People ex rel. Schad v. My Pillow, Inc.

• Decision Date: 15 June 2017
• Docket Number: No. 1-15-2668.,1-15-2668.
• Citation: 82 N.E.3d 627,2017 IL App (1st) 152668
• Parties: The PEOPLE EX REL. SCHAD, DIAMOND & SHEDDEN, P.C., Plaintiff–Appellee, v. MY PILLOW, INC., Defendant–Appellant.
• Court: United States Appellate Court of Illinois

2017 IL App (1st) 152668

82 N.E.3d 627

The PEOPLE EX REL. SCHAD, DIAMOND & SHEDDEN, P.C., Plaintiff–Appellee,

v.MY PILLOW, INC., Defendant–Appellant.

No. 1-15-2668.

Appellate Court of Illinois, First District, FOURTH DIVISION.

June 15, 2017

Catherine A. Battin and Nicholas M. Furtwengler, of McDermott Will & Emery LLP, of Chicago, for appellant.

Stephen B. Diamond, Tony Kim, and David Kim, of Stephen B. Diamond, P.C., of Chicago, for appellee.

OPINION

PRESIDING JUSTICE ELLIS delivered the judgment of the court, with opinion.

¶ 1 This case requires us to consider matters of first impression arising under the Illinois False Claims Act, including whether damages paid by defendant prior to final judgment should be included in, or credited against, the amount of "damages" to be trebled under the Act and whether a law firm serving both as client and attorney may recover statutory attorney fees under the Act.

¶ 2 Relator, Stephen B. Diamond, P.C., formerly Schad, Diamond & Shedden, P.C. (relator), brought this qui tam action, on behalf of the State of Illinois, under the Illinois False Claims Act. 740 ILCS 175/1 et seq . (West 2012). Relator alleged that defendant, My Pillow, Inc. (My Pillow), knowingly failed to collect and remit use taxes on merchandise sold at craft shows in Illinois and on Internet and telephone sales to Illinois customers, as required by State law.

¶ 3 After a bench trial, the circuit court found in favor of relator as to the claims regarding Internet and telephone sales. The court awarded relator treble damages and attorney fees totaling $1,383,627.

¶ 4 We affirm the judgment in favor of relator. The evidence was sufficient to demonstrate that My Pillow acted in reckless disregard of its obligation to collect and remit use taxes on its Internet and telephone sales. The damages found by the trial court were supported by the evidence, and the trial court properly included, within the amount of damages to be trebled, those tax payments made by My Pillow before final judgment. We reverse that portion of the attorney-fee award that granted fees to relator for legal work performed by its own attorneys but otherwise affirm the fee award. We remand to the circuit court only for a recalculation of the attorney-fee award.

¶ 5 I. FALSE CLAIMS ACT

¶ 6 The Illinois False Claims Act (Act), formerly known as the Whistleblower Reward and Protection Act, allows the Attorney General or a private individual to bring a civil action on behalf of the State for false claims. See, e.g. , State ex rel. Pusateri v. Peoples Gas Light & Coke Co ., 2014 IL 116844, ¶ 16, 386 Ill.Dec. 674, 21 N.E.3d 437 ; see also 740 ILCS 175/1, 4 (West 2008). The Act closely mirrors the federal False Claims Act originally enacted in 1863. Scachitti v. UBS Financial Services , 215 Ill.2d 484, 506, 294 Ill.Dec. 594, 831 N.E.2d 544 (2005) ; see also 31 U.S.C. §§ 3729 through 3733 (2000). Both acts provide for qui tam actions brought by citizens seeking to reveal fraud against the government. People ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc. , 2015 IL App (1st) 132999, ¶ 30, 391 Ill.Dec. 687, 31 N.E.3d 363.

¶ 7 Thus, in construing the Act, Illinois courts have relied on federal courts' interpretation of the Federal False Claims Act for guidance. See id . (and cases cited therein); accord United States ex rel. Geschrey v. Generations Healthcare, LLC , 922 F.Supp.2d 695, 702 n.4 (N.D. Ill. 2012) (court's reasoning on false claim under Federal False Claims Act applied equally to state act, because "Illinois courts interpreting the state act look to interpretations of the similarly worded federal [act]").

¶ 8 Relator's claim is based on section 3 of the Act. 740 ILCS 175/3 (West 2012). Section 3 states, in relevant part, that a person is liable under the Act when he

"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 knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State." 740 ILCS 175/3(a)(1)(G) (West 2012).

For purposes of section 3, the term "knowingly" 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." 740 ILCS 175/3(b)(1)(A) (West 2012). "[N]o proof of specific intent to defraud" is required. 740 ILCS 175/3(b)(1)(B) (West 2012).

¶ 9 This case concerns a unique form of false claim involving the failure to collect and remit use taxes on the sale of merchandise in Illinois under the Retailer's Occupation Tax Act (ROTA) ( 35 ILCS 120/1 et seq . (West 2012)) and the Use Tax Act ( 35 ILCS 105/1 et seq . (West 2012)). "ROTA and the Use Tax Act are complementary, interlocking statutes that comprisethe taxation scheme commonly referred to as the Illinois ‘sales tax.’ " Kean v. Wal–Mart Stores, Inc ., 235 Ill.2d 351, 362, 336 Ill.Dec. 1, 919 N.E.2d 926 (2009). "[B]ecause of the impracticality of collecting the tax from individual purchasers, the burden of its collection is imposed upon the out-of-state vendor." Brown's Furniture, Inc. v. Wagner , 171 Ill.2d 410, 418, 216 Ill.Dec. 537, 665 N.E.2d 795 (1996).

¶ 10 The gist of relator's complaint is that My Pillow was required to collect and remit use taxes to the State but failed to do so. This specimen of false claim is known as a "reverse false claim," in that the defendant is not alleged to have obtained money fraudulently from the government but, rather, to have failed to pay money duly owed. See, e.g. , People ex rel. Beeler, Schad & Diamond, P.C. v. Relax the Back Corp ., 2016 IL App (1st) 151580, ¶ 19, 408 Ill.Dec. 281, 65 N.E.3d 503 (reverse false claim is where material misrepresentation is made to avoid paying money owed to government); State ex rel. Beeler Schad & Diamond, P.C. v. Ritz Camera Centers, Inc. , 377 Ill.App.3d 990, 996, 316 Ill.Dec. 128, 878 N.E.2d 1152 (2007) ("[t]he reverse false claims provision was added to provide that an individual who makes a material misrepresentation to avoid paying money owed to the Government would be equally liable under the Act as if he had submitted a false claim to receive money" (internal quotation marks omitted)).

¶ 11 II. BACKGROUND

¶ 12 My Pillow is a Minnesota corporation involved in the sales, marketing, and distribution of pillows. The company was founded in 2004 by Mike Lindell, who is the company's chief executive officer. Lindell says he sewed the first pillows himself by hand. By 2009, the company had between 5 and 20 employees.

¶ 13 Beginning in 2010, independent contractors began selling My Pillow's products at craft shows in Illinois and throughout the country. Between April 2010 and July 2012, My Pillow sold its products at 44 craft shows in Illinois. It is no longer disputed that My Pillow collected use tax on its craft show sales and remitted all the tax to the Illinois Department of Revenue (IDOR). (Relator alleged otherwise at trial, but the court ruled in favor of My Pillow on the craft-show use taxes, and relator does not challenge that ruling on appeal.)

¶ 14 In June 2010, My Pillow began selling its products through the Internet. My Pillow did not collect sales or use tax on Internet or telephone sales to Illinois purchasers. Relator began its investigation of My Pillow in August 2011.

¶ 15 In October 2011, Lindell created and launched a detailed infomercial, for which he paid a marketing company close to $200,000. In 2011, as a result of the infomercial, the company expanded impressively. Monthly sales increased from $200,000 to $10 million. The number of employees grew from 20 in October 2011 to 500 in a very short period of time. By February 2013, My Pillow had 650 employees.

¶ 16 My Pillow registered to do business in Illinois in July 2012. On July 13, 2012, relator filed its initial complaint under the Act, claiming that My Pillow failed to collect and remit Illinois use tax on merchandise sold at craft shows in Illinois and on its Internet sales and telephone sales to Illinois customers. Relator filed an amended complaint on October 31, 2012. The State declined to intervene, and the amended complaint was unsealed on January 15, 2013.

¶ 17 Relator filed a second amended complaint on February 26, 2013. My Pillow was served with process in March 2013.

¶ 18 In November 2013, My Pillow began to collect and remit use tax on Internet and telephone sales. My Pillow amended its sales and use tax returns, i.e. , the IDOR Form ST–1s, and paid a total of $106,970 in taxes it owed to Illinois on Internet and telephone sales for 2012 ($61,218) and 2013 ($45,752).

¶ 19 Relator filed a third amended complaint on April 28, 2014. In its third amended complaint, relator alleged in count I that, although My Pillow collected tax on craft show sales, it did not remit the tax to IDOR. In count II, relator alleged that My Pillow failed to collect and remit use tax on website and telephone sales.¹

¶ 20 A two-day bench trial began on September 22, 2014. Four witnesses testified at trial: Lindell, Nicole Oestrich, Stephen Diamond, and David Kim.

¶ 21 Lindell testified that, in April or May 2010, he asked an accountant, who had been doing his tax returns for 30 years, whether he had to charge sales tax on Internet sales. According to Lindell, it was his understanding that he would have to charge sales tax on Internet purchases within Minnesota but not on those that were shipped out of state. Lindell, however, never sought his accountant's advice or consulted with anyone about the collection, remittance, or payment of Illinois sales and use tax.

¶ 22 Lindell testified that, in July 2013, he told an employee, David Boyd, to begin collecting tax on Internet and telephone sales. Boyd did not follow Lindell's directions, and Lindell fired him for insubordination in November 2013....