People ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc.
82 N.E.3d 627
Ill. App. Ct.2017Background
- Relator (Stephen B. Diamond, P.C.) brought a qui tam action under the Illinois False Claims Act alleging My Pillow failed to collect/remit Illinois use tax on Internet and telephone sales (craft-show claims were tried and lost below and are not at issue on liability here).
- My Pillow began Internet sales in 2010, did not collect Illinois use tax on those sales, later registered in Illinois and, after suit, amended returns and paid $106,970 in past-due tax for 2012–2013.
- After a two-day bench trial the court found My Pillow acted with "reckless disregard" (knowingly) as defined by the Act for Internet/telephone sales and awarded treble damages plus penalties and attorney fees.
- The trial court trebled total damages including the $106,970 paid pre-judgment, then credited that payment, producing the ‘‘proceeds’’ figure used to calculate relator’s statutory share and attorney fees.
- The court awarded relator 30% of proceeds and approximately $600,960 in attorney fees; My Pillow appealed liability, the trebling/crediting of pre-judgment payments, the temporal scope of damages, and the award of fees to a relator-law firm for work performed by its own lawyers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether My Pillow acted with "knowingly"/reckless disregard under IL False Claims Act | Relator: My Pillow ignored obvious warning signs and made no reasonable inquiry into tax duties, so knowledge/recklessness established | My Pillow: Nexus/tax obligation was a debatable legal question; could not have acted recklessly on unsettled law | Held: Affirmed — despite legal uncertainty, My Pillow made no reasonable inquiry and thus acted in reckless disregard. |
| Whether pre-judgment tax payments ($106,970) should be trebled or netted before trebling | Relator: Pre-judgment payments are proceeds caused by suit and should be included in damages to be trebled, then credited after trebling | My Pillow: Payments should reduce damages before trebling (net trebling) | Held: Trebling before crediting affirmed (Bornstein principle applies). |
| Whether damages may reach back to June 2010 (before relator's investigation began) | Relator: Damages measure the State’s loss from the wrongful conduct; recovery may go back to the date of the misconduct within statutory limitations | My Pillow: Relator lacked alleged facts/timeframe pre-investigation; cannot recover for pre-investigation period | Held: Affirmed — relator proved losses back to June 2010; pleading/answer and verdict cure any technical pleading defects; six-year statutory limit controls. |
| Whether relator-law firm can recover attorney fees for work performed by its own member lawyers | Relator: Statute awards reasonable attorneys’ fees and costs; firm is an organizational plaintiff represented by its members | My Pillow: A plaintiff-attorney (or firm representing itself) should not recover fees for its own self-representation | Held: Partially reversed — fees for work performed by relator’s own member lawyers vacated; fees for outside counsel stand. Court declined to permit double recovery and relied on Hamer policy concerns (avoid rewarding self-representation and potential abusive fee generation). |
Key Cases Cited
- Quill Corp. v. North Dakota, 504 U.S. 298 (U.S. 1992) (physical-presence/substantial-nexus rule for state sales tax)
- Brown’s Furniture, Inc. v. Wagner, 171 Ill. 2d 410 (Ill. 1996) (Illinois discussion of nexus/physical presence for sales/use tax)
- United States v. Bornstein, 423 U.S. 303 (U.S. 1976) (pre-judgment payments are included in damages that are trebled/doubled and then credited)
- Kay v. Ehrler, 499 U.S. 432 (U.S. 1991) (pro se attorney not entitled to fee awards; organizational plaintiffs differ because of attorney-client relationship)
- Hamer v. Lentz, 132 Ill. 2d 49 (Ill. 1989) (policy reasons to deny fee awards to attorneys representing themselves under fee-shifting statutes)
- Ritz Camera Centers, Inc. v. Schad, Diamond & Shedden, P.C., 377 Ill. App. 3d 990 (Ill. App. Ct.) (reverse-false-claims context and need to make factual determinations about knowledge/recklessness)
- McGinty v. New York, 193 F.3d 64 (2d Cir. 1999) (pre-judgment corrective payments do not moot or eliminate statutory liquidated/treble damages)
- Anchor Mortgage Corp. v. United States, 711 F.3d 745 (7th Cir. 2012) (court applied net-trebling in different factual setting; distinguished by this court as a typical FCA goods/contract case not a reverse-tax claim)