Stride Rite to Pay $1 Million to Illinois Under Tax Settlement

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By Michael J. Bologna

Oct. 31 — Stride Rite Children’s Group will pay nearly $1 million in uncollected sales and use taxes, damages and penalties to Illinois and a whistle-blower under terms of a settlement negotiated between the Illinois attorney general and the national retailer of children’s shoes ( Illinois ex rel. Stephen B. Diamond P.C. v. SR/Ecom Inc. , Ill. Cir. Ct., No. 13 L 13198, order 10/18/16 ).

But the tax whistle-blower in the case vigorously objected in a brief filed with the court, arguing the settlement “robs the State of Illinois of hundreds of thousands of dollars.”

Cook County Circuit Court Judge Thomas R. Mulroy on Oct. 18 approved a proposed settlement between Stride Rite, a subsidiary of Rockford, Mich.-based footwear holding company Wolverine World Wide Inc., and Illinois, pouring $978,453 into a settlement pool. The total represents roughly three times the uncollected sales tax due on shipping and handling charges for internet-based transactions attributable to Illinois customers between October 2012 and May 2014.

A substantial portion of the settlement will be paid to veteran tax whistle-blower Stephen B. Diamond P.C., which filed suit against Stride Rite under the Illinois False Claims Act. The settlement specifies that Diamond and his law firm recover between 25 percent and 30 percent of the settlement total.

A spokesperson for Illinois Attorney General Lisa Madigan said Oct. 31 the settlement isn’t yet final. The official said Mulroy still must make a specific determination about Diamond’s share and award attorney’s fees and costs.

Diamond originally filed suit against Stride Rite in 2013, alleging the company knowingly committed a tax fraud against the state by failing to collect tax on shipping and handling charges in certain electronic commerce transactions. Diamond and his various law firms have filed more than 900 tax false claims actions against retailers in Cook County Circuit Court over the last 15 years.

Secretive Negotiations

The settlement generated controversy earlier this year when Diamond filed an objection, asserting he had been excluded from the negotiations. The Stride Rite case marked one of the few times a suit by Diamond, acting as qui tam relator, generated a settlement negotiated by the state and the defendant. A recent analysis by Bloomberg BNA revealed that Diamond has negotiated more than 350 settlements in false claims actions benefiting the state.

“The proposed settlement is a product of secretive negotiations from which the State and Defendants excluded Relator because Relator constantly pointed out the inadequacy of the proposed settlements,” Diamond wrote in an Aug. 1 brief filed with the court.

During oral arguments before Mulroy on Oct. 4, Diamond asserted Stride Rite’s sales tax liability covered a period 12 months longer than the settlement envisioned. Diamond insisted the settlement should cover a period prior to Oct. 9, 2012, the date on which Wolverine acquired Stride Rite and other shoe brands from Collective Brands Inc.

In the Aug. 1 brief, Diamond pointed to statements by Wolverine tax managers admitting to sales tax liability for this pre-acquisition period. He pegged the unpaid taxes plus treble damages payable to the state at between $256,353 and $434,787, depending on the way the liability is calculated.

Arm’s-Length Negotiations

Attorneys for Stride Rite and Illinois told Mulroy the settlement had been negotiated at “arm’s length” as required by law. The attorneys said tax professionals had been consulted during the litigation, finding that Collective Brands and its web-based retail channels had insufficient nexus in Illinois to require tax collections on shipping and handling charges prior to Oct. 9, 2012. In this context, the attorneys doubted Diamond’s ability to prove Stride Rite knowingly violated the law during the pre-acquisition period, allowing for a larger damage calculation.

Mulroy weighed the arguments and concluded Oct. 18 the state and Stride Rite had proposed an adequate settlement.

“Balancing the vagaries of litigation, the likelihood of success as to the damages claimed for the pre-acquisition period, and the heightened burden of proving scienter for fraud against the certainty of the large amount of tax the State will recover under this agreement and the compensation Relator will receive for his dedicated work in this matter, the Court is convinced that this settlement is fair, adequate and reasonable,” Mulroy wrote.

Diamond and counsel for Stride Rite declined comment on the settlement.

Stride Rite was represented by Mary Kay Martire, a partner in the Chicago office of McDermott Will & Emery LLP. Illinois was represented by Assistant Attorney General Charles F. Godbey.

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 Diamond’s brief is at http://src.bna.com/jK0.

Text of the order is at http://src.bna.com/jKu.

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