This past May, a Cook County Associate Judge dismissed 201 Illinois False Claims Act (IFCA) cases at the request of Illinois Attorney General Lisa Madigan. The state’s action is an encouraging, albeit overdue, development in a long-running legal saga where one enterprising lawyer has harnessed the state’s enforcement power to pursue personal financial gain that provides little or no benefit to the public.
Much like its federal equivalent, the IFCA allows private citizens (relators) to file fraud claims on behalf of the state. The fraud must be based on a false claim, typically a violation of a law or regulation. If successful, relators can collect up to 30% of the award plus attorneys’ fees.
The relator that brought these suits, and hundreds others like them over the last ten years, is hardly a traditional “whistleblower.” One can better describe Attorney Stephen B. Diamond as a self-appointed business-tax investigator and collector. He and his colleagues at the Chicago-based law firm Schad, Diamond & Shedden PC order products online, and if they suspect that the retailer hasn’t properly charged Illinois taxes, Diamond files suit under the IFCA representing himself as the relator.
Diamond initially focused his suits on out-of-state businesses for allegedly failing to charge Illinois use taxes. In 2009, propelled in part by an Illinois Supreme Court decision, Kean v. Wal-Mart Stores, that introduced new confusion into the state’s tax laws, Diamond expanded his dragnet to any businesses that did not tax the shipping and handling charges for online orders.
The pressure on businesses, especially smaller ones, to settle Diamond’s IFCA claims is overwhelming. Consider the following: If Diamond makes five separate orders from a company, and on each order the shipping and handling tax the company failed to charge is $5, the company owes Illinois $25 in taxes, plus a small penalty. But if Diamond files an IFCA suit against the business, it could be liable for three times the amount of the unpaid tax, $75, plus a minimum of $5,000 per violation—$25,000. Even if Diamond accepts a settlement amount significantly less than that, he’ll ask for attorneys’ fees and the company will have to pay its own lawyers as well. The president of a patio furniture and pool equipment company targeted by Diamond told Chicago Daily Law Bulletin that he spent around $30,000 to settle a lawsuit even after a state tax audit cleared his company of any wrongdoing.
Diamond’s targets have beaten a path to Attorney General Madigan’s door, urging her to intervene in and voluntarily dismiss the relator’s suits. As was discussed in a WLF Legal Pulse post last April, state attorneys-general can dismiss false-claims cases, an action that both immediately relieves defendants and the judiciary of the burden of addressing frivolous lawsuits and deters other similarly flawed suits.
Over the past 7 years, Attorney General Madigan has resisted calls to dismiss large numbers of cases en masse, opting instead to consider them on a case-by-case basis. Even when she has dismissed certain claims, Diamond has challenged her action in court and demanded the state pay him fees in instances where companies pay uncollected taxes. Courts routinely reject the request for fees, and because the standard for blocking the state’s voluntary dismissal is so high—“glaring evidence of bad faith”—they also regularly deny Diamond’s dismissal challenges.
Last February, Attorney General Madigan had an unexplained change of heart with regard to wholesale dismissal of Diamond’s suits. Her office filed a motion with a Cook County trial judge to intervene in and dismiss 201 IFCA claims, on the ground that none of the targeted defendants conducted business in Illinois, and were thus beyond the court’s jurisdiction. Diamond accused the attorney general of bad faith, but the court denied his motion on May 23, 2016.
Diamond’s pursuit for wealth on Illinois’ behalf is quite analogous to the short-lived 2010 boom in federal “patent-marking” lawsuits. The Patent Act allowed any individual who discovered that a product had been marked with either an expired or incorrect patent number to sue on the government’s behalf and collect a share of the damages. Plaintiffs’ lawyers undertook investigations similar to Diamond’s online shopping sprees and, egged on by a favorable Federal Circuit decision, filed hundreds of suits against Brooks Brothers, cup maker Solo, Frisbee producer Wham-O, and other manufacturers. The September 16, 2011 signing of the America Invents Act, which included a provision that limited standing in faulty patent-marking suits to the federal government and actually injured parties, put an end to that litigation bonanza.
The Illinois legislature is attempting a similar approach to ending Diamond’s lawsuits. The IFCA is one of the few state false-claims laws that does not prohibit qui tam suits involving tax claims. A bill introduced last January would amend the IFCA to reroute all tax-related claims to the Department of Revenue, which would determine their credibility and allow the Department to refer claims to the attorney general. Private individuals who bring unpaid taxes to the Department’s attention could receive an award. Regrettably, Attorney General Madigan has stated that such a reform is unnecessary.
It is unclear at this moment whether the attorney general’s admirably aggressive move to terminate large numbers of Diamond’s suits, or the pending legislation, will deter him from continuing his mail-order lawsuit scheme. Even if the state eventually seeks dismissal of every future suit, businesses will still be forced to hire lawyers and defend themselves initially. And every new suit undermines Illinois’ efforts to improve its reputation as a poor place to do business.
In the meantime, perhaps the only way retailers can stay off Stephen Diamond’s target list is to follow the advice one lawyer said he gave to his clients: if you receive an order from a Stephen Diamond or anyone at his law firm’s address, “politely decline to fill it.”
Also published by Forbes.com at WLF’s contributor page.