942 F.3d 554
2d Cir.2019Background
- New York State and New York City sued UPS for transporting unstamped (untaxed) cigarettes from Native American reservation sellers to individual consumers, alleging violations of the Contraband Cigarette Trafficking Act (CCTA), the PACT Act, New York Public Health Law §1399-ll, and breach of a 2005 Assurance of Discontinuance (AOD) with the NY Attorney General.
- UPS had executed the AOD after an earlier NYAG investigation; the AOD required audits, training, a shipper database, account termination for violators, and included a $1,000 stipulated penalty for violations.
- The PACT Act (2010) exempts common carriers (named AODs) from the Act and preempts state delivery bans only if the carrier’s AOD “is honored throughout the United States to block illegal deliveries.”
- After a bench trial the district court found UPS violated the AOD, knowingly transported contraband/unstamped cigarettes for multiple reservation shippers, and awarded unpaid-tax damages plus large per-violation penalties under the AOD, PACT Act and PHL §1399-ll; total award ≈ $247 million.
- The Second Circuit affirmed liability, (1) held UPS forfeited the PACT Act exemption because it did not “honor” the AOD nationwide (measured by substantial compliance and corporate commitment), (2) reduced the AOD audit-penalty award (audit breaches are per-shipper not per-package), (3) upheld CCTA liability (permitted aggregation), (4) reversed the district court’s 50% diversion reduction and awarded full unpaid taxes, and (5) vacated duplicative PACT Act penalties and affirmed a single $78.8M penalty under PHL §1399-ll; final judgment modified accordingly.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether UPS is exempt from the PACT Act / whether PACT Act preempts PHL §1399-ll | AOD was not honored nationwide; UPS breached AOD so exemption inapplicable; state and city may enforce statutes | UPS: mere existence / nationwide recognition of AOD suffices for exemption; exemption should not turn on compliance | Court: exemption requires UPS to ‘‘honor’’ (i.e., comply with) the AOD nationwide; UPS failed to do so → exemption forfeited; PACT Act defense rejected; PHL liability upheld |
| Whether AOD’s $1,000 stipulated penalty covers audit-provision breaches and whether penalty is per-shipper or per-package | Plaintiffs: AOD’s “each and every violation” covers audit duty and permits per-package penalties (as district court applied) | UPS: penalty tied to shipments only; audit breach is shipper-level → single penalty per shipper | Court: penalty provision covers audit breaches, but audit duty is shipper-focused; penalty is one $1,000 per shipper violation (not per package); reduced AOD penalty from ~$80.5M to $20,000 |
| Whether CCTA requires single-transaction >10,000 cigarettes or permits aggregation over shipments | Plaintiffs: aggregation permissible to find a quantity >10,000 and establish contraband across a shipper’s course of shipments | UPS: CCTA requires a single shipment exceeding 10,000 cigarettes; cannot aggregate | Court: aggregation permitted; CCTA’s “a quantity” does not imply single-transaction requirement → UPS liable under CCTA |
| Proper measure of compensatory damages for unpaid taxes (diversion rate issue) | Plaintiffs: recover unpaid taxes on unlawful shipments in full (no diversion reduction) | UPS: many purchasers would have evaded taxes anyway; district court’s 50% diversion estimate (or UPS’s 94.6%) should govern | Court: statutory damages under CCTA/PACT Act measure unpaid taxes on the unlawful transactions; diversion (tort causation) not required; award full unpaid taxes ($17.356M State; $1.442M City) |
| Whether cumulative per-violation penalties under PACT Act, PHL §1399-ll and AOD may be stacked | Plaintiffs: seek penalties under all regimes | UPS: stacking produces duplicative/excessive punishments | Court: treated stacking with caution — vacated PACT Act penalty award as duplicative, affirmed a single $78.8M PHL penalty (and reduced AOD penalty) as reasonable overall remedy |
Key Cases Cited
- Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154 (2d Cir.) (discusses reservation sales and state stamping system)
- Milhelm Attea & Bros., Inc. v. New York, 512 U.S. 61 (U.S.) (taxing reservation sales to non-members)
- Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463 (U.S.) (state taxation limits on reservation sales to tribal members)
- Hemi Group, LLC v. City of New York, 559 U.S. 1 (U.S.) (limits on recovering unpaid taxes from parties not obligated to collect/remit them)
- Holder v. Humanitarian Law Project, 561 U.S. 1 (U.S.) (standard for evaluating ambiguous statutory application in context of national security—cited for principles on statutory interpretation)
- Zalaski v. City of Hartford, 723 F.3d 382 (2d Cir. 2013) (bench-trial standard of review: findings of fact for clear error, legal conclusions de novo)
- MBIA Inc. v. Federal Insurance Co., 652 F.3d 152 (2d Cir. 2011) (contract interpretation principles for settlement agreements)
- Sir Speedy, Inc. v. L & P Graphics, Inc., 957 F.2d 1033 (2d Cir. 1992) (damages need a reasonable basis; mathematical precision not required)
- United States v. Russell, 464 U.S. 16 (U.S.) (presumption from Congress’ inclusion/omission of terms across statutory provisions)
- United States v. Bajakajian, 524 U.S. 321 (U.S.) (Excessive Fines Clause and gross disproportionality standard)