Opinion
101069/2015
04-06-2018
The People of the State of New York, and certain legal subdivisions thereof, ex rel. James A. Hunter and Keenan D. Kmiec, Plaintiffs, v. Starbucks Corporation, Defendant.
Attorneys for Plaintiffs-Relators (pro se) James A. Hunter, Esq. Hunter & Kmiec 255 West 94th Street, No. 10M New York, New York 10025 (646) 666-0122 Keenan D. Kmiec, Esq. Hunter & Kmiec 14020 Old Harbor Lane, No. 107 Marina Del Rey, California 90292 (917) 859-7970 Attorneys for Defendant Todd Harrison, Esq. McDermott Will & Emery LLP 340 Madison Avenue New York, New York 10173 (212) 547-5400
Attorneys for Plaintiffs-Relators (pro se) James A. Hunter, Esq. Hunter & Kmiec 255 West 94th Street, No. 10M New York, New York 10025 (646) 666-0122 Keenan D. Kmiec, Esq. Hunter & Kmiec 14020 Old Harbor Lane, No. 107 Marina Del Rey, California 90292 (917) 859-7970 Attorneys for Defendant Todd Harrison, Esq. McDermott Will & Emery LLP 340 Madison Avenue New York, New York 10173 (212) 547-5400 James E. d'Auguste, J.
In this qui tam action brought by plaintiffs-relators James A. Hunter ("Hunter") and Keenan D. Kmiec ("Kmiec") (collectively, "plaintiffs" or "relators") on behalf of the State of New York ("State"), defendant Starbucks Corporation ("Starbucks") seeks an order (1) dismissing plaintiff-relators' complaint with prejudice, pursuant to CPLR 3211(a)(1) and (a)(7), based upon a lack of documentary evidence; or, (2) in the alternative, limiting plaintiffs' claim to the "Survey" time period of November 2013 through September 2014; and (3) excluding licensee stores from plaintiffs' claims. Plaintiffs sue to recover damages under the New York False Claims Act ("False Claims Act" or "FCA"), consisting of the Finance Law at Section 187 et seq., alleging that Starbucks fraudulently withheld sales tax on certain food items sold in its stores and thereby violated Section 1105(d) of the New York State Tax Law ("Tax Law"). For the reasons stated herein, defendant's motion is granted to the extent that it seeks dismissal of the complaint, pursuant to CPLR 3211(a)(7), for failure to state a cause of action.
Factual and Procedural History
Hunter and Kmiec are attorneys, partners in the law firm Hunter & Kmiec, and reside in New York and California, respectively. Complaint, ¶¶ 8, 9. Plaintiffs commenced this action by filing a complaint, under seal, on or about June 11, 2015. After the Attorney General declined to intervene in this litigation by notice dated March 1, 2017, plaintiffs elected to continue litigating this action pursuant to Finance Law Section 190(2)(f). Plaintiffs served the complaint on Starbucks in July 2017 and seek a judgment against it for $10 million in allegedly unpaid sales tax, as well as treble damages and civil penalties, and seek to recover their statutory 25-30% share of the amount recovered in the action, together with costs and attorneys' fees. See Finance Law § 190(6)(b).
Starbucks, incorporated in the State of Washington, has a principal office located at 7 Penn Plaza, New York, New York and owns and operates hundreds of stores and cafes in the State. Complaint, ¶ 10. Plaintiffs allege no relationship to Starbucks other than as customers, and their claims are based on information collected by them during an informal survey of a number of Starbucks stores located in New York State from November 2013 through September 2014 ("Survey"). Id., ¶ 3. After one plaintiff noticed, on informal visits to a Starbucks store on the Upper West Side of Manhattan, that Starbucks allegedly routinely failed to charge and collect the full amount of sales tax due on his orders (id., ¶ 36), plaintiffs devised and conducted a survey of approximately eighty Starbucks stores in New York State, including stores licensed by third parties and operated within retail stores, such as Target, or in other places, including airports and train stations. Id., ¶¶ 25, 27, 36, 37; see id., Ex. C (Survey). The Survey was designed to "examine[ ] the tax practices of Starbucks personnel selling pastries at Starbucks stores." Id., ¶ 26. Although plaintiffs allege that the "Starbucks stores visited in the Survey [were not selected] with the goal of biasing the Survey's results," the stores surveyed were selected "primarily based on their proximity to [the visiting plaintiffs'] itineraries through the State." Id., ¶ 129. The Survey indicates that approximately one-fourth of the stores were located outside of New York City, and the rest of the stores surveyed were located within the five boroughs of New York City. See id., Ex. C (Survey). Plaintiffs believe, based upon publicly available information, that "Starbucks owns and operates the majority of the Starbucks stores visited in the Survey and the majority of the Starbucks stores in the State." Id., ¶ 29.
In the complaint, a Starbucks "store" is defined as a "'Starbucks'-branded location engaged in retail sales, whether owned and operated by Starbucks or by third parties under license or similar arrangements. The term includes all standalone 'Starbucks'-branded coffee shops as well as 'Starbucks'-branded kiosks or storefronts within supermarkets, department stores, malls, airports, train stations, and other establishments." Id., ¶ 27. Further, the term "store" specifically "does not include 'Teavana'-branded stores, 'Seattle's Best Coffee'-branded stores, or other retail locations owned or licensed by Starbucks but doing business under trade names or brands other than 'Starbucks'." Id., ¶ 28. Additionally, the term "store" also "does not include grocery stores or other retail locations that are not 'Starbucks'-branded but that sell some 'Starbucks'-branded items, such as 'Starbucks'-branded instant coffee." Id.
The complaint also defines the term "personnel" as "Starbucks employees or other agents working at Starbucks stores subject to Starbucks' control or direction. Based on publicly available information, [plaintiffs] believe the majority of the Starbucks personnel encountered in the Survey, and the majority of Starbucks personnel in the State, are employees of Starbucks." Id., ¶ 30. The complaint further states that "Starbucks has contractual rights giving it substantial control over how these individuals perform their duties in Starbucks stores," even though "some Starbucks personnel may be employees of franchisees, licensees, or other third parties." Id., ¶ 31. Such duties "over which Starbucks exercises control include charging and collecting payments from customers, including any sales tax due." Id. As a result, plaintiffs allege that Starbucks is vicariously liable for the noncompliance of its personnel under the theory of respondeat superior and by statute such that Starbucks has caused violations of Section 189(1)(g) of the False Claims Act. Id., ¶32.
The Survey was conducted over a period of approximately eleven months, from November 2013 to September 2014, and involved plaintiffs placing orders for various pastries. Id. ¶ 41. Plaintiffs recorded details about their orders, such as "the date and time of the order and the location of the Starbucks store; whether the order was consumed on the premises of the Starbucks store; whether the order was served heated; what packaging or dishware was used to serve the order;" the amount of sales tax due on the order; and the amount of tax charged and collected on each order. Id., ¶ 39. Plaintiffs set out the results of their Survey in a spreadsheet, and their analysis of the results, which includes no input from experts or others, as the basis for their claims. See id., ¶ 40; id., Ex. C (Survey).
The Court notes that despite the complaint stating the Survey took place "over a period of 11 months, spanning two years, from November 2013 to September 2014" (id., ¶ 37), this represents a time period of only eleven months.
The complaint defines the term "pastries" as "baked goods sold in Starbucks stores that are ready to eat and not prepackaged," specifically:
a. all pastries or other non-savory baked goods, including without limitation muffins, donuts, Danish pastry, tarts, sweet buns, scones, cookies, brownies and bars (such as crisped rice treats or lemon bars), sweet breads (such as pumpkin bread or gingerbread), and all sliced or individually portioned cakes (whether sheet cakes, loaf cakes, cupcakes, cake "pops," or otherwise); and
b. the following savory or semi-sweet baked goods: soft pretzels (plain, topped, or stuffed); all bagels, however prepared or topped; and croissants (plain or filled).
As a result of the Survey, plaintiffs claim that "Starbucks failed to charge and collect (and presumably failed to report and remit) the proper amount of sales tax due on the vast majority of [their] orders of pastr[ies] in the Survey." Id., ¶ 42. More specifically, plaintiffs allege that Starbucks violated the Tax Law by failing to collect the full amount of sales tax due on pastries because "(a) the pastry was sold for on-premises consumption; (b) the pastry was sold in a heated state; or (c) the pastry was not sold in the same form, condition, quantities and packaging in which it is commonly sold in grocery stores." Id., ¶ 43.
Plaintiffs claim that almost all of the Starbucks locations they visited for the purpose of the Survey had seating areas, but Starbucks employees "routinely" did not collect sales tax for orders that they know would be consumed on the premises. Id., ¶¶ 49, 50, 57. As an example, plaintiffs allege that "[o]n three occasions, at three different stores, Starbucks personnel plated the Relator's pastry on ceramic dishes rather than in disposable packaging. Unless they expected the Relator to walk away with the store's dishware, Starbucks personnel knew without doubt that these orders would be consumed on the premises," yet they did not "charge or collect a single cent of tax." Id., ¶ 58. Further, plaintiffs allege that "Starbucks personnel rarely collect sales tax even when told an order is for on-premises consumption. In 22 of the Survey's orders, the Relator asked Starbucks personnel, before the pastry was rung up, to prepare it 'for here,' and in only one of those twenty-two sales did Starbucks personnel charge and collect sales tax. Id., ¶ 59. Plaintiffs allege that, for purposes of the Survey, they ordered sixty-eight pastries for on-premises consumption, but they were charged only 10% of the tax due on such items. Id., ¶ 60. Specifically, plaintiffs "were charged a total of $144.00 for these orders, on which a total of $12.40 in sales tax came due. Starbucks personnel charged and collected just $1.25 of this tax. As a result, Starbucks personnel failed to charge and collect, and presumably failed to report and remit a total of $11.15 in sales tax, or 90% of the total sales tax due under the Tax Law." Id.
Plaintiffs also claim that Starbucks employees did not charge tax on pastries that were heated in toaster ovens or microwaves. Id., ¶¶ 64-66. Plaintiffs allege that they ordered items from a line of baked goods advertised as "warmly served" (id., ¶¶ 71-72), and that their orders sometimes were warmed even when plaintiffs did not request that the pastries be heated. Id., ¶¶ 67-70. According to plaintiffs, several Starbucks employees encouraged them to have their orders heated by opining that the pastries were "great" or "better" warmed or it was the "only . . . way" to enjoy them (id., ¶¶ 76-78); and other employees, when asked by plaintiffs how items were served, told them certain pastries were "usually" served warm or told them that employees "were supposed to warm them." Id., ¶¶ 74-75, 79-80. Plaintiffs allege that, out of five specific orders, as set forth in the complaint, in which the Starbucks employees recommended the pastries to be served warm, "those same personnel collected tax on just one of those five sales." Id., ¶ 81. They further state that "[n]oncompliance of this sort is routine," such that the Survey shows that "Starbucks stores sold the Relators 51 pastries in a '[]heated state.' A total of $9.71 in sales tax came due on those orders under Section 1105(d)(i)(3)(A) of the Tax Law. Despite that unambiguous authority, Starbucks stores collected just $1.29, or 13% of the total sales tax due." Id., ¶ 82.
Additionally, plaintiffs allege that Starbucks improperly failed to tax pastries sold "to go" that were not sold in "the same form and condition, quantities and packaging" as they would normally be found in supermarkets or grocery stores, in violation of Section 1105(d)(i)(3) of the Tax Law. Id., ¶¶ 83-86. Plaintiffs claim that, "with the exception of three orders served on ceramic plates, every single pastry sold in the Survey was served in a [wax or tissue paper] 'warming sleeve,'" which is not how pastries are normally found in supermarkets or grocery stores. Id., ¶¶ 87-89. Plaintiffs allege that none of the pastries they ordered was sold as it would normally be in a supermarket or grocery store, and, therefore, all of their one hundred orders should have been taxed, "regardless of whether the food was heated or sold for on-premises consumption." Id., ¶¶ 86, 104. Plaintiffs contend that "Starbucks personnel were required to charge, collect, report, and remit a total of $17.97 in tax on those sales. Instead, Starbucks personnel collected just $2.69, or 15% of the total sales tax due." Id., ¶ 105.
On pastry purchases totaling $208.25, plaintiffs claim that the Survey results indicate that taxes in the total amount of $17.97 should have been collected on their orders, but only $2.69, or 15% of taxes owed, was collected. Id., ¶¶ 105-07, 110. Plaintiffs allege that "Starbucks failed to charge and collect, and presumably failed to report and remit to the State, $15.28 in lawful sales tax, or 85% of the total tax due on the sales made to the Relators." Id., ¶ 111. Plaintiffs also allege that one of them conducted a follow-up survey of twenty-four additional stores in Manhattan on two days in June 2015, just prior to filing the complaint, and found that "[a]lthough a total of $5.24 in sales tax came due on those orders under the unambiguous terms of the Tax Law, Starbucks personnel collected just $0.66, or 13%, of the [sales] tax due." Id., ¶¶ 143-44; see id., Ex. H (Follow-up Survey). Because Starbucks was conducting business in New York for more than ten years prior to their survey, plaintiffs allege that "it is likely" that Starbucks engaged in "longstanding, widespread, and flagrant tax evasion" at all times during the FCA's ten-year statute of limitations period and "has cost the State millions of dollars in lost revenue." Id., ¶¶ 3, 5. Based on their own estimates, and calculations, of Starbucks' revenue from the sale of pastries in its New York stores from 2005 through 2014, "[a]ssuming the Survey's results fairly reflect Starbucks' sales tax practices in the State," plaintiffs allege that the State has lost approximately $10 million in tax revenue. Id., ¶¶ 135-37, 141-42, 154.
Discussion
Plaintiffs, in their sole cause of action, allege that Starbucks violated Finance Law Section 189(1)(g), which imposes liability on "any person who . . . knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the state or a local government." The FCA applies "to claims, records, or statements made under the tax law only if (i) the net income or sales of the person against whom the action was brought equals or exceeds one million dollars for any taxable year . . . ; (ii) the damages pleaded in such action exceed three hundred and fifty thousand dollars; and (iii) the person is alleged to have violated paragraph (a), (b), (c), (d), (e), (f) or (g) of subdivision one of this section." Finance Law §§ 189(4)(a)(i)-(iii). Although "[t]he typical false claim involves the state paying out money because of a false claim" (State ex rel. Seiden v. Utica First Ins. Co., 96 AD3d 67, 71 (1st Dep't 2012)), a claim brought under Section 189(1)(g), known as a reverse false claim, "involves money owed to the government rather than money paid by the government" (United States ex rel. Quartararo v. Catholic Health Sys. of Long Island Inc., 2017 WL 1239589, at *8 (E.D.NY 2017) (emphasis omitted)). Such a claim is based on allegations that a person "uses a false record to avoid an obligation to pay the government." Seiden, 96 AD3d at 71; see also Cantrell v. New York Univ., 326 F. Supp. 2d 468, 470 (S.D.NY 2004) ("An underreporting of monies owed to the government . . . is often referred to as a 'reverse false claim.'").
New York's False Claims Act was designed to follow the federal False Claims Act, "and therefore it is appropriate to look toward federal law when interpreting the New York act." Seiden, 96 AD3d at 71.
As stated in Seiden:
To allege a reverse false claim [under Section 189(1)(g)], a plaintiff must state facts tending to show: "(1) that the defendant made, used, or caused to be used a [material] record or statement to conceal, avoid, or decrease an obligation to [the government]; (2) that the statement or record was false; (3) that the defendant knew that the statement or record was false; and (4) that [the state] suffered damages as a result."Seiden, 96 AD3d at 71-72 (third and fourth alterations in original) (quoting United States v. Raymond & Whitcomb Co., 53 F. Supp. 2d 436, 444-45 (S.D.NY 1999)). A reverse false claim must also be stated with particularity. Id.at 72. "[I]n order to be liable under the FCA, a party must knowingly make a false statement or knowingly file a false record." People v. Sprint Nextel Corp., 26 NY3d 98, 112 (2015). "Knowingly," as defined in the statute, means "that a person, with respect to information: (i) has actual knowledge of the information; (ii) acts in deliberate ignorance of the truth or falsity of the information; or (iii) acts in reckless disregard of the truth or falsity of the information." Finance Law §§ 188(3)(a)(i)-(iii); Sprint, 26 NY3d at 112. While the FCA "require[s] no proof of specific intent to defraud" (Finance Law § 188(3)(b)), the scienter "requirement is still 'rigorous.' More specifically, '[w]hat matters is . . . whether the defendant knowingly violated a requirement that the defendant knows is material to the Government's payment decision.' The purpose of the scienter requirement is to avoid punishing 'honest mistakes or incorrect claims submitted through mere negligence'" (United States ex rel. Wood v. Allergan, Inc., 246 F. Supp. 3d 772, 828 (S.D.NY 2017) (alteration in original) (emphasis omitted) (citations omitted)). The statute expressly provides that "acts occurring by mistake or as a result of mere negligence are not covered by this article." Finance Law § 188(3)(b).
Further, the false statement or record "must be material to the other party's course of action." See Universal Health Servs. v. United States ex rel. Escobar, ___ U.S. ___, 136 S. Ct. 1989, 2001 (2016). "Material" is defined as "having a natural tendency to influence, or be capable of influencing the payment or receipt of money or property." Finance Law § 188(5). In assessing materiality, courts "look to the effect on the likely or actual behavior of the recipient of the alleged misrepresentation." Grabcheski v. Am. Int'l Grp., Inc., 687 F. App'x 84, 87 (2d Cir. 2017) (quoting Escobar, 136 S. Ct. at 2002). "The materiality standard is demanding." Escobar, 136 S. Ct. at 2003. In addition, materiality "cannot be found where noncompliance is minor or insubstantial." Id.
Plaintiffs' FCA claim rests on Starbucks' alleged violations of Tax Law Section 1105(d), pertaining to the imposition of New York State sales tax on food and drink sold in "restaurants, taverns or other establishments in this state." Tax Law § 1105(d)(i). Section 1105(d)(i) of the Tax Law provides, in relevant part, that a 4% tax shall be paid on the following:
The receipts from every sale of . . . food and drink of any nature or food alone, when sold in or by restaurants, taverns or other establishments in this state . . . (except those receipts taxed pursuant to subdivision (f) of this section):Id., §§ 1105(d)(i)(1)-(3). Additional local taxes may also apply to such food and drink, as alleged by plaintiffs: "Sales tax is assessed at a combined rate equal to the sum of a statewide sales tax rate plus any local sales tax rate in effect where the sale occurs. The point of delivery determines which jurisdictions' rates apply." Complaint, ¶ 15. Further, plaintiffs allege that "[t]he statewide rate for taxable food and drink is currently 4.000%. A surtax of 0.375% applies within the Metropolitan Transportation Commuter District, the 12-county area in and around the City of New York (the 'MTCD'). Cities, counties, and other local jurisdictions with taxing authority may levy additional tax, with local rates currently ranging from 3.000% to 4.500%." Id., ¶ 16. In New York City, sales of taxable food and drink are subject to a combined state and local rate of 8.875%. Id., ¶ 17. "The combined tax rates for sales of food and drink in the State currently range from 7.000% in jurisdictions such as Saratoga Springs to 8.875% in jurisdictions such as the City of New York. Id., ¶ 18.
(1) in all instances where the sale is for consumption on the premises where sold;
(2) in those instances where the vendor or any person whose services are arranged for by the vendor, after the delivery of the food or drink by or on behalf of the vendor for consumption off the premises of the vendor, serves or assists in serving, cooks, heats or provides other services with respect to the food or drink; and
(3) in those instances where the sale is . . . for consumption off the premises of the vendor, except where food (other than sandwiches) or drink or both are (A) sold in an unheated state and, (B) are of a type commonly sold for consumption off the premises and in the same form and condition, quantities and packaging, in establishments which are food stores other than those principally engaged in selling foods prepared and ready to be eaten.
"This rate equals the sum of the statewide rate of 4.000%, the City of New York's local rate of 4.500%, and the MTCD surtax of 0.375%." Id.
The New York State Department of Taxation and Finance ("Department of Taxation and Finance" or "DTF") has adopted regulations that interpret Section 1105(d). See 20 N.Y.C.R.R. § 527.8 ("Sale of Food and drink. [Tax Law, § 1105(d)]). The regulations include a comprehensive list of the types of establishments, "as well as other establishments engaged in the sale of food or drink for consumption on or off premises [that] are required to collect the tax," which includes cafes. Id., § 527.8(b). The regulations provide that "consumption on the premises shall mean that the food or drink sold may be consumed on the premises where the vendor conducts his business," and "consumption off the premises shall mean that the food, including sandwiches, or drink is intended to be consumed at a place away from the vendor's premises." Id., §§ 527.8(d), (e). The regulations further provide that
The term "premises" is defined to "mean the total space and facilities in or on which the vendor conducts his business, including but not limited to parking areas for the convenience of in-car consumption, counter space, indoor or outdoor tables, chairs, benches and similar conveniences." Id., § 527.8(c).
[t]he determination of when food or drink is sold either in a heated or unheated state must be made according to the vendor's method of merchandising.Id., §§ 527.8(e)(1)(i)-(ii).
(i) If the vendor attempts to maintain the food at a temperature which is warmer than the surrounding air temperature by using heating lamps, warming trays, ovens or similar units, or cooks to order, the vendor is selling food in a heated state.
(ii) If the vendor sells prepared foods from units maintained at or below surrounding air temperature, such sales are sales of prepared food in an unheated state.
Application
To survive the instant motion to dismiss, plaintiffs must plead sufficient factual allegations for the Court to draw the reasonable inference that Starbucks knowingly made or used false records to conceal, avoid, or decrease its obligation to pay sales tax under Tax Law Section 1105(d), and that the State suffered substantial damages as a result. See Seiden, 96 AD3d at 71-72. Plaintiffs' allegations of fraud are that, during their visits to about eighty Starbucks stores from November 2013 through September 2014, Starbucks' employees erroneously, and in at least a few instances intentionally, did not charge or collect the proper sales tax when plaintiffs ordered bakery items to eat on the premises, or when they ordered or were served warmed bakery items, or when they ordered bakery items to go, even when the items were not packaged or in a form that would be found in food stores. Plaintiffs claim that Starbucks' employees knowingly made, used, or caused to be made or used, false records—i.e., sales receipts reflecting the amount of tax charged on pastry items—to deprive the State of tax revenue. See Complaint, Ex. G (Receipts). There are no claims that Starbucks otherwise failed to collect sales tax on food and drink as required by law. As plaintiffs concede, their survey showed that Starbucks properly collected sales tax on drinks and food other than certain pastry items. There also are no factual allegations identifying any false records made or used prior to November 2013, although plaintiffs contend that based on the results of their eleven-month survey, it is "likely" that Starbucks engaged in a decade-long scheme to avoid paying sales tax on baked goods. Id., ¶ 3. Plaintiffs estimate, based on information obtained from unidentified public records, that, during the ten-year statute of limitations period of the FCA, Starbucks failed to pay approximately $10 million in tax revenue. Id., ¶¶ 3, 5. However, the complaint also alleges that the Survey indicates Starbucks "presumably failed to report and remit to the State[ ] $15.28 in lawful sales tax," which is "85% of the total tax due on the sales made to the Relators in the Survey." Id., ¶ 111.
"[T]he Relators believe that no sales of food or drink within the State during the past ten years have been subject to tax exclusively at the statewide rate of 4.000%. Every taxable sale of food and drink within the State during this period has been subject to tax at one or more local tax rates in addition to the statewide rate. Accordingly, any person who failed to collect and remit tax on such sales necessarily shortchanged not only the State of New York but also a 'local government' within the meaning of 188(6) of the State Finance Law." Complaint, ¶ 19.
Plaintiffs also claim that Starbucks' income tax returns, which are based on Starbucks' sales receipts, are also false records knowingly made, used, or caused to be made or used to deprive the State of tax revenue. Id., ¶¶ 23-24.
Plaintiffs claim that the unambiguous language of the Tax Law and related regulations demonstrate that Starbucks violated the law. Plaintiffs support this claim by alleging that Starbucks' employees knowingly evaded the law, based upon comments made by four employees at different stores, that they usually do not charge the sales tax for eating in, or always make the order to go, or take off the tax for eating in. Id., ¶¶ 113-16 (including the following exchanges: (1) at a store in the Bronx, "Starbucks personnel explained that 'there's a separate price for eating in,'" despite plaintiff's statement that he intended to consume his order at the premises, to which "Starbucks personnel responded, 'That's OK; we don't actually charge it to anyone;'" (2) at a store on the Upper East Side of Manhattan, Starbucks personnel manually adjusted plaintiff's order price "by removing the sales tax from the total. When the Relator asked why, Starbucks personnel responded, 'It's a 'for here' tax. I just always make it to go;'" (3) at a store on Roosevelt Island, plaintiff asked "why sales tax had been manually subtracted from his order total," to which "Starbucks personnel responded that there was a 'different price' for dining in, adding 'but I usually take it off;'" (4) at a store in Queens, Starbucks personnel "admitted that he 'usually' does not charge sales tax even when he knows the customer will consume the order on the premises"). Moreover, plaintiffs claim that "knowing or willful evasion would be the only reasonable explanation for the Survey's findings." Id., ¶ 117. However, even if the allegations in the complaint—that employees failed to collect the proper amount of sales tax on pastries ordered by plaintiffs, that some employees disregarded whether the pastries were warmed for plaintiffs or were intended to be eaten on the premises, and that a few employees told plaintiffs that they knew they were not charging taxes that should have been charged—are true, the pleadings do not permit a reasonable inference that Starbucks had actual knowledge of, or acted in deliberate ignorance or reckless disregard of, its employees' alleged noncompliance with the Tax Law.
To the extent that plaintiffs contend that Starbucks acted with reckless disregard because it knew of its obligations under the Tax Law and had the means to comply with Section 1105(d) (see Pls.' Mem. in Opp'n, at 14), "the mere existence of an 'obligation' does not establish a violation of the FCA. Rather, in the reverse false claims context, it is only when an obligation is knowingly concealed or knowingly and improperly avoided or decreased that a provider has violated the FCA." Kane ex rel. United States v. Healthfirst, Inc., 120 F. Supp. 3d 370, 389 (S.D.NY 2015) (emphasis omitted). Plaintiffs' argument that Starbucks knew that its employees were not charging proper taxes because of the existence of a manual that had been distributed to Starbucks employees and informed them how tax should be applied also fails to support their claim that Starbucks deliberately ignored or recklessly disregarded its employees' actions so as to constitute a violation of the FCA. See Pls.' Mem. in Opp'n, at 19. Further, there are no allegations to support a finding that Starbucks employees who were not charging the proper amount of sales tax were or could have been acting within their authority or to benefit the corporation. See VFP Invs. I LLC v. Foot Locker, Inc., 147 AD3d 491 (1st Dep't 2017).
Additionally, the allegations do not permit a reasonable inference that Starbucks failed to collect taxes on certain pastries during the entire ten-year statute of limitations period preceding the commencement of this action. It is not disputed that since at least 2006, Starbucks has been regularly audited by the Department of Taxation and Finance to determine whether it is submitting the proper amount of sales tax. See Van Pay Aff., ¶¶ 7-9, 13-28. In her affidavit in support of the instant motion, Cassie Van Pay ("Van Pay"), a tax manager employed by Starbucks, attests, without refute, that at least some of the relevant tax issues here—"whether Starbucks was properly collecting sales tax on its sale of food 'for dine-in' and 'to-go'" "specifically, whether Starbucks was properly treating 'to-go' sales as nontaxable sales (id., ¶ 15), "whether Starbucks was properly collecting sales tax on its sale of baked-goods, including pastries" (id., ¶ 23), and "Starbucks sales tax treatment of warmed pastries" (id., ¶ 28)—have been and continue to be addressed during Department of Taxation and Finance audits (id., ¶¶ 4, 13-28). There is no assertion in the within action that Starbucks failed to cooperate with the DTF's audits or failed to follow the DTF's guidance during or after the audits. Compare Sprint, 26 NY3d at 108. To the contrary, Starbucks apparently sought guidance with respect to whether "Starbucks was properly collecting tax on its 'to-go' sales." Id., ¶ 17; see id., ¶¶ 15-19. The Department of Taxation and Finance auditor for the audit conducted for the period of 2006-2009 indicated to Van Pay that "'To Go Sales' [are] not taxable" and attests that "there was no further communication from the auditor on this issue." Id., ¶ 19. Van Pay also attests that "[n]o additional sales tax was assessed relating to Starbucks sales at retail stores for the 2006-2009 Audit period." Id., ¶ 20.
Even if Van Pay's "affidavit does not in itself warrant dismissal under CPLR 3211, because it does not establish conclusively that plaintiffs have no cause of action, it supports [a finding] that the conclusory nature of plaintiffs' allegations is more than a matter of inartful pleading." Godfrey v. Spano, 13 NY3d 358, 374 (2009) (citation omitted). In view of the ongoing audits and Starbucks' cooperation with the DTF's audits, and considering plaintiffs' admission that Starbucks substantially complied with the Tax Law with respect to drinks and food other than pastries, the allegations demonstrate only negligence or carelessness on the part of some employees and are insufficient to draw a reasonable inference that the failure to collect the full amount of taxes on certain pastries was designed to conceal, reduce, or avoid Starbucks' obligation to pay sales tax. See Seiden, 96 AD3d at 72; State of New York ex rel. Jacobson v. Wells Fargo Nat'l Bank, N.A., 2015 WL 11111209, at *10 (S.D.NY 2015), aff'd, 824 F.3d 308 (2d Cir. 2016); see also United States ex rel. Panarello v. Kaplan Early Learning Co., 2014 WL 1315367, at *4 (W.D.NY 2014) (dismissing the complaint alleging violations of the federal False Claims Act where it described "non-compliant rather than fraudulent behavior").
While, as stated above, plaintiffs provide some anecdotal evidence of statements by Starbucks employees indicating that sales tax was not charged in several instances and refer to a handbook distributed to Starbucks employees, there is no indication that failing to collect sales tax on certain "to-go" items consumed at the premises or warmed pastries was a policy of Starbucks. Many of the stores visited by plaintiffs were admittedly franchises. With respect to the Starbucks franchises, plaintiffs submitted conflicting information—that some franchises do charge the appropriate sales tax and some franchises do not. Moreover, individual orders from a store that was visited twice does not indicate a course of repeated conduct, as discussed infra. Further, the Survey conducted by plaintiffs, wherein they visited Starbucks stores over a period of eleven months, is insufficient evidence, due to the lack of the use of any plausible scientific methodology, to warrant denial of the instant motion.
Although one case involving a random sampling permitted a reverse false claim under the federal False Claims Act to go forward, the factual circumstances differ from those herein. In United States ex rel. Customs Fraud Investigations, LLC v. Victaulic Co., 839 F.3d 242 (3d Cir. 2016), the relator in that case conducted "a study of listings from the online auction site eBay for [defendant's] products," which reviewed more than 200 listings. 839 F.3d at 248. The relator combined this study with an analysis of the defendant's shipping manifest data in order to conclude that systematic fraud must have occurred. Id. More importantly, the action was permitted to continue because the relator "bolstered" the complaint "by attaching an expert declaration stating that [the relator's] analysis provides overwhelming evidence" that the defendant did not comply with the law with respect to the sale of its goods "and attached actual examples of the data on which [the relator] and its expert based their analyses." Id. (internal quotation marks omitted). The expert report, by Abraham J. Wyner, Ph.D., a Statistics professor at University of Pennsylvania's Wharton School of Business, "explained that because [the relator] did not 'have access to direct evidence that traces and tracks imported [the defendant's goods] in the U.S. supply chain,' 'statistical methods can be used to establish indirect evidence.'" Id. at 256. In his report, Professor Wyner "opines that the process chosen by [the relator] to survey the secondary market for [the defendant's] products 'is standard practice' in this regard." Id. As a result, "Professor Wyner concluded that '[the relator's] findings are so stark that the only conclusion one can possibly reach is that [the defendant] is not properly marking its imports.'" Id. at 257 (emphasis in original). Accordingly, the court concluded "that the variable being measured here, the existence of country of origin markings on [the defendant's goods], could support the results of [the relator's] product study only if [the defendant] was not properly marking its imported [goods]." Id.
Customs Fraud Investigations, LLC, supra, further details the fundamentals of statistical sampling: "A valid statistical survey essentially has three steps: (i) identify a population of interest, (ii) take a random sample from that population, and (iii) use the observations in the sample to draw inferences about the population as a whole." Id. at 261 (Fuentes, J., concurring in part, dissenting in part). In more specific terms, "[t]here are a few critical features that are necessary for such a survey to be valid," such as the following:
First, it is important for the sample to be drawn from the correct population of interest. When a survey makes an error relating to "the specification of the population to be sampled . . . any estimates made on the basis of the sample data will be biased." . . . Second, a valid statistical sample must be drawn randomly. Surveys rely on random sampling because "[t]he statistics derived from observations or measurements of random samples permit one to estimate the parameters of the population." Indeed, "random selection is the only selection mechanism . . . that automatically guarantees the absence of selection bias. That is because when we use random sampling we are, by definition,
assuring the absence of any association that may exist between selection rules and the variables in our study."Id. at 261 (Fuentes, J., concurring in part, dissenting in part) (first, third, and fourth alterations in original) (footnotes and citations omitted). While the relator in Customs Fraud Investigations, LLC had an expert in statistics confirm their study and their findings, that is not the situation in the instant case. Here, the Survey was not scientifically performed and plaintiffs' Survey was unsupported by any expert review or report. As a result, there is no indication from the evidence submitted by plaintiffs that their reverse false claim under the FCA meets the statutory pleading requirement of $350,000. Plaintiffs can only prove minimal damages of $15.28. While the Court need not determine whether such a scientific methodology could be used to demonstrate that the State has suffered the required amount of damages, however, if it was possible to use such a methodology, at a minimum, plaintiffs would need a scientifically valid sampling and survey to prove the alleged damages.
With respect to plaintiffs' failure to allege sufficient facts to meet the statutory pleading requirement under the FCA, the Court notes that a "plaintiff 'is not obliged to show . . . that he actually sustained damages, but only that damages attributable to defendant['s] conduct might be reasonably inferred.' However, even at the pleading stage, those damages must not be speculative." Galloway v. Wittels, 2014 WL 36065, at *4 (Sup. Ct. NY County Jan. 6, 2014) (Kern, J.) (first alteration in original) (citation omitted) (quoting Fielding v. Kupferman, 65 AD3d 437, 442 (1st Dep't 2009)) (citing Zarin v. Reid & Priest, 184 AD2d 385, 388 (1st Dep't 1992); see also United States ex rel. Chorches v. Am. Med. Response, Inc., 865 F.3d 71, 86 (2d Cir. 2017) (stating that the pleading standard "must not be mistaken for license to base claims of fraud on speculation and conclusory allegations" (internal quotation marks and citation omitted)). Plaintiffs' allegations that Starbucks' illegal practices were ongoing for a decade before this action was started and that it suffered $10 million in damages are based purely on speculation. Based upon this failure to meet the pleading requirements alone, plaintiffs' claim must be dismissed.
In light of the foregoing, the Court need not address Starbucks' argument that the complaint is barred by Finance Law Section 190(9)(a) and its other alternative arguments. Accordingly, it is hereby
ORDERED that defendant's motion to dismiss is granted and the complaint is dismissed; and it is further,
ORDERED that the Clerk shall enter judgment accordingly.
This constitutes the decision and order of this Court. Dated: April 6, 2018 Hon. James E. d'Auguste, J.S.C.
Id., ¶ 33. The term "pastries" specifically "does not include other foods sold in Starbucks stores (such as candy, sandwiches, salads, or whole fruit), and it also does not include baked goods of any kind sold prepackaged and labeled for retail sale (such as bags of cookies)." Id., ¶ 34; see id., ¶ 35; id., Ex. B.