On July 17, 2014, a federal grand jury in San Francisco returned a 15-count indictment charging FedEx with crimes for allegedly failing to heed warning signs that illegal Internet pharmacies were using FedEx facilities to ship drugs to consumers. United States v. FedEx Corporation, et al., CR-14-380 (ND CA, July 17, 2014). This prosecution of the world’s largest delivery service represents a significant expansion of the U.S. Department of Justice’s efforts to outsource law enforcement to private third parties and then go after these third parties when they fail to meet an undefined standard of compliance rather than focus on the criminals themselves. This prosecution also signifies the DOJ’s adoption of a legal theory that operating services businesses have a de facto Know Your Customer (KYC) duty similar to that where such a duty is imposed by law, e.g., anti-money laundering compliance for financial institutions.
In the FedEx indictment, the underlying criminal activity involves unlawful Internet pharmacies that sell prescription drugs to individuals who either lack a prescription or who have not been adequately assessed by a healthcare professional. While the government notes in the indictment that there are many legitimate Internet pharmacies which service many healthcare plans, it highlights certain unlawful Internet pharmacies supplying either real or false (adulterated) drugs to customers who provide only basic information, often through a single questionnaire, which would not satisfy a reasonable prescriber.
The indictment alleges that FedEx delivered packages for these illegal online pharmacies, despite having knowledge that this impermissible conduct was taking place. This includes specific warnings by government officials from various agencies, including Congress.1 In addition to government warnings, the indictment outlines specific instances where FedEx employees allegedly knew of the illegal conduct yet continued to provide service to the online pharmacies. According to the indictment, FedEx employees expressed safety concerns relating to certain delivery addresses that were empty parking lots; where people would wait for deliveries of drugs; and where customers would “jump” on FedEx trucks and demand online pharmacy packages. The indictment also alleged that FedEx changed its delivery policies such that Internet pharmacy packages could be delivered to stations rather than to specific, problematic customers. According to the indictment, FedEx used a “catchall” classification for the online pharmacy accounts so that any uncollected revenues caused by the pharmacies being shut down by law enforcement would not impact employees’ year-end sales goals.
FedEx has fully denied all the charges. Patrick Fitzgerald, senior vice president for marketing and communications at FedEx, said in a written statement, “We have repeatedly requested that the government provide us a list of online pharmacies engaging in illegal activity. Whenever DEA provides us a list of pharmacies engaging in illegal activity, we will turn off shipping for those companies immediately. So far the government has declined to provide such a list.”
Ultimately, the indictment charges FedEx with separate Conspiracies to Distribute Controlled Substances, 21 U.S.C. §846, and to Distribute Misbranded Drugs, 18 U.S.C. §371, and the substantive offenses of Distribution of a Controlled Substance, 21 U.S.C. §841, and Misbranding Drugs, 21 U.S.C. §§ 331, 333, and 353. The indictment alleges a gross gain of $820 million over 10 years from the alleged criminal activity and also seeks a criminal forfeiture.
In a typical KYC case, a specific duty under the law exists for an entity to conduct business for or with another. The most common example is a commercial bank which may not extend banking services without having engaged in appropriate KYC and having in place a compliance plan to do so. See 31 U.S.C. § 5318. The failure to abide by the compliance plan is then actionable. See, e.g., 31 U.S.C. § 5321(a)(1). Here, no such mandate from Congress has been legislated imposing a KYC duty on companies transporting packages. Had Congress wished to impose such a duty, it could have done so but instead has chosen not to make companies like Fedex extensions of law enforcement. As FedEx representative Patrick Fitzgerald said, “We are a transportation company — we are not law enforcement.”
By filing felony criminal charges, the government has flexed its muscles against a company that was not willing to settle. Unlike United Parcel Service, which agreed to forfeit $40 million in payments it received from illicit online pharmacies under a non-prosecution agreement with the U.S. Justice Department in March 2013; Walgreen Company which agreed to pay $80 million in civil fines in 2013 for failing to report suspicious drug orders of oxycodone; and CVS which settled for $78 million to resolve civil claims it improperly sold cold medications that were used to make methamphetamine in 2010, FedEx did not settle but vowed to fight. As a result, instead of looking at just civil causes of action, the government has greatly upped the ante to felony charges that can have much greater immediate and collateral impact on FedEx.
The implications of this indictment go well beyond transporting pharmaceutical goods. Can the government deputize private companies and force them to violate the privacy of their customers without a legal mandate from Congress to do so? Does the government have to provide explicit information of present illegal activity before it can require a private company to stop engaging in otherwise legitimate actions like the transportation of packages? If the government can deputize FedEx to look at all of its packages, then does FedEx become a “state actor” for Fourth Amendment purposes such that it requires a search warrant before opening up a package or the evidence may be suppressed? Does the FedEx indictment show that the government has recognized it lacks the law enforcement resources to deal with the growing problem of illegal Internet pharmacies and now must outsource its enforcement to private companies like FedEx? The answers to these and other related questions will soon come to the fore as the FedEx case will force the government and the court to confront these issues.