Attorney General James, NYC Corp. Counsel Announce $35 Million Settlement With Fedex Over Shipping Of Illegal Cigarettes

NEW YORK - Attorney General Letitia James and City Corporation Counsel Zachary W. Carter announced a $35.3 million settlement today with FedEx Ground Package System, Inc. (“FedEx”) to resolve claims over illegal cigarette deliveries to residents throughout New York City and State made by FedEx over a ten-year period. This settlement resolves three lawsuits against FedEx alleging that it partnered with cigarette trafficking businesses to illegally ship hundreds of thousands of untaxed cigarettes to New Yorkers. In addition to the payment, FedEx will implement internal reforms and hire an independent consultant that will oversee FedEx’s compliance with the law and provide compliance reports to the City and State.

The settlement follows the October 2018 ruling by federal district judge for the Southern District of New York, Edgardo Ramos, finding that FedEx’s conduct over many years for customers with such names as “Cigarettes Direct To You” established without the need for a trial that FedEx had knowingly violated a federal anti-cigarette trafficking statute and a 2006 Assurance of Compliance with the New York Attorney General’s Office in which, to avoid prosecution, FedEx expressly agreed to cease residential cigarette deliveries and comply with a New York law prohibiting those deliveries.

“For years, FedEx knowingly engaged in illegal and harmful behavior at the expense of New Yorkers’ health,” said Attorney General Letitia James. “Not only did FedEx violate laws created to protect the public from the serious health risks associated with cigarettes, but they also swindled New York City and State out of millions of dollars in tax revenue. Let this serve as a message that we will never allow companies - however large or small - to cheat or harm New Yorkers.”

“This settlement forces FedEx into compliance with State and City laws enacted to discourage smoking through the imposition of cigarette taxes. For the worst of reasons – profit – FedEx shipped millions of untaxed cigarettes to residents throughout the State, cheating the City out of millions of dollars in tax revenue and with apparent indifference to the impact on public health,” said Zachary W. Carter, City Corporation Counsel. “The illegal deliveries cheated the City out of millions of dollars in tax revenue in addition to violating public health laws intended to deter access to cigarettes by young people.”

The evidence is clear that cigarette taxes are the most effective means of deterring smoking. As New York has increased the tax rate on cigarettes, the number of smokers in New York has sharply declined. According to the World Health Organization, maintaining high taxes on cigarettes is the most effective anti-smoking policy intervention, particularly among youth.  By enabling cigarette traffickers to sell and ship untaxed cigarettes to New Yorkers, FedEx caused damages to New York State and City in lost tax revenue. In addition to the monetary tax loss, FedEx’s conduct frustrated the public health purpose underlying such taxes – to reduce cigarette smoking.  Under this settlement, New York State and New York City recovered substantially more than the amount of the tax loss. This additional amount represents, in large part, a penalty based on the fact, among others, that FedEx was previously investigated for this same conduct, the conduct was longstanding and pervasive throughout the company, and the conduct had the potential to negatively impact public health.

Under the terms of the settlement, FedEx agreed to implement reforms to ensure compliance with various laws.  FedEx agreed to:

  • Cease domestic shipments of tobacco products, including cigarettes (with limited exceptions set forth in the Settlement Agreement);
  • Implement company-wide communications and annual training concerning tobacco shipments, including mandatory notices by employees to company officials if tobacco shipments are discovered;
  • Take disciplinary action against any employee or contractor who knowingly facilitates tobacco shipments; and
  • Retain an independent consultant recommended by the City and State to both advise and monitor the company’s compliance with the settlement agreement and with federal, state, and local laws and regulations governing the shipment of tobacco. The consultant will immediately report violations to the City and State and provide quarterly reports.

The terms of the settlement agreement will be extended by one year for each year in which there is a material breach of the agreement upon a court, or special master determination. 

The Attorney General’s Office thanks the New York State Department of Taxation and Finance for their invaluable assistance on this case.

This case was jointly investigated and prosecuted by the New York Attorney General and the City of New York. The trial team was led by Manisha M. Sheth, former Executive Deputy Attorney General of the Division of Economic Justice, and included Assistant Attorney Generals Leslieann Cachola, Brant Campbell, Paulina Stamatelos, of the Health Care Bureau, Assistant Attorney Generals Joseph Kowalczyk and Samantha Liskow of the Environmental Protection Bureau,  Assistant Attorney General Sandra Pullman of the Civil Rights Bureau, Senior Advisor & Special Counsel Laura Wood, and Assistant Solicitor General Judith Vale of the Division of Appeals and Opinions. The Office’s Chief Economist Peter Malaspina provided invaluable assistance in the prosecution and resolution of this matter. The Health Care Bureau is overseen by Lisa Landau and the case was supervised by Matthew Colangelo. The Health Care Fraud Bureau is part of the Division of Social Justice, which is led by Chief Deputy Attorney General for Social Justice Jennifer Levy

Eric Proshansky, Deputy Chief of the Affirmative Litigation Division, and Krista Friedrich, Hope Lu, and Joshua Rubinfrom that division handled the lawsuit for the Corporation Counsel’s Office.