From 2006 through 2012, FedEx carriers delivered “an infinitesimal percentage” of packages containing untaxed, unstamped cigarettes to New York residents. Enforcement actions followed, and in 2018, FedEx settled the actions by paying $35.3 million and agreeing to several internal reforms. A FedEx stockholder brought a derivative action on behalf of FedEx against its board and two officers alleging that they had breached their duty of loyalty by failing to oversee FedEx’s compliance with state and federal laws governing the transportation and delivery of cigarettes. The plaintiff’s only claim was that a majority of the demand defendants violated their Caremark duties because they knew of corporate misconduct yet acted in bad faith by consciously disregarding their duty to address that misconduct, a “prong two” Caremark claim. In Pettry v. Smith, C.A. No. 2019-0795-JRS (Del. Ch. June 28, 2021), appeal pending, Vice Chancellor Joseph Slights held that the plaintiff had failed to adequately plead that a majority of the board faced a substantial likelihood of liability on her claims or that they were otherwise disabled by interest or lack of independence, and dismissed the complaint for failure to adequately plead demand futility.
As explained in the opinion, FedEx was subject to a number of federal, state and local laws governing the transportation of cigarettes and other tobacco products. In 2004, the New York Attorney General undertook an investigation into FedEx’s illegal shipments of cigarettes to New York consumers. In 2006, FedEx entered into an assurance of compliance agreement (AOC) with the Attorney General under which FedEx agreed to cease all cigarette deliveries to unlicensed persons in New York and to implement internal processes and controls designed to assure that the company would not engage in further illegal cigarette deliveries. However, FedEx continued to ship unstamped cigarettes. In 2011, New York City informed FedEx that it had violated state and federal laws by shipping and delivering cigarettes and sought to recover $6.5 million in unpaid taxes. In 2013, FedEx paid $2.4 million to settle the claims.