at 681 (citing Twombly, 550 U.S. at 551). “To survive a motion to dismiss,
a complaint must contain sufficient factual matter . . . to ‘state a claim to relief that is plausible
on its face.’” Id. at 678 (quoting Twombly, 550 U.S. at 570). A claim is facially plausible “when
the plaintiff pleads factual content that allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.” Id. (citing Twombly, 550 U.S. at 556). More
specifically, the plaintiff must allege sufficient facts to show “more than a sheer possibility that a
defendant has acted unlawfully.” Id. If the plaintiff has not “nudged [the] claims across the line
from conceivable to plausible, [the] complaint must be dismissed.” Twombly, 550 U.S. at 570;
Iqbal, 556 U.S. at 680.
Also pending before the Court, but not yet fully briefed, are FedEx’s motion to compel the production of certain
documents Plaintiffs have withheld or redacted on privilege grounds and Plaintiffs’ cross-motion for a protective
The question on a motion to dismiss “is not whether a plaintiff will ultimately prevail but
whether the claimant is entitled to offer evidence to support the claims.” Sikhs for Justice v.
Nath, 893 F. Supp. 2d 598, 615 (S.D.N.Y. 2012) (quoting Villager Pond, Inc. v. Town of Darien,
56 F.3d 375, 378 (2d Cir. 1995)). “[T]he purpose of Federal Rule of Civil Procedure 12(b)(6) ‘is
to test, in a streamlined fashion, the formal sufficiency of the plaintiff’s statement of a claim for
relief without resolving a contest regarding its substantive merits,’” and without regard for the
weight of the evidence that might be offered in support of plaintiff’s claims. Halebian v. Berv,
644 F.3d 122, 130 (2d Cir. 2011) (quoting Global Network Commc’ns, Inc. v. City of New York,
458 F.3d 150, 155 (2d Cir. 2006)).
A. FedEx’s Motion to Dismiss Plaintiffs’ NYPHL and N.Y. Exec. Law Claims
1. Plausibility and Retroactivity
FedEx first argues that the Court should dismiss Plaintiffs’ NYPHL and N.Y. Exec. Law
claims because the Second Amended Complaint contains no factual allegations regarding
deliveries taking place after September 27, 2013, when NYPHL § 1399-ll was amended to grant
the City and State the authority to enforce it. FedEx’s Mem. at 1–4, 6. In response, Plaintiffs
urge the Court to reconsider its prior ruling that the 2013 amendment is not retroactive, so as to
permit them to seek civil penalties against FedEx for pre-amendment violations of the statute.
Pls.’ Opp’n Mem. at 15–22. Alternatively, Plaintiffs argue that they have sufficiently pleaded
post-amendment violations, and thus their claims should survive at least as to that time period.
Id. at 22–24.
The Court has already held that “Plaintiffs’ allegations combined with the evidentiary
record developed in FedEx I render Plaintiffs’ claim that FedEx knowingly delivered unstamped
cigarettes for the shippers named in the [Amended] Complaint entirely plausible.” FedEx, 175
F. Supp. 3d at 360. The Amended Complaint and the Second Amended Complaint in FedEx II
are largely identical, and both contain allegations that FedEx engaged in unlawful conduct from
2005 to 2015. Compare Am. Compl. (FedEx II, Doc. 23), with Second Am. Compl. (FedEx II,
Doc. 74). 8 To be sure then, the Court has already ruled on the plausibility of Plaintiffs’ postamendment allegations, finding them to be sufficiently pleaded at this stage.
The Court has also already held that the 2013 amendment to NYPHL § 1399-ll is not
retroactive, FedEx, 91 F. Supp. 3d at 527–29, and that Plaintiffs cannot use N.Y. Exec. Law
§ 63(12) to collect civil penalties for pre-amendment violations of NYPHL § 1399-ll, FedEx, 175
F. Supp. 3d at 363–64. The Court will not reconsider these rulings, as the Court has already
considered and rejected Plaintiffs’ arguments on these issues. See Kolel Beth Yechiel Mechil of
Tartikov, Inc. v. YLL Irrevocable Tr., 729 F.3d 99, 104 (2d Cir. 2013) (“A motion for
reconsideration should be granted only when the [moving party] identifies ‘an intervening
change of controlling law, the availability of new evidence, or the need to correct a clear error or
prevent manifest injustice.’”) (quoting Virgin Atl. Airways, Ltd. v. Nat’l Mediation Bd., 956 F.2d
1245, 1255 (2d Cir. 1992)). 9
Accordingly, to the extent that Plaintiffs’ NYPHL and N.Y. Exec. Law claims survive,
Plaintiffs may only seek civil penalties for FedEx’s post-amendment violations of NYPHL
§ 1399-ll. 10
By contrast, in FedEx I, Plaintiffs’ allegations that FedEx engaged in unlawful conduct remain limited to the
period prior to the 2013 amendment to NYPHL § 1399-ll. Am. Compl. (FedEx I, Doc. 13) ¶ 3.
To the extent Plaintiffs argue that the Court’s prior rulings are inconsistent with Judge Forrest’s decision in New
York v. United Parcel Service, Inc., No. 15 Civ. 1136 (KBF), 2016 WL 4094707 (S.D.N.Y. June 10, 2016), see Pls.’
Opp’n Mem. at 21, that district court case is not controlling authority over this Court. See, e.g., Plumbing Supply,
LLC v. Exxonmobil Oil Corp., No. 14 Civ. 3674 (VB), 2016 WL 1611490, at *3 (S.D.N.Y. Apr. 21, 2016).
Because the Court affirms its prior rulings, it need not decide FedEx’s alternative argument that the State should
be judicially estopped from recovering civil penalties for pre-amendment violations of NYPHL § 1399-ll. FedEx’s
Mem. at 7–8.
2. PACT Act Preemption
FedEx next argues that Plaintiffs’ NYPHL and N.Y. Exec. Law claims should be
dismissed because, once again, Plaintiffs have not alleged any proof that FedEx is not exempt
under the PACT Act. FedEx’s Mem. at 11–17; see 15 U.S.C. § 376a(e)(5)(C)(ii) (“No State may
enforce against a common carrier a law prohibiting the delivery of cigarettes or other tobacco
products to individual consumers or personal residences without proof that the common carrier is
not exempt under paragraph (3) of this subsection.”); id. § 376a(e)(3) (providing that FedEx is
exempt if the AOC “is honored throughout the United States to block illegal deliveries of
cigarettes or smokeless tobacco to consumers”). 11
In response, Plaintiffs argue that their new allegations in Second Amended Complaint
show that neither the states nor FedEx honor and recognize the nationwide effect of the AOC, as
is required to claim exemption under the PACT Act. Pls.’ Opp’n Mem. at 11–14; see FedEx,
175 F. Supp. 3d at 362–63 & n.11; accord New York v. United Parcel Serv., Inc., 179 F. Supp.
3d 282, 295 (S.D.N.Y. 2016) (“UPS II”) (clarifying that the PACT Act exemption requires that
both the carrier and the states honor and recognize the agreement and its nationwide effect).
Plaintiffs first argue that the Second Amended Complaint adequately pleads that the
states do not honor the nationwide effect of the AOC. Pls.’ Opp’n Mem. at 14. In support,
The PACT Act provides that if the AOC “is terminated or otherwise becomes inactive,” FedEx would still be
exempt if it “is administering and enforcing policies and practices throughout the United States that are at least as
stringent as the agreement.” 15 U.S.C. § 376a(e)(3)(A)(ii). This exemption does not apply here, as the parties do
not allege that the AOC has been terminated or is inactive. Indeed, the fact that the agreement is still active serves
as the basis for both the State’s AOC claim and FedEx’s argument in favor of preemption.
The PACT Act also provides that FedEx would be exempt if it is subject to “any other active agreement [with] a
State that operates throughout the United States to ensure that no deliveries of cigarettes or smokeless tobacco shall
be made to consumers or illegally operating Internet or mail-order sellers and that any such deliveries to consumers
shall not be made to minors or without payment to the States and localities where the consumers are located of all
taxes on the tobacco products.” Id. § 376a(e)(3)(B)(ii)(II). This exemption also does not apply here, as the parties
do not allege the existence of any agreement between FedEx and a state other than the AOC.
Plaintiffs allege that the AOC (i) does not provide any other state with a right of enforcement,
and (ii) does not provide any other state with a right to obtain any penalty for an illegal cigarette
delivery into that state. Second Am. Compl. (FedEx II, Doc. 74) ¶¶ 103–107. 12 These aspects of
the AOC were in existence at the time Congress created the exemption, however, and this Court
has already concluded that “Congress created [the] exemption to keep [the AOC] in place.”
FedEx, 175 F. Supp. 3d at 362. Indeed, “[t]he evidence before Congress was that the three
settlement agreements enumerated in § 376a(e)(3)(B)(ii)(I) already had effect across the nation,”
and “[b]y requiring nationwide recognition, Congress merely sought to codify the status quo with
respect to carriers who had already agreed to curb illegal cigarette deliveries.” New York v.
United Parcel Serv., Inc., 131 F. Supp. 3d 132, 141 & n.8 (S.D.N.Y. 2015) (“UPS I”). 13 Thus,
Paragraph 33 of the AOC provides that it “shall not grant any rights or privileges to any person or entity who is
not a party” to the AOC. Paragraph 23 provides that no penalty shall be imposed for a violation of the AOC if the
violation “involves the delivery of Cigarettes to an Individual Consumer outside the State of New York.”
See also Prevent All Cigarette Trafficking Act of 2007, and the Smuggled Tobacco Prevention Act of 2008:
Hearing on H.R. 4081 & H.R. 3689 Before the Subcomm. on Crime, Terrorism, & Homeland Sec. of the H. Comm.
on the Judiciary, 110th Cong. 9 (2008) (testimony of Rep. Weiner) (“[UPS, DHL, and FedEx] have agreed in an
agreement with New York state that is now being followed throughout the country, they have agreed not to ship this
tobacco product. . . . So the only one who would actually be covered by this in a real practical sense is the United
States Postal Service. Everyone else would already be following their status quo operations.”); id. at 79 (testimony
of David S. Lapp, Chief Counsel, Tobacco Enforcement Unit, Office of the Attorney General of Maryland,
testifying on behalf of the National Association of Attorneys General) (“Along with other State attorneys general,
we have attained agreements with . . . the major delivery companies, including UPS, FedEx and DHL, all to stop
Internet sales of cigarettes.”); id. at 124 (statement of Eric Proshansky, Deputy Chief, Division of Affirmative
Litigation, New York City Law Department) (“The states, acting through the National Association of Attorneys
General, and with the assistance of the Bureau of Alcohol, Tobacco, Firearms & Explosives, negotiated an
unprecedented set of agreements with credit card processors and common carriers in which members of those
industries have pledged to end any participation in the Internet cigarette business.”); H. Comm. on the Judiciary,
Prevent All Cigarette Trafficking Act of 2008 or PACT Act, H.R. Rep. No. 110-836, at 24 (2008) (“[T]he
subsection provides a limited exception from these requirements for a common carrier with an active settlement
agreement with a State, honored nationwide, to block deliveries of cigarettes and smokeless tobacco or shipments
where applicable taxes have not been paid. The three major common carriers—United Parcel Service, FedEx, and
DHL—all have such agreements with the New York State Attorney General’s office. At the May 1, 2008, hearing
on the bill, the Crime, Terrorism, and Homeland Security Subcommittee received testimony that these agreements
were effective at stopping the illegal shipment of cigarettes. To consumers [sic].”); 155 Cong. Rec. S5853 (daily ed.
May 21, 2009) (statement of Sen. Kohl) (“In recognition of UPS and other common carriers’ agreements to not
deliver cigarettes to individual consumers on a nationwide basis, pursuant to agreements with the State of New
York, we have exempted them from the bill provided this agreement remains in effect.”); 156 Cong. Rec. H1534
(daily ed. Mar. 17, 2010) (statement of Rep. Weiner) (“[I]t is already by agreement that UPS, FedEx, DHL, the
major common carriers have said, You know what? We think it’s wrong to be facilitating this by making deliveries
for Internet tobacco companies, so we’re not going to do it. They’ve agreed to it. It’s in place in all 50 States.”).
the fact that a state “is not a party to [the AOC] and the [AOC] provides no remedies or
enforcement mechanism for the state to pursue is not a sufficient basis to find that the [AOC] is
not honored or recognized throughout the United States.” UPS II, 179 F. Supp. 3d at 304.
Plaintiffs next argue that the Second Amended Complaint adequately pleads that FedEx
does not honor the nationwide effect of the AOC. Pls.’ Opp’n Mem. at 14. In support, Plaintiffs
allege, in essence, that FedEx cannot be said to honor its agreement given its pervasive
violations. Second Am. Compl. (FedEx II, Doc. 74) ¶ 108; see also id. ¶ 32 (alleging that FedEx
knowingly shipped tens of thousands of cartons of cigarettes, including unstamped cigarettes, to
individual residences in New York and nationwide); id. ¶¶ 35–47 (detailing the basis for alleging
FedEx’s knowledge). This Court has already concluded that interpreting “honored” to simply
mean “complied with” would “undermine the purpose of providing an exemption for carriers
who have come to a nationwide settlement agreement.” FedEx, 175 F. Supp. 3d at 363.
Namely, “[i]f the City or State could bring suit against a carrier who is not complying with the
settlement agreement by bringing a PACT Act claim, there would be no point to a nationwide
agreement, with its own set of remedies, which was recognized by Congress to serve the same
purpose as the PACT Act.” Id. However, this Court agrees with the conclusion in UPS II that a
carrier may not retain the exemption provided by Congress by maintaining the requisite
nationwide policies “in name only,” UPS II, 179 F. Supp. 3d at 306, as that would also defeat
Congress’s intention to “ensure that the carrier was acting in conformity with the PACT Act’s
goals across the country,” FedEx, 175 F. Supp. 3d at 363. Thus, while one violation of the AOC
would be insufficient to establish that FedEx no longer honors the agreement nationwide,
evidence that FedEx has failed to implement and enforce a compliance program that effectively
prevents the prohibited delivery of cigarettes could result in the loss of its entitlement to the
FedEx argues that Plaintiffs’ allegations, if true, establish at most a violation of its
nationwide policy, but not its non-existence. FedEx’s Reply Mem. at 10. The Court disagrees.
Given the degree of non-compliance alleged in the Second Amended Complaint, the finder of
fact could conclude that FedEx no longer recognizes the nationwide effect of the AOC. 14 In that
event, FedEx would no longer be exempt under the PACT Act, and FedEx could be held liable
for violations of NYPHL § 1399-ll. Plaintiffs will thus be permitted to pursue their NYPHL and
N.Y. Exec. Law claims at this juncture.
3. FAAAA Preemption
Finally, FedEx argues that Plaintiffs’ NYPHL and N.Y. Exec. Law claims are preempted
by the FAAAA. FedEx’s Mem. at 8–11. The Court finds that the PACT Act expressly carves
out from the FAAAA’s reach state laws like the one Plaintiffs seek to enforce here.
In relevant part, the FAAAA provides that “a State . . . may not enact or enforce a law . . .
related to a price, route, or service of any motor carrier . . . with respect to the transportation of
property.” 49 U.S.C. § 14501(c)(1); see also id. § 41713(b)(4)(A) (similar provision for
combined motor-air carriers). In Rowe v. New Hampshire Motor Transport Association, 552
U.S. 364 (2008), the Supreme Court held that this provision of the FAAAA preempted a Maine
statute that required carriers like FedEx to provide services to verify a recipient’s age and
In UPS II, Judge Forrest concluded that the City and State could raise a genuine issue of fact as to UPS’s
entitlement to the PACT Act exemption by: (1) “present[ing] evidence of a sufficiently large number of instances of
shipments of contraband cigarettes that it suggests that UPS is, overall, turning a blind eye towards such unlawful
shipments;” or (2) “submitting evidence showing that UPS policymakers have in fact turned a blind eye to
shipments of contraband cigarettes.” UPS II, 179 F. Supp. 3d at 306. The Court agrees that either type of evidence
could establish proof that a carrier is not entitled to the PACT Act exemption, without foreclosing the possibility that
other types of evidence could also suffice.
identity, to check shipments for certain markings, and to compare shipments to a list of
proscribed shippers distributed by Maine’s Attorney General. The Court concluded that to allow
Maine to insist that carriers provide these services “could easily lead to a patchwork of state
service-determining laws, rules, and regulations,” which would be “inconsistent with Congress’
major legislative effort [through the FAAAA] to leave such decisions, where federally
unregulated, to the competitive marketplace.” Id. at 373. The Court acknowledged, however,
that states could persist in their efforts to prevent cigarettes from falling into the hands of minors
by “seek[ing] appropriate federal regulation,” citing, as an example, the then-current version of
the bill that became the PACT Act. Id. at 377. Indeed, Justice Ginsburg, in a concurring
opinion, noted that the Court’s decision had left a “large regulatory gap” for Congress to fill, and
that having been “alerted to the problem, Congress [had] the capacity to act with care and
dispatch to provide an effective solution.” Id. at 377–78 (Ginsburg, J., concurring).
In enacting the PACT Act, Congress filled the regulatory gap identified by Justice
Ginsburg by “impos[ing] strict restrictions on the ‘delivery sale’ of cigarettes and smokeless
tobacco.” Red Earth LLC v. United States, 657 F.3d 138, 141 (2d Cir. 2011). 15 In order to avoid
a patchwork of related state regulation, Congress expressly prohibited states from enforcing
certain types of laws restricting such deliveries. 15 U.S.C. § 376a(e)(5)(A). Specifically, states
(i) require that a carrier verify the age or identity of the consumer accepting the
(ii) require that a carrier obtain a signature from the consumer accepting the delivery;
(iii) require that a carrier verify that all applicable taxes have been paid;
“A ‘delivery sale’ occurs when the buyer and seller are not in each other’s physical presence at the time the buyer
requests or receives the cigarettes, as when cigarettes are ordered over the Internet and delivered by mail.” Red
Earth, 657 F.3d at 141 (citing 15 U.S.C. § 375(5)).
(iv) require that packages delivered by a carrier contain any particular labels, notice, or
(v) prohibit carriers from making deliveries on the basis of whether the shipper is or is
not identified on any list of shippers maintained and distributed by any entity other
than the federal government.
Id. However, Congress expressly carved out other types of state laws from both PACT Act
preemption and preemption by “any other Federal statute,” including the FAAAA. Id.
§ 376a(e)(5)(C)(i). Specifically, states are permitted to generally prohibit “the delivery sale, or
the shipment or delivery pursuant to a delivery sale, of cigarettes or other tobacco products to
individual consumers or personal residences.” Id. 16
FedEx concedes that the PACT Act does not preempt NYPHL § 1399-ll to the extent the
statute prohibits deliveries to “individual consumers or personal residences.” FedEx’s Mem. at
10–11. But FedEx argues that the carve-out does not extend to deliveries to “businesses.” Id.
FedEx’s argument is without merit. In the PACT Act, the term “consumer” means “any person
that purchases cigarettes or smokeless tobacco” who is not “lawfully operating as a
manufacturer, distributor, wholesaler, or retailer of cigarettes or smokeless tobacco.” 15 U.S.C.
§ 375(4). The Act further defines a “person” to include an “individual,” as well as a
“corporation, company, association, firm, [or] partnership.” Id. § 375(10). Congress thus
envisioned that its carve-out would apply to statutes restricting deliveries to all unlawfully
operating entities, including both businesses and natural persons.
The only remaining question is whether NYPHL § 1399-ll qualifies for the PACT Act’s
carve-out. NYPHL § 1399-ll prohibits carriers like FedEx from knowingly shipping cigarettes to
any person it reasonably believes is not:
Pursuant to § 376a(e)(5)(C)(ii), states are not permitted to enforce such laws against a common carrier “without
proof that the common carrier is not exempt under” § 376a(e)(3). As explained above, Plaintiffs will be permitted to
offer proof that FedEx is no longer exempt by virtue of the AOC. See supra Section III.A.2.
(a) a person licensed as a cigarette tax agent, wholesale dealer, or registered retail
(b) an expert warehouse proprietor or an operator of a customs bonded warehouse; or
(c) a person who is a federal or state officer, employee, or agent and who presents
himself or herself as such, when such person is acting in accordance with his or her
NYPHL § 1399-ll(2). The New York statute thus proscribes the exact type of conduct spelled
out in the PACT Act carve-out, i.e., deliveries to unauthorized persons. The FAAAA cannot,
therefore, be construed to preempt New York’s law. 17
B. The Parties’ Discovery Dispute
During the course of discovery in FedEx II, certain disputes have arisen concerning
FedEx’s obligation to produce documents related to cigarette sellers other than those identified in
the pleadings and deliveries outside the State of New York. Pls.’ July 6, 2016 Ltr. (FedEx I,
Doc. 219) at 1. Plaintiffs now ask the Court to compel FedEx to produce:
The Court’s reading comports with the Senate Judiciary Committee’s stated rationale for including the carve-out
in the first place—to preserve NYPHL § 1399-ll and other like statutes:
One criticism of earlier versions of the PACT Act focused on creating federal regulations of the
delivery of tobacco products, when a large number of states have already passed laws in this area.
Common carriers and other delivery services believed that it would be burdensome to comply with
the various federal and state requirements in this area.
To lessen these concerns, subsection (e)(4) [which, following subsequent amendments, became
subsection (e)(5)] was added . . . . This subsection preempts a limited number of state laws in this
area, namely those types of laws that are being replaced by the strong federal regulatory scheme in
the PACT Act. . . .
New York has adopted regulations, however, that do not in any way conflict with the PACT Act’s
provisions. New York has enacted a law that completely prohibits the delivery sale of tobacco
products to individual consumers. Because New York’s law entirely prohibits the delivery sale,
shipment and delivery of cigarettes to consumers, rather than regulating how such delivery sale,
shipment or delivery should be effected, there is no need to preempt New York’s law, or other
similar statutes. As a result, subsection (e)(4)(C) [which became subsection (e)(5)(C)] was
included to clarify that state laws prohibiting the delivery sale, and those prohibiting the shipment
or delivery pursuant to a delivery sale, of cigarettes and smokeless tobacco to individual consumers
are not preempted by the PACT Act. This is intended to preserve New York’s existing law and
ensure that other states are able to adopt similar laws in the future.
S. Comm. on the Judiciary, Prevent All Cigarette Trafficking Act of 2007, S. Rep. No. 110-153, at 12–13 (2007).
(1) all improper shipping forms related to the shipment of cigarettes or tobacco,
regardless of shipper;
(2) nationwide shipping records for the cigarette sellers at issue in FedEx II; and
(3) documents concerning an investigation by the California State Attorney General’s
Office related to FedEx’s shipment of cigarettes within that state.
In response to request (1), FedEx has agreed to produce all improper shipping forms
related to the shipment of cigarettes or tobacco, but only for the cigarette sellers at issue in this
case. FedEx’s July 21, 2016 Ltr. (FedEx I, Doc. 227) at 2. FedEx does not assert that producing
the remaining documents would be burdensome. Instead, FedEx argues that the request is overly
broad, since information for other shippers is not relevant to any claim in the case, and FedEx
has not yet pleaded its affirmative defenses in FedEx II. Id. at 2–3. The Court disagrees, and
finds that all improper shipping forms related to the shipment of cigarettes or tobacco, regardless
of shipper, is relevant to aspects of the case that have nothing to do with PACT Act preemption,
including Plaintiffs’ request for injunctive relief, civil penalties, and the appointment of a special
master. See Pls.’ July 28, 2016 Ltr. (FedEx I, Doc. 228) at 2. Moreover, to the extent that FedEx
asserts an entitlement to PACT Act preemption in its Answer to the Second Amended
Complaint, nationwide improper shipping forms will also be relevant to the issue of whether
FedEx honored the nationwide effect of the AOC. Accordingly, request (1) is granted. 18
In response to request (2), FedEx argues that it has already agreed to produce
considerable information about the nationwide shipments of the cigarette sellers at issue in
FedEx argues that focusing on the cigarette sellers at issue in this case would be consistent with this Court’s
approach in resolving the dispute over the scope of FedEx’s depositions of Plaintiffs. FedEx’s July 21, 2016 Ltr.
(FedEx I, Doc. 227) at 3–4. The Court’s decision to limit the scope of Plaintiffs’ discovery obligations was rooted
in identifiable burdens imposed on the City and State, as well as a regard for government officials’ broad executive
discretion. See, e.g., City of New York v. FedEx Ground Package Sys., Inc., No. 13 Civ. 9173 (ER), 2016 WL
1718261, at *8 (S.D.N.Y. Apr. 27, 2016). FedEx has not even asserted any burden here, nor does it necessarily
enjoy the same treatment as government officials.
FedEx II. FedEx’s July 21, 2016 Ltr. (FedEx I, Doc. 227) at 4–5. FedEx asserts that the only
information it is withholding—package-specific details for out-of-state deliveries—is irrelevant,
because it would only assist Plaintiffs in calculating damages, which they are not seeking for the
out-of-state shipments. Id. at 5. Again, the Court disagrees. FedEx’s degree of involvement in
the conduct of each cigarette seller’s business is particularly relevant to Plaintiffs’ RICO claims
and is also relevant to assist the finder of fact in determining what FedEx knew and whether the
shipments at issue contained cigarettes. See Pls.’ July 28, 2016 Ltr. (FedEx I, Doc. 228) at 4. As
FedEx is not asserting that the request is too burdensome, request (2) is granted.
In response to request (3), FedEx argues only that information for shippers other than the
cigarette sellers at issue in this case is irrelevant. FedEx’s July 21, 2016 Ltr. (FedEx I, Doc. 227)
at 6. Having just concluded that such information is relevant, and in the absence of any
argument by FedEx that producing the documents would impose a burden, the Court grants
For the foregoing reasons, FedEx’s motion to dismiss Plaintiffs’ NYPHL and N.Y. Exec.
Law claims is DENIED and Plaintiffs’ request for discovery is GRANTED. In light of the fact
that the current deadline for document production in FedEx II has already passed, 19 the parties
The Civil Case Discovery Plan and Scheduling Order provides that the production of all documents was to be
completed by March 16, 2016 in FedEx I and by October 17, 2016 in FedEx II. Sept. 23, 2016 Order (FedEx I, Doc.
235) ¶ 8.
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