Cook County Record

Saturday, April 4, 2020

Appeals panel: Lawyer not allowed to keep $600K fee for qui tam unpaid sales tax suit vs My Pillow

By Scott Holland | Jun 16, 2017

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A state appeals court has ruled a lawyer who had individually sued pillow maker My Pillow, ostensibly on behalf of the state of Illinois for unpaid taxes, is not allowed to keep roughly $600,000 in legal fees he had claimed as part of the litigation.

Attorney Stephen B. Diamond, who now practices through the firm of Stephen B. Diamond P.C., formerly known as Schad, Diamond & Shedden, P.C., sued My Pillow Inc., of Minnesota, in Cook County Circuit Court for violations of the Illinois False Claims Act, as a so-called qui tam plaintiff. He said the company knowingly failed to collect and remit tax on items sold at Illinois craft shows, as well as through online and phone sales to Illinois customers.

Cook County Judge Thomas R. Mulroy ruled in favor of Diamond related to the claims for unpaid online and telephone sales, awarding Diamond treble damages, plus legal fees, totaling $1.38 million. In an opinion issued June 15, First District appellate justices Eileen O’Neill Burke, David Ellis and Margaret McBride affirmed Mulroy’s ruling, and said evidence supported the damages assessed. But the justices reversed the legal fees award.

Ellis wrote the opinion, and explained how the state’s False Claim Act closely mirrors an 1863 federal law, allowing private citizens to pursue action for fraud against the government. Ellis also explained how the state’s Retailer’s Occupation Tax Act and the Use Tax Act complement one another, ultimately imposing the burden of sales tax on vendors, even those from other states.

Since the original filing, Diamond stopped disputing whether My Pillow collected sales tax related to transactions at 44 Illinois craft shows between April 2010 and July 2012. Online sales began in June 2010, and in October 2011, My Pillow founder Mike Lindell paid $200,000 for an infomercial that led monthly sales to spike from $200,000 to $10 million. Employee rolls ballooned from 20 to 650 by February 2013.

In November 2013, months after Diamond filed his initial complaint, My Pillow began to collect sales tax and amended returns to show it paid $61,218 in sales tax for online and phone sales in 2012 and $45,752 in 2013. Mulroy subtracted those payments from $889,637, a figure he arrived at by computing and trebling damages, as well as adding penalties. After subtracting the amount paid, Mulroy added legal fees of $600,960 to reach the final award. Of that, Diamond got the legal fees, as well as $266,891, or a sum equal to 30 percent of the trebled statutory proceeds.

The justices referenced the 1989 Illinois Supreme Court ruling in Hamer v. Lentz, in which an attorney acting pro se on a Freedom of Information Act complaint was denied an award of legal fees. Part of that opinion was concern “unscrupulous attorneys” could pursue FOIA complaints as a means of generating legal fees. Appellate courts since have applied Hamer to broader contexts, Ellis wrote, “denying attorney fees to individual attorneys representing themselves in litigation.”

In 1991, when the U.S. Supreme Court ruled in Kay v. Ehrler, Ellis wrote, it “clearly signaled that organizational plaintiffs would stand on different ground than individual plaintiffs engaged in self-representation.” But the justices specifically noted that provision “focused on the presence of an attorney-client relationship and nothing more,” and the issue with Diamond’s role is much more about the Hamer precedent and whether awarding Diamond fees incentivizes future similar actions based more on self enrichment than public good.

Ultimately, the panel found Diamond’s role in his own firm — one that specializes in qui tam false claims litigation — settled the matter of whether he is eligible for fees:

“If the same person is both the final decision-maker at the client-corporation — its president — and the lead attorney giving advice to the decision-maker, do we have the requisite ‘independence’ envisioned by these federal circuit courts relying on the Kay footnote?” they wrote.

The justices upheld Mulroy’s ruling on the false claims allegations regarding My Pillow’s online and phone sales, but remanded the case back to state court for recalculation of the attorney fee award.

My Pillow was represented in the action by attorneys with the firm of McDermott Will & Emery, of Chicago, according to Cook County court records.

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Organizations in this Story

Schad, Diamond and Shedden, P.C.Stephen B. DiamondIllinois Supreme CourtIllinois First District Appellate CourtMcDermott, Will & Emery LLP