United States: Reed Smith Clients Vindicated – Illinois Circuit Court Grants Motion To Dismiss In Qui Tam Winery Cases

On January 20, 2016, Judge Thomas Mulroy of the Cook County Circuit Court in Chicago granted the Illinois Attorney General's Motions to Dismiss numerous qui tam cases brought against California wineries, 17 of which are represented by Reed Smith. We've written previously about the hundreds of False Claims Act cases alleging that out-of-state wineries improperly failed to collect sales tax on shipping charges for wine shipped to Illinois customers.1 These dismissals are the culmination of efforts by Reed Smith, the Wine Institute, and the affected taxpayers to combat these meritless cases.

Orders dismissing cases

Under the Illinois False Claims Act, the Illinois Attorney General has prosecutorial discretion to dismiss a False Claims Act case, though such discretion is not unfettered. Generally, absent fraud, misconduct, or bad faith on the part of the Attorney General's office, courts will defer to the prosecutorial discretion of the state and dismiss a matter if such dismissal is requested by the state. In the aforementioned cases, Judge Mulroy found no evidence of fraud or bad faith by the state associated with its handling of the cases or its Motions to Dismiss, and therefore, Judge Mulroy granted the state's Motions to Dismiss.

Events leading up to the dismissals

These rulings are the culmination of a process Reed Smith undertook in early 2015 to elicit a government response in cases where the Attorney General declined to intervene and allowed the qui tam plaintiff to proceed on behalf of the state. In a prior Tax Alert2, we advised that, as part of Reed Smith's representation of the Wine Institute and dozens of individual wineries, Reed Smith was able to obtain Private Letter Rulings from the Illinois Department of Revenue that established that an internet vendor that offered an online purchaser the option to decline shipping and take delivery at the vendor's location was, by offering that option, rendered not liable for tax collection on shipping charges to the purchaser.

These rulings prompted the Department of Revenue's proposal of a retroactive amendment to its regulation to clarify that such an option would result in no liability under its regulation, both as it stood at the time and after the decision in Kean v. Wal-Mart Stores, Inc., 235 Ill. 2d 351 (2009).3 The combined effect of the Private Letter Rulings, the Wine Institute lawsuit, and the proposed amended regulations released by the Department appears to have led the Illinois Attorney General to move to dismiss cases in which the defendants could establish the existence of a pick-up option at the time of the plaintiff's alleged purchases.

The qui tam plaintiff opposed the motions on the basis that the submissions by the defendants to the Attorney General that established the existence of a pick-up option were fraudulent, and the court granted the plaintiff the right to depose several defendants represented by Reed Smith. After receiving argument from the parties, including overviews of deposition testimony, Judge Mulroy concluded that there was no evidence of fraud and, in the absence of such evidence, he would uphold the Attorney General's broad discretion to dismiss a False Claims Act claim. On January 20, 2016, he ordered the cases dismissed.

Questions remain

The dismissal of these cases is a victory for taxpayers, but questions remain. There are still no clear answers as to whether similarly situated taxpayers that have already settled their cases with the qui tam plaintiff, or as part of the Attorney General's global settlement offer, are entitled to any relief. Similar questions remain for taxpayers who voluntarily paid tax on shipping charges to preempt a lawsuit, even though such tax was not owed.

Additionally, in another Tax Alert4, we recently advised that the Department added a safe-harbor provision to its proposed regulatory amendment that clarifies taxpayers will face no tax liability for either following the regulation prior to its amendment, or following the Kean decision for periods prior to the amendment of the regulation. Once adopted, the safe-harbor provision may afford an additional basis for the Attorney General to exercise discretion to dismiss actions where the vendor did not offer a pick-up option to its customers. This may also affect cases previously settled with payments to the government and the plaintiff.

Footnotes

1. See our July 28, 2015 Tax Alert.

2. Id.

3. See our January 20, 2016 Tax Alert.

4. Id.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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