United States: An Illustration Of The Importance Of Regulatory Compliance For Logistics Companies

Can a state government impose "quasi law enforcement" responsibilities on private logistics companies when it comes to the products they ship? After a recent 10-day bench trial, one federal judge answered yes, in some cases they can. In doing so, the court effectively fined United Parcel Service, Inc. (UPS) nearly $250 million.

In the case of The State of New York and the City of New York v. United Parcel Service, Inc., the United States District Court for the Southern District of New York found UPS liable for shipping untaxed cigarettes from unlicensed shippers into the City and State of New York in violation of several New York state laws.

The court summarily rejected UPS's defense that its large size and compartmentalized organizational structure made it impossible to establish that it knowingly violated any New York regulations. The court cited not only a wealth of circumstantial evidence demonstrating UPS's apparent indifference to making even minimal efforts to comply with New York's regulatory expectations but also UPS's measurable efforts to identify and curb the shipment of untaxed cigarettes and tobacco products after the inception of the lawsuit filed by the City and State of New York.

BACKGROUND

On February 18, 2015, the State and the City filed their Complaint against UPS alleging, primarily, that UPS violated an Assurance of Discontinuance (AOD) that it had entered into with the State in 2005. The AOD was a negotiated agreement between the State and UPS resolving an investigation into UPS's pre-2005 shipment of cigarettes and other tobacco products in and out of New York. Under the AOD, UPS agreed to implement internal processes for identifying its cigarette retailer customers, compiling a detailed database of their shipment activity and auditing the customers UPS had a reasonable basis to believe may be shipping cigarettes. The AOD also required that UPS institute a series of escalating disciplinary measures that culminate in a three-year suspension of the customer's access to UPS services if it determined that customers were shipping cigarettes into New York. After reviewing the AOD's provisions and considering the evidence before it regarding UPS's compliance, the Southern District of New York concluded that UPS lazily turned a blind eye to the cigarette-shipping activities of its customers and instead relied on its size to justify its passive approach to regulatory compliance.

In concluding that UPS was liable for its violations of the AOD and other pertinent New York regulations, the court acknowledged that the City and State of New York were required to show that UPS "knowingly" transported cigarettes. To support this conclusion, the court pointed to both the collective and individual knowledge of UPS employees when interacting with their customers. This included UPS's history with particular cigarette-shipping customers, observed activity at a shipper's addresses when picking up shipments, the signage present at the location of shipments, and the use of terms such as "cigar," "tobacco," or "cigarette" in the names of a shipper's internet URL.

In drawing this evidence together, the court highlighted the well-established principle that a corporate defendant is deemed to have knowledge of a regulatory violation if the means were present by which the company could have reasonably detected the regulatory infractions. The court found overwhelming factual support for the conclusion that UPS had actual knowledge of the unlicensed cigarette-shipping activities of its customers with which UPS was participating as the shipper of this alleged contraband.

When it came time to assess the appropriate compensatory and punitive damages, the Southern District considered UPS's refusal to acknowledge wrongdoing, the prolonged nature of its conduct and the significance of the public harm the operative regulations were put in place to prevent. The court noted an interest in balancing constitutional principles requiring proportionality of the penalty with the need for an award that would have a sufficient deterrent effect on an organization as large as UPS.

Defiantly, UPS disregarded the court's order requiring that UPS submit a package-count for each of the shippers that formed the basis of its liability. Instead, UPS chose to submit its own damages calculations based on only three of the eighteen total customers identified by the City and State, and argued that it could not proffer a calculation of appropriate damages for the remaining customers because the City and State had not established liability for those customers. The court treated UPS's failure to address the remaining shippers as a waiver of any response to the damage calculations submitted by the plaintiffs, and the court awarded $165,817,479.00 to the City and $81,158,135.00 to the State.

ANALYSIS

The federal court's ruling reinforces the principle that logistics companies, like other corporate defendants, are charged with being conversant in the regulations that apply to their industry. Courts will not tolerate willful ignorance and they are prepared to perform a case-specific analysis of all available circumstantial evidence as to the compliance or noncompliance of logistics companies with state and local regulations. The case teaches that in the realm of transporting regulated cargo, a transportation and logistics−based company must be cognizant of these state and local regulations and of the reasonably apparent circumstances of the business transactions that it may be facilitating.

This ruling also establishes that federal courts will not excuse a corporate defendant where it relies on its size and organizational structure in an effort to demonstrate a lack of knowledge to avoid regulatory compliance. The United States District Court for the Southern District of New York displayed a willingness to accept and consider evidence of every aspect of UPS's operations from the executive level down to the activity of its truck drivers, and the court did not hesitate to impute the collective knowledge of each part of the company to the company as a whole. Above all, New York v. UPS demonstrates that a logistics company must approach all of its operations with sensitivity to federal, state and local regulations or risk the assessment of substantial, and perhaps debilitating, penalties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.