State v. Burlington Coat Factory

• Decision Date: 06 December 2006
• Docket Number: No. 1-05-3824.,1-05-3824.
• Parties: The STATE ex rel. BEELER, SCHAD AND DIAMOND, P.C., Plaintiff, v. BURLINGTON COAT FACTORY WAREHOUSE CORPORATION and Burlington Coat Factory Direct Corporation, Defendants-Appellees (The State of Illinois, Appellee; Beeler, Schad and Diamond, P.C., Appellant).
• Court: United States Appellate Court of Illinois

Page 423

860 N.E.2d 423

307 Ill.Dec. 769

The STATE ex rel. BEELER, SCHAD AND DIAMOND, P.C., Plaintiff, v. BURLINGTON COAT FACTORY WAREHOUSE CORPORATION and Burlington Coat Factory Direct Corporation, Defendants-Appellees (The State of Illinois, Appellee; Beeler, Schad and Diamond, P.C., Appellant).

No. 1-05-3824.

Appellate Court of Illinois, First District, Third Division.

December 6, 2006.

Huff & Gaines Ltd. (John L. Huff, of counsel) and Schad, Diamond & Shedden, P.C. (Stephen B. Diamond, Stanley W. Pierson, of counsel), Chicago, for Appellant.

Lisa Madigan, Attorney General of the State of Ilinois; Gary Feinerman, Solicitor General; Brian F. Barov, Assistant Attorney General, for Appellee the State of Illinois.

Foley & Lardner LLP, Chicago (Mary Kay M. Martire and Tracy D. Williams, of counsel), for Appellees Burlington Coat Factory Warehouse Corporation and Burlington Coat Factory Direct Corporation.

Justice KARNEZIS delivered the opinion of the court:

Plaintiff-relator Beeler, Schad and Diamond, P.C. (relator), filed a qui tam action in the name of the State of Illinois (the state) against defendants Burlington Coat Factory Warehouse Corporation (Burlington Corporation) and Burlington Coat Factory Direct Corporation (Burlington Direct) (collectively defendants) pursuant to the Whistleblower Reward and Protection Act (740 ILCS 175/1 et seq. (West 2002)). Relator alleged that Burlington Direct, an Internet sales company incorporated in New Jersey, violated the Act when it failed to collect and remit use tax to the state on its Internet sales to customers in Illinois. The Attorney General of the State of Illinois intervened and moved for voluntary nonsuit and dismissal. The court granted the motion to dismiss. Relator appeals, arguing that the court erred in denying relator's request for discovery and in granting the motion to dismiss. We affirm.

Background

Burlington Corporation is a Delaware corporation with its principal place of business in New Jersey. There are 19 Burlington Coat Factory (BCF) stores in Illinois, each incorporated separately as an Illinois corporation. Burlington Direct is a subsidiary of Burlington Corporation and sells BCF merchandise on the Internet. Consumers shopping for BCF merchandise on the Burlington Corporation website are automatically directed to the Burlington Direct website in order to select and complete their purchases. Customers who purchase merchandise from the Burlington Direct website can return the merchandise to a BCF store for exchange or store credit if they have prior approval from Burlington Direct. They cannot get a refund of the purchase price from the stores.

Pursuant to the Use Tax Act (35 ILCS 105/1 et seq. (West 2002)), if an out-of-state retailer maintains a place of business in Illinois, it has a duty to collect and remit use tax to the state for sales it makes to customers in Illinois. 35 ILCS 105/3-45 (West 2002). Burlington Direct makes sales to Illinois customers through its website. From 1998 through 2003, it did not collect and remit use tax on those sales. Relator filed suit against defendants in the name of the state, alleging defendants knowingly made false claims about their use tax liability in violation of the Whistleblower Reward and Protection Act. Relator contended that Burlington Direct had a duty to collect and remit use tax on the sales because it maintains a place of business in Illinois through the 19 BCF stores in Illinois, asserting that Burlington Corporation controls the 19 BCF stores in Illinois as well as Burlington Direct and that they are all the same business. As proof that the stores operate in tandem with Burlington Direct and are, therefore, a place of business for Burlington Direct in Illinois, relator points out that Burlington Direct and the stores sell the same merchandise; operate under the same management, distribution and ordering systems; use common advertisements in newspapers and on Burlington Corporation's website; cooperate in making exchanges and refunds; and facilitate sales on the Burlington Corporation website by automatically redirecting customers to the Burlington Direct website for purchases of any Burlington Coat Factory merchandise.

The Whistleblower Reward and Protection Act (the Act) is an anti-fraud statute. Pursuant to section 3 of the Act, a person is liable to the state for civil penalties and triple damages for any damage the state sustains as a result of fraud perpetrated by that person on the state, such as for knowingly making or using false records or statements to conceal, avoid or decrease an obligation to pay or transmit money or property to the state. 740 ILCS 175/3(a)(7) (West 2002). The Attorney General may bring a civil action in the name of the state for violation of the Act. 740 ILCS 175/4(a) (West 2002). A private person, referred to as a "relator," may also bring a civil action in the name of the state for a violation of the Act, for that person and for the state. 740 ILCS 175/4(b)(1) (West 2002). Such an action is referred to as a "qui tam" action. 740 ILCS 175/4(c) (West 2002). Once a relator files a qui tam action, the state may intervene, proceed with the action and take over conduct of the action; or it may decline to intervene, thus giving the relator the right to conduct the action. 740 ILCS 175/4(b)(4) (West 2002). A relator is considered "a party to the action" and, if a suit is successful, is awarded a percentage of the proceeds or settlement. 740 ILCS 175/4(c)(1), (d) (West 2002).

Relator's qui tam action alleged that Burlington Direct's Internet order confirmations falsely stated that no tax was due from its customers, defendants' failure to collect and remit the tax Burlington Direct caused damages to the State of Illinois and defendants knowingly made false records and statements to conceal their use tax obligation and their failure to satisfy it. The Attorney General intervened in the action. Almost two years later, after numerous agreed to extensions, the Attorney General moved for nonsuit and voluntary dismissal, asserting that there was probably not a sufficient nexus with Illinois under the commerce clause for Burlington Direct, an out-of-state company, to collect use tax on sales to customers in Illinois. Relator objected.

Under section 4(c)(2)(A) of the Act, the state may dismiss a qui tam action notwithstanding the objections of the relator if the relator has been notified of the filing to the motion to dismiss and the court has provided the relator an opportunity for a hearing on the motion. 740 ILCS 175/4(c)(2)(A) (West 2002). The court held such a hearing here. It first determined that section 4(c)(2)(A) does not give the Attorney General unfettered discretion to dismiss a qui tam action under the Act. It then applied the standard for dismissal of a qui tam action articulated in United States ex rel. Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir.1998).

The Act "closely mirrors" the federal False Claims Act (31 U.S.C. § 3729 et seq. (2000)) (FCA), which provides that a person may bring a civil action for a violation of the federal act for the person and for the United States government. Scachitti v. UBS Financial Services, 215 Ill.2d 484, 506-07, 294 Ill.Dec. 594, 831 N.E.2d 544, 557 (2005); 31 U.S.C. 3730 (2000). In a dismissal provision substantially similar to the dismissal provision in section 4(c)(2)(A) of the Act, the FCA provides that the federal government may dismiss a qui tam action despite objections by the relator as long as the relator is notified and has been provided an opportunity for a hearing on the dismissal. 31 U.S.C. § 3730(c)(2) (2000). Sequoia Orange interprets this provision and sets out a two-part test for determining whether the government's motion to dismiss a qui tam action should be granted. Sequoia Orange, 151 F.3d at 1145. Under Sequoia Orange, the government must first identify a valid governmental purpose for the dismissal and then show a rational relation between dismissal and accomplishment of that purpose. Sequoia Orange, 151 F.3d at 1145. If this two-part test is satisfied, then the burden shifts to the relator to show that dismissal is fraudulent, arbitrary and capricious, or illegal. Sequoia Orange, 151 F.3d at 1145.

The court here found relator failed to successfully rebut the reasons advanced by the Attorney General under the Sequoia Orange test and granted the Attorney General's motion to dismiss the action. Relator appeals.

Analysis

Relator first argues that the court erred in granting the dismissal because, applying the Sequoia Orange test, (1) the Attorney General's assertion of insufficient nexus does not demonstrate a valid government purpose such that dismissal would be rationally related to that purpose and (2) the Attorney General's decision to move for dismissal was arbitrary and capricious. It may be that relator is correct on both counts. However, we do not reach these arguments because we decline to follow Sequoia Orange. The circuit court applied the Sequoia Orange test because, in its determination, the state does not have unfettered discretion to voluntarily dismiss a qui tam action and, unless some system of checks and balances on the state's power to dismiss is in place, the relator's interest in the suit is undermined and the court's function during the hearing on relator's objections to dismissal is meaningless.¹ While we agree that the state's discretion to dismiss is not entirely unfettered, it is, however, only minimally qualified by the Act and not subject to a Sequoia Orange "checks and balances" test.

Section 4(c)(2)(A) provides: "The State may dismiss the action notwithstanding the objections of the person initiating the action if the person has been notified by the State of the filing of the motion and the court has provided the person with an opportunity for a hearing on the motion." 740 ILCS 175/4(c)(2)(A) (West 2002). The court found...