People ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc.
2017 Ill. App. LEXIS 384
| Ill. App. Ct. | 2017Background
- Relator (law firm Stephen B. Diamond, P.C.) sued My Pillow, Inc. under the Illinois False Claims Act (qui tam) alleging failure to collect/remit Illinois use tax on Internet and telephone sales (craft-show claims were tried and relator lost).
- My Pillow began internet sales in 2010, did not collect Illinois use tax on internet/phone orders, registered in Illinois in 2012, and began collecting/remitting in 2013 after suit; it paid $106,970 in amended ST-1s for 2012–2013 before final judgment.
- After a two-day bench trial the court found My Pillow acted with "reckless disregard" regarding internet/telephone sales, awarded trebled damages and statutory penalties, and granted relator attorneys’ fees and costs totaling $1,383,627.
- The trial court included the $106,970 that My Pillow paid pre-judgment within the base damages that were trebled, then credited that payment after trebling.
- My Pillow appealed liability, the damages calculation (trebling of pre-trial payments and temporal scope), and the attorney-fee award (challenging fees for relator’s own lawyers and fees relating to unsuccessful craft-show claims).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether My Pillow acted with the requisite scienter ("knowingly" via reckless disregard) | Relator: My Pillow ignored obvious warnings and made no reasonable inquiry into Illinois use-tax obligations despite sales into Illinois, so acted in reckless disregard. | My Pillow: The nexus/taxability question was legally debatable (gray area); good-faith uncertainty negates "knowingly." | Court affirmed liability: legal uncertainty does not excuse failure to make reasonable inquiry; facts showed My Pillow buried its head in the sand and thus acted with reckless disregard. |
| Whether pre-judgment tax payments ($106,970) should be included in the amount trebled | Relator: Pre-judgment payments were produced because of the suit and therefore are part of the State’s damages; include in base damages, treble, then credit payment. | My Pillow: Payments should be deducted before trebling (net trebling). | Court held payments are included in damages that are trebled and credited afterward (following Bornstein). |
| Whether relator may recover damages for periods before relator’s investigation (pre-August 30, 2011) | Relator: Damages accrue from the time of the wrongful conduct (June 2010); pleading and verdict support recovery back to that date within statutory limitation. | My Pillow: Relator should be limited to damages only after its investigation date; earlier periods were not properly pled/foreseeable. | Court held relator may recover for pre-investigation period back to June 2010; pleading/answer and verdict cured any pleading/formal objections and limitations are governed by the Act’s six-year statute. |
| Whether relator (a law firm) can recover statutory attorneys’ fees for legal work performed by its own member-attorneys | Relator: An organization represented by in-house/member counsel can recover fees (Kay footnote and federal circuit decisions treating law firms as organizations). | My Pillow: Hamer/Kay bar pro se attorney-fee recovery; awarding fees to a relator-law firm invites double recovery and abusive fee-generation. | Court held relator cannot recover fees for work performed by its own member lawyers; fees for outside counsel retained by relator remain recoverable. |
| Whether fees for work on unsuccessful craft-show claims are recoverable (overlap/common core) | Relator: Much of the work overlapped and derived from a common core of facts/legal theories—fees for related work are recoverable. | My Pillow: Relator should not get fees for unsuccessful craft-show claims. | Court held fees for outside counsel covering the common core (including craft-show work that overlapped with successful claims) were properly awarded; court did not abuse discretion. |
Key Cases Cited
- United States v. Bornstein, 423 U.S. 303 (holding government damages are trebled before crediting compensatory payments)
- Quill Corp. v. North Dakota, 504 U.S. 298 (substantial-nexus/physical-presence rule for state sales tax jurisdiction)
- Brown’s Furniture, Inc. v. Wagner, 171 Ill. 2d 410 (Illinois discussion of nexus and sales/use tax scheme)
- Kay v. Ehrler, 499 U.S. 432 (pro se attorney may not recover statutory fees; footnote distinguishing organizational plaintiffs represented by in-house counsel)
- Hamer v. Lentz, 132 Ill. 2d 49 (Illinois Supreme Court denying fee recovery to an attorney proceeding pro se; policy rationales)
- Anchor Mortgage Corp. v. United States, 711 F.3d 745 (7th Cir.) (discusses net trebling approach in typical FCA cases; distinguished by court)
- McGinty v. State of New York, 193 F.3d 64 (2d Cir.) (pre-judgment remedial payments do not moot or negate statutory liquidated damages)
- United States v. King-Vassel, 728 F.3d 707 (7th Cir.) (definition/discussion of reckless-disregard standard)