State ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc.

• Decision Date: 20 September 2018
• Docket Number: Docket No. 122487
• Citation: State ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2018 IL 122487, 115 N.E.3d 923, 426 Ill.Dec. 1 (Ill. 2018)
• Parties: The STATE of Illinois EX REL. SCHAD, DIAMOND & SHEDDEN, P.C., Appellant, v. MY PILLOW, INC., Appellee.
• Court: Illinois Supreme Court

2018 IL 122487

115 N.E.3d 923

426 Ill.Dec. 1

The STATE of Illinois EX REL. SCHAD, DIAMOND & SHEDDEN, P.C., Appellant,

v.MY PILLOW, INC., Appellee.

Docket No. 122487

Supreme Court of Illinois.

Opinion filed September 20, 2018

Stephen B. Diamond, of Stephen B. Diamond, P.C., Tony Kim and Matthew Burns, of Kim & Burns LLP, David A. Genelly, of Vanasco, Genelly & Miller, and Michael W. Rathsack, all of Chicago, for appellant.

Catherine A. Battin and Daniel R. Campbell, of McDermott Will & Emery LLP, of Chicago, for appellee.

David S. Ruskin and David A. Hughes, of Horwood Marcus & Berk Chtrd., of Chicago, for amicus curiae Illinois Chamber of Commerce.

Lisa Madigan, Attorney General, of Springfield (David L. Franklin, Solicitor General, and Brett E. Legner, Deputy Solicitor General, of Chicago, of counsel), amicus curiae.

CHIEF JUSTICE KARMEIERdelivered the judgment of the court, with opinion.

¶ 1 This appeal presents a single issue: where the relator in a successful qui tam action brought against a corporation for the benefit of the State of Illinois under the Illinois False Claims Act(Act)( 740 ILCS 175/1 et seq.(West 2012) ) is a law firm, does section 4(d)(2) of the Act(id.§ 4(d)(2) ) entitle the firm to an award of both a reasonable amount "for collecting the civil penalty and damages" from the corporation on behalf of the Stateand an additional amount in attorney fees for the services performed by the firm's own lawyers for the same work?The circuit court concluded that it does and awarded the law firm not only a share of the proceeds for its efforts in collecting the penalty and damages from the corporation but also a substantial additional sum for attorney fees, expenses, and costs.The appellate court affirmed in part, reversed in part, and remanded.While it agreed that the law firm was entitled to an award of attorney fees for outside counsel it had retained, it held that the statute does not authorize an award of attorney fees for work done by the firm's own attorneys.It therefore sent the case back to the circuit court to recalculate the amount of fees the firm was entitled to recover.2017 IL App (1st) 152668, ¶ 158, 415 Ill.Dec. 423, 82 N.E.3d 627.We allowed the law firm's petition for leave to appeal( Ill.S. Ct. R. 315(eff. July 1, 2017) ) and granted leave to the Attorney General of the State of Illinois and the Illinois Chamber of Commerce to file friend of the court briefs in support of the defendant( Ill.S. Ct. R. 345(eff. Sept. 20, 2010) ).For the reasons that follow, we affirm the appellate court.

¶ 2 BACKGROUND

¶ 3 In July 2013, the law firm of Schad, Diamond and Shedden, P.C., subsequently known as Stephen B. Diamond, P.C.(Diamond), filed a qui tam action against My Pillow, Inc.(My Pillow), a Minnesota corporation, pursuant to the Act( 740 ILCS 175/1 et seq.(West 2012) ).Diamond amended its complaint a number of times, but the particulars of the revisions are unimportant.The gist of its claim was that My Pillow had "knowingly conceal[ed] or knowingly and improperly avoid[ed] or decrease[d] an obligation to pay or transmit money or property to the state" in violation of section 3(a)(1)(G) of the Act.Id.§ 3(a)(1)(G).More specifically, Diamond charged that My Pillow had failed to collect and remit to the State tax due under the Retailers' Occupation Tax Act( 35 ILCS 120/1 et seq.(West 2012) ) and the Use Tax Act( 35 ILCS 105/1 et seq.(West 2012) ) and had knowingly made false statements, kept false records and avoided obligations in violation of both statutes.The law firm's Retailers' Occupation Tax Act allegations arose from the sale of My Pillow products at craft shows.Its Use Tax Act claims pertained to the company's sale of its products online and by phone.

¶ 4 While the Act authorizes the attorney general to bring a civil action against persons the attorney general has found to be in violation of section 3 of the Act(see740 ILCS 175/4(a)(West 2012) ), it also expressly permits such actions to be commenced by private parties, as this one was (seeid.§ 4(b)(1) ).Where, as here, a private party initiates the action, the cause must be brought in the name of the State(id. ), and the State must be served with a copy of the complaint and other documents (id.§ 4(b)(2) ).The State then has the right to intervene and take over the action.Id.If it elects not to proceed, the party who initiated the action has the right to conduct it, subject to certain ongoing rights of the State.Id.§§ 4(b)(4)(B), 4(c)(3).There is no dispute that the State received the requisite notice in this case and expressly elected not to proceed with the action itself, yielding the right to conduct the litigation to Diamond.

¶ 5 From filing of the complaint to final judgment, Diamond the relator was represented by Diamond the law firm.The complaint, which was amended several times, specifically identified the relator as "Shad, Diamond & Shedden, P.C.," initially and then, after the firm changed its name, as "Stephen B. Diamond, P.C.(f/k/a Schad, Diamond & Shedden, P.C.) * * * a professional corporation located at 332 South Michigan Avenue, Suite 1000, Chicago, Illinois 60604."All subsequent pleadings in the case were filed by the firm itself, under that same name, using the law firm attorney code issued to it by the clerk's office in Cook County.

¶ 6 In its complaint, Diamond alleged that it made the purchases of My Pillow products at craft shows, online, and by telephone.Exhibits attached to the complaint show the billing and shipping address for all but one of the online purchases as being that of Diamond's office.The lone sale not sent to the firm's office was shipped to attorney Stephen Diamond(Stephen), the firm's president.Pleadings and other documents filed in the case on behalf of Diamond bore Diamond's name and address, often without the signature of any individual attorney.Stephen and other attorneys from Diamond conducted depositions for Diamond.During the two-day bench trial, Stephen served not only as lead trial counsel for Diamond but also testified as a witness.Two other Diamond lawyers served similar dual roles, representing Diamond and also appearing as witnesses on its behalf.While an outside law firm also appeared as counsel of record for Diamond, its involvement in the case was extremely small.In every meaningful respect, Diamond represented itself.

¶ 7 At the conclusion of the bench trial, the circuit court issued a written decision, finding in favor of My Pillow and against Diamond on Diamond's Retailers' Occupation Tax Act claims, but in favor of Diamond and against My Pillow on Diamond's Use Tax Act claims.Following additional briefing and a hearing, the circuit court ordered My Pillow to pay $343,227 in damages and $225,500 in statutory penalties, for a total of $568,727.The court subsequently increased this award to $782,667.It also recognized that the litigation had resulted in My Pillow paying the State an additional $106,970 in use taxes it owed, bringing the total proceeds from the action to $889,637.

¶ 8 Pursuant to section 4(d)(2) of the Act(id.§ 4(d)(2) ), a private party bringing a successful claim under the Act is entitled to receive not less than 25% nor more than 30% of the proceeds of the action to compensate it for recovering the money on behalf of the State.In this case, the circuit court made an award at the top end of the range, holding that My Pillow should pay 30% of the $889,637 in total proceeds, or $266,891, to Diamond with the balance to be paid directly to the State.

¶ 9 In addition to receiving 30% of the proceeds as compensation for its bringing the action against My Pillow on the State's behalf, Diamond asserted that, under section 4(d)(2) of the Act, My Pillow was also required to pay it "an amount for reasonable expenses which the court finds to have been necessarily incurred, plus reasonable attorneys' fees and costs."Id.Diamond submitted a lengthy fee petition in support of its claim.The total amount requested was $748,383.This sum included $29,499 in office, travel, and other expenses incurred by Diamond and $1094 it expended for purchases of My Pillow products; $4824 for what Diamond described as "common fees and expenses"; and $1800 in attorney fees Diamond paid to the law firm of Vanesco Genelly & Miller for 4.5 hours of work performed by that firm in connection with this litigation.By far the largest portion of the fee request, however, was $697,760 in attorney fees for work performed by Diamond itself in investigating and litigating this case and an additional $14,500 Diamond billed to draft the fee petition, an amount Diamond described as "substantially less than Relator's [ (Diamond's) ] actual fees of $22,644."

¶ 10 Diamond's request for $697,760 in attorney fees for its own work was supported by a voluminous and detailed printout showing the date the work was done, who did it, what their billable rate was, how many hours were worked, the total charge for each item, and a description of the service performed.It is clear from those entries that there was no differentiation between Diamond the relator and Diamond the law firm.Along with charges for legal research, drafting of documents, and court appearances were charges for scheduling visits to craft shows, attending the shows, purchasing My Pillow products, and checking credit card statements for My Pillow purchases.In addition, while individual lawyers with Diamond both conducted the trial and appeared as witnesses on Diamond's behalf, the attorney fee request made no distinction between these roles.Time spent making purchases and giving testimony was not separated out from time devoted to making legal arguments and examining witnesses.Every action taken in the case by Diamond, the relator, was also billed by Diamond, the law firm.It all involved the same work by the same people.

¶ 11 My Pillow objected to the fees sought by Diamond for work done by the...