People ex rel. Lindblom v. Sears Brands, LLC
2019 IL App (1st) 180588
Ill. App. Ct.2019Background
- Relators Richard and Ralph Lindblom (owners of a local appliance retailer) brought a qui tam action under the Illinois False Claims Act alleging Home Depot and other big-box retailers avoided Illinois retailers’ occupation tax by treating sales+installation of dishwashers and over-the-range microwaves as construction contracts not subject to sales tax collection from customers.
- Relators claimed defendants knowingly misclassified transactions, giving them a pricing advantage and reducing tax remittances; relators informed the Illinois Department of Revenue in letters (2004 and 2015) and the Department issued a 2015 compliance alert on the issue.
- The Attorney General declined to intervene; relators proceeded and amended their complaint multiple times. The third amended complaint alleged Home Depot practice via (1) a former employee (relators’ father), (2) a Home Depot sales associate admission, and (3) a written quote stating no sales tax would be charged on an installed appliance.
- Home Depot moved to dismiss asserting: (a) public disclosure bar (prior news article and departmental letters), (b) government action bar (Department audit), and (c) failure to plead fraud with specificity — specifically arguing relators failed to plead a completed transaction showing Home Depot did not collect sales tax.
- The trial court dismissed the third amended complaint with prejudice for failure to plead a specific completed transaction and denied leave to amend; the appellate court reversed, holding the complaint met the heightened fraud pleading standard and that neither the public disclosure nor government-action bars defeated the suit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Applicability of public-disclosure bar | Lindbloms: prior media/Dept. materials did not disclose fraud as to Home Depot; they were original source (letters prompted Dept. guidance). | Home Depot: allegations mirror public news and Dept. publications; public disclosure bar requires dismissal. | Court: public-disclosure bar does not apply — media/letters did not publicly disclose fraudulent conduct specific to Home Depot, and relators plausibly plead original-source status. |
| Applicability of government-action bar | Lindbloms: an audit is not an "administrative civil money penalty proceeding" that bars relator suit; no final notice of liability was issued. | Home Depot: Dept. audit of transactions means State already prosecuting matter; relator suit duplicates government action. | Court: government-action bar does not apply; an audit alone is not the type of proceeding the bar contemplates. |
| Sufficiency of fraud pleading — must plead a completed transaction | Lindbloms: detailed allegations (employee statements, written quote) and pattern of practice suffice under heightened fraud pleading; specific single transaction not required. | Home Depot: relators failed to plead a completed sale where tax was not charged and not remitted; dismissal warranted. | Court: reversed — complaint satisfied the heightened fraud pleading standard without a pleaded completed transaction; allegations created a probable inference of deliberate misclassification to avoid tax. |
| Denial of leave to amend to add a specific transaction | Lindbloms: sought leave to add a completed-transaction allegation (proposed fourth amended complaint). | Home Depot: amendment unduly delayed, after multiple amendments and previous notices; trial court properly denied leave. | Court: because it reversed the dismissal on pleading sufficiency, it did not reach or need to decide the denial-of-amendment abuse-of-discretion claim. |
Key Cases Cited
- Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (Illinois Supreme Court) (explains ROTA/Use Tax relationship)
- Irwin Industrial Tool Co. v. Department of Revenue, 238 Ill. 2d 332 (Illinois Supreme Court) (sales/use tax scheme and definitions)
- Connick v. Suzuki Motor Co., 174 Ill. 2d 482 (Illinois Supreme Court) (heightened pleading standard for fraud claims)
- Spurgeon v. Department of Revenue, 52 Ill. App. 3d 29 (appellate discussion that affixed tangible personal property becomes part of real estate)
- G.S. Lyon & Sons Lumber & Manufacturing Co. v. Department of Revenue, 23 Ill. 2d 180 (property incorporated into real estate loses identity as tangible personal property)
- Marshall v. Burger King Corp., 222 Ill. 2d 422 (pleading standards; treat well-pleaded facts as true)