United States: Illinois Appellate Court Blows The Whistle On Serial Relator

In a bombshell opinion, the Illinois Appellate Court held that a law firm serving both as client and attorney may not recover statutory attorneys' fees under the Illinois False Claims Act (the Act). In People ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2017 IL App (1st) 152668 (June 15, 2017), the Illinois Appellate Court, First District, reversed the trial court's award of attorney fees in excess of $600,000 for work performed by Diamond's law firm on behalf of itself as the relator. McDermott represents My Pillow in this matter.

Much like its federal counterpart, the Act allows private citizens (referred to as relators) to file fraud claims on behalf of the state of Illinois. If successful, relators can collect up to 30 percent of the damages award plus attorneys' fees. The Diamond firm is hardly a traditional "whistleblower" with "inside knowledge," as it has filed approximately 1,000 different qui tam actions as the relator over the last 15 years. The firm initially focused its suits on out-of-state businesses for allegedly knowingly failing to collect Illinois use tax on merchandise delivered to Illinois customers, then expanded its dragnet to allege a knowing failure to collect tax on shipping and handling charges associated with merchandise shipped to Illinois. The firm then targeted out-of-state liquor retailers for alleged knowing nonpayment of certain taxes on the sale of alcoholic beverages to Illinois residents and, most recently, the firm filed over 80 lawsuits targeting tailors based in Hong Kong and London, making similar claims for not collecting Illinois use tax.

Over the years, only a handful of these lawsuits have gone to trial. Instead, defendant retailers have been motivated to settle the cases because the tax dollars at issue are minimal and the costs to defend against the lawsuits are significant. Even when settling, retailers are often hit with huge demands for attorneys' fees for work performed by the Diamond firm on behalf of itself. The circuit court has repeatedly approved the Diamond firm's fee petitions based on the firm's argument that a footnote in the US Supreme Court case Kay v. Ehrler, 499 US 432 (1991) justified an award of fees when an organization was represented by its members, despite the general principal that precludes an award of fees to an individual for self-representation.

The appellate court noted that the issue of whether a law firm relator can recover attorneys' fees for work performed on its own behalf in the context of a false claims act case is an issue of first impression. 2017 IL App (1st) 152668, ¶ 103. Thus, the court's opinion contains an exhaustive discussion of the cases cited by both parties. See id. ¶¶ 99–148. The court ultimately looked to the Illinois Supreme Court's reasoning in Hamer v. Lentz, 132 Ill. 2d 49 (1989), a case involving the Illinois Freedom of Information Act, in holding that "the fee-shifting provision in the Act does not permit the award of attorney fees to relator, who served as its own attorney for much of this case." Id. ¶ 148.

Relying on Hamer, the court considered the purpose of the attorney fees provision and noted that the purpose of the Act is to reveal fraud against the government. Id. ¶ 132. The attorney fees provision in the Act "incentivizes individuals to ferret out such fraud by removing the burden of legal fees as a deterrent." Id. The court determined that the legal fees in this case were not a burden for the Diamond firm because the firm is rewarded from the proceeds of the lawsuit and could not show time lost because it doesn't perform any other legal work. Id. ¶¶ 134-36.

The court also examined the potential for abuse of the attorney fee provision in the Act. The court noted that the Diamond firm "has made a business out of filing these false-claims cases as a party plaintiff." Id. ¶ 144. The court indicated that it is "hard to imagine... that the prospect of earning fees is not a significant driver in the decision to file these cases. It is presumably the reason why relator chooses to file these lawsuits in the name of the law firm and perform (or at least partially perform) the legal work on the case, too—to obtain both the statutory percentage of recovery as well as attorney fees." Id. ¶ 146. Thus, the court held that, at a minimum, there is "a potential for abusive fee generation if attorneys' fees were awarded to a law firm that was both relator and attorney." Id.

The court's decision will hopefully prohibit the Diamond firm from collecting attorneys' fees in future cases and pending litigation and serve as persuasive authority in other states.

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