New York Attorney General Eric Schneiderman today announced his office has filed a $70 million lawsuit against Federal Express (FedEx) Corp. (NYSE: FDX) for “unlawfully” shipping nearly 80 million cigarettes to consumers in New York.
The lawsuit joins and expands upon a complaint that New York City filed in December and adds extensive claims of FedEx’s unlawful shipments around the state, Schneiderman’s office said in a news release.
The joint complaint alleges that FedEx made nearly 33,000 illegal shipments of cigarettes to consumers in New York between 2006 and 2012, amounting to over 400,000 cartons of untaxed cigarettes and a direct tax loss of more than $10 million, according to Schneiderman’s office.
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Each illegal shipment carries a maximum penalty of $5,000.
The shipments were in “clear violation” of an agreement FedEx entered into with the New York State Attorney General’s Office in 2006, in which it agreed to stop all unlawful cigarette deliveries to consumers both in New York and throughout the country, Schneiderman’s office said.
The lawsuit further alleges that the company engaged in a pattern of racketeering activity with various cigarette retailers to traffic cigarettes in violation of the federal anti-racketeering statute.
FedEx’s “blatant disregard” for its long-standing agreement with New York, as well as federal and state law, enabled shipment of tens of millions of “cheap, untaxed” cigarettes to New Yorkers, Schneiderman said in the news release.
“Not only has FedEx cheated the state out of millions in tax dollars, but many of these cigarettes may have ended up in the hands of teenagers, who are particularly vulnerable to low-priced cigarettes. Illness and death caused by cigarette smoking is the number one preventable public-health epidemic of our day. If we can make cheap cigarettes less widely available, we can discourage young people from smoking and limit this public- health disaster,” Schneiderman said.
The federal Contraband Cigarette Trafficking Act (CCTA) and Prevent All Cigarette Trafficking (PACT) Act, along with New York state tax and public-health laws prohibit these FedEx shipments, according to Schneiderman’s office.
Documents subpoenaed from FedEx and that the federal Bureau of Alcohol, Tobacco, Firearms and Explosives submitted provided the basis for the attorney general’s investigation, the office said.
The documents indicate that FedEx made thousands of shipments of cigarettes to New York consumers from cigarette vendors in Kentucky, California and Long Island’s Shinnecock Reservation since 2006.
All the shipments violated New York Public Health Law 1399-ll, which prohibits direct shipments of cigarettes to consumers in the state, the office said.
In addition, the cigarettes did not bear New York state or New York City tax stamps, so the shipments violated the federal CCTA. It specifically prohibits shipments of 10,000 or more untaxed cigarettes in a jurisdiction where such taxes are required by state or local law, Schneiderman’s office said.
With multiple violations of the CCTA, FedEx engaged in a “pattern” of racketeering activity with the various cigarette retailers. Thus, in addition to the tax loss, New York is entitled to treble (three times the amount of) damages under the federal Racketeer Influence and Corrupt Organizations (RICO) Act, amounting to nearly $35 million in penalties.
Under the federal PACT Act, shippers are required to place specified labels identifying the contents as cigarettes and to report all sales. FedEx didn’t satisfy either requirement, so New York is entitled to “significant” penalties for these violations, the attorney general said.
In addition, the assurance-of-compliance agreement reached with FedEx in 2006 provides that the company must pay a stipulated penalty of $1,000 per violation, amounting to about $34 million, according to Schneiderman’s office.
Contact Reinhardt at ereinhardt@cnybj.com
