New York v. United Parcel Service, Inc.

17-1993-cv (L)
New York v. United Parcel Service, Inc.
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2018
Argued: March 8, 2019 Decided: November 7, 2019
Docket Nos. 17-1993-cv; 17-2107-cv; 17-2111-cv
THE STATE OF NEW YORK, THE CITY OF NEW YORK,
Plaintiffs-Appellees - Cross-Appellants,
— v. —
UNITED PARCEL SERVICE, INC.,
Defendant-Appellant - Cross-Appellee.
B e f o r e:
JACOBS and LYNCH, Circuit Judges, and VILARDO, District Judge.*
*
Judge Lawrence J. Vilardo, of the United States District Court for the Western
District of New York, sitting by designation.
In this civil action, filed in the United States District Court for the Southern
District of New York (Forrest, J.), the State and City of New York charged UPS
with violating the Contraband Cigarette Trafficking Act, 18 U.S.C. 2341 et seq., the
Prevent All Cigarette Trafficking Act, 15 U.S.C. 375 et seq., and New York Public
Health Law 1399-ll, as well as breaching its settlement agreement (the
“Assurance of Discontinuance”) with the New York State Attorney General.
After a bench trial, the district court found that UPS had violated its obligations
under the Assurance of Discontinuance in a number of respects and also
knowingly transported contraband cigarettes from its shipper-customers on
Native American reservations to consumers throughout the State and City in
violation of several statutes. The district court ordered UPS to pay $9.4 million in
unpaid cigarette taxes and $237.6 million in total penalties to the plaintiffs. UPS
appeals from that judgment, arguing that the district court erred in both its
liability and damages rulings. The State and City cross-appeal from aspects of the
damages rulings. We AFFIRM the district court’s liability rulings, MODIFY the
damage and penalty awards, and AFFIRM the judgment as modified.
Judge Jacobs concurs in part and dissents in part in a separate opinion.
STEVEN WU, Deputy Solicitor General, State of New York, (Eric
T. Schneiderman, Attorney General, State of New York,
Barbara D. Underwood, Solicitor General, State of New
York, Eric Del Pozo, Assistant Solicitor General of
Counsel, State of New York, on the brief) for Plaintiff-
Appellee - Cross-Appellant State of New York.
RICHARD DEARING, Chief, Appeals Division, Corporation
Counsel, City of New York, (Zachary W. Carter,
Corporation Counsel, City of New York, Claude S.
Platton, Deputy Chief, Appeals Division, Corporation
Counsel City of New York, Jeremy W. Schneider, Senior
Counsel, Appeals Division of Counsel, Corporation
Counsel, City of New York, on the brief) for Plaintiff-
Appellee - Cross-Appellant City of New York.
2
MARK A. PERRY, Gibson, Dunn & Crutcher LLP, Washington,
D.C., (Christopher J. Baum, Aidan Taft Grano, Gibson,
Dunn & Crutcher LLP, Washington, D.C., Caitlin J.
Halligan, Gibson, Dunn & Crutcher LLP, New York,
NY, Deanne E. Maynard, Morrison & Foerster, LLP,
Washington, D.C., Paul T. Friedman, Morrison &
Foerster, LLP, San Francisco, CA, on the brief) for
Defendant-Appellant - Cross-Appellee.
Barry S. Schaevitz, Beth G. Oliva, Oksana G. Wright, Fox
Rothschild LLP, New York, NY, for Amicus Curiae Cigar
Association of America, Inc.
Richard Pianka, ATA Litigation Center, Arlington, VA, for
Amicus Curiae American Trucking Associations, Inc.
Kimo S. Peluso, Heather Yu Han, Sher Tremonte LLP, New
York, NY, for Amici Curiae Campaign for Tobacco-Free
Kids, American Cancer Society Cancer Action Network,
American Lung Association, New York State American
Academy of Pediatrics, Chapters 2 & 3, Public Health
Law Center at the Mitchell Hamline School of Law, and
Truth Initiative Foundation.
Nora Flum, Deputy Attorney General, California, Xavier
Becerra, Attorney General, California, Karen Leaf,
Senior Assistant Attorney General, California, Samuel P.
Siegel, Associate Deputy Solicitor General, California,
George Jepsen, Attorney General of Connecticut, Russell
A. Suzuki, Acting Attorney General of Hawai’i, Lisa
Madigan, Attorney General of Illinois, Curtis T. Hill, Jr.,
Attorney General of Indiana, Thomas J. Miller, Attorney
General of Iowa, Brian E. Frosh, Attorney General of
Maryland, Maura Healey, Attorney General of
Massachusetts, Bill Schuette, Attorney General of
Michigan, Gurbir S. Grewal, Attorney General of New
Jersey, Ellen F. Rosenblum, Attorney General of Oregon,
3
Josh Shapiro, Attorney General of Pennsylvania, Alan
Wilson, Attorney General of South Carolina, Sean D.
Reyes, Attorney General of Utah, Thomas J. Donovan,
Jr., Attorney General of Vermont, Mark R. Herring,
Attorney General of Virginia, Robert W. Ferguson,
Attorney General of Washington, Peter K. Michael,
Attorney General of Wyoming, Karl A. Racine, Attorney
General of the District of Columbia, Wanda Vázquez
Garced, Attorney General of Puerto Rico, for Amici
Curiae California, Connecticut, Hawai’i, Illinois, Indiana,
Iowa, Maryland, Massachusetts, Michigan, New Jersey,
Oregon, Pennsylvania, South Carolina, Utah, Vermont,
Virginia, Washington, Wyoming, the District of
Columbia, and Puerto Rico.
Leslie Rutledge, Arkansas Attorney General, Nicholas Bronni,
Deputy Solicitor General, Arkansas, Jeff Landry,
Attorney General of Louisiana, Elizabeth B. Murrill,
Solicitor General, Arkansas, Patricia H. Wilton, Deputy
Solicitor General, Arkansas, for Amici Curiae Louisiana,
Arkansas, and Kentucky.
Jeffrey S. Bucholtz, King & Spalding LLP, Washington, D.C.,
Merritt E. McAlister, Val Leppert, King & Spalding LLP,
Atlanta, GA, Warren Postman, U.S. Chamber Litigation
Center, Inc., Washington, D.C., for Amicus Curiae
Chamber of Commerce of the United States of America.
Cory L. Andrews, Richard A. Samp, Washington Legal
Foundation, Washington, D.C., for Amicus Curiae
Washington Legal Foundation.
4
GERARD E. LYNCH, Circuit Judge:
In this civil action, filed in the United States District Court for the Southern
District of New York (Katherine B. Forrest, Judge), the State and City of New York
(collectively “plaintiffs”) charged UPS with violating the Contraband Cigarette
Trafficking Act (“CCTA”), 18 U.S.C. 2341 et seq., the Prevent All Cigarette
Trafficking Act (“PACT Act”), 15 U.S.C. 375 et seq., and New York Public Health
Law (“PHL”) 1399-ll, as well as with breaching its settlement agreement (the
“Assurance of Discontinuance” or “AOD”) with the New York State Attorney
General (“NYAG”). After a bench trial, the district court found that UPS had
violated its obligations under the Assurance of Discontinuance in a number of
respects, and knowingly transported contraband cigarettes from its shipper-
customers on Native American reservations to consumers throughout the State
and City in violation of several statutes. The district court ordered UPS to pay
$9.4 million in unpaid taxes and $237.6 million in total penalties to the plaintiffs.
UPS appeals from that judgment, arguing that the district court erred in both its
liability and damages rulings; the plaintiffs cross-appeal from aspects of the
damages rulings. For the reasons explained below we AFFIRM the district court’s
5
liability rulings, MODIFY the damage and penalty awards, and AFFIRM the
judgment as modified.
TABLE OF CONTENTS
BACKGROUND. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
I. Factual Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. The State’s and City’s Cigarette Taxation Regime. . . . . . . . . . . . . . . . 7
B. Tax Evasion in the State and City. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
C. The NYAG’s First Investigation of UPS. . . . . . . . . . . . . . . . . . . . . . . . 13
D. The NYAG’s Second Investigation of UPS.. . . . . . . . . . . . . . . . . . . . . 16
II. The Federal Regulatory Regime. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
A. The Contraband Cigarette Trafficking Act. . . . . . . . . . . . . . . . . . . . . 17
B. The Prevent All Cigarette Trafficking Act. . . . . . . . . . . . . . . . . . . . . . 18
III. Procedural History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
A. The Complaint Against UPS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
B. Pre-Trial Motion Practice. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
C. UPS’s Rule 26 Motion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
D. The District Court’s Liability Opinion. . . . . . . . . . . . . . . . . . . . . . . . . 37
E. The District Court’s Damages and Penalties Opinion. . . . . . . . . . . . 47
DISCUSSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
I. Standard of Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
II. The Liability Theories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
A. UPS Did Not Honor the AOD and is Therefore Subject to Liability
Under the PACT Act and PHL § 1399-ll.. . . . . . . . . . . . . . . . . . . . . . . 52
B. UPS is Liable for Violations of the AOD’s Audit Requirement.. . . . 71
6
C. UPS Violated the CCTA by Knowingly Transporting More Than
10,000 Unstamped Cigarettes.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
III. The Damages and Penalties Awards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
A. The District Court Did Not Abuse Its Discretion in Allowing the
Plaintiffs to Present Their Damages Case Nor Did It Clearly Err in
Making Factual Findings Based on Record Evidence.. . . . . . . . . . . . 83
1. The District Court Reasonably Refused to Strike the Plaintiffs’
Entire Damages and Penalties Case.. . . . . . . . . . . . . . . . . . . . . . . . 84
2. The District Court’s Factual Findings on Damages and Penalties
Were Supported by the Evidence.. . . . . . . . . . . . . . . . . . . . . . . . . . 88
(i) Package Quantity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
(ii) Package Contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
3. The District Court Did Not Err By Ordering the Parties to Submit
Post-Trial Calculations of Damages and Penalties.. . . . . . . . . . . 95
B. The District Court Erred in Awarding the Plaintiffs Only Half of the
Unpaid Taxes on Cigarettes UPS Unlawfully Shipped... . . . . . . . . . 98
C. The District Court Abused Its Discretion in Awarding Per-Violation
Penalties Under Both the PACT Act and PHL § 1399-ll.. . . . . . . . . 104
CONCLUSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
BACKGROUND
I. Factual Background
A. The State’s and City’s Cigarette Taxation Regime
The deleterious effects of cigarette smoking and the associated public
health costs are enormous. Tobacco use kills almost 30,000 people per year in
New York, exceeding the number of deaths caused by alcohol, motor vehicle
7
accidents, firearms, and toxic agents combined. Tobacco-related health care costs
New Yorkers $10.4 billion annually. Thus, like the federal government, New
York State (the “State”) and New York City (the “City”) impose excise taxes on
cigarettes in order to discourage cigarette smoking and defray some of the health
care costs it causes. Those public policy goals, obviously, can be achieved only
insofar as the taxes are actually paid.
The State first instituted an excise tax on cigarettes in 1939. N.Y. Tax Law
§ 471 (1939). The law requires a tax to be imposed on “all cigarettes possessed in
the state by any person for sale” except when the “state is without power to
impose such tax.” Id. The law presumes that all cigarettes possessed for sale or
use are taxable, unless an exemption applies. See id.; 20 N.Y.C.R.R. § 76.1(a)(1).
Taxable cigarettes must bear a stamp evidencing payment of the tax. N.Y.
Tax Law § 471; N.Y.C. Admin. Code § 11–1302(g). New York’s Department of
Taxation and Finance (“DTF”) “precollects” the tax from a limited number of
state-licensed stamping agents, who buy and affix tax stamps to each pack of
cigarettes, and incorporate the value of the tax into the sale price of the cigarettes,
thereby passing the tax along to each subsequent purchaser in the distribution
chain and, ultimately, to the consumer. See Tax Law § 471(2); 20 N.Y.C.R.R.
8
§§ 74.2–74.3; N.Y.C. Admin. Code § 11–1302(g)–(h); see also Oneida Nation of N.Y.
v. Cuomo, 645 F.3d 154, 158 (2d Cir. 2011) (discussing licensed stamping agents’
pivotal role in state taxation scheme). Given this regulatory regime, it is
immediately apparent that the tax has not been paid on cigarettes not bearing
stamps (“unstamped cigarettes”).
Both the State’s and City’s excise taxes on cigarettes increased significantly
in the 2000s. At nearly all times relevant to this appeal, the State’s excise tax was
$4.35 per pack of cigarettes,1 see Tax Law § 471(1); 20 N.Y.C.R.R. § 74.1(a)(2), and
the City’s excise tax was $1.50 per pack, see N.Y.C. Admin. Code § 11–1302.2 The
combination of State, City, and Federal cigarette taxes meant that by July 2010,
the taxes on a pack of cigarettes were $6.86 in New York City and $5.36 in the rest
of the State.
B. Tax Evasion in the State and City
The cigarette tax has always posed thorny issues for the sale of cigarettes
on Native American reservations. Federal law prohibits New York from
1
The tax was increased to $4.35 from $2.75 on July 1, 2010. See N.Y. Tax Law
§ 471; 2010 Sess. Laws News of N.Y. Ch. 134 (A. 11515).
2
Accordingly, for each carton of cigarettes (which typically contains 10 packs of
cigarettes), the State excise tax rate is $43.50 per carton, and the City excise tax
rate is $15.00 per carton.
9
imposing taxes on the sale of cigarettes to tribal members on their own
reservation for personal use. See Moe v. Confederated Salish & Kootenai Tribes of
Flathead Reservation, 425 U.S. 463, 475–81 (1976). New York is permitted, however,
to tax the sale of cigarettes from reservation sellers to non-tribal members. See
Dep’t of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., Inc., 512 U.S. 61, 64 (1994).
In 2010, § 471(1) was amended to state explicitly that “sales to qualified Indians
for their own use and consumption on their nations’ or tribes’ qualified
reservation” are exempt from the State’s taxation scheme. However, it also made
explicit that the tax should be collected on “all cigarettes sold on an Indian
reservation to non-members of the Indian nation or tribe and to non-Indians.”
N.Y. Tax Law § 471(1).
The sale of both taxable and tax-free cigarettes on reservations has
complicated the State’s ability to enforce the tax law and collect the taxes due.3
See Oneida Nation, 645 F.3d at 158. Reservation sellers’ refusal to participate in the
tax stamping system for the collection of cigarette taxes has amplified the
3
New York State’s DTF entered a public “forbearance” policy, which was in
effect from at least the mid-1990's until February 2010, pursuant to which it did
not enforce tax regulations governing on-reservation sales of cigarettes to non-
Native Americans.
10
problem. See id. at 159–161.
In the 1980s, New York State’s DTF determined that the volume of untaxed
cigarettes that reservation retailers sold “would, if consumed exclusively by tax-
immune Indians, correspond to a consumption rate 20 times higher than that of
the average New York resident.” Milhem Attea, 512 U.S. at 64–65. In other words,
either Native Americans were smoking an extraordinary number of cigarettes, or
a substantial number of non-Native American New Yorkers were purchasing
their cigarettes from reservation retailers without paying the relevant taxes. See
Oneida Nation, 645 F.3d at 158–59. DTF estimated that it was losing approximately
$65 million a year in tax evasion, in substantial part due to non-tribal members
purchasing unstamped cigarettes from reservation sellers. Id. at 159. A more
recent study concluded that 60% of the cigarettes consumed in New York were
subject to tax evasion, resulting in an estimated loss of tax revenue exceeding $2
billion annually.4
In 2000, in response to this alarming level of sales of unstamped cigarettes,
New York’s Legislature enacted PHL § 1399-ll which effectively requires that all
4
RTI Int’l, 2014 Independent Evaluation Report of the New York Tobacco
Control Program 25 (2014), https://www.health.ny.gov/
prevention/tobacco_control/docs/2014_independent_evaluation_report.pdf.
11
cigarette sales in New York be made face-to-face. The law was specifically
targeted to combat the “shipment of cigarettes sold via the internet or by
telephone or mail order to residents of this state.” Act of June 14, 2000, § 1, 2000
N.Y. Laws 2905, 2905. It imposes liability on both sellers of cigarettes and
common carriers for shipping cigarettes in violation of the statute.
Specifically, the statute makes it illegal for cigarette sellers to ship
cigarettes to any person in New York—regardless of whether the excise taxes
have been paid—with exceptions for certain statutorily authorized recipients
(specifically, licensed resellers or government agents). See PHL § 1399-ll(1). The
statute also makes it illegal for a common carrier “to knowingly transport
cigarettes to any person” in New York who is not “reasonably believed by such
carrier” to be a statutorily authorized recipient. Id. at § 1399-ll(2). “[I]f cigarettes
are transported to a home or residence,” the law “presume[s]” the carrier’s
knowledge that the delivery was unauthorized. Id. Violation of these provisions
results in a civil penalty, imposed on the shipper or carrier, of $5,000 for each
violation or $100 per pack of cigarettes shipped. Id. at § 1399-ll(5). Both the NYAG
and corporation counsel for political subdivisions of the state are authorized to
bring an action against a violator to recover civil penalties. Id. at § 1399-ll(6).
12
C. The NYAG’s First Investigation of UPS
Faced with widespread resistence to the collection of cigarette taxes by
reservation cigarette sellers, the State turned its attention to the common carriers
who delivered cigarettes for those sellers. In 2004, the NYAG began investigating
cigarette deliveries made by UPS to residential customers, in violation of PHL
§ 1399-ll. The investigation concluded that UPS regularly delivered unstamped
cigarettes to residential customers in New York and that such deliveries
originated principally from reservation sellers. Many of those sellers advertised
their cigarettes as “tax-free” and accepted orders over the Internet or by
telephone.
After some negotiation, the NYAG and UPS agreed that in exchange for
the NYAG’s refraining from bringing a civil suit against UPS for its alleged
violations of PHL § 1399-ll, UPS would enter into a settlement agreement in the
form of an Assurance of Discontinuance. The AOD was executed in October 2005
and became effective approximately one month later. In the AOD, UPS agreed,
inter alia, to comply with PHL § 1399-ll and to adhere to its own internal
“Cigarette Policy,” which also prohibits the shipment of cigarettes to consumers.
The AOD also required UPS to adhere to a detailed set of policies and procedures
13
in furtherance of its compliance with PHL § 1399-ll. UPS agreed to do, among
other things, the following:
• Take measures to ensure that UPS’s drivers, pre-
loaders and other employees are “actively
looking” for “indications” that a package might
contain cigarettes and “alerting UPS management
of such packages and attempting to intercept such
packages,” S. App’x at 506 ¶ 35;
• Develop and maintain a database of cigarette
shippers, compiled from those sellers identified
by the NYAG, UPS’s own database (using such
words as “cigarette,” “smoke,” and “tobacco”),
UPS’s knowledge of known cigarette retailers,
and Internet searches of cigarette websites, S.
App’x at 499–500 ¶¶ 21–22;
• Terminate relationships with shippers that
unlawfully attempt to use UPS to ship cigarettes
to unauthorized recipients and report those
shippers to the NYAG, S. App’x at 502 ¶¶ 26–27;
• Instruct drivers not to deliver packages
containing cigarettes to unauthorized recipients,
S. App’x at 505–06 ¶¶ 34, 36;
• Promulgate and publicize to customers selling
cigarettes a policy prohibiting cigarette shipments
to unauthorized recipients, S. App’x at 500 ¶ 23;
and
• “[A]udit shippers where there is a reasonable
basis to believe that such shippers may be
tendering Cigarettes for delivery to Individual
Consumers, in order to determine whether the
14
shippers are in fact doing so,” S. App’x at 501
¶ 24.
The AOD also contains a penalty provision subjecting UPS to “a stipulated
penalty of $1,000 for each and every violation of [the AOD] . . . provided,
however, that no penalty shall be imposed if (a) the violation involves the
shipment of Cigarettes to an Individual Consumer outside the State of New York,
or (b) the violation involves the shipment of Cigarettes to an Individual
Consumer within the State of New York, but UPS establishes to the reasonable
satisfaction of the [NYAG] that UPS did not know and had no reason to know
that the shipment was a Prohibited Shipment.” S. App’x at 508 ¶ 42. The AOD
also explicitly states that the “rights and remedies in [the AOD] are cumulative
and in addition to any other statutory or other rights that the [NYAG] may have
at law or equity, including but not limited to any rights and remedies under PHL
§ 1399-ll.” S. App’x at 511 ¶ 51.
UPS also represented, through the AOD, that it had informed
approximately 400 shippers that had accounts with UPS that it would no longer
accept packages containing cigarettes for delivery to unauthorized recipients in
New York, that it had conducted an unannounced audit of ten shippers, and that
15
it had begun providing formal training to its delivery drivers regarding PHL
§ 1399-ll. S. App’x at 496 ¶¶ 11–13.
D. The NYAG’s Second Investigation of UPS
In 2011, after agents of the DTF seized packages containing cigarettes from
a UPS facility near Potsdam, New York, the NYAG conducted a second
investigation into UPS’s shipment of unstamped cigarettes from Native
American reservations to individual consumers. As a result of that investigation,
the NYAG notified UPS that it had breached the AOD with respect to packages it
had delivered for shippers located on reservations near Potsdam (the “Potsdam
Shippers”). After a dialogue between the NYAG and UPS, the NYAG eventually
demanded that UPS pay a penalty for its violations of the AOD. UPS refused the
NYAG’s demand for penalties, but it did provide the State with certain delivery
information regarding the Potsdam Shippers.
Approximately two years later, the New York City Department of Finance
(“City Finance”) served a subpoena on UPS seeking delivery records for a
number of other shippers located on reservations. City Finance also conducted a
number of controlled buys of unstamped cigarettes after the First Deputy Sheriff
of City Finance received an email from a store called “Seneca Cigars” advertising
16
untaxed cigarettes shipped via UPS. The controlled buys were successful: City
Finance received packages containing unstamped cigarettes which had been
shipped via UPS. Between the time UPS received the subpoena from City Finance
in July 2013 and February 2015 (when this lawsuit was commenced) the parties
engaged in a number of communications, during which time the plaintiffs
provided UPS with, inter alia, a draft complaint. After negotiation between the
parties broke down, the plaintiffs filed this lawsuit.
II. The Federal Regulatory Regime
Unlawful cigarette sales have also attracted the attention of the United
States Congress. Two federal laws, relevant here, regulate the sale and shipment
of cigarettes.
A. The Contraband Cigarette Trafficking Act
In 1978, Congress enacted the Contraband Cigarette Trafficking Act, which
established criminal and civil penalties for trafficking in untaxed cigarettes. See 18
U.S.C. § 2341 et seq. The CCTA makes it illegal “for any person knowingly to
ship, transport, receive, possess, sell, distribute, or purchase contraband
cigarettes.” Id. at § 2342(a). The CCTA defines “contraband cigarettes” as “a
quantity in excess of 10,000 cigarettes, which bear no evidence of the payment of
17
applicable State or local cigarette taxes in the State or locality where such
cigarettes are found.” Id. at § 2341(2).5
The CCTA is enforceable by states, through their attorneys general, as well
as local governments, through their chief law enforcement officers. See id. at
§ 2346(b)(1). Such enforcers may seek “civil penalties, money damages, and
injunctive or other equitable relief . . . in addition to any other remedies under
Federal, State, local, or other law.” Id. at § 2346(b)(2)–(3).
B. The Prevent All Cigarette Trafficking Act
In 2010, Congress enacted the Prevent All Cigarette Trafficking Act, 15
U.S.C. 375 et seq., to: “require Internet and other remote sellers of cigarettes and
smokeless tobacco to comply with the same laws that apply to law-abiding
tobacco retailers; create strong disincentives to illegal smuggling of tobacco
products; provide government enforcement officials with more effective
enforcement tools to combat tobacco smuggling; make it more difficult for
cigarette and smokeless tobacco traffickers to engage in and profit from their
illegal activities; increase collections of Federal, State, and local excise taxes on
5
There are exceptions to this definition of “contraband cigarettes” that are not
relevant here. See, e.g., 18 U.S.C. § 2341(2) (requiring “contraband cigarettes” to
also be in the possession of non-exempt persons).
18
cigarettes and smokeless tobacco; and prevent and reduce youth access to
inexpensive cigarettes and smokeless tobacco through illegal Internet or
contraband sales.” Pub. L. No. 111–154, §§ (1)(c)(1)–(6).
To achieve these ends, the PACT Act outright bans the mailing of
cigarettes through the United States Postal Service (“USPS”). See 18 U.S.C.
§ 1716E(a)(1). The PACT Act also requires cigarette sellers who ship cigarettes to
consumers to comply with all applicable state and local tax requirements, 15
U.S.C. § 376a(a)(3); comply with strict registration, reporting, and record-keeping
duties, id. at §§ 376a(a)(1)–(2), (c); and mark the outside of any packages
containing cigarettes with a conspicuous label indicating that the package
contains cigarettes and that federal law requires the payment of all applicable
excise taxes, id. at § 376a(b). The PACT Act also requires the U.S. Attorney
General to create a “Non-Compliant List” (“NCL”) of delivery sellers of
cigarettes, and to update and distribute that list on a regular basis to USPS, state
attorneys general, and others. Id. at § 376a(e)(1).
As particularly relevant in this case, the PACT Act also imposes restrictions
on common carriers’ rights to transport cigarettes. The Act prohibits a common
carrier from delivering any package that does not contain the required tobacco-
19
disclosure label, if the carrier “knows or should know the package contains
cigarettes.” Id. at § 376a(b)(2). The PACT Act further prohibits common carriers
from “knowingly complet[ing] . . . a delivery of any package for any person
whose name and address are on the [NCLs].” Id. at § 376a(e)(2)(A).
Despite wide-sweeping regulations on the sale of cigarettes, the PACT Act
exempts certain common carriers from its requirements. Pursuant to these
exemptions, any requirements or restrictions placed directly on common carriers
by the statute do not apply to a common carrier that has entered into a qualifying
settlement agreement. UPS’s AOD, which is explicitly named in the statute,
qualifies “if [it] is honored throughout the United States to block illegal deliveries
of cigarettes or smokeless tobacco to consumers.” Id. at § 376a(e)(3)(B)(ii)(I). The
statute specifically enumerates two other qualifying settlement agreements with
the NYAG, the Assurances of Discontinuance executed by DHL Holdings USA,
Inc. (“DHL”), and Federal Express Corporation (“FedEx”). See id.
Congress similarly afforded common carriers the same exemption from
enforcement of state statutory bans on cigarette shipments to consumers, such as
PHL § 1399-ll, by providing that such state laws are preempted as applied to
common carriers that qualify for PACT Act exemption. See id. at
20
§ 376a(e)(5)(C)(ii). The PACT Act bars a state from enforcing such a delivery ban
against a common carrier “without proof that the common carrier is not exempt”
from the PACT Act. Id.
The PACT Act empowers states, through their attorneys general, and local
governments, through their chief law enforcement officers, to bring suits against
violators. Id. at § 378(c)(1)(A). Common carriers who violate the PACT Act are
subject to a civil penalty of “$2,500 in the case of a first violation, or $5,000 for any
violation within 1 year of a prior violation” id. at § 377(b)(1)(B), in addition to any
criminal penalty and “any other damages, equitable relief, or injunctive relief
awarded by the court, including the payment of any unpaid taxes to the
appropriate Federal, State, local, or tribal governments,” id. at § 377(b)(2).
III. Procedural History
A. The Complaint Against UPS
The State and City filed their first complaint against UPS on February 18,
2015, and a first amended complaint (“FAC”), on May 1, 2015. The FAC alleged
that despite entering the AOD, UPS continued to service numerous contraband
cigarette enterprises operating out of smoke shops located on the following
Native American reservations within the State: the Seneca Cattaraugus
21
Reservation, the Seneca Allegany Reservation, the Tonawanda Reservation, and
the St. Regis Mohawk Reservation. The plaintiffs’ claims were directed
specifically at UPS’s conduct with regard to twenty-two entities (the “Relevant
Shippers”), grouped as follows:
• “Elliott Enterprise Group,” consisting of Elliott Enterprise(s), Elliott
Express (or “EExpress”), and Bearclaw Unlimited/AFIA;
• “Shipping Services Group,” consisting of Seneca Ojibwas Trading
Post, Shipping Services, and Morningstar Crafts & Gifts;
• Indian Smokes;
• “Smokes & Spirits Group,” consisting of Smokes & Spirits, Native
Outlet, A.J.’s Cigar, Sweet Seneca Smokes, and RJESS;
• “Native Wholesale Supply Group,” consisting of Native Wholesale
Supply and Seneca Promotions;
• “Arrowhawk Group,” consisting of Seneca Cigarettes/Cigars,
Hillview Cigars, Two Pine Enterprises, and Arrowhawk Smoke
Shop;
• “Mohawk Spring Water Group” consisting of Mohawk Spring Water
and Action Race Parts; and
• Jacobs Manufacturing/Tobacco.
The plaintiffs alleged that UPS serviced the Relevant Shippers by
delivering unstamped cigarettes from their businesses to residences in the State
and City. The plaintiffs claimed that the records they had obtained indicated that
between January 2010 and November 2014, UPS made over 78,000 deliveries to
22
residents throughout the State and City on behalf of the Relevant Shippers. The
complaint alleged that UPS knew that these shipments contained unstamped
cigarettes based on, inter alia, UPS’s prior experience in connection with the
NYAG’s investigation and the AOD; numerous court decisions regarding Native
American reservation smoke shops’ non-compliance with the State’s cigarette tax
regime; widespread media reporting; UPS’s entering into tobacco delivery
contracts with most or all of the reservation smoke shops for which UPS shipped
and delivered cigarettes; UPS employees visiting, observing, and picking up
packages for reservation smoke shops; and UPS’s general practice of enmeshing
itself deeply in its customers’ businesses.
The FAC asserted fourteen causes of action seeking various forms of relief
under the CCTA, the PACT Act, PHL § 1399-ll, the AOD, and the Racketeer
Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C. §§ 1961–68.6
B. Pre-Trial Motion Practice
On May 22, 2015, UPS filed a motion to dismiss the FAC pursuant to Rule
12(b)(6). UPS raised several arguments in its motion, including that (1) all claims
6
The district court awarded summary judgment to UPS on the RICO claims. That
ruling is not challenged on appeal.
23
must be dismissed for failure to plausibly allege that UPS delivered cigarettes or
that UPS knew that those deliveries contained cigarettes, (2) the CCTA claims
must be dismissed because the plaintiffs did not allege that UPS engaged in any
single transaction involving the shipment of more than 10,000 unstamped
cigarettes, (3) the PACT Act claims must be dismissed because UPS is exempt
from suit based on its AOD, and (4) the PHL § 1399-ll claims must be dismissed
because that statute is preempted by the PACT Act.
The district court rejected several of UPS’s claims, including UPS’s
contention that the plaintiffs had not adequately pled that UPS knowingly
delivered unstamped cigarettes, and UPS’s argument that the plaintiffs’ CCTA
claims failed because the FAC did not allege that UPS participated in any
transaction in which it shipped more than 10,000 unstamped cigarettes.
Lastly, the court addressed UPS’s contention that the claims brought
pursuant to the PACT Act and PHL § 1399-ll were subject to dismissal because
the PACT Act exempts UPS from its requirements so long as the AOD “is
honored throughout the United States to block illegal deliveries of cigarettes or
smokeless tobacco to consumers.” 15 U.S.C. § 376a(e)(3)(B)(ii)(I). In addressing
whether the PACT Act and PHL § 1399-ll claims against UPS should be
24
dismissed, both parties’ briefing assumed that the “is honored” language in the
exemption provision refers to whether UPS has complied with the terms of the
AOD. UPS argued that the plaintiffs had failed to adequately allege that UPS was
not entitled to the benefit of the exemption due to violations of the AOD. On the
other hand, the plaintiffs argued that by alleging that UPS had breached the AOD
by violating several of its provisions, they had adequately alleged that UPS had
not “honored [the AOD] throughout the United States.”
On July 30, 2015, the district court held oral argument on the motion to
dismiss; during that argument, the parties maintained the positions they had
taken in their briefs. Subsequently, on August 26, 2015, the court issued an order
informing the parties that it was considering a reading of the PACT Act’s
exemption provision that had not previously been advanced by either party. The
court explained that, under its proposed alternative reading, the exemption
provision is a definitional provision that merely defines the types of settlement
agreements that qualify for exemption and does not purport to reach questions of
compliance or noncompliance with the obligations assumed under any particular
agreement. See New York v. United Parcel Service, Inc., 179 F. Supp. 3d 282, 291
(S.D.N.Y. 2016). Because the parties had not addressed that statutory reading in
25
their briefing or at oral argument, the court invited the parties to submit
supplemental briefing that did so.
The parties each filed supplemental briefs on September 9, 2015. UPS
argued that the text and structure of the PACT Act compelled the interpretation
that the court was considering—that the exemption provision was merely
definitional. The plaintiffs’ supplemental brief continued to advocate for the
reading they had previously advanced—that UPS was entitled to the exemption
only if it had fully complied with the requirements imposed on it by the
AOD—and that the allegations in their complaint were sufficient to vitiate the
exemption.
On September 16, 2015, the district court issued a decision dismissing the
claims brought pursuant to the PACT Act and PHL § 1399-ll, and denying UPS’s
motion as to the remaining claims. See New York v. United Parcel Service, Inc., 131
F. Supp. 3d 132 (S.D.N.Y. 2015). The court’s dismissal of the PACT Act and PHL
§ 1399-ll claims was premised on the interpretation of the exemption provision
that the court had advanced in its earlier order. The court understood the term
“honored” in the exemption provision to mean “recognized” and thus held that
UPS would be exempt from the PACT Act if the AOD had appropriate breadth
26
such that all states in the country recognized the AOD. The court concluded that
because the FAC failed to allege that the AOD had not been recognized by states
nationwide, UPS’s exemption from the PACT Act remained in place. Given that
the plaintiffs had failed to even allege that the AOD had not been recognized
nationwide, the court concluded that it “need not determine the precise
procedure by which a state must honor an agreement.” Id. at 142.
On October 21, 2015, the plaintiffs moved for leave to file a second
amended complaint (“SAC”), seeking to add back the previously dismissed
claims brought under the PACT Act and PHL § 1399-ll. The basis for the motion
was that the plaintiffs had not anticipated the court’s interpretation of the PACT
Act, and as a result had not previously had an opportunity to plead such claims
in light of that interpretation. On November 23, 2015, the court granted the
plaintiffs’ motion and the plaintiffs filed the SAC on November 30, 2015.
The SAC alleged that the AOD is not recognized by all states in the nation.
It noted several states that have their own cigarette delivery ban statutes and do
not recognize the AOD. It also explained that under the AOD, no state other than
New York has any right to enforce the AOD, nor any right to obtain a penalty for
an illegal cigarette delivery into that state. Further, the plaintiffs revived their
27
compliance interpretation of the exemption provision, alleging that because UPS
had not complied with the terms of the AOD, the PACT Act’s exemption
provision was inapplicable to the claims it had brought under the PACT Act and
PHL § 1399-ll.7
On February 2, 2016, UPS moved for partial summary judgment on the
PACT Act and PHL § 1399-ll claims seeking to have them dismissed once again
on the ground that UPS is exempt from both statutes since the AOD is recognized
nationwide. UPS acknowledged that the plaintiffs had submitted declarations
from assistant attorneys general in six states who had asserted that they do not
have the right to enforce the AOD, and therefore would not utilize the AOD to
block deliveries of cigarettes to consumers. However, UPS argued that the “states
should be deemed to ‘honor’ an agreement enumerated in the Exemption
7
The plaintiffs later moved for leave to file a third amended complaint (“TAC”),
for the purpose of broadening their allegations of UPS’s misconduct. The
plaintiffs claimed that discovery had revealed that UPS had failed to conduct
audits of customers it had reason to believe were shipping cigarettes, failed to
train its workers to prevent cigarette trafficking, and failed to maintain internal
databases of tobacco shippers, all of which violated specific provisions of the
AOD. The plaintiffs also claimed that discovery had revealed that in addition to
serving brick-and-mortar smoke shops on Indian reservations, UPS also handled
accounts that had no physical retail location, but which UPS must nevertheless
have known were cigarette dealers. UPS consented to the plaintiffs’ motion. The
court granted leave and the plaintiffs filed the TAC on February 24, 2016.
28
Provision as long as the agreement is still active nationwide.” UPS Memo of Law
in Support of its Motion for Partial Summary Judgment at 10, New York v. UPS,
179 F. Supp. 3d 282 (S.D.N.Y. 2016) (No. 15 Civ. 1136 (KBF)), ECF No. 173. Put
another way, UPS explained, a state must honor an agreement if “the parties to
the agreement have not terminated the agreement or otherwise rendered it
inactive, and the policies and practices memorialized in the agreement are still
maintained nationwide.” Id.
On the other hand, the plaintiffs contended that the exemption provision
did not exempt UPS when it was enacted, but, instead, provided only for the
possibility of future exemption upon all fifty states affirmatively assenting to the
AOD, a condition that UPS had never fulfilled. The plaintiffs argued that by
providing declarations of several state attorneys general and a representative of
the National Association of Attorneys General stating that they do not “formally
acknowledge” or “accept” the AOD, they had established that the AOD is not
honored nationwide, and therefore UPS had lost its exemption from the PACT
Act.
The court issued its summary judgment decision on April 19, 2016, at
which time it took another look at the exemption provision. United Parcel Service,
29
Inc., 179 F. Supp. 3d at 282. It explained that while the phrase “‘is honored’ most
plausibly means ‘is recognized,’” the passive language of the exemption
provision is ambiguous as to whether it means “‘is honored [by states
nationwide],’ or ‘is honored [by UPS nationwide],’ or both.” Id. at 293 (alterations
in original). Therefore, while the court had previously granted in part UPS’s
motion to dismiss concluding that UPS is entitled to the exemption if the AOD
was “recognized” by all states in the nation, based on the parties’ fuller
arguments and the evidence that had been developed, the court came to the
conclusion that “is honored” also requires that UPS itself give the AOD
nationwide breadth.
The court’s updated understanding was that the exemption provision
“does not require that a carrier’s policies be 100% effective at preventing the
shipment of cigarettes to consumers,” but that “UPS may not retain the
exemption simply by maintaining the requisite policies nationwide in name only.”
Id. at 306 (emphasis in original). Thus, it concluded that “if [the] plaintiffs could
present evidence creating an inference that the effectiveness of UPS’s policies is
so compromised that these policies are not in fact in place, that would be
sufficient to raise a genuine issue of fact for trial.” Id.
30
After reviewing the factual materials submitted by the parties, the court
concluded that the plaintiffs’ evidence did “not support the inference that UPS’s
purported non-compliance [was] so severe that UPS no longer ‘honor[ed]’ the
AOD throughout the United States as that term is used in [the exemption
provision].” Id. But, since the court had changed its interpretation of the
exemption provision, it allowed the plaintiffs an opportunity to make an
additional factual showing in an attempt to raise a genuine issue of material fact.
It explained that two types of evidence would be relevant to a determination that
UPS had not honored the AOD: first, the plaintiffs could present evidence of a
sufficiently large number of instances of shipments of contraband cigarettes to
suggest that UPS had turned a blind eye toward such unlawful shipments; and
second, the plaintiffs could present evidence showing that UPS policymakers had
in fact turned a blind eye to shipments of contraband cigarettes.
At a hearing held on June 7, 2016, the plaintiffs made an oral presentation
to the court that included both types of relevant evidence. UPS responded with
its own presentation. By the end of the hearing the court was convinced that
there was a triable issue of fact as to whether UPS had given nationwide effect to
31
the AOD. It noted that the plaintiffs had made a sufficient showing that UPS had,
in large part, abandoned the AOD at least in New York.
C. UPS’s Rule 26 Motion
While the parties were engaged in motion practice over the PACT Act and
PHL § 1399-ll claims, they continued to have discovery disputes. On January 20,
2016, UPS submitted a letter motion to the court seeking to compel the plaintiffs
to provide more complete responses to certain interrogatories issued during
discovery. On February 1, 2016, the court denied the motion as untimely,
reasoning that UPS had failed to raise any issue regarding plaintiffs’
interrogatory responses in either of the two discovery conferences held by the
court, nor had it spoken up in response to the court’s April 3, 2015, scheduling
order. At the second conference, which took place on November 18, 2015, the
court expressly enumerated the outstanding discovery and other issues that
remained to get the matter ready for trial, which did not include the issue UPS
raised in its letter motion. In denying the motion, the court explained that “it was
incumbent upon UPS to raise any additional discovery issues that it had and
whether it sought to obtain further responses from plaintiffs with respect to their
interrogatory responses” at the second discovery conference, but that instead,
32
“UPS affirmatively stated that it was seeking to move the case forward and noted
that fact discovery as to plaintiffs had expired on November 17, 2015.” S. App’x
at 30.
Nevertheless, the court recognized that UPS’s concern about lacking
information to prepare for trial was important. It noted that given the particular
parties in the case and the nature of the claims, UPS had not had the opportunity
to depose representatives of the plaintiffs and ask about the factual bases for their
claims. The court therefore ordered the plaintiffs to provide UPS with
information regarding the nature of the plaintiffs’ expected proof for an exemplar
shipper group for which it expected to establish UPS’s liability. Specifically, the
district court required the plaintiffs to provide UPS with the following
information for an exemplar shipper: exemplars of shipments alleged to have
contained cigarettes or the plaintiffs’ basis (if circumstantial) as to what proof
would be offered as to this element, the facts and circumstances showing UPS’s
knowledge of the contents of shipments (or, if circumstantial, a clear statement of
circumstantial facts), and a calculation of each plaintiff’s damages as to the
specific shipper.
33
The plaintiffs complied with that order in a disclosure dated March 3, 2016.
This disclosure (the “Arrowhawk Letter”) provided detailed information for the
“Arrowhawk Group” of shippers. The Arrowhawk Letter disclosed that the
plaintiffs would use UPS’s billing and delivery spreadsheets, produced by UPS
and identified by Bates number, to calculate how many packages UPS shipped
for the Arrowhawk Group. Specifically, it listed six UPS account numbers
associated with the Arrowhawk Group, and identified the specific UPS
spreadsheets containing packages for those account numbers. It also explained
that it would prove that the shipments identified contained cigarettes with, inter
alia, testimony regarding the nature of the Arrowhawk Enterprise as a cigarette
dealer and shipping invoices listing the contents of packages shipped by UPS.
The Arrowhawk Letter also explained that the plaintiffs would attempt to
prove UPS’s knowledge of the contents of packages shipped by the Arrowhawk
Group by presenting evidence of the following:
• “Pickup location was a warehouse next to a retail
business named ‘Arrowhawk Smoke Shop’ that
prominently displayed outdoor advertisements
for cigarettes, and which had a visible inventory
that consisted almost exclusively of large stacks of
cigarette cartons;
34
• UPS drivers purchased cigarettes and/or received
cigarettes for free from employees of the
Arrowhawk Enterprise at both the smokeshop
and the warehouse;
• UPS drivers routinely observed the following
inside the warehouse:
– Cases of cigarettes with visible printed
markings indicating their contents;
– Cases of cigarettes cut in half and left open,
revealing clearly-marked cartons of
cigarettes inside;
– No inventory items other than these cases
and cartons of cigarettes;
– Arrowhawk Enterprise employees visibly
opening cases and repackaging cigarette
cartons into other boxes for shipment by
UPS;
– Custom-made boxes used for the UPS
shipments, which were marked with ‘[x-y]
carton’ indicating how many cigarette
cartons that size of box could hold;
• UPS drivers returned packages to the warehouse
that had been rejected by customers. These
packages contained cigarettes, and at least some
were partially open when returned;
• The totality of the circumstances, including the
volume of shipments, the location of the pickups
on an Indian reservation, and the other shipping
location descriptors, indicated that the
Arrowhawk Enterprise was a cigarette dealer,
35
especially given the residential addresses of the
consignees and the pattern of repeat shipments;
• UPS has admitted that it knew that any cigarettes
being shipped from Indian reservations in New
York would be untaxed contraband.”
J. App’x at 424.
Lastly, the Arrowhawk Letter set forth a chart indicating that the State and
City would each seek damages and penalties for violations of the CCTA, RICO,
PACT Act, PHL § 1399-ll, and the AOD.8 The chart indicated that the plaintiffs
would seek to recover the unpaid taxes on each carton of cigarettes UPS shipped
for the Arrowhawk Group under the CCTA and PACT Act,9 per-violation
penalties for each package and carton of cigarettes shipped under the PACT Act
and PHL § 1399-ll, respectively, and a $1,000 stipulated penalty for each package
that UPS had failed to audit in accordance with the audit provision of the AOD. It
revealed that the plaintiffs sought more than $83 million in damages and
8
The one exception was that the City was not seeking penalties under the AOD
given that it was not a party to that agreement.
9
The Arrowhawk Letter explained that certain calculations were contingent on
issues that would be resolved later, such as the weight of each package and the
number of cigarette cartons per package.
36
penalties under the CCTA, PACT Act, and PHL § 1399-ll, plus $8 million more
under the AOD, with respect to the Arrowhawk Group alone.
D. The District Court’s Liability Opinion
The case was tried to the bench on September 19–29, 2016. The parties
called thirty-eight witnesses and submitted more than 1,000 documents into
evidence. After receiving post-trial submissions and hearing closing arguments,
the district court issued a 219-page opinion constituting its findings of fact and
conclusions of law. See New York v. United Parcel Service, Inc., 253 F. Supp. 3d 583(S.D.N.Y. 2017).
The trial evidence focused on twenty-two shippers located on four Native
American reservations in upstate New York. The court found that UPS
knowingly transported unstamped cigarettes for seventeen of the shippers
between 2010 and the date this lawsuit was filed. The court also found that UPS
failed to audit those seventeen shippers plus three additional ones (collectively
the “Liability Shippers”), despite having reasonable grounds to believe that each
of them was delivering cigarettes to unauthorized recipients, in violation of the
AOD. In support of its findings, the court recited “exemplar” facts in its decision
that were representative of the evidence introduced at trial.
37
The district court found UPS’s efforts to comply with the AOD were
“inadequate” and “fell woefully short” between 2010, when the suit was filed,
and 2013. Id. at 603.10 Despite UPS’s having had a “clear awareness” when it
signed the AOD that it had assumed a number of explicit obligations which
required affirmative efforts and vigilance to ensure compliance with its terms, id.,
“UPS’s lack of commitment to true, active AOD compliance pervaded its
corporate culture,” id. at 604. Those in positions of responsibility at UPS knew
that, in many respects, “UPS was ‘flying blind’ regarding whether Indian-
reservation-based customers were shipping cigarettes.” Id. The evidence showed
UPS’s wholesale disregard of the AOD’s terms and its brazen disregard for the
spirit of the agreement.
First, despite the AOD’s express mandate that UPS train relevant personnel
about its “Cigarette Policy” and various compliance measures, UPS delivered
“little actual training.” Id. at 607. The only training that UPS provided to its
10
The court found that in 2013, faced with the prospect of a lawsuit, UPS
increased its efforts to comply with the AOD. UPS’s efforts in 2013 and 2014 were
part of its “ramping up” process to get into compliance with the AOD, which was
not achieved until the filing of the lawsuit on February 18, 2015. Thus, while UPS
had transformed itself in time to avoid the imposition of an injunction or
independent monitor, it was too late to avoid liability for its past conduct.
38
personnel was a three-minute annual pre-work message on tobacco compliance.
Several employees did not recall the existence of the training and others recalled
its existence but not its content. The court thus concluded that the little training
UPS did conduct was “inadequate to properly train employees on UPS’s Tobacco
Policy and was inadequate to train employees on AOD compliance measures or
on how to recognize signs that shippers may have been tendering packages with
cigarettes.” Id. The testimony and evidence revealed to the court that UPS’s
training on tobacco issues was designed merely to check the box, rather than to
ensure that employees would observe and report signs of cigarette shipments.
Second, despite the AOD’s requirement that UPS audit shippers whenever
“there is a reasonable basis to believe that such shipper may be tendering
Cigarettes for delivery to Individual Consumers,” UPS implemented no formal
audit policies for cigarette shippers and provided no audit training to its
employees. The court found that UPS’s audits were conducted far too
infrequently to comply with the AOD. The district court reasoned that UPS knew
that certain shippers had names that included the word “tobacco,” “cigar,” or
“smokes,” indicating a certainty of tobacco shipments and a reasonable
possibility of cigarette shipments; it knew that a number of others (without
39
eponymous names) sold cigarettes, making shipments all the more likely; it knew
that certain reservation shippers refused to disclose what they were shipping; it
knew that others had opened multiple accounts or that new accounts were
opened at the same addresses as ones recently terminated for cigarette
shipments; and, of course, all of this was against the backdrop that those shippers
were located on reservations that had been associated with sales and shipments
of unstamped cigarettes for years. Despite this knowledge, the district court
noted that UPS often failed to conduct audits until it was actually confronted
with impermissible cigarette shipments in fortuitous ways, such as when
cigarettes fell “out of a broken box.” See id. at 615.11
Third, UPS failed to utilize information available to it in various places that
provided employees, at all levels of its corporate structure, insight into the fact
that it was regularly shipping unstamped cigarettes. For example, UPS received
the NCLs created by the United States Department of Justice pursuant to the
PACT Act, but inexplicably failed to use them to identify at-risk shippers; UPS
11
UPS pointed to 28 audits it conducted between 2011 and 2016, several of which
were of the Relevant Shippers. But the court noted that 26 of those audits were
conducted between 2013 and 2016, at a time when UPS had already received a
subpoena and was aware of a likely impending lawsuit or had already been
sued.
40
ignored inquiries it received from customers regarding lost or damaged packages
(so called “tracers”) which indicated that the customers were purchasing
cigarettes from reservation sellers; and UPS drivers and sales account personnel
who met with UPS’s customers saw signage on or near the Liability Shippers’
storefronts advertising cigarette sales and indeed saw cigarettes on display racks
at the locations of the Liability Shippers.
Fourth, UPS took no action despite knowing that certain of its customers
were routinely shipping unstamped cigarettes. UPS account executives entered
details of meetings and communications with some of the Liability Shippers into
a UPS database, evidencing their knowledge that their customers were shipping
cigarettes. Those same account executives were responsible for obtaining a
tobacco agreement (memorializing the seller’s notification of the prohibition
against cigarette deliveries to consumers) from each of their customers who
would be shipping tobacco but frequently failed to do so in violation of the
AOD’s express terms. UPS allowed its personnel to rely heavily (and often
exclusively) on what their shippers claimed to be shipping even in the face of
contrary evidence.
Fifth, the district court found that UPS viewed the passage and
41
implementation of the PACT Act as a business opportunity. The court explained
that “as other couriers were required to terminate cigarette shippers as a result of
the PACT Act, UPS picked up the business.” Id. at 618. It noted that the “evidence
supports an increase in shipments via UPS by the Relevant Shippers in the
months immediately following the effective date of the PACT Act.” Id. Account
personnel and others at UPS knew that this surge was due, at least in part, to
capturing the business lost by USPS. The court did “not buy” UPS’s contention
that it did not “put two and two together” to figure out that the passage of the
PACT Act is what led it to newfound business for customers located on Native
American reservations. Id. at 605.
Given that UPS had violated “so many different AOD obligations as to so
many shippers,” the court “easily” found, id. at 664, that UPS “persistent[ly]
fail[ed] to honor the AOD,” vitiating its PACT Act exemption, id. at 665.12 The
court thus found UPS liable for violations of the AOD, PACT Act, PHL, and the
12
The court rejected UPS’s argument that because the plaintiffs had proven only
violations of the AOD in New York, that it could not be shown that the AOD was
not honored “nationwide.” The court held “it would be odd to find that an AOD
was not honored in its home state (here, New York) due to flagrant and repeated
violations, but that because the home-state Attorney General did not prove
violations in other states, the AOD was nonetheless ‘honored’ nationally.” Id. at
664.
42
CCTA. Specifically, the court found UPS liable for violating the audit provision of
the AOD, and it interpreted the audit provision to mean that UPS committed a
new violation every time UPS shipped a package on behalf of a Liability Shipper
once it had a reasonable basis to believe such shipper was shipping cigarettes. It
held UPS liable for violating the PACT Act by knowingly delivering packages for
five of the Liability Shippers that appeared on the NCLs. The court also found
that UPS was liable under PHL § 1399-ll for knowingly delivering cigarettes, on
behalf of seventeen of the Liability Shippers, to statutorily unauthorized
recipients.
Lastly, the court found that UPS violated the CCTA and explained that it
would award the plaintiffs compensatory damages for lost tax revenues
equivalent to half of the amount of unpaid taxes on the cigarettes that UPS
shipped for the Liability Shippers. The court limited the compensatory damage
award to half of the state and local excise taxes that went unpaid on UPS’s
cigarette shipments on the reasoning that half of the purchasers would have
managed to buy untaxed or lower-taxed cigarettes by some other means, that is,
that they would have been “diverted”away from reservation sellers and found
other ways to obtain untaxed cigarettes if UPS had complied with the law by
43
declining those shipments.
The court then turned to “the complicated question of determining the
appropriate penalties to be imposed for the violations of the AOD and the
various statutory schemes.” Id. at 695. Since the plaintiffs sought per-violation
penalties under the AOD, PACT Act and PHL § 1399-ll, the court was required to
make determinations about how many packages and cartons of cigarettes UPS
actually shipped for each of the Liability Shippers.
At trial, the plaintiffs had contended that the number of packages UPS
shipped for each of the Liability Shippers, which was necessary to calculate both
the AOD and PACT Act penalties, could be easily determined from UPS’s
delivery spreadsheets: they sorted the spreadsheets by the account numbers for
the Liability Shippers, removed duplications, and added up the number of
packages shipped.
UPS, for its part, argued that simply tallying the packages for each Liability
Shipper would capture certain categories of packages that should be excluded,
such as letter size envelopes, packages weighing less than one pound (since a
carton of cigarettes weighs approximately one pound), and packages that UPS
shipped to the Liability Shipper rather than just ones from the Liability Shippers.
44
The court noted that because the spreadsheets are in Excel format and are
searchable, it would be straightforward to exclude such categories from the
package count.
The method by which the court calculated the number of cigarette cartons
UPS shipped for each Liability Shipper was slightly more complicated. At trial,
the plaintiffs understandably did not present direct evidence showing the exact
number of cartons of cigarettes contained in each of the packages that UPS
shipped for the Liability Shippers. That would have been an impossible task.
Rather, the plaintiffs presented sample evidence for each of the Liability
Shippers, showing that the packages UPS shipped for such shippers contained
cigarettes. Using such evidence, the court itself calculated a reasonable
approximation as to the particular percentage of each Liability Shipper’s
packages that contained cigarettes. For some of the Liability Shippers that
percentage was 100% and for others it was as low as 27%. The court explained
that it would calculate the number of cartons of cigarettes that UPS shipped for
each of the Liability Shippers by: taking the number of packages that UPS
shipped for each Liability Shipper, multiplying it by the approximation of the
percentage of packages for each Liability Shipper that contained cigarettes,
45
summing the weights of all such packages, and then dividing by one pound per
carton of cigarettes.
Given the complexities in the per-violation penalty calculations, the court
engaged the assistance of the parties in actually completing the calculations,
applying the relevant dates, definitions, and findings it had provided. It ordered
the parties to provide it with certain information to help it assess the appropriate
quantum of penalties.13
13
UPS moved to strike the plaintiffs’ damages case because the plaintiffs failed to
provide it with a robust pretrial damage computation pursuant to Fed. R. Civ. P.
26 and failed to anticipate evidentiary issues with the trial presentation of their
damages claim. The court found preclusion of the plaintiffs’ damages case
unwarranted for several reasons: (1) the Arrowhawk Letter complied with the
court’s order and provided UPS with enough information regarding the nature of
the plaintiffs’ proof, (2) the plaintiffs in fact used the type of evidence and
testimony that they had identified in the Arrowhawk Letter, (3) UPS had
declined the plaintiffs’ offer to provide it with a full damages and penalties
calculation for each shipper several weeks before trial, and (4) UPS undoubtedly
possessed the information to replicate the same calculation in the Arrowhawk
Letter for each shipper.
Importantly, the court noted that the damages and penalty calculations
were ultimately based on known data points: penalty ranges set forth in the AOD
and statutory schemes at issue, and compensatory damages based on the
statutory tax rate imposed on a carton of cigarettes. The court rejected UPS’s
argument that it was somehow prejudiced by the plaintiffs’ inadequate pre-trial
disclosure, concluding that UPS’s complaints “[rang] hollow” given that it had a
detailed disclosure regarding the Arrowhawk Group yet did not identify any
rebuttal witnesses or testimony. 253 F. Supp. 3d at 686. It viewed UPS as having
made deliberate tactical choices to position its preclusion argument.
46
E. The District Court’s Damages and Penalties Opinion
After the district court received the parties’ submissions, it issued an
opinion and order on damages and penalties. See New York v. United Parcel
Service, Inc., 15–cv–1136 (KBF), 2017 WL 2303525 (S.D.N.Y. May 25, 2017). The
court explained that the plaintiffs had appropriately complied with the court’s
order, but that UPS had “refused to include a majority of the information
requested by the Court,” providing package counts with respect to only three of
the Liability Shippers.14 Id. at *2. The court thus deemed UPS to have waived
arguments relating to the calculations submitted by the plaintiffs and the court
calculated its determination of damages and penalties using the uncontested
numbers of packages and cartons supplied by the plaintiffs.
The court believed that significant penalties were appropriate and it
explained the factors that it considered in assessing appropriate penalties. First, it
cited UPS’s level of culpability, including “[n]umerous separate acts by
numerous UPS employees [that] allowed vast quantities of unstamped cigarette
shipments to be delivered to unauthorized recipients in New York.” Id. at *3.
14
The court explained that UPS’s submission “demonstrate[d] a lack of
cooperation and, frankly, odd abrasiveness” which was “consistent with UPS’s
lack of acceptance of responsibility for their actions at issue in this case.” Id. at *2.
47
Second, it cited the harm to public health caused by UPS’s conduct, noting,
however, that it was also the case that UPS, as the transporter rather than
manufacturer or seller of cigarettes, bears a lower level of culpability for the
impact on public health than other entities. Third, the court explained that UPS’s
limited profits from the violations would suggest a relatively low penalty. Lastly,
the court noted that UPS could bear a hefty fine which would “capture the
attention of the highest executives in the company.” Id. at *4.
Finally, the court set out its damages and penalty determination with
respect to each statutory regime and the AOD. With respect to the AOD, the
court awarded the State the $1,000 stipulated penalty for every package that UPS
shipped on behalf of a Liability Shipper, once it had a reasonable basis to believe
that such shipper was tendering cigarettes. The court used the plaintiffs’ tally of
the packages for each Liability Shipper (having applied the appropriate dates
from the liability opinion), to calculate penalties of $80,468,000 due to the State
under the AOD.
With respect to the PACT Act, the court calculated the maximum per-
violation penalties authorized by the statute: $2,500 for the first violation and
$5,000 per subsequent violation for every package UPS shipped for the five
48
Liability Shippers who were on the NCLs. Using the package counts provided by
the plaintiffs, the court concluded that imposing the maximum per-violation
penalties would entitle the State to $70,517,500 and the City to $86,182,500. Given
the “totality of the facts and circumstances” of the case, however, the court
awarded the plaintiffs only 50% of the maximum available PACT Act penalties:
$35,258,750 to the State and $43,091,250 to the City. Id. at *7.
With respect to PHL § 1399-ll, the court applied the $5,000 per-violation
penalty permitted by the statute to the number of cartons UPS had shipped for
each of the Liability Shippers. It calculated that the maximum penalty award
under the statute was $82,820,000 to the State and $74,690,000 to the City. Again,
however, considering the “totality of the facts and circumstances” of the case, the
court awarded the plaintiffs 50% of the maximum available PHL § 1399-ll
penalties: $41,410,000 to the State and $37,345,000 to the City. Id. at *8.
Lastly, the district court awarded the plaintiffs compensatory damages
under the CCTA. The court measured the compensatory damages “by plaintiffs’
lost tax revenue attributable to the number of packs/cartons of cigarettes UPS
knowingly shipped to the Liability Shippers, using a 50% diversion rate.” Id. at
*9. Given the court’s findings on the number of cartons of cigarettes UPS shipped
49
for which no tax was paid, it awarded compensatory damages for unpaid taxes
of $8,679,729 to the State and $720,885 to the City under the CCTA.15
The total award against UPS summed to $246,975,614.
DISCUSSION
Both UPS and the plaintiffs appeal from the district court’s post-trial
rulings. UPS urges us to overturn both the district court’s liability and damages
rulings. With respect to liability, UPS argues that the district court erred in: (1)
finding it non-exempt from the PACT Act; (2) awarding the State penalties under
the AOD for violations of the audit obligation; and (3) finding it liable for
violations of the CCTA. With respect to damages, UPS argues that the district
court erred in: (1) awarding the plaintiffs damages and penalties based on the
evidence presented, which it claims should have been precluded; (2) awarding
the plaintiffs 50% rather than only 5.4% of the amount of unpaid taxes on the
cigarette cartons UPS transported in violation of the CCTA; and (3) imposing a
“gargantuan” penalty award upon it, Appellant’s Br. at 41 & 77. The plaintiffs
cross-appeal on the ground that the district court erred in not awarding them the
15
The court also awarded the plaintiffs $1,000 each in nominal penalties under
the CCTA.
50
full amount of unpaid taxes.
I. Standard of Review
“In evaluating a challenge to a judgment entered after a bench trial, we
review the district court’s findings of fact for clear error and its legal conclusions
de novo.” Zalaski v. City of Hartford, 723 F.3d 382, 388 (2d Cir. 2013). Among the
conclusions of law that we review de novo are the court’s interpretations of the
statutes at issue and the AOD. See Olin Corp. v. Ins. Co. of N. Am., 221 F.3d 307,
320 (2d Cir. 2000).
We review the district court’s decision on whether to preclude a party’s
damages case and rulings on discovery sanctions for abuse of discretion. See
Patterson v. Balsamico, 440 F.3d 104, 120 (2d Cir. 2006); Funk v. Belneftekhim, 861
F.3d 354, 365 (2d Cir. 2017). We also review the district court’s assessment of
damages and penalties for abuse of discretion. See Advance Pharmaceutical, Inc. v.
United States, 391 F.3d 377, 398 (2d Cir. 2004).
II. The Liability Theories
We start with UPS’s several attacks on the district court’s liability rulings:
first, that it is exempt from the PACT Act and PHL § 1399-ll because it “honored
[the AOD] throughout the United States;” second, that the AOD’s penalty
51
provision does not authorize penalties for violations of the audit obligation; and
third, that the plaintiffs failed to establish the threshold quantity and scienter
elements of the CCTA.
A. UPS Did Not Honor the AOD and is Therefore Subject to Liability
Under the PACT Act and PHL § 1399-ll.
UPS contends that the district court erred by holding it liable for violations
of the PACT Act and PHL § 1399-ll.16 It does not dispute that its conduct would
violate those statutes if they apply here—because UPS knowingly made
deliveries for NCL shippers, in violation of the PACT Act, and because UPS
knowingly shipped cigarettes to recipients not authorized to receive them, in
violation of PHL § 1399-ll(2). Rather, UPS asserts that it was error for the district
court to find it liable under those statutes because it is exempt from the PACT
Act, and PHL § 1399-ll is therefore preempted.
The exemption provision of the PACT Act states that UPS, FedEx, and
DHL are exempt from the PACT Act if their AODs are “honored throughout the
16
For the most part, in the interest of simplicity, we discuss the question in terms
of whether UPS is exempt from the provisions of the PACT Act. Because the
PACT Act preempts state laws such as PHL § 1399-ll(2) only when the PACT Act
exemption applies, UPS’s liability under both the PACT Act and PHL § 1399-ll(2)
turns on the applicability of the PACT Act exemption.
52
United States to block illegal deliveries of cigarettes.” 15 U.S.C.
§ 376a(e)(3)(B)(ii)(I). The district court interpreted that provision to mean that in
order to avail itself of the exemption, UPS was itself required to honor the AOD
throughout the United States. It concluded that UPS had not so honored the
AOD, because UPS had violated so many different AOD obligations as to so
many shippers, from the time the AOD became effective until the date the
lawsuit was filed, and because the widespread violations documented at trial
resulted from a general corporate culture of disregard for the AOD and from the
absence of UPS officials at every level to take reasonable steps to ensure
compliance. UPS argues that it was error for the district court to take a
compliance-based approach to determining whether the AOD was honored
within the meaning of the exemption provision.
In interpreting the exemption provision, we look first to its plain language.
See Nwozuzu v. Holder, 726 F.3d 323, 327 (2d Cir. 2013). The PACT Act provides
that the Act’s compliance obligations, as well as state delivery bans such as PHL
§ 1399-ll, “shall not apply to a common carrier that is subject to” one of various
agreements, including UPS’s AOD with the State. 15 U.S.C. § 376a(e)(3)(A).
However, that exemption applies only “if [the carrier’s agreement] is honored
53
throughout the United States to block illegal deliveries of cigarettes.” Id. at
§ 376a(e)(3)(B)(ii)(I). Thus, as we have previously stated, UPS is exempt from the
PACT Act, and PHL § 1399-ll is preempted, to the extent that the AOD is
“honored throughout the United States to block illegal deliveries of cigarettes.”
The most natural reading of the plain language of the exemption
provision—and indeed, the reading initially adopted by both sides in litigating
UPS’s original motion to dismiss the complaint—is that a party “honors” an
agreement by complying with it. The relevant dictionary definitions (that is,
those that define “honor” as it relates to contracts), expressly advise that to
“honor” a contract means to live up to its terms. See MERRIAM WEBSTER’S
COLLEGIATE DICTIONARY (11th ed. 2008) (defining “honor” as “to live up to or
fulfill the terms of”); NEW OXFORD AMERICAN DICTIONARY (3d ed. 2015) (defining
“honor” as “[f]ulfill (an obligation) or keep (an agreement)”).
That definition fully comports with ordinary usage. One does not “honor”
a contract merely by agreeing to it in the first instance, or by acknowledging the
existence of a contractual duty. When one asks her contractual counterparty
whether, in light of some recent event, he still intends to “honor” their contract,
she is asking whether he intends to comply with his obligations. When a
54
customer asks a store clerk whether she will “honor” the store’s return policy, he
is asking whether the store will comply with the terms of its policy and process a
refund for the returned item. Similarly, contrary to the dissent’s suggestion,
Dissenting Op. at 6-7, a bank does not “honor” a check simply by verbally
acknowledging the validity of the obligation; a bank “honors” a check by actually
paying on it. See BLACK’S LAW DICTIONARY (11th ed. 2019) (defining the verb
“honor”: “[t]o accept or pay (a negotiable instrument) when presented.”). These
definitions support the district court’s ultimate conclusion that UPS could
“honor” the AOD only insofar as it “live[d] up to” or “fulfill[ed]” its obligations
under the agreement.
The context makes clear, moreover, that it is UPS itself that must “honor”
the AOD to obtain its exemption. Although the use of the passive voice does not
represent exemplary drafting, no other meaning makes sense. The meaning
suggested early in the litigation by the district court, that it is the 49 states other
than New York that must “honor” the AOD by somehow “recognizing” the
agreement is particularly far-fetched, and indeed UPS conspicuously fails to
advance that interpretation on appeal. That omission is unsurprising. The district
court itself abandoned this proposed meaning, and both the evidentiary
55
submission by the plaintiffs below and the amicus submission on behalf of 18
states, the District of Columbia, and Puerto Rico in this Court make clear that the
AOD was not adopted nationwide by state attorneys general or other law
enforcement officials. Nor is there any evidence in the record that any State ever
announced its intention to accept UPS’s promises to New York in the AOD as a
substitute for any obligation UPS would otherwise have under the PACT Act or
state law.
UPS and New York, as the only parties to the AOD, are the only parties
capable of “honoring” it. Reading the exemption provision as a whole makes
clear that, as between those parties, it is UPS that must do the “honoring.” The
party who must “honor” the AOD must do so “throughout the United States to
block illegal deliveries of cigarettes.” That could be a directive only to UPS. It
would make no sense to require New York to “honor [the AOD] throughout the
United States to block illegal deliveries of cigarettes.” The PACT Act was not a
demand that New York become the cigarette-tax enforcer for the entire United
States. And indeed, the AOD itself makes clear that New York could not fulfill
such a role, since the AOD does not permit the NYAG to seek penalties for acts
occurring outside of New York. See S. App’x at 508 ¶ 42. Finally, since it is UPS
56
that will benefit from the exemption, it is logical to look to its actions to
determine whether the exemption will apply, and conversely would be unfair to
deprive UPS of the exemption because New York had somehow failed to
“honor” the agreement.
Thus, the most reasonable interpretation of the exemption provision is that
UPS’s exemption remained in place to the extent that UPS itself “lived up to” or
“fulfilled” its obligations under the AOD. We agree with the district court that
UPS’s wholesale noncompliance with the AOD means that it did not “honor” the
AOD and therefore forfeited its exemption.
UPS makes no effort to argue that the district court’s extensive factual
findings on how little it did to fulfill its obligations under the AOD, which are set
forth above in great detail, are clearly erroneous. Rather it attempts to deflect
those findings by proposing alternative explanations of the exemption provision.
First, it tells us that “honored throughout the United States” means that the
agreement must have nationwide operation, and “[b]ecause it is undisputed that
UPS’s AOD has applied nationwide since its inception, the PACT Act exempts
UPS from its reach and preempts the PHL.” Appellant’s Br. at 28–29 (internal
citations omitted). Then it says it “is exempt from the PACT Act if [its]
57
obligations under the AOD are accepted as valid throughout the United States,
even though UPS contracted only with New York.” Appellant’s Br. at 31
(emphasis omitted).
Mimicking the exemption provision itself, UPS avoids using active verbs
and proper nouns in explaining the exemption provision. It says that it is exempt
because the AOD has “nationwide operation,” Appellant’s Br. at 37, but fails to
acknowledge that for the AOD to have actually “operat[ed]” nationwide UPS
would have needed to take measures to implement the policies laid out in the
AOD. Given the court’s extensive factual findings, we know that UPS did not in
fact do so.
UPS’s alternative formulation is equally vague. It says that it is exempt if
its obligations under the AOD are “accepted as valid,” Appellant’s Br. at 31, but it
does not specify who—UPS or the 50 States and the District of Columbia—must
do the “accept[ing].” In any event, UPS never clarifies what it would mean for
UPS or the States to have accepted the AOD as valid, or point to any actual
events reflecting such acceptance. The PACT Act does not require that UPS make
any formal commitment to Congress, the Attorney General of the United States
(who is vested with the authority to enforce the PACT Act), or States other than
58
New York. Nothing in the PACT Act requires UPS to acknowledge the AOD’s
enforceability outside of New York, or suggests that a mere announcement on the
part of UPS that it would adopt a company-wide policy consistent with the AOD
would qualify for the exemption. Moreover, the record contains no documents or
testimony evidencing a legally binding commitment on the part of UPS to
comply with the terms of the AOD within even a single State other than New
York. And, again, the court’s findings foreclose a conclusion that UPS, through its
conduct, accepted the AOD’s obligations as valid, since UPS extensively
breached them.
Nor does the legislative history support any implication that Congress
entered a grand bargain with UPS that would trade an exemption from the PACT
Act for a commitment on the part of UPS to comply with the AOD nationwide,
coupled with some implied congressional grant of authority to the States to
enforce that commitment as third-party beneficiaries of the deal. Rather, the
House Report tells us that the exemption was included because “[a]t the May 1,
2008 hearing on the bill, the Crime, Terrorism, and Homeland Security
Subcommittee received testimony that [the AODs with UPS, FedEx, and DHL]
were effective at stopping the illegal shipment of cigarettes to consumers.” H.R.
59
Rep. No. 110–836, at 24 (2008). Thus, Congress agreed to exempt UPS from the
PACT Act because UPS represented that the measures it was taking to stop illegal
cigarette trafficking were effective, not in exchange for a promise to open itself up
to AOD liability, enforced by the States, nationwide—let alone for an
unenforceable verbal representation that ultimately proved unreliable. Nor is it
clear that the States would regard themselves as “beneficiaries” of any such
deal.17
Further, nothing in the AOD itself purports to bind UPS to obligations
outside of New York. The AOD expressly disclaims any right of New York to
seek penalties for violations outside of New York State. S. App’x at 508 (“UPS
shall pay to the State of New York a stipulated penalty of $1,000 for each and
every violation . . . provided, however, that no penalty shall be imposed if (a) the
17
UPS’s argument that Congress sub silentio granted every state attorney general
the authority to sue UPS under a contract to which neither Congress nor the
States are parties comes as a surprise to at least 18 states, the District of
Columbia, and Puerto Rico. See Amicus Brief of California Amici at 14 (“But New
York is the only State that has an agreement of this kind with UPS, and it is the
only State that can file suit should UPS breach it.”). And indeed, under our
dissenting colleague’s view, not only would other states be permitted to sue UPS
under a contract they played no role in negotiating, but they would in fact be
required to sue only under that contract and not the PACT Act once UPS has
claimed in litigation that the AOD should apply nationally. See Dissenting Op. at
11.
60
violation involves the shipment of Cigarettes to an Individual Consumer outside
the State of New York . . .”) (emphasis added). Indeed, the AOD expressly states
that it grants rights and privileges only to the parties to the agreement. Id. at 511
(“This Assurance of Discontinuance shall not grant any rights or privileges to any
persons or entity who is not a party to this Assurance of Discontinuance . . . .”).
Thus, UPS’s argument boils down to a simple proposition: that the mere
existence of the AOD, and UPS’s adoption of a cigarette policy, shield it from
other liability regardless of whether UPS takes any steps to comply with them.18
18
The dissent correctly points out that, under our interpretation, the same
impermissible conduct by UPS gives rise to potential liability under three
sources: the AOD, the PACT Act, and the PHL. Dissenting Op. at 10. However,
we disagree with the dissent’s suggestion that our acceptance of multiple sources
of liability is inconsistent with our determination infra that the cumulative
penalties imposed by the district court were excessive. Id. As detailed in III.C,
infra, the damages imposed on UPS were excessive on the facts of this case; our
interpretation of the PACT Act is not undermined by the possibility that a
common carrier could face liability from multiple sources, particularly where the
relevant statutes and the AOD take different, albeit related, approaches to
addressing the problem of cigarette trafficking. See, e.g., 15 U.S.C. § 376a(e)(2)(A)
(prohibiting common carriers from delivering packages to persons whose names
appear on the NCLs); PHL § 1399-ll(2) (prohibiting common carriers from
transporting any cigarettes unless the recipient falls into one of three statutory
exceptions); S. App’x 499-500 ¶¶ 21-22 (requiring UPS to develop and maintain
an internal database of cigarette shippers). Whether and to what degree those
penalties should be cumulated is a judgment to be made in the damage or
penalty phase of litigation, and not by allowing a wrongdoer to elect which set of
remedies it would prefer be imposed once it is sued. There are many legal
61
But that is not a reasonable reading of the statute, nor could it be what Congress
intended.
As a textual matter, such a reading renders much of the language in the
exemption provision superfluous. The exemption in question applies if (1) a
common carrier is “subject to” an AOD with New York, 15 U.S.C.
§ 376a(e)(3)(A)(I); and (2) the AOD “is honored throughout the United States to
block illegal deliveries to consumers,” id. at § 376a(e)(3)(B)(ii)(I). If Congress had
intended the exemption to turn solely on the AOD’s mere existence, then it
would have included just the first requirement, and exempted UPS from the
PACT Act if it is merely “subject to” the AOD. UPS’s interpretation effectively
treats the “honored” requirement as surplusage. See Dunn v. CFTC, 519 U.S. 465,
472 (1997) (noting doctrine that statutes should not be construed to render their
provisions mere surplusage); Mary Jo C. v. New York State and Local Retirement
contexts in which multiple overlapping sources of liability exist but a single
punishment or measure of damages is appropriate. For example, defendants may
be convicted on multiple related charges without consecutive sentences being
appropriate. See Whalen v. United States, 445 U.S. 684, 692 (1980); see also 18 U.S.C.
§ 3584(b). In the civil context, plaintiffs may successfully pursue theories of
negligence and breach of fiduciary duty but may not recover multiple damage
awards for the same losses. See Conway v. Icahn & Co., Inc., 16 F.3d 504, 511 (2d
Cir. 1994). So here.
62
Sys., 707 F.3d 144, 156 (2d Cir. 2013) (“One of the most basic interpretive canons
is that a statute should be construed so that effect is given to all of its provisions,
so that no part will be inoperative or superfluous, void or insignificant.”)
(internal quotations and alterations omitted).
Treating the AOD’s mere existence as an exemption from the PACT Act’s
compliance obligations would also thwart the statute’s goal of blocking cigarette
trafficking nationwide. See PACT Act, Pub. L. 111–154, § 1(c)(4), 124 Stat. 1087,
1088. Since New York is the only state with the power to enforce the AOD, and
lacks the power to seek penalties for violations in other states, UPS’s
interpretation would enable it to deliver unlimited untaxed cigarettes in 49 of the
50 States without a remedy under the AOD, the PACT Act, or those States’ own
laws. Congress could not have intended its narrowly drawn exemption to give
common carriers like UPS free rein to engage in the very wrongdoing that the
statute was meant to prohibit.
The legislative purpose to block cigarette shipments illegal under state law,
moreover, is not merely derived from extra-statutory legislative history. It is
written into the language of the exemption provision itself as a modifier of the
word “honor” that defines its meaning. Rather than leaving us to guess what
63
“honor” means, Congress specified that the exemption applies only if the AOD is
“honored throughout the United States to block illegal deliveries of cigarettes . . . to
consumers.” Id. at § 376a(e)(3)(B)(ii)(I) (emphasis added). Merely giving lip service
to nationwide coverage of the AOD does nothing “to block deliveries.” Deliveries
are blocked only if UPS complies with the AOD. By specifying that the exemption
applies if the AOD is honored in such a way as to “block illegal deliveries of
cigarettes . . . to consumers,” Congress clearly signaled that “honoring” the
agreement involves compliance.
UPS’s remaining objections to the standard applied by the district court in
assessing whether UPS “honored” the AOD are meritless.
First, UPS asserts that application of the PACT Act’s exemption cannot
turn on whether it has in fact complied with the AOD, because such an inquiry
would be “rudderless.” Appellant’s Br. at 37. It is true that the PACT Act does
not define specifically how widespread and persistent violations would have to
be to justify a conclusion that UPS was not “honoring” the AOD nationwide.
That does not mean, however, that the courts are left without standards to apply.
The district court here applied a reasonable test, combining the extent of the
violations and the evidence of corporate failure to take reasonable steps to assure
64
compliance, to determine that the AOD was not “honored throughout the United
States.” Had a few UPS employees in one or even a few places corruptly or
negligently failed to comply with the AOD, it would be perfectly reasonable to
say that UPS had not “dishonored” the agreement. But when UPS as a
corporation makes no serious effort to train or police its employees anywhere in
the United States, it has failed to honor the AOD, particularly if that failure also
results in widespread, flagrant non-compliance on the very home turf of the
AOD: in New York. Whatever ambiguities might exist at the margins about
whether the AOD may be “honored” in the face of intermittent or unintentional
violations, UPS’s flagrant and undisputed disregard of the AOD makes that
question an easy one here. See, e.g., Holder v. Humanitarian Law Project, 561 U.S. 1,
20 (2010) (reaffirming that a party “who engages in some conduct that is clearly
proscribed cannot complain of the vagueness of the law as applied to the conduct
of others”) (quotation marks omitted).19
19
We accordingly reject our dissenting colleague’s concern that UPS could be
subjected to cascading penalties by a few violations of the AOD in “Rabbit
County,” or that the application of the PACT Act exemption turns on the
complete success of its interdiction efforts. Dissenting Op. at 9. The district court
determined that UPS was not honoring the AOD throughout the United States
based on evidence of a virtually complete disregard of its obligations in New
York, and a “lack of commitment to true, active AOD compliance [that] pervaded
65
Second, UPS objects that the district court’s construction of the exemption
provision violates due process because a common carrier will know only in
retrospect whether it has engaged in “enough” misconduct to forfeit the
exemption and would never be able to invoke the exemption successfully at any
stage prior to trial. That UPS cannot know, without being subject to litigation,
whether it is exempt from the PACT Act is not of grave concern. The PACT Act
exemption was granted with the expectation that the AOD would be an effective
substitute for the PACT Act requirements. New York (or any other plaintiff) can
claim that the exemption is rendered inapplicable only in the context of litigation
(as here) in which it charges widespread violations of the AOD. Thus, the issue of
whether UPS is exempt from the PACT Act will arise only during litigation
brought when a state’s attorney general believes that the AOD has been
flagrantly or frequently violated and that the exemption therefore does not apply
but the PACT Act does. In other words, the PACT Act issue does not set UPS up
its corporate culture.” 253 F. Supp. 3d at 604. Complete success at interdicting the
shipment of untaxed cigarettes is not required; good faith, reasonably effective
effort to comply with the AOD is. The AOD is not honored by a flagrant and
pervasive disregard for its provisions.
66
for litigation from which it should be exempt.20
Third, UPS argues that the district court erased the words “throughout the
United States” from the exemption provision because it made no findings
regarding UPS’s purported non-compliance in any jurisdiction other than New
York. UPS is correct that “throughout the United States” clearly means in all
States, not just New York. But the PACT Act grants an exemption when UPS
affirmatively honors the obligations of the AOD throughout the country; it does
not revoke an otherwise applicable exception only when UPS dishonors the AOD
everywhere in the United States. We are not persuaded that UPS honored the
agreement “throughout the United States” when it took no, or only hopelessly
ineffective, steps to comply with the AOD in New York, and the record evidence
shows that at least some of the breaches were national in scope, thus establishing
20
For that reason, we do not share Judge Jacobs’s concern about the fact that our
interpretation would require the exemption to be sorted out in litigation. See
Dissenting Op. at 9. The availability of a defense is often dependent on facts that
cannot be known until they are determined through litigation. The PACT Act
exemption is an exemption from liability, not from litigation; the exemption does
not purport to grant immunity from being sued. And even a defense, such as
qualified immunity, that is an immunity from litigation has to be litigated: public
officers are called to court to account for their conduct and the legal standard for
immunity in many cases cannot be applied until the facts can be established, at
summary judgment or even at trial. Like UPS, public officials often cannot know
whether they are immune from litigation until the issue has been litigated.
67
widespread breaches of the agreement. See, e.g., J. App’x 658 (lack of formal audit
policy); J. App’x 640-41 (cursory training of drivers); J. App’x 811, 1331 (shipment
of cigarettes across nation).
Our dissenting colleague adopts an interpretation that has never been
advanced by UPS itself, or by any other party or amicus curiae. Judge Jacobs
would have us find that UPS “honors” the AOD once it confirms in any litigation
that it intends to be bound by the AOD across the nation. Dissenting Op. at 8.
Prior to such confirmation, the exemption would be available as a discretionary
shield against claims brought by any of the other 49 states, which UPS may
choose to invoke, or not, based on tactical considerations in the litigation.
Dissenting Op. at 7-8.
As demonstrated above, nothing in the statutory language, the legislative
history, or sound policy suggests that the exemption should apply based on a
mere verbal commitment by UPS to comply with the AOD throughout the
country; moreover, the record shows that at no time between the enactment of
the PACT Act in 2010 through the filing of this lawsuit in 2015 did UPS make any
such verbal commitment. The dissent nevertheless embraces the theory that a
verbal commitment to the AOD suffices and, in an attempt to avoid the
68
embarrassing fact that UPS never even made a public commitment prior to this
lawsuit, asserts that UPS was not required to do so until confronted with
litigation charging that it violated the PACT Act. Under the dissent’s approach, in
such an enforcement action UPS could make its own tactical decision to disclaim
the national application of the AOD and compel a plaintiff state to proceed under
state law, or to embrace national application and compel the state to proceed
under the AOD, depending on which regime’s liability and penalty provisions
were more favorable to it. The dissent apparently would then allow UPS to
change its position in subsequent litigation brought by a different state, and
pledge future compliance nationally with the AOD, in order to invoke its PACT
Act exemption if the AOD scheme were tactically preferable to UPS in that
litigation. Only from that point on would the dissent apply the principles of
judicial estoppel to require UPS to comply with the AOD in other states and
exempt UPS from litigation under either the PACT Act or any state laws relating
to cigarette trafficking. Such an approach would leave UPS free to disregard the
AOD throughout the United States, yet retain its exemption from the PACT Act
and the state regulations it preempts, until it is caught violating its obligations
under one or the other regime – and even at that point, to elect which set of rules
69
and remedies would apply. We cannot think of any other regulatory regime that
applies in such a manner or provides such tactical advantages to an entity that
violates its obligations under federal and state statutes as well as a settlement
agreement to which it had freely agreed.21 We do not believe that Congress
intended such an anomalous result.
We conclude that as a matter of law, the clear meaning of the exemption is
that UPS is exempt only if it in fact substantially complies with the AOD
throughout the country. We also conclude that the district court’s well-supported
specific findings regarding UPS’s failure, at a nation-wide corporate level, to take
reasonable steps to assure compliance anywhere, and its widespread, well-
documented violations of its obligations in New York, amply support its broader
factual conclusion that UPS did not honor the AOD “throughout the United
States,” as it was required to do to be exempt from the PACT Act. Accordingly,
21
The dissent’s construction is also inconsistent with its own expressed concern
that our interpretation leaves the availability of the exemption unknowable until
a case is litigated. Dissenting Op. at 9. Under the dissent’s view, whether UPS
intends to comply with the AOD is not determined until it is sued for violating
state law or the PACT Act, at which time UPS has an option as to which regime
(the AOD or the federal and state statutes) should be applied to its past and
future conduct. It seems to us that the burden of any uncertainty in this regard
should fall on the wrongdoer, and not on the States that would not know in
advance what rules govern UPS’s behavior within their borders.
70
we affirm the district court’s liability determination with respect to the PACT Act
and PHL § 1399-ll.
B. UPS is Liable for Violations of the AOD’s Audit Requirement.
The district court found that UPS violated its audit obligation under the
AOD and imposed the AOD’s $1,000 per-violation penalty for each package that
UPS shipped on behalf of the Liability Shippers after it had a “reasonable basis to
believe” that such Liability Shipper was “tendering Cigarettes for delivery to
Individual Consumers.” United Parcel Service, Inc., 2017 WL 2303525 at *5. That
finding resulted in penalties of roughly $80.5 million due to the State, for 80,468
packages.
On appeal, UPS argues that (1) the AOD’s stipulated penalty provision
does not apply to audit violations at all; and (2) even if it does, it authorizes a
maximum penalty of only $1,000 for each Liability Shipper, or $20,000 in total.
We disagree with UPS’s first argument and therefore affirm the district court’s
findings of liability for violating its audit obligation under the AOD. We agree
with UPS’s second argument, however, and therefore reduce the penalty
imposed by the district court.
Because the AOD is a settlement agreement, its provisions are interpreted
71
under general contract principles. See MBIA Inc. v. Fed. Ins. Co., 652 F.3d 152,
170–71 (2d Cir. 2011). We enforce the AOD according to the plain meaning of its
terms. Id. at 171.
Paragraph 24 of the AOD, titled “Audits,” states that:
UPS shall audit shippers where there is a reasonable
basis to believe that such shippers may be tendering
Cigarettes for delivery to Individual Consumers, in
order to determine whether the shippers are in fact
doing so.
S. App’x at 501. Paragraph 42 of the AOD, coming under the heading
“Enforcement, Penalties and Costs,” provides that:
UPS shall pay to the State of New York a stipulated
penalty of $1,000 for each and every violation of this
Assurance of Discontinuance occurring after the
Effective Date; provided, however, that no penalty shall
be imposed if (a) the violation involves the shipment of
Cigarettes to an Individual Consumer outside the State
of New York, or (b) the violation involves the shipment
of Cigarettes to an Individual Consumer within the
State of New York, but UPS establishes to the
reasonable satisfaction of the Attorney General that UPS
did not know and had no reason to know that the
shipment was a Prohibited Shipment.
S. App’x at 508.
By its plain language, the penalty provision extends to violations of the
72
AOD’s audit requirement. It straightforwardly provides for penalties for all
violations of the AOD. The term “violation” means “[a]n infraction or breach of
the law” or “the contravention of a right or duty.” BLACK’S LAW DICTIONARY (11th
ed. 2019). The provision’s sweeping reference to “each and every violation”
plainly envisions penalties for violations of every type of obligation imposed on
UPS by the AOD, including violations of UPS’s auditing duty. Neither of the two
exemptions from the penalty provision apply to auditing violations.
UPS argues that the necessary inference from the two exemptions to the
penalty provision is that the provision was meant to apply only to UPS’s
knowing shipment of cigarettes within New York State. But the scope of the
exemptions to a provision do not necessarily define the scope of that provision
itself. To the contrary, the existence and scope of the exemptions here support the
opposite conclusion. The drafters of the AOD plainly knew how to exempt
certain violations and did so. Those exemptions, however, are limited to certain
types of violations involving shipments of cigarettes. That no exemption is
provided for any category of violations of the audit requirement or of any of the
other record-keeping or other obligations agreed to by UPS confirms that “each
and every violation” of the audit duty, without exception, is subject to penalties.
73
See Quadrant Structured Prods. Co., Ltd. v. Vertin, 23 N.Y.3d 549, 560 (2014)
(omission of language from contractual provision leads to “inescapable
conclusion” that “parties intended the omission”).22
22
UPS also points to other parts of the AOD to support its definition of
“violation.” For example, it notes that the definition of “Alleged Past
Violations”—the obverse of future “violations”—is UPS’s delivery of “packages
containing cigarettes to persons who were not authorized to receive them
pursuant to PHL § 1399-ll in violation of PHL § 1399-ll(2).” Appellant’s Br. at 50.
But the definition of “Alleged Past Violations” cannot be relevant to the
definition of a violation of the AOD. A past violation could only be a violation of
PHL § 1399-ll, because past violations, by definition, must have occurred before
the AOD came into existence. The AOD created additional obligations with which
UPS was required to comply, and imposed penalties for violations of those
obligations, not simply for violations of pre-existing statutory duties.
UPS also notes that the AOD defines “Potential Violations” only as
shipments. But that is a non-sequitur. The AOD does not treat “Potential
Violations” as a defined term. The term “Potential Violations” appears in the
AOD only as part of a section titled “Response to Notice of Potential Violation.”
That section describes the measures UPS should take in response to a notice from
the NYAG to UPS that one of its customers is shipping cigarettes to individual
consumers. See S. App’x at 507 ¶ 39. Any reference to a “violation” in that section
thus clearly refers to a customer’s violation, which can only be a “violation of
UPS’s Cigarette Policy.” UPS, by contrast, can commit many other kinds of
violations of the AOD, because the AOD imposes obligations on UPS beyond
simply complying with PHL § 1399-ll or its own Cigarette Policy.
Indeed, the “Definitions” provision of the AOD specifically defines
“Prohibited Shipment” as “any package containing Cigarettes tendered to UPS
where the shipment, delivery, or packaging of such Cigarettes would violate
Public Health Law § 1399-ll.” S. App’x at 498. If the AOD were intended, as UPS
claims, to define violations only as the knowing shipment of cigarettes, then the
penalty provision could have been written to say that “UPS shall pay to the State
of New York a stipulated penalty of $1,000 for each and every Prohibited
74
Further, it is entirely consistent with the context in which the AOD was
negotiated that UPS would face penalties for violations of the AOD’s various
procedural and prophylactic requirements. In consideration for the cessation of
the State’s investigation into UPS’s alleged past unlawful cigarette shipments,
UPS agreed to take on certain new contractual obligations. The AOD is an
attempt to establish a comprehensive and interdependent set of obligations that
collectively reduce the likelihood that UPS will ship packages containing
cigarettes. To read the term “violation” as limited to the knowing shipment of
cigarettes would mean that UPS could fail to comply with any of the host of other
obligations without consequence. Insulating UPS from liability for violations of
any of these provisions would thwart the AOD’s purpose.23
Shipment it makes” instead of using the much more general phrase “each and
every violation.”
23
UPS claims that because the AOD is a contract with the State, the State’s
remedy for a breach was to seek actual damages in a breach of contract action.
But the contract itself specifies the penalties that UPS agreed to pay for “each and
every violation.” UPS argues that applying the penalty provision to audit
violations would be “unconscionable” because it then would mandate penalties
for “minor” or “ministerial” breaches of the AOD. Appellant’s Br. at 53. But
contrary to what UPS claims, the district court did not hold that the State could
recover a stipulated penalty of $1,000 for any breach of any obligation in the
AOD, whatever the gravity of the breach or UPS’s scienter, and neither do we.
Auditing is a core compliance mechanism of the AOD, the breach of which
75
Once we accept that the penalty provision covers violations of UPS’s audit
duty, the question becomes just how much liability UPS incurs for its failure to
audit the Liability Shippers. The district court translated liability for failure to
audit into a penalty for each package of cigarettes that was shipped after UPS
should have audited but did not—in effect treating each unaudited package as a
separate violation of the audit requirement. UPS argues that this was error
because, at most, UPS breached the audit provision once per shipper.
We agree with UPS that the audit provision applies to shippers, not
shipments. By its plain terms, the audit provision is shipper-oriented. It requires
UPS to “audit shippers where there is a reasonable basis to believe that such
shippers may be tendering Cigarettes for delivery to Individual Consumers, in
order to determine whether the shippers are in fact doing so.” S. App’x at 501 ¶ 24
(emphasis added).
If UPS had a reasonable basis to believe that Shipper X was shipping
imperils other aspects of the overall compliance scheme. A failure to audit
suspected cigarette shippers deprives UPS of valuable knowledge of what its
customers are actually shipping, which in turn stymies UPS’s duty to suspend or
terminate the accounts of known cigarette shippers, and ultimately its ability to
enforce the ban on cigarette deliveries to consumers. Whether there exists a
category of de minimis violations of the AOD for which a court may reject a
demand for a stipulated penalty is a question not posed by this case.
76
cigarettes on January 1, then UPS should have audited Shipper X on January 1.
That UPS’s obligation to audit Shipper X remained in effect on January 2, when
UPS continued to ship unaudited packages of cigarettes for Shipper X, does not
mean UPS committed a second violation. The violation is single and continuous
until UPS purges the obligation by actually conducting an audit.
At any rate, the plaintiffs do not argue, and the district court did not find,
that UPS committed a separate audit violation on every day or every week or
every month that UPS failed to audit, once it had a reasonable basis to believe
that a particular shipper was sending cigarettes to individual consumers. Rather,
they argue, and the district court concluded, that every package shipped by a
seller who should have been audited constitutes a separate violation of the audit
requirement. But that is simply not what the AOD provides. While knowingly
delivering cigarettes to an individual consumer may violate a different provision
of the AOD, see S. App’x at 498–99 ¶ 17, the audit provision itself requires an
audit. It does not provide (as the parties could have provided if they so intended)
that every shipment by a shipper who should have been audited but was not
constitutes a violation of the AOD.
Thus, a failure to audit a shipper results in only one penalty—a penalty for
77
failing to audit that shipper.24 The district court found, and UPS does not contest,
that UPS failed to audit all 20 Liability Shippers. Therefore, the penalty for
violations of UPS’s audit obligations under the AOD should have been $20,000.
We therefore vacate the district court’s $80.5 million penalty award and modify
this judgment to impose a penalty of $20,000 under the AOD.
C. UPS Violated the CCTA by Knowingly Transporting More Than
10,000 Unstamped Cigarettes.
The district court held that UPS was liable under the CCTA for knowingly
transporting “contraband cigarettes,” see 18 U.S.C. § 2342(a), which are defined as
“a quantity in excess of 10,000 cigarettes, which bear no evidence of the payment
of applicable State or local cigarette taxes,” id. at § 2341(2). Specifically, the
district court found that for certain cigarette manufacturers, UPS routinely
delivered cigarettes in lots of 10,000 or more, and that for others of the Liability
Shippers, the number of unstamped cigarettes UPS transported far exceeded
10,000 in total.
24
The plaintiffs protest that a $1,000 penalty per shipper, rather than per
shipment, would render the AOD’s audit requirement toothless. But the low
penalties here result merely from the plaintiffs’ concession that they were seeking
penalties under the AOD for violations only of the audit requirement. The
plaintiffs chose to forego their right to seek penalties for UPS’s violations of other
provisions of the AOD.
78
UPS argues that the district court committed legal error in assessing UPS’s
liability under the CCTA. First, UPS contends that the district court erred in
aggregating separate shipments to meet the CCTA’s quantity requirement for
certain of the Liability Shippers. It claims that the CCTA’s use of “a quantity”
—singular—“in excess of 10,000 cigarettes” criminalizes only a single act of
transporting 10,000 cigarettes. Appellant’s Br. at 63 (emphasis in original). Second,
UPS contends that it cannot be held liable under this reading of the CCTA
because there was no proof that it knew that any one delivery exceeded 10,000
unstamped cigarettes.
We reject UPS’s interpretation of the statute. The plain text of the CCTA’s
definition of “contraband cigarettes” imposes no per-transaction requirement,
and the use of the indefinite article “a” in the phrase “a quantity” does not
necessarily signify a singular shipment. Referring to “a quantity” of something
does not, in common parlance, preclude aggregation.25 It makes perfect sense to
25
The district courts within this Circuit have all been of the view that aggregation
is permissible under the CCTA. See, e.g., City of New York v. FedEx Ground Package
System, Inc., 91 F. Supp. 3d 512, 520 (S.D.N.Y. 2015) (“Defendant’s interpretation
of Section 2341(2) conflicts with the plain, unambiguous text of the CCTA which
imposes no ‘in a single transaction requirement.’”) (internal quotation marks
omitted); City of New York v. LaserShip, Inc., 33 F. Supp. 3d 303, 313 (S.D.N.Y.
2014) (“The text of the CCTA is unambiguous. It provides that ‘a quantity in
79
say that a shipper who makes more than ten 1,000-cigarette deliveries has
delivered “a quantity” of more than 10,000 cigarettes, just as a child receives “a
quantity” of presents for her birthday comprising what she receives from each
individual guest at her birthday party, through the mail, or during personal visits
from other well-wishers before or after the day of the party. 26
excess of 10,000 cigarettes’ constitutes contraband. It says nothing to suggest that
the relevant quantity must be found in a single transaction.”) (internal citations
omitted); City of New York v. Gordon, 1 F. Supp. 3d 94, 103 (S.D.N.Y. 2013) (same);
City of New York v. Golden Feather Smoke Shop, Inc., No. 08–CV–3966 (CBA), 2009
WL 2612345, at *35 (E.D.N.Y. Aug. 25, 2009) (“In any event, the Court rejects the
view that defendants can sell unlimited quantities of unstamped cigarettes so
long as they avoid making any single sale in excess of 49 cartons. Nothing in the
CCTA provides that for cigarettes to be considered contraband they must be sold
in a single transaction.”).
26
We are mindful that the aggregation principle creates certain puzzles or
anomalies. If a person subject to the CCTA ships one package of 5,000 unstamped
cigarettes, she has not violated the CCTA because the 5,000 unstamped cigarettes
are not “contraband cigarettes.” But if she later ships another package with 5,001
unstamped cigarettes, that package contains contraband cigarettes and the
cigarettes in the earlier package retroactively become contraband cigarettes.
There is also a line-drawing problem. To the extent aggregation is
permissible in principle, there will be extreme cases where shipments of
unstamped cigarettes are spread out in time and space such that it does not make
sense to categorize them as “a quantity.” But wherever the line should be drawn
in time and space, this case does not present a close call. UPS maintained
accounts for shippers setting themselves up in business for the purpose of selling
significantly more than 10,000 unstamped cigarettes, who then did indeed ship
far more than 10,000 unstamped cigarettes on a regular and consistent basis over
an extended but compact period of time. Those shippers, and consequently UPS
80
As the district court explained in FedEx, “[t]his view is supported by the
fact that other CCTA provisions do contain an explicit per-transaction
requirement, and therefore it should be presumed that Congress acted
intentionally and purposefully in excluding such a requirement from [the
definition of contraband cigarettes].” 91 F. Supp. 3d at 520 (emphasis in original).
For example, the CCTA makes it unlawful “for any person knowingly to make
any false statement or representation with respect to the information required by
this chapter to be kept in the records of any person who ships, sells, or distributes
any quantity of cigarettes in excess of 10,000 in a single transaction.” 18 U.S.C.
§ 2342(b) (emphasis added); see also id. at § 2343(a) (record-keeping requirements
for any single transaction of over 10,000 cigarettes); id. at § 2343(b) (reporting
requirements for persons processing more than 10,000 cigarettes in a month).
That Congress included single-transaction or specific time-frame qualifiers in
other CCTA provisions but not in 18 U.S.C. § 2341(2) further supports our
conclusion that aggregation is permissible for the purposes of meeting the
definition of “contraband cigarettes.” See Russell v. United States, 464 U.S. 16, 23
as their aider and abetter, cannot avoid liability by claiming that they organized
all (or most) of their shipments to contain 10,000 or fewer unstamped cigarettes.
81
(1983) (presuming Congress acted intentionally in omitting term included in
other provisions of statute).
Since we hold that the CCTA delivery prohibition contains no single-
transaction requirement, UPS’s argument that it did not have knowledge that any
particular shipment contained a quantity in excess of 10,000 unstamped cigarettes
is beside the point. UPS does not contend it had no knowledge that the Liability
Shippers shipped more than 10,000 unstamped cigarettes in the aggregate.
We therefore affirm the district court’s determination that UPS violated the
CCTA by knowingly shipping contraband cigarettes for the Liability Shippers.
III. The Damages and Penalties Awards
UPS argues that even if we sustain one or more of the liability theories, we
should reverse the damages and penalties awards. First, it argues that the district
court erred in denying its motion to preclude the plaintiffs’ damages evidence
because the plaintiffs failed to provide UPS with a robust pre-trial damages
computation pursuant to Fed. R. Civ. P. 26, and erred in awarding damages and
penalties because the plaintiffs failed to prove any damages at trial. Second, it
argues that the district court adopted a diversion rate in its compensatory
damages calculation that was not supported by the evidence. Third, it argues that
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the penalty award imposed by the district court is grossly disproportionate to the
loss suffered by the plaintiffs and the gains received by UPS for the conduct at
issue.
In contrast, the plaintiffs cross-appeal, arguing that the district court
should have awarded them the full amount of unpaid State and City taxes on
cigarettes shipped by UPS under the PACT Act or CCTA without applying any
diversion rate. We address each of these arguments in turn.
A. The District Court Did Not Abuse Its Discretion in Allowing the
Plaintiffs to Present Their Damages Case Nor Did It Clearly Err in
Making Factual Findings Based on Record Evidence.
UPS raises several challenges with respect to the way the plaintiffs
presented their damages and penalties case from discovery through their post-
trial submission, as well as to how the district court held the plaintiffs to their
burden of proof. UPS complains that: (1) before trial the plaintiffs failed to inform
them of the amount or the process by which they would calculate their damages
and penalties claims, in violation of Rule 26; (2) during trial the plaintiffs did not
adequately prove their damages and penalties claims; and (3) it was error for the
district court to order the plaintiffs to submit additional information post-trial to
calculate the quantum of damages and penalties. For the reasons explained
83
below, we are unpersuaded that the district court abused its discretion in
allowing the plaintiffs to present their damages case, in making factual findings
based on the trial record, or in ordering the parties to submit calculations post-
trial.
1. The District Court Reasonably Refused to Strike the
Plaintiffs’ Entire Damages and Penalties Case.
UPS appeals from the district court’s denial of its Rule 26 motion, which it
renewed post-trial, complaining that the court should have precluded the
plaintiffs’ damages evidence entirely. We disagree with UPS and conclude that
the district court did not abuse its “broad latitude” in managing discovery, or in
failing to impose discovery sanctions on the plaintiffs. See EM Ltd. v. Republic of
Argentina, 695 F.3d 201, 207 (2d Cir. 2012); Argo Marine Sys., Inc. v. Camar Corp.,
755 F.2d 1006, 1015 (2d Cir. 1985).
Rule 26 requires a plaintiff to disclose “a computation of each category of
damages claimed,” and to provide an opportunity for the defendant to review
the evidence used to calculate damages. Fed. R. Civ. P. 26(a)(1)(A)(iii). Rule
37(c)(1) provides that a failure to comply with Rule 26(a)’s disclosure obligations
results in preclusion of the evidence “unless the failure was substantially justified
84
or harmless.” Fed. R. Civ. P. 37(c)(1).
The district court denied UPS’s pretrial motion to bar monetary relief,
viewing “the overall record as sufficiently placing UPS on notice as to the
damage[s] theory.” J. App’x at 443. In adhering to that ruling after trial, the
district court reaffirmed that UPS had “adequate pre-trial notice to counter
plaintiffs’ damages claim.” United Parcel Service, Inc., 253 F. Supp. 3d at 687. In
essence, this was a ruling that any Rule 26 violation that may have occurred was
“harmless.” See Fed. R. Civ. P. 37(c)(1).
On appeal, UPS contends that it was substantially prejudiced by the
plaintiffs’ limited Rule 26(a) disclosure because “[t]he number of packages, and
the derivative number of packages containing unstamped cigarette cartons,
transported by UPS constituted the determinative measure of both compensatory
damages and penalties” and “[t]hus, disclosure of the methodology and evidence
supporting those calculations was critical to UPS’s defense.” Appellant’s Br. at 76.
But that is the very same argument that the district court rejected after holding
(1) that the plaintiffs provided this exact information for the Arrowhawk Group,
(2) that because UPS “knew the [other] shippers, it could easily locate the same
types of documents for each, and it knew plaintiffs’ general methodology,” and
85
(3) that “the calculations were ultimately based on known data points: penalty
ranges generally set forth in the AOD and statutory schemes at issue, and
compensatory damages based on the statutory tax rate imposed on each carton of
cigarettes.” United Parcel Service, Inc., 253 F. Supp. 3d at 686–88.
By the time of trial, UPS knew that the plaintiffs would rely on UPS’s
spreadsheets to prove that UPS delivered packages for shippers on the federal
NCLs in violation of the PACT Act, and that they would pursue per-package
penalties for those violations. Similarly, UPS knew that the plaintiffs would be
seeking AOD penalties “for each package that UPS failed to audit in accordance
with Paragraph 24 of the AOD.” J. App’x at 425. And UPS knew that, based on
package counts and proof of contents, the plaintiffs would be seeking per-
package penalties under PHL § 1399-ll and unpaid taxes under the CCTA and
PACT Act.
In sum, the plaintiffs disclosed their damages theory from the beginning;
made clear to UPS throughout the discovery period that UPS’s own internal
spreadsheets would be key documents used to prove total damages;27 notified UPS
27
Plaintiffs questioned a UPS witness “extensively” (UPS’s word) on the
spreadsheets, and UPS heard from plaintiffs’ own Rule 30(b)(6) witness that
damages would be computed based on those documents. J. App’x at 198.
86
that plaintiffs would rely on direct and circumstantial evidence to prove package
contents; and provided a computation of damages for an exemplar shipper group.
In contrast to a situation in which damages data are reasonably known only to
the plaintiff—e.g., loss of future profits or physical injuries—here the damages
related to UPS’s own historical shipping activities, as derived from UPS’s own
internal records. We agree with the district court that UPS was well-positioned to
respond to claims about what it had shipped and with what frequency.
Whether or not we would have required the plaintiffs to provide more
than only an exemplar of the full amount of their damages and penalties had we
been in the district court’s position is of no moment; management of the
discovery process is confided to the sound discretion of the district court. Here,
the judge who oversaw the discovery process and trial acted well within her
discretion in concluding that UPS did not “suffer[] any real prejudice” from the
lack of a more robust disclosure. United Parcel Service, Inc., 253 F. Supp. 3d at 687.
Therefore, it was not error for the district court to allow the plaintiffs to present
evidence of damages and penalties at trial.
87
2. The District Court’s Factual Findings on Damages and
Penalties Were Supported by the Evidence.
In order to prove damages and liability for penalties in this case, the
plaintiffs were required to prove how many packages of cigarettes UPS shipped.
To do this, the plaintiffs provided the court with UPS’s own spreadsheets
reflecting how many packages UPS shipped for each Liability Shipper, as well as
direct and circumstantial evidence showing what percentage of the packages UPS
shipped for each Liability Shipper contained cigarettes. The district court held
that the spreadsheets, which UPS itself had generated and produced during
discovery, were sufficient to prove the quantity of packages underlying the
damage and penalty calculations for all claims. The district court also made
reasonable inferences about package contents from various pieces of both direct
and circumstantial evidence put forth by the plaintiffs.
On appeal, UPS contends that the plaintiffs’ proof of damages and
penalties at trial was insufficient. The thrust of UPS’s argument is that the
plaintiffs never presented a witness—fact or expert—to testify about their
damages and penalties calculations.
88
(i) Package Quantity
UPS’s complaint regarding the plaintiffs’ use of UPS’s own spreadsheets to
calculate the number of packages it shipped for each of the Liability Shippers
rings hollow. The spreadsheets, produced in Excel format, contain fields showing
the unique shipper number, the date a package was picked up, the state and zip
code of delivery, and the actual or billed weight of every package. They were
generated by UPS “specifically for this litigation” in response to plaintiffs’
request for information about UPS’s delivery services for cigarette dealers. J.
App’x at 199. Along with the spreadsheets, UPS produced a data dictionary
defining the terms in the spreadsheet column headings.
Prior to trial, the court overruled UPS’s foundational objection to the
spreadsheets’ admission because UPS had stipulated to their authenticity. The
court explained that UPS made only a foundational objection and did not object
to the spreadsheets as irrelevant or hearsay. Consequently, the plaintiffs could
offer the spreadsheets without the need for a sponsoring witness. At trial, the
spreadsheets and data dictionaries were admitted into evidence without
accompanying testimony. UPS chose not to submit a witness to explain what it
understood the spreadsheets to mean or not to mean.
89
At trial, and now, UPS challenges whether the spreadsheets are a reliable
indicator of the overall number of packages shipped. But UPS produced these
spreadsheets in the first instance in response to plaintiffs’ requests for
information about shipment counts. Assuming that UPS faithfully complied with
its production obligations, it cannot now assert that its own documents did not in
fact answer the questions to which UPS represented they were responsive.
The data contained in UPS’s spreadsheets themselves, in conjunction with
the UPS data dictionaries, provided a reasonable basis upon which to tabulate the
number of packages shipped and determine when they were shipped.28
Once evidence has been admitted as relevant and authentic, a factfinder has
broad latitude to determine the weight the evidence deserves. Any lack of
supporting testimony describing business records already established as
authentic “is relevant only as to the weight to be accorded such records.” Stein
28
UPS also contends that the district court erred in accepting the plaintiffs’
method for tabulating the package and carton counts. The plaintiffs sorted the
spreadsheets by account number (i.e., shipper), eliminated duplicates, and added
up the packages shipped. UPS made certain objections to this methodology
which the court addressed. The court agreed with UPS that packages weighing
less than one pound were unlikely to contain cigarettes and thus should be
excluded from the tabulation and that packages being delivered to a cigarette
shipper, rather than delivered by a shipper, should also be excluded.
90
Hall & Co. v. S.S. Concordia Viking, 494 F.2d 287, 292 (2d Cir. 1974). Moreover, a
factfinder’s damages calculation need only have a “reasonable basis.” Sir Speedy,
Inc. v. L & P Graphics, Inc., 957 F.2d 1033, 1038 (2d Cir. 1992).
That the parties’ counsel made conflicting arguments about what the
spreadsheets proved, and that the district court resolved those disputes as trier of
fact, is entirely unremarkable. Choosing among “competing inferences that can
be drawn from the evidence” is the factfinder’s province. United States v.
Morrison, 153 F.3d 34, 49 (2d Cir. 1998). “[W]e defer to the fact finder’s
determination of the weight of the evidence and the credibility of the witnesses
and to the fact finder’s choice of the competing inferences that can be drawn from
the evidence.” United States v. LaSpina, 299 F.3d 165, 180 (2d Cir. 2002) (internal
quotations and alterations omitted). UPS has not come close to establishing that
the district court’s findings were clearly erroneous.
(ii) Package Contents
With respect to package contents for six of the Liability Shippers, the
plaintiffs submitted direct evidence of contents, consisting of order forms,
shipping invoices describing package contents, driver summaries, packing slips,
and daily report printouts, as well as direct testimony and admissions in a federal
91
plea agreement. For the remaining eleven cigarette shippers, plaintiffs provided
circumstantial evidence of package contents. The district court found that there
was ample evidence as to each Liability Shipper to (1) support the fact that
packages contained cigarettes and (2) reasonably approximate the percentage of
each Liability Shipper’s packages that contained cigarettes.
UPS complains that the plaintiffs offered shifting and inconsistent theories
to prove package contents and that the plaintiffs did not prove the number of
cigarette cartons UPS shipped with mathematical precision. As an initial matter,
UPS was well aware that the plaintiffs intended to rely on both circumstantial
and direct proof of the contents of what UPS calls the “plain brown boxes” it
transported. See Appellant’s Br. at 1 & 46. Plaintiffs’ interrogatory responses,
served nearly a year before trial, previewed that they would use circumstantial
evidence such as tracer inquiries, the results of UPS’s eventual audits, and
shippers’ placement on the NCL to prove the contents of packages UPS shipped
for the Liability Shippers.
Again before trial, in the Arrowhawk Letter, the plaintiffs identified the
types of circumstantial evidence that they would rely on at trial to prove the
contents of packages UPS shipped for the Liability Shippers. At trial, the
92
plaintiffs presented, and the district court relied on, circumstantial evidence of
package contents such as reports from UPS drivers, tracer inquiries, results of
UPS’s belated audits, controlled buys of cigarettes by City investigators, the
presence of certain shippers on the federal NCL, and the shippers’ overall
product lines. In its liability opinion, the district court examined the evidence
with respect to each Liability Shipper and then made an assessment, on a
shipper-by-shipper basis, as to what percentage of each Liability Shipper’s
packages contained cigarettes. UPS challenges the approach in concept, rather
than lodging a specific challenge to any of the district court’s factual
determinations.
As an initial matter, there was nothing impermissible about the plaintiffs’
reliance on circumstantial evidence to prove their case. See United States v.
Casamento, 887 F.2d 1141, 1156 (2d Cir. 1989) (“Circumstantial evidence . . . is of
no lesser probative value than direct evidence.”). Indeed, such proof may have
been the only proof available here given that, like other wrongdoers, cigarette
traffickers do not commonly create or retain records of their criminal activities or
testify without asserting their right to self-incrimination.
Moreover, UPS had every opportunity to challenge—and did
93
challenge—the circumstantial evidence that the plaintiffs proffered. UPS argued
to the district court at length that the evidence did not show either that the
packages it shipped contained cigarettes or that UPS knew that the businesses
were shipping cigarettes.
To the extent that the district court could not pin down the precise number
of cigarette cartons each Liability Shipper shipped, the responsibility lies at UPS’s
own door. See Raishevich v. Foster, 247 F.3d 337, 343 (2d Cir. 2001) (“If the
plaintiff’s inability to prove an exact amount of damages arises from actions of
the defendant, a factfinder has some latitude to make a just and reasonable
estimate of damages based on relevant data.”) (internal quotation marks
omitted); Sir Speedy, Inc., 957 F.2d at 1038 (explaining that a claimant “need not
prove the amount of loss with mathematical precision”). UPS had a contractual
audit obligation, as well as other legal obligations, not to ship stamped or
unstamped cigarettes to individual consumers. UPS cannot accept contraband
cigarettes for shipment, look the other way, and then demand exacting proof of
what was inside the packages that it controlled. See Story Parchment Co. v. Paterson
Parchment Paper Co., 282 U.S. 555, 565 (1931) (when uncertainty in proving
damages is caused by the defendant’s own wrongful act, “justice and sound
94
public policy alike require that he should bear the risk of the uncertainty thus
produced”); Whitney v. Citibank, N.A., 782 F.2d 1106, 1118 (2d Cir. 1986) (“When a
difficulty faced in calculating damages is attributable to the defendant’s
misconduct, some uncertainty may be tolerated.”).
We therefore conclude that the plaintiffs’ evidence was sufficient to
establish liability and damages and the district court’s approach to making
factual determinations based on the record evidence was entirely reasonable.
3. The District Court Did Not Err By Ordering the Parties to
Submit Post-Trial Calculations of Damages and Penalties.
In its liability opinion, the district court ordered the parties to provide the
court with a calculation of the quantity of packages and cartons UPS shipped for
each Liability Shipper. The liability opinion directed the parties to apply the
relevant dates, definitions, and findings provided by the court to the data
provided in the spreadsheets so that the court could assess the precise
“quantum” of damages and penalties to be awarded. Per the court’s order, the
plaintiffs submitted a detailed calculation of the packages and cartons UPS
shipped for each Liability Shipper, including the specific exhibits admitted
during trial that the plaintiffs used to identify the package and carton figures. On
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the other hand, UPS, in defiance of the court’s order, submitted a calculation for
only three of the Liability Shippers. Because UPS failed to comply with the
court’s order, the court “calculate[d] its determination of damages and penalties
using the uncontested numbers of Packages and Cartons supplied by plaintiffs
where appropriate.” United Parcel Service, Inc., 2017 WL 2303525 at *2.
UPS claims that by ordering the parties to submit post-trial calculations,
the district court reopened the record, “stepped into the role of expert witness
and created a previously undisclosed, untested, and unsupported methodology
on which to base damages and penalties.” Appellant’s Br. at 87. Despite UPS’s
hyperbolic protestations, this course of action was a reasonable method of
ensuring that both sides had an opportunity to apply the court’s factual findings
to the evidence in the record.29
UPS’s claim that the district court reopened the record sua sponte after trial
is incorrect. The record was never reopened; the court simply directed the parties
29
See United States v. Global Distributors, Inc., 498 F.3d 613, 620 (7th Cir. 2007)
(“Although the district court gave Global an opportunity to file a memorandum
on damages, and Global availed itself of that option, Global did not ‘challenge[]
the arguments in the government’s damages memorandum.’ Instead, it
continued to present excuses for its underlying behavior. The district court thus
took as undisputed the facts in the government’s memorandum and drew
inferences from those facts.”) (alteration in original).
96
to apply the court’s definitions and findings to the already admitted evidence to
assist the court in calculating the “quantum” of relief. The information contained
in both parties’ post-trial submissions derived from evidence that had already
been admitted into the record and which UPS had ample opportunity to
challenge or explain. As is not unusual in a bench trial, the court requested
supplementary argument from the parties, not additional evidence.
We also agree with the district court that, contrary to UPS’s argument, the
type of analysis conducted in the post-trial submissions did not require expert
testimony. UPS emphasizes that the spreadsheets were large and unwieldy. But
the parties, with the help of Excel, were easily capable of conducting the simple
arithmetic calculations that the district court ordered.30
UPS also complains that by ordering it to conduct and submit a calculation
of the packages containing cigarettes—information that would be used to punish
30
It is true that the district court ordered the parties to remove duplicate entries
and packages weighing under one pound, which required some human
manipulation in the Excel program. But that the district court accepted UPS’s
arguments as to why certain packages in the spreadsheets should not be counted
does not mean that the plaintiffs were unable to perform the calculation without
an expert. Had the district court not given UPS the chance to submit its own
calculation or to verify the plaintiffs’ calculations, we would be more concerned
about potential error. But UPS had every opportunity to refute the calculations
proffered by the plaintiffs.
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UPS financially—the district court violated the principle of party presentation
and shifted the burden of proof. The court’s order did not shift the burden of
proof onto UPS. The evidence and theories of damages and penalties had been
put forth by the plaintiffs. All the court ordered UPS to do was to submit, if it so
chose, its contentions regarding the numbers of packages and cartons as they
were defined in the liability opinion. By that time, the plaintiffs had already met
their burden of proof on damages. What remained was to plug in the damage
and penalty calculations based on information in the record.
B. The District Court Erred in Awarding the Plaintiffs Only Half of
the Unpaid Taxes on Cigarettes UPS Unlawfully Shipped.
The district court awarded the plaintiffs a total of $9.4 million in damages
for unpaid cigarette taxes.31 The court recognized that both the PACT Act and
CCTA authorized it to award the plaintiffs damages for the taxes that went
unpaid on the cigarettes that UPS illegally transported under those statutes. After
calculating the amount of unpaid taxes due under both statutes, the district court
concluded that it would award damages for unpaid taxes under the CCTA,
which summed to a larger amount than the damages for unpaid taxes under the
31
The district court also awarded $1,000 in nominal penalties under the CCTA.
That award is not challenged on appeal.
98
PACT Act.32
However, because the district court thought of the plaintiffs’ “lost tax
revenues [as] a type of compensatory damage[],” see United Parcel Service, Inc.,
253 F. Supp. 3d at 687, it applied tort principles of causation to limit the plaintiffs’
recovery of unpaid taxes by the amount of “tax diversion,” or the extent to which
purchasers of unstamped cigarettes would have purchased New York-taxed
cigarettes if the former were not available through UPS. The court awarded the
plaintiffs only 50% of the state and local excise taxes that went unpaid on UPS’s
cigarette shipments, reasoning that half of the purchasers of unstamped
cigarettes transported by UPS would have managed to buy untaxed or lower-
taxed cigarettes by some other means if UPS had complied with the law by
declining those shipments.
On appeal, UPS argues that the district court erred in applying a diversion
rate of 50%, instead of accepting the testimony of its expert, who opined that
94.6% of consumers whose unstamped cigarettes were delivered by UPS would
32
The damages for compensatory damages were higher under the CCTA than
under the PACT Act because UPS shipped more cartons of cigarettes in violation
of the CCTA than it did in violation of the PACT Act (since only five of the
Liability Shippers were on the NCLs).
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still have evaded State and City taxes in a “but-for world” where the unstamped
cigarettes shipped by UPS were unavailable. The plaintiffs cross-appeal on this
point, claiming that it was error for the district court to apply any diversion rate
at all to the plaintiffs’ damages for unpaid taxes.
Determining the correct measure of relief under the CCTA and PACT Act
is a question of statutory interpretation, which we review de novo. See Gortat v.
Capala Bros., Inc., 795 F.3d 292, 295 (2d Cir. 2015). A straightforward reading of
both the CCTA and the PACT Act leads us to conclude that the proper measure
of damages under either statute is simply the amount of unpaid taxes on the
unlawful transactions UPS knowingly facilitated. The district court erred in
importing tort principles of causation into that calculation.
The CCTA allows a state or locality in a civil action to obtain “appropriate
relief for violations,” including but not limited to “money damages” and
“injunctive or other equitable relief,” 18 U.S.C. § 2346(b)(2), which easily
encompasses “unpaid taxes.” The PACT Act allows a state or locality to recoup
“damages, equitable relief, or injunctive relief . . . including the payment of any
unpaid taxes to the appropriate Federal, State, local or tribal governments.” 15
100
U.S.C. § 377(b)(2) (emphasis added).33
Of course, the State and City have to prove the existence of such “unpaid
taxes.” But nothing in the language of either the PACT Act or the CCTA suggests
that “unpaid taxes” should be construed to mean the taxes that would have been
collected not on the untaxed cigarette sales that actually occurred, but on the
hypothetical transactions that would have occurred in some counterfactual
33
The statutory basis for holding UPS liable for unpaid taxes distinguishes this
case from Hemi Group, LLC v. City of New York, N.Y., 559 U.S. 1 (2010), on which
the dissent relies. In Hemi Group, the Supreme Court cautioned against allowing
the recovery of unpaid taxes from defendants who, like UPS, were never
responsible for paying those taxes in the first place. There, the City sought to
recover unpaid taxes under RICO, which provides a cause of action for “[a]ny
person injured in his business or property by reason of a violation of section
1962.” 18 U.S.C. 1964(c). The City asserted that it suffered injury in the form of
lost tax revenue—its “business or property” in RICO terms—“by reason of” the
Hemi Group’s fraud, that is, its failure to submit customer information to New
York State. Hemi Group, 559 U.S. at 7. The Court concluded that the City could not
sustain its cause of action because the connection between the Hemi Group’s
failure to comply with its Jenkins Act reporting requirements (the predicate RICO
offense) and the City’s lost tax revenue was too attenuated. The case did not
involve the concept of “diversion.” Here, in contrast, the statutes at issue were
enacted for the precise purpose of preventing sellers of cigarettes from evading
the collection and payment of taxes, and explicitly or implicitly provided for the
recovery of unpaid taxes as a form of relief for violations by common carriers. We
have no quarrel with Judge Jacobs’s assertion that the “Supreme Court’s teaching
[in Hemi Group] transcends the [RICO] context.” Dissenting Op. at 16. But the
Court’s caution about permitting damages in the form of unpaid taxes against
parties that are not themselves responsible for paying them surely cannot apply
where Congress has authorized such relief.
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universe. “Unpaid taxes” more naturally means the taxes that should have been
charged on the actual transactions that occurred, but that were not paid.34
Rather than engaging in the required statutory analysis, the district court
accepted a faulty analogy to tort principles. But the language of private tort
actions is relevant here only to the extent that it accords with the texts and
purposes of the CCTA and PACT Act. Those statutes, which Congress intended
to meaningfully deter common carriers such as UPS from transporting untaxed
cigarettes, and which are aimed squarely at evasion of state and local cigarette
taxes, cannot fairly be understood to incorporate UPS’s diversion theory. We
have previously explained that “in an enforcement action, civil or criminal, there
34
Surely no one would dispute that proposition if the defendant here were the
actual seller-shipper of the cigarettes. Take the example of a Manhattan jeweler
who pretends to ship jewelry to an out-of-state address to evade sales taxes. We
would undoubtedly reject an argument that the jeweler should not be liable for
the unpaid sales taxes on the theory that, if the taxes had been charged, the
customer would have cancelled the purchase and bought the jewelry in New
Jersey instead, obviating any harm to the City or State from the jeweler’s failure
to collect and transmit the proper sales tax. UPS in effect argues that it should not
be held liable for the unpaid taxes it helped the shippers evade because it is only
an aider and abetter, rather than the principal offender. But those who aid and
abet or conspire in wrongful conduct are generally jointly and severally liable for
the harm caused by that conduct, regardless of the degree of their participation
or culpability in the overall scheme. See, e.g., Lumbard v. Maglia, Inc., 621 F. Supp.
1529, 1536 (S.D.N.Y. 1985) (citing W. Prosser, Handbook of the Law and Torts
292–93 (4th ed. 1971)).
102
is no requirement that the government prove injury, because the purpose of such
actions is deterrence, not compensation.” SEC v. Apuzzo, 689 F.3d 204, 212 (2d
Cir. 2012) (rejecting defendant’s invocation of “proximate cause” tort principle in
SEC enforcement action). And in any event, tort principles typically do not
permit a defendant to avoid paying damages by arguing that another tortfeasor’s
(or even innocent party’s) actions would have been sufficient to produce the
claimed harm absent the defendant’s tortious conduct. See Basko v. Sterling Drug,
Inc., 416 F.2d 417, 429 (2d Cir. 1969).
The failure of UPS’s argument is further demonstrated by the inherently
speculative nature of the inquiry that it persuaded the district court to undertake.
UPS faults the district court’s 50% diversion rate as unsupported by any reliable
methodology. We concur. At the same time, we also concur with the district
court’s well-founded rejection of UPS’s expert witness’s theory that 94.6% of
cigarette purchasers would have either quit smoking altogether, found other
methods of obtaining bootlegged untaxed cigarettes, or traveled to other states to
buy cigarettes if deprived of access to home delivery of cigarettes from
reservation sellers. No doubt some, or even many, purchasers would have found
other means of feeding their addictions while avoiding taxes. But the extent of
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such evasion is inherently unknowable, and a rule that requires a district court to
engage in such a speculative enterprise is as impractical as it is unmoored to the
statutory concept of “unpaid taxes.”
Thus, we hold that the district court erred in applying a 50% “diversion
rate” to limit the plaintiffs’ damages for unpaid taxes. The plaintiffs are entitled
to the full amount of the unpaid taxes on cigarettes transported by UPS in
violation of the CCTA, totaling $17,356,458 for the State and $1,441,770 for the
City.
C. The District Court Abused Its Discretion in Awarding Per-
Violation Penalties Under Both the PACT Act and PHL § 1399-ll.
The final issue we must consider is whether the district court abused its
discretion in imposing cumulative penalties on UPS under the PACT Act, PHL
§ 1399-ll and the AOD. At the outset, we note that we have already concluded
that the penalties under the AOD must be reduced from $80.5 million to $20,000.
See supra II.B.35 That reduction obviates some of our concern with the district
court’s assessment of what were in effect treble penalties. But we are still
presented with the question of whether the total penalty award that
35
We have also raised the compensatory award for unpaid taxes to $18.8 million.
See supra III.B.
104
remains—approximately $78 million under the PACT Act and another $78
million under PHL § 1399-ll—is excessive. We hold that it is.
In general, civil penalties are designed to punish culpable individuals,
deter future violations, and prevent the conduct’s recurrence. District courts have
discretion in fashioning appropriate relief in civil enforcement actions to achieve
these goals. See Friends of the Earth, Inc., v. Laidlaw Environmental Servs. (TOC), Inc.,
528 U.S. 167, 192 (2000). A district court may exceed its discretion, however,
when its decision—though not necessarily the product of legal error or a clearly
erroneous factual finding—cannot be located within the range of permissible
decisions. Slupinski v. First Unum Life Ins. Co., 554 F.3d 38, 47 (2d Cir. 2009). In
determining the amount of civil penalties, district courts are typically guided by a
number of factors, including the good or bad faith of the defendants, the injury to
the public, and the defendant’s ability to pay. See Advance Pharmaceutical, Inc., 391
F.3d at 399.36
Our assessment of the civil penalties in this case begins with the statutes
36
In awarding statutory civil penalties, district courts are also constrained, at the
outer bounds, by the Eighth Amendment’s Excessive Fines Clause. See United
States v. Bajakajian, 524 U.S. 321, 328 (1998). A civil penalty violates the Excessive
Fines Clause if it is “grossly disproportional to the gravity of the defendant’s
offense.” Id. at 337.
105
under which they were imposed. The PACT Act allows the district court to
impose per-violation – that is, per-package – penalties on a common carrier for
shipping packages for sellers identified on the NCLs. The PACT Act caps the
penalty for a common carrier’s first violation at $2,500 but increases the limit to
$5,000 for any subsequent violations that take place within one year of a previous
violation. 15 U.S.C. § 377(b)(1)(B). PHL § 1399-ll authorizes the district court to
impose per-violation – that is, per-carton – penalties on a common carrier for
each carton of cigarettes that the common carrier ships, capping the penalty for
each violation at $5,000. See PHL § 1399-ll(5). The district court awarded the
plaintiffs approximately half of the per-violation penalties authorized under both
statutes, imposing on UPS, in effect, a $2,500 penalty for each violation of the
PACT Act and another $2,500 penalty for each violation of PHL § 1399-ll. The
district court’s assessment of penalties was permissible under the statutory
schemes because both the PACT Act and PHL § 1399-ll are silent regarding the
maximum penalties that may be imposed against a defendant.
However, it is worth noting here that Congress rarely exercises its
authority to establish maximum-authorized civil penalties. Rather, when
Congress adopts legislation authorizing the award of civil penalties, it generally
106
leaves to the courts the job of fleshing out federal common-law rules governing
the maximum aggregate size of penalties and punitive damages awards. Thus,
the fact that the district court’s penalty award is technically permissible under the
statutory regimes at play does not necessarily mean that it is a reasonable penalty
in all circumstances. Penalties cascading on a defendant from several different
statutory regimes must be applied with great care when they result from one
underlying set of bad actions.
The double counting of PACT Act and PHL § 1399-ll penalties here falls
within the category of unreasonable penalties. UPS was punished under both the
PACT Act and PHL § 1399-ll for what was largely the same underlying conduct.
Specifically, because all of the NCL shippers, for which UPS faced PACT Act
penalties, were also Liability Shippers for which UPS faced PHL § 1399-ll
penalties, UPS faced double per-violation penalties at a rate of $2,500 for many of
the same shipments.37 That led the district court to impose penalties of $156
37
The five shippers on the NCLs—Elliot Enterprises, Elliot Express/EExpress,
Bearclaw Unlimited/AFIA, Indian Smokes, and Smokes and Spirits, for which
UPS faced PACT Act penalties—were all also Liability Shippers for which UPS
faced penalties. Indeed, the district court used the fact that certain shippers were
on the NCLs to deem them Liability Shippers for purposes of PHL § 1399-ll
liability. See United Parcel Service, Inc., 253 F. Supp. 3d at 629 (“While the fact that
[Elliot Enterprises] was located on an Indian reservation was alone insufficient to
107
million under the PACT Act and PHL § 1399-ll for what was, in essence, one set
of impermissible conduct.
That double counting, among other factors, leads us to conclude that the
penalties that the district court imposed on UPS are too high. We recognize that
both New York and Congress take cigarette trafficking seriously, which is why
several laws address the conduct for which UPS is being held liable. UPS holds a
key position in the distribution chain and can have a meaningful impact in
putting an end to the sale of unstamped cigarettes from reservation sellers to
consumers throughout New York. But the $240 million penalty originally
imposed by the district court, and even the $160 million penalty that remains in
the wake of our correction to the district court’s erroneous calculation of
penalties under the AOD, is far too large a pill to swallow for the conduct at issue
here. In so concluding, we revisit some of the factors that the district court
considered in the first instance.
support a reasonable basis to believe it was shipping cigarettes, when that fact
was combined with its presence on the November 2010 NCL and its presence in
the Tobacco Watchdog Group letter, the question was not close.”).
Approximately 54% of the PHL § 1399-ll penalty award to the State was
attributable to NCL shippers, and approximately 80% of the PHL § 1399-ll
penalty award to the City was attributable to NCL shippers. See J. App’x at
507–18.
108
The district court was correct that UPS bears a high degree of culpability
for the shipment of unstamped cigarettes, having flouted its obligations under
the PACT Act and PHL § 1399-ll, as well as the AOD to which it assented in order
to settle an earlier investigation. The court concluded that “[n]umerous separate
acts by numerous UPS employees allowed vast quantities of unstamped cigarette
shipments to be delivered to unauthorized recipients in New York.” United Parcel
Service, Inc., 253 F. Supp. 3d at 690 (emphasis added). But, at the same time, UPS
is not the primary wrongdoer here: the proscriptions against UPS shipping
cigarettes are intended to prevent the actual cigarette sellers from evading taxes.
It is worth considering that UPS itself “had no obligation to collect, remit, or pay”
the taxes that were evaded. Hemi Group, 559 U.S. at 17.
We also consider the public harm caused by UPS’s conduct. The district
court concluded that the State and Congress have deemed the transport of
cigarettes a public health issue, but that UPS, as the transporter, bears a lower
level of culpability than other entities, such as the manufacturer or seller of
cigarettes, for the public health issues caused by smoking. We agree with the
district court that the effect of cigarette smoking on public health is substantial,
but that the gravity of UPS’s conduct is partially mitigated by the attenuated
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causal relationship between its conduct and the public health consequences of
smoking.
Another aspect of the public harm is, of course, the plaintiffs’ lost tax
revenue on the cigarettes whose untaxed sale UPS facilitated. But the harm to the
public fisc here totaled, at most, $18.8 million. The aggregate penalty imposed by
the district court amounted to approximately 13 times that financial loss, and
even the penalties remaining after the correction of the AOD penalty amount to
more than eight times the maximum tax lost. The penalty amount even more
dramatically dwarfs any profits UPS made on the illegal cigarette shipments. See
United Parcel Service, 253 F. Supp. 3d at 690; J. App’x at 1953–54 (estimating
profits on all shipments for Liability Shippers from 2010 through 2014 at
$475,000).
The analogous penalty under the federal Sentencing Guidelines for
sentences for trafficking cigarettes under the CCTA sheds some light on these
ratios. See U.S.S.G. § 2E4.1; cf. Bajakajian, 524 U.S. at 338 (considering the
maximum possible sentence under the Sentencing Guidelines for comparable
conduct). The Guidelines are particularly relevant here because they make clear
that tax evasion is the principal conduct at which these statutes are directed, see
110
U.S.S.G. § 2E4.1, and are designed to avoid hyper-technical, per-violation penalty
calculations where the conduct at issue “involv[es] substantially the same harm.”
U.S.S.G. § 3D1.2. The operative Guidelines permit the court to set a fine at up to
four times the amount of pecuniary loss caused.38 See U.S.S.G. §§ 2E4.1, 2T4.1,
8C2.4(d), 8C2.6. Thus, under our reading of the Sentencing Guidelines, the $18.8
million in unpaid taxes lost by the State and City would permit a sentencing
court to impose a fine up to $75.2 million, a far smaller financial penalty for a
criminal violation than the district court imposed for a civil offense.39
38
We do not suggest that the Sentencing Guidelines applicable to criminal CCTA
violations set an outer limit on the penalties that can be imposed under a
different, civil, statutory regime. We merely use the Guidelines as a useful cross-
check on the reasonableness of the district court’s cumulative penalty amount.
39
Section 2E4.1, titled “Trafficking in Contraband Cigarettes and Smokeless
Tobacco,” provides that the base offense level for unlawful conduct relating to
contraband cigarettes and smokeless tobacco is the greater of 9 or the offense
level from the tax table in § 2T4.1 corresponding to the amount of the tax evaded.
The tax table at § 2T4.1 indicates that the offense level is 26 for a tax loss of $18.8
million. Since the offense level from the tax table is greater than 9, we use 26 as
the offense level. Section 8C2.4 instructs that, when sentencing organizations, the
base fine is the greater of the amount from the offense level fine table at
§ 8C2.4(d) or “the pecuniary loss from the offense caused by the organization, to
the extent the loss was caused intentionally, knowingly, or recklessly.” § 8C2.4(a).
Here, the latter of those amounts, $18.8 million of pecuniary loss, is the greater
one, so that becomes the base fine. That base fine of $18.8 million would be
multiplied by four, however, assuming a culpability score of 10 or more. See
§ 8C2.5 (culpability score of at least 10 for organization with 5,000 or more
111
Lastly, we note that the deterrent value of civil penalties here is lessened to
some extent by the fact that UPS began increasing its efforts to comply with the
AOD in the fall of 2013, and was “achieving actual compliance as of the date this
lawsuit was filed on February 18, 2015.” United Parcel Service, Inc., 253 F. Supp. 3d
at 617. Given such compliance, the district court’s reasoning that “only a hefty
fine will have the impact on such a large entity to capture the attention of the
highest executives in the company,” id. at 691, was flawed. UPS’s efforts to
pursue more aggressive compliance with the AOD as early as 2013 indicate that
an award in the hundreds of millions of dollars is not needed to accomplish
specific deterrence.40
employees if the court also finds “tolerance of the offense by substantial authority
personnel was pervasive throughout the organization”); § 8C2.6 (indicating a
minimum multiplier of 2 and a maximum multiplier of 4 for a culpability score of
10 or more). Thus, if UPS were facing criminal charges in federal court, the
maximum fine the district court could have imposed would be $75.2 million. See
§ 8C2.7.
40
It is also worth noting that the deterrent effect on other similarly situated
carriers is limited. Only two other major carriers had AODs comparable to that
entered by UPS. One, DHL, closed its domestic shipping business in 2008. See J.
App’x at 779; 1995. The other, FedEx, faced a similar lawsuit but reached a
settlement during the pendency of this appeal. See Order for Dismissal and
Retention of Jurisdiction, City of New York v. FedEx Ground Package Sys., Inc., No.
1:13–cv–09173–ER (S.D.N.Y. Jan. 15, 2019), ECF No. 631.
112
Thus, we conclude that the district court’s duplicative $78 million penalty
awards under the PACT Act and PHL § 1399-ll cannot be located within the
realm of permissible decisions. One $78 million penalty appears sufficient to
accomplish the goals of the PACT Act and PHL § 1399-ll, without nearing the
boundaries of excessiveness.
Although we would typically vacate and remand a case when concluding
that the district court abused its discretion in imposing a certain penalty or
punishment, that need not be done in every situation, and the circumstances of
this case counsel against remanding for further proceedings in this already
extended litigation. First, the district court judge who ably handled this case
below has retired from the bench and it would be burdensome and inefficient for
a new judge to review the record and arrive at a new penalty calculation at this
late stage. See United States v. Ganci, 47 F.3d 72, 74 (2d Cir. 1995) (refusing to
remand sentence where it would be an “inefficient use of judicial resources”
despite remand being the normal procedure under the circumstances). Moreover,
the district court has already calculated the appropriate amount of damages
under each statutory regime and we find no error in either calculation. We have
carefully considered the record ourselves and conclude that $78 million is an
113
appropriate penalty. See Brown v. Maxwell, 929 F.3d 41, 48 (2d Cir. 2019)
(concluding, after reviewing summary judgment materials in connection with
appeal, that appellate court could order unsealing documents without requiring a
remand).
The district court in the first instance could have awarded penalties under
either statutory regime. In vacating one of the $78 million awards, we choose to
sustain the award under PHL § 1399-ll and vacate the award under the PACT
Act. We do so because PHL § 1399-ll addresses the conduct that both Congress
and the State seek to stop: the shipment of unstamped cigarettes to consumers.
The PHL § 1399-ll award reflects a steep price of $2,500 per carton of cigarettes
that UPS actually shipped. It also incorporates penalties for violations with
respect to each of the Liability Shippers, including those on the NCLs.
Therefore, we vacate the $78.4 million penalty award under the PACT Act
and affirm the $78.8 million penalty award under PHL § 1399-ll.
CONCLUSION
For the reasons stated above, we: AFFIRM the judgment of liability and
attendant $78.8 million penalties under PHL § 1399-ll; AFFIRM the judgment of
liability but VACATE the imposition of $78.4 million in penalties under the
114
PACT Act; AFFIRM the judgment of liability but MODIFY the award of damages
under the CCTA to $17.4 million to the State and $1.4 million to the City; and
AFFIRM the judgment of liability but MODIFY the award of penalties under the
AOD to $20,000 to the State. The judgment of the district court, as so modified, is
AFFIRMED.
115
DENNIS JACOBS, Circuit Judge, concurring in part and dissenting in part:
The majority opinion admirably recounts the history of this case and the
dizzying contractual and statutory provisions that govern. I recount only what is
necessary to understand my positions in dissent.
To collect revenue and reduce public health costs, New York State and the
City of New York impose taxes on cigarettes, amounting (currently) to $43.50 per
carton‐‐doing well while doing good. Of course, those taxes are only effective
insofar as they are actually collected, and both New York State and the federal
government have passed statutes intended to curb tax evasion, including by the
imposition of damages and penalties on common carriers that deliver cigarettes,
of which UPS is one. The regulation of UPS is enforced, variously, by four
potential sources of liability.
I
Enacted in 2000, New York’s Public Health Law § 1399‐ll makes it
“unlawful for any common or contract carrier to knowingly transport cigarettes
to any person in this state reasonably believed by such carrier” to be
unauthorized to receive untaxed cigarettes. § 1399‐ll(2). Delivery to a home or
residence creates a presumption of unauthorized delivery. Id. The PHL
authorizes penalties “not to exceed the greater of (a) five thousand dollars for
each . . . violation; or (b) one hundred dollars for each pack of cigarettes shipped,
caused to be shipped or transported in violation of [the PHL].” Id. § 1399‐ll(5).
In 2004, the New York State Attorney General investigated UPS’s
compliance with PHL § 1399‐ll, and found regular instances of violation. To
settle the resulting dispute, in October 2005, UPS entered into an Assurance of
Discontinuance (the “AOD”) with New York. Broadly, the AOD forbids UPS
from knowingly shipping untaxed cigarettes to consumers in New York State,
and specifies certain compliance measures to be taken by UPS, including, for
example, auditing suspect shippers and maintaining a list of shippers who have
been caught selling untaxed cigarettes. The stipulated penalty is “$1,000 for each
and every violation.” S. App’x at 508.
Five years later, the Prevent All Cigarette Trafficking Act (the “PACT
Act”), 15 U.S.C. § 375 et seq., banned the mailing of cigarettes through the United
States Postal Service, and placed further restrictions and reporting requirements
on common carriers. Among other prohibitions, common carriers are forbidden
from accepting any packages from shippers on a “Non‐Compliant List” that is
maintained by the U.S. Attorney General. 15 U.S.C. § 376a(e)(1). The PACT Act
2
authorizes penalties “in an amount not to exceed . . . $2,500 in the case of a first
violation, or $5,000 for any violation within 1 year of a prior violation.” 15 U.S.C.
§ 377. Critical here, the PACT Act has an exemption from its penalties‐‐and
preempts any damages or penalties available under state laws‐‐if “the Assurance
of Discontinuance [AOD] entered into by the Attorney General of New York and
United Parcel Service, Inc. . . . is honored throughout the United States to block
illegal deliveries of cigarettes or smokeless tobacco to consumers.” 15 U.S.C.
§ 376a(e)(3)(B)(ii)(I).
The shipment of cigarettes is regulated by yet another statute. The
Contraband Cigarette Trafficking Act (the “CCTA”), enacted in 1978, makes it
illegal “for any person knowingly to ship, transport, receive, possess, sell,
distribute, or purchase contraband cigarettes,” 18 U.S.C. § 2342(a), and defines
“contraband cigarettes” as “a quantity in excess of 10,000 cigarettes, which bear
no evidence of the payment of applicable State or local cigarette taxes in the State
or locality where such cigarettes are found.” Id. § 2342(2). The CCTA provides
that “[w]hoever knowingly violates [the CCTA] shall be fined,” but gives no
guidance as to amount. Id. § 2344.
3
In this case, filed in February 2015, New York State and the City of New
York (together, the “plaintiffs”) allege that, from 2010 to 2015, UPS violated the
PHL, the AOD, the PACT Act, and the CCTA by knowingly shipping untaxed
cigarettes to consumers in New York. The district court found after a bench trial
that UPS had violated each of the statutes, and awarded the following damages
and penalties:
 $78.4 million in penalties for accepting packages from shippers on the
Non‐Compliant List, in violation of the PACT Act;
 $78.8 million in penalties for the knowing shipment of untaxed cigarettes,
in violation of the PHL;
 $9.4 million in damages for the recovery of unpaid taxes on cigarettes
shipped in violation of the CCTA;
 $1,000 in nominal penalties for violating the CCTA;
 $80.5 million in penalties for violating the auditing provision of the AOD.
The total combined award was a colossal $246.9 million.
4
II
I concur in part with the majority opinion, because I agree with the
majority’s navigation of many of these difficult issues. Specifically, I agree that:
 the district court properly concluded that the AOD authorizes penalties for
auditing violations;
 the district court erred in concluding that the AOD authorized per‐package
penalties for auditing violations, amounting to an $80 million award, and
that the proper award is $20,000;
 the district court did not abuse its discretion in denying UPS’s motion for
Rule 26 sanctions;
 the district court did not clearly err in finding the package quantity and
contents for the purposes of calculating damages and penalties; and
 the district court did not err by ordering the parties to submit post‐trial
damages calculations.
These conclusions by the majority are sound and well‐reasoned.
I part company with the majority on two issues, and to that extent I
respectfully dissent. First, I believe that UPS is exempted from the PACT Act,
and that the PHL is preempted, because UPS has “honored” the AOD
nationwide (within the meaning of the statute) by subjecting itself (implicitly and
explicitly) to the AOD nationwide, and I therefore conclude that the district court
erred in awarding damages and penalties under the PACT Act and the PHL.
Second, I believe that the CCTA’s definition of “contraband cigarettes” does not
5
permit aggregation of packages with fewer cigarettes to arrive at “a quantity in
excess of 10,000 cigarettes”; and I further conclude that the district court erred in
awarding damages under the CCTA without sufficient evidence to support the
award.
The PACT Act and the PHL
It is a close question whether UPS is exempted from the PACT Act and the
PHL is preempted. The wording of the statute offers little help. Nevertheless,
the majority’s proposed solution raises so many knotty problems that it cannot
be right.
As the majority opinion explains, UPS is exempted from the PACT Act,
and the PHL is preempted, if the AOD is “honored throughout the United States
to block illegal deliveries of cigarettes or smokeless tobacco to consumers.” 15
U.S.C. § 376a(e)(3)(B)(ii)(I) (PACT Act exemption); 15 U.S.C. § 376a(e)(5)(C)(ii)
(preemption of state laws). According to the majority opinion, UPS would
“honor” its undertaking only by exercising sufficient care to prevent illicit
trafficking. In my view, UPS “honors” the AOD so long as it subjects itself to the
terms of the AOD throughout the nation.1 See Black’s Law Dictionary (defining
The majority cites the phrase “to block illegal deliveries of cigarettes or
1
smokeless tobacco to consumers” as evidence that the “honored” clause was
6
“to honor” as to accept an obligation as valid, such as when a bank honors a
check). Thus one does not dishonor a contract by subjecting oneself to its terms
of liquidated damages.
This interpretation of the statute achieves straightforward application of a
nebulous term, as follows. If a state or locality other than New York sues UPS
under the PACT Act, UPS is not obliged to invoke the exemption; but if it does,
the plaintiff cannot obtain remedies under the PACT Act, and is limited to the
somewhat lesser remedies under the AOD. The condition is that UPS can invoke
the exemption only if it “honors” the AOD in any enforcement suits brought by
any State or locality. It does so by forgoing certain potent defenses that would
otherwise defeat such a claim: that states other than New York lack privity with
UPS; that other states did not agree to be bound by the AOD; that the wording of
the AOD references cigarette distribution in New York only; and that the AOD
grants no “rights or privileges to any” non‐party. In that way, the New York‐
centric terms of the AOD do not defeat or complicate the exemption term of the
PACT Act, which post‐dated the AOD by five years. Nor can UPS back out of its
intended to involve a compliance inquiry. But “to” clauses are more commonly
understood as statements of statutory purpose, not directives. See Allison Engine
Co. v. Sanders, 553 U.S. 662, 668 (2008) (concluding that “to get a false or
fraudulent claim paid by the government” is a purpose clause, not a condition).
7
obligation to honor the AOD nationwide: UPS’s invocation of the PACT Act
exemption in any single forum would operate to estop its invocation of defenses
against the AOD in any other forum. And the undertaking expressly made in
this case‐‐to honor the AOD nationwide‐‐has similar estoppel effect. Pace the
majorityʹs misconception that UPS would thus have a case‐by‐case power of
election in every state.
Thus UPS honors the AOD nationwide by subjecting itself to the AOD’s
penalty provision. And at this point having already done so in New York, it has
no other option but to honor it nationwide. Up until that point, UPS was
subjected to either (i) the AOD or (ii) the PACT Act and local state laws‐‐but not
all three. This is a common‐sense result that seems contemplated by the
exemption in the PACT Act. The manifest design of the PACT Act is to allow
and ensure the imposition of one penalty or another, not to stack penalty upon
penalty based on whether the company devoted a sufficient (though undefined)
level of care and attention to weeding out untaxed‐cigarette parcels from the
millions of parcels it delivers every day.
The majority’s interpretation is that to “honor” means to conduct sufficient
oversight to the interdiction of cigarette traffic, and to devote sufficient resources
8
to that effort. That interpretation is unworkable for several reasons. First, if the
applicability of the exemption were to turn on success of its interdiction
measures, no one (courts, common carriers, states, or municipalities) could know
whether the exemption is applicable until vexed questions were sorted out in
litigation. The exemption would then become ineffective, because UPS could not
rely on it: UPS could only know after trial whether it had sufficiently “honored”
the AOD to qualify. And if UPS is found to be out of compliance with the AOD
(say, in Rabbit County), triplicative penalties pile up under two statutes and a
contract, all of which regulate the same conduct. This is untenable; worse, it is
unconvincing.
The statute provides no standard for deciding whether UPS honored the
AOD in the way posited by the majority. Would a single breach of a reporting
requirement caused by management indifference (or other priorities) render the
exemption inapplicable? Given the millions of packages delivered each day,
would a hundred failures of compliance a month render the exemption
inapplicable? What if the common carrier materially breaches the AOD in one
state, but complies in the other forty‐nine? How likely is it that Congress
intended the applicability of the exemption to turn on such baffling questions, or
9
that Congress intended hundreds of millions of dollars of penalties to be
rendered based on open issues? With no statutory guidance (or useful help from
the parties), the district court created its own standard.2
The majority’s preferred approach is internally inconsistent. If, as the
majority sees it, Congress intended UPS to lose its exemption if it breached the
AOD, one must infer that Congress also intended the assessment of penalties
from three sources for the same conduct in the event of noncompliance. But, as
the majority concludes, that result cannot be sustained: for that very reason, the
majority has sharply reduced the judgment of $247 million. To avoid stacking of
penalties under the PHL, the AOD, and the PACT Act, the majority simply
chooses one statute’s penalties to apply (the PHL), and writes off the penalties
under the PACT Act and the AOD.
The majority alludes to a problem of “announcement”‐‐how will other
States know whether UPS has agreed to subject itself to the AOD nationwide, so
that those States can therefore look to penalties under the AOD? But UPS has
2 The district court concluded that the exemption is unavailable if “the
effectiveness of UPS’s policies [is] so compromised that these policies are not in
fact in place.” S. App’x at 144. This invention is nowhere in the statute; it is
subjective and vague; and it would require a trial to decide what contract and
what statutes govern the case.
10
made that very announcement here. When UPS invoked the exemption in the
PACT Act in this case, and advocated for preemption of the PHL, it became
bound by the AOD nationwide by virtue of judicial estoppel. Thus, if Idaho now
sues, UPS will be bound by its representation in this lawsuit that the AOD is
effective nationwide and therefore will lose the ability to interpose defenses to
claims under the AOD; and Idaho will seek penalties under the AOD because it
will be unable to seek penalties elsewhere. Problem solved.
As to penalties under the AOD, the district court awarded $80 million for
auditing violations (reduced by the majority opinion to $20,000) and imposed no
penalties for the knowing shipment of untaxed cigarettes. The only penalties
awarded by the majority for that unlawful conduct fall under the PACT Act and
the PHL, which (in my view) are subject to UPS’s exemption and to federal
preemption, respectively. The plaintiffs argue that, if (as I think) the penalty
awards under the PACT Act and PHL cannot be sustained, substitute penalties
must be levied under the AOD for the knowing shipments of untaxed cigarettes.
UPS argues waiver, because the plaintiffs did not seek those penalties under the
AOD at trial. See S. App’x at 385 (“Plaintiffs are not seeking penalties [for
knowing shipments]‐‐they seek penalties only for violations of the audit
11
obligation in ¶ 24 [of the AOD].”). The plaintiffs explain, however, that they
were willing to forgo collection under the AOD only because it would result in a
duplicative award, and that it did not waive its right to seek those penalties if
they were not duplicative.
The waiver, if there was one, should be overlooked. UPS does not
challenge the district court’s findings that it knowingly shipped some untaxed
cigarettes; and UPS admits that it should be bound by either the AOD or the
PHL/PACT Act. Accordingly, I would vacate the awards under the PACT Act
and the PHL, and remand with instructions to consider whether penalties are
appropriate under the AOD for the knowing shipment of untaxed cigarettes.
Based on the district court’s findings of the number of untaxed cartons of
cigarettes knowingly shipped by UPS, the penalties would amount to about $30
million‐‐a quite considerable penalty for failure to monitor a minute fraction of
the parcels shipped by UPS.
12
The CCTA
I dissent from the majority’s award of damages under the CCTA because:
(1) the district court erred in concluding that the CCTA permits aggregation of
small shipments to reach the 10,000‐cigarette threshold in the definition of
“contraband cigarettes”, and (2) the district court erred in awarding any
damages under the CCTA because there was insufficient evidence to sustain the
award.
The CCTA outlaws the knowing shipment of “contraband cigarettes,” 18
U.S.C. § 2342(a), defined as “a quantity in excess of 10,000 cigarettes, which bear
no evidence of the payment of applicable State or local cigarette taxes.” 18 U.S.C.
§ 2341(2). The district court ruled (and the majority agrees) that the CCTA
permits aggregation of smaller quantities to meet the 10,000‐cigarette threshold.
That is a misreading. “A quantity,” a singular noun, is read naturally to
reference a single shipment of more than 10,000 cigarettes, which amounts to 50
cartons. This interpretation fits the express purpose of the statute, to address
“the serious problem of organized crime and other large scale operations of
interstate cigarette bootlegging.” S. Rep. No. 95‐962, at *3 (1978).
13
If aggregation is permitted (as my colleagues conclude), courts will be left
to resolve difficult questions, starting with time period. The plaintiffs argue that
aggregation should be permitted over the entire four‐year period of the statute of
limitations. Such aggregation would impose a penalty for shipping about one
carton a month. This quick calculation tells us something about what Congress
likely intended. Surely, organized crime has something better to do.
As to the calculation of damages under the CCTA, the majority concludes
that the plaintiffs are entitled to recover the taxes they would have collected for
each and every carton of untaxed cigarettes shipped by UPS. I disagree.
The issue is resolved by general principles of damages. In order to recover
compensatory money damages, the plaintiffs must demonstrate that their loss of
tax revenue was caused by the defendant’s actions. See Anderson Grp., LLC v.
City of Saratoga Springs, 805 F.3d 34, 52 (2d Cir. 2015) (“Compensatory damages
are designed to place the plaintiff in a position substantially equivalent to the one
that he or she would have enjoyed had no tort been committed.”); see also Cooper
Indus., Inc. v. Leatherman Tool Grp., Inc., 532 U.S. 424, 432 (2001) (“[Compensatory
damages are] intended to redress the concrete loss that the plaintiff has suffered
by reason of the defendant’s wrongful conduct.”).
14
Unlike the sellers of the cigarettes, who are directly responsible for
remitting the taxes to the state, UPS never had an obligation to pay the cigarette
taxes. The damages theory relies on UPS’s role as a conduit‐‐incidental to its
useful and legitimate business. No damages were caused by UPS failing to pay
the tax (it never owed any); any damage was caused by UPS transporting
cigarettes for sellers who did owe the taxes but failed to pay.
The intuitive point‐‐that UPS was never responsible for paying the taxes
on the cigarettes‐‐is critical in light of the Supreme Court’s decision in Hemi
Group, LLC v. City of New York, N.Y., 559 U.S. 1 (2010). The City of New York
sued an online cigarette seller in New Mexico that shipped untaxed cigarettes to
consumers in New York City. Because it was an out‐of‐state seller, defendant
Hemi Group was under no obligation to charge, collect, or remit the City’s tax on
those sales. The City argued under RICO that Hemi was liable nevertheless
because it failed to comply with a federal statute that required it to report
customer information to the state. The Court concluded that the alleged acts of
racketeering (violations of the federal reporting requirement) were attenuated
from the alleged damages (unpaid City taxes), and therefore could not justify
15
RICO recovery for the unpaid taxes. What matters for us is the Court’s
observation in dismissing the City’s claims:
It bears remembering what this case is about. It is about the RICO
liability of a company for lost taxes it had no obligation to collect,
remit, or pay, which harmed a party to whom it owed no duty. It is
about imposing such liability to substitute for or complement a
governing body’s uncertain ability or desire to collect taxes directly
from those who owe them.
Id. at 17. We are thus cautioned against allowing the collection of unpaid taxes
from defendants who, like UPS, were never responsible for paying them in the
first place. True, Hemi was a RICO case; but the Supreme Court’s teaching
transcends the context.3
The plaintiffs here are entitled to recover no more than the cigarette taxes
that would have been collected in the absence of UPS’s illegal conduct. That
depends (as the district court ruled) on the “diversion rate,” i.e. the percentage of
smokers who would have purchased tax‐stamped cigarettes if UPS complied
with the law.
3 The majority deems Hemi inapplicable to this context because the Hemi
principle “surely cannot apply where Congress has authorized such relief.”
Majority Op. at 101 n.33. But Congress did not: the majorityʹs preceding sentence
asserts no more than that Congress did so ʺimplicitly.ʺ In any event, the PACT
Act does not apply for the reasons I set out above, and, as to the CCTA, the
majority posits the payment of “unpaid taxes” only as it may be
“encompasse[d]” in “money damages.” Majority Op. at 100.
16
As UPS contends, the plaintiffs failed to sustain their burden of proving
damages because they failed to offer any evidence of a diversion rate.
The district court’s finding‐‐that the diversion rate is 50 percent‐‐comes
from mid‐air. The only testimony at trial on the proper diversion rate came from
UPS’s expert, Dr. Nevo; he opined that 5.4 percent was appropriate. The district
court rejected Dr. Nevo’s testimony (on a questionable basis), and then simply
made up another rate:
On balance, the Court cannot arrive at a precise number of cigarette
cartons consumers would have purchased, but 50% is a reasonable
number based on the totality of facts. The Court therefore finds
plaintiffs are entitled to compensatory damages in the amount of
50% of Cartons . . . shipped by the Liability Shippers.
S. App’x at 442. In its entirety, that is the district courtʹs analysis of the diversion
rate. There is no citation to precedent or the record. And the plaintiffs offered no
evidence at trial to support a 50 percent rate.
The plaintiffs argue that the 50 percent diversion rate is supported (more
or less) by Dr. Nevo’s opinion that 56 percent of all cigarette sales in New York
State are taxed sales. But the district court did not predicate its 50 percent
finding on Dr. Nevo’s 56 percent estimate. In any event, Dr. Nevo’s testimony‐‐
that 56 percent of New York smokers buy taxed cigarettes‐‐does not mean that
17
smokers who buy untaxed cigarettes shipped by UPS would buy taxed cigarettes
in the same proportion as all other New Yorkers if their smokes could not be
shipped by UPS. The premise is untenable, given that many of those consumers
are financially marginal, are likely to be price sensitive, and are unlikely to have
an extra $3,000 a year for a carton‐per‐week habit.
Therefore, because the plaintiffs did not offer sufficient evidence to
support its damages calculation, I would reverse the damages award under the
CCTA.
*****
In sum, I vote to: vacate the penalty awards imposed under the PACT Act
and the PHL; vacate the award of damages under the CCTA; reduce to $20,000
the penalty for auditing violations under the AOD; and remand to the district
court with directions to calculate the reasonable penalties under the AOD for the
knowing shipment of untaxed cigarettes.
18