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Second Circuit Halves Damages Against UPS for Shipping Untaxed Cigarettes

Woman Lighting Cigarette
By Joseph Fawbush, Esq. on November 08, 2019

To offset the billions smoking costs New York, the state created a large excise tax. In turn, that created a large market for smuggled cigarettes, since many states have significantly lower taxes than New York. Tobacco smuggling is now a multibillion-dollar industry, with profit margins for smuggling cigarettes greater than cocaine, heroin or guns. In 2010, as many as one in five cigarettes were purchased illicitly.

Enforcing Tax Through Common Carriers

New York officials have long sought to cut down on the number of untaxed cigarettes bought in the state. Native American tribes, who were exempt from the excise tax, often advertised their tax-free cigarettes and shipped them to non-tribal members. So New York created a law preventing common carriers from shipping cigarettes – whether taxed or not – to New York residents.

Suspecting noncompliance, New York first investigated UPS for shipping untaxed cigarettes in 2004. UPS then agreed to no longer ship cigarettes, and in exchange New York agreed not to file a civil suit. However, according to New York officials, UPS failed to live up to its bargain. New York filed a lawsuit against UPS in 2014. In 2017, a district court judge awarded $247 million in damages against UPS. UPS appealed, arguing the penalty was excessive.

Liability Upheld, But Damages More Than Halved

The Second Circuit affirmed liability for UPS, finding that there was sufficient evidence regarding the quantity of packages UPS shipped to uphold the damages and sanctions against UPS. However, it reduced the penalties against UPS by a total of $159 million. In originally awarding $247 million to the state and New York City, the district court penalized UPS for violations of the Prevent All Cigarette Trafficking Act (PACT) and failing to live up to the Assurance of Discontinuance, an exemption within PACT which allows common carriers to avoid penalties. The district court also awarded damages for violating the federal Contraband Cigarette Trafficking Act and New York's Public Health Law § 1399-II. The panel found penalizing UPS for violations all applicable laws for the same underlying actions resulted in an excessive penalty.

Instead, the panel vacated the penalties under PACT. In addition, it lowered the penalty for violating the AOD from $80.5 million to $20,000. It did, however, increase the damages under the CCTA to over $17 million in unpaid taxes.

In all, however, the decision provides approximately $150 million in reduced damages and penalties for UPS.

The End of the Line

The panel took the somewhat unusual step in not remanding the case back to district court. It found no error with the calculation of penalties, but rather simply vacated one award of damages while affirming another.

Absent appeal, therefore, this is the end of the long-running litigation against UPS, who must pay $100 million.

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