Court Tosses Fees for ‘King of Qui Tam,’ Business Model Done?

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By Michael J. Bologna

The profit motive driving hundreds of false claims lawsuits by a Chicago lawyer known as the “king of qui tam” may be drying up after an appeals court rejected the prolific whistle-blower’s demand for fees in a case involving unpaid sales and use taxes ( Illinois ex rel. Schad, Diamond & Shedden PC v. My Pillow, Inc. , Ill. App. Ct., No. 152668, 6/15/17 ).

In a case of first impression, a three-judge panel of the Illinois Appellate Court reversed a portion of a circuit court ruling that granted Stephen B. Diamond attorney fees in an action under the Illinois False Claims Act (FCA) against the retailer My Pillow Inc.

Diamond had successfully demonstrated that My Pillow had failed to collect and remit tax on merchandise sold to Illinois customers from internet and telephone sales platforms. After a bench trial in September 2014, a Cook County Circuit Court judge awarded a judgment of $1,383,627, with $782,667 in the form of damages and penalties, and $600,960 in the form of attorney fees.

The appeals panel upheld the circuit court’s judgment with regard to My Pillow’s failure to collect and remit taxes to Illinois, but it reversed on Diamond’s eligibility for attorney fees. The court found Diamond, serving as relator on behalf of the State of Illinois, couldn’t achieve benefits in the litigation as both the whistle-blower and the attorney for the whistle-blower.

“We hold 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,” Judge David Ellis wrote on behalf of the panel. “To the extent that the trial court awarded relator fees for work performed by relator’s own attorneys, that fee award is reversed.”

Notorious Whistle-Blower

The ruling—the first of its kind dealing with a whistle-blower also serving as his own counsel—could derail the false claims freight train that Diamond, and his law firm Stephen B. Diamond P.C., has steered through Cook County Circuit Court for more than a decade. Diamond is regarded as the most prolific tax whistle-blower in the country, and his “cottage industry” of FCA actions has perplexed and annoyed retailers, policymakers, and legal scholars across the country. All of the cases involve purported violations of the Illinois sales and use tax code.

“We think this could really solve the problem here in Illinois,” said Catherine A. Battin, a partner with McDermott Will & Emery in Chicago and counsel to My Pillow. “There have been discussions about solving it legislatively. This decision leaves the door open for legitimate insiders and relators, but not this kind of cottage industry where you have one lawyer filing a 1000 lawsuits.”

Diamond has served as relator in about 1,000 qui tam actions over the last 15 years. A recent investigation by Bloomberg BNA revealed Diamond has collected almost $12 million through this pattern of litigation. The Illinois General Assembly is considering various legislative fixes to address Diamond’ strategies.

Officials with Diamond’s law firm didn’t immediately respond to a request for comment. Battin speculated that Diamond would likely appeal the ruling to the Illinois Supreme Court because it undermines the “abusive fee generation” component of his business model.

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the decision is at http://src.bna.com/pUN.

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