Judge dismisses 201 lawsuits in latest chapter of businesses' battle against Illinois False Claims Act

By Taryn Phaneuf | Jun 21, 2016

CHICAGO — Abuse of an Illinois whistleblower law will continue to sour businesses toward the state if lawmakers don’t take steps toward reform, attorneys and business advocates say.

Abuse of an Illinois whistleblower law will continue to turn off businesses wanting to remain or relocate to the state if lawmakers don’t take steps toward reform, attorneys and business advocates say.

Hundreds of lawsuits have been filed against businesses in Illinois for failing to properly charge and collect taxes. But, the state law that rewards whistleblowers for reporting impropriety also has made it easy to bring claims to court that often end in settlements despite their lack of merit.

“What is happening here is not fair and it is not right," said Travis Akin, executive director of Illinois Lawsuit Abuse Watch. "How can we expect businesses to want to invest in Illinois when we allow these abusive lawsuits to continue?” 

The Illinois False Claims Act allows a private citizen to bring a lawsuit on behalf of the state against someone who is accused of defrauding the government. As a whistleblower under the IFCA, the private citizen who brings the suit (called a “relator”) is entitled to as much as 30 percent of whatever is recovered in the case, as well as attorney’s fees. The relator can also pursue the claim even if the state declines to join.

Unlike other states, the IFCA doesn’t exempt sales and excise taxes. A bill introduced in the state Senate in January would reform the law by rerouting tax-related claims through the Department of Revenue. Someone there would determine if the claims are credible and how to correct them. The revenue department could pursue an audit or, if it's more serious, could recommend the attorney general take legal action. 

The reform would basically create a buffer by intentionally halting a whistleblower’s ability to bring a case straight to court, Keith Staats, director of the Illinois Chamber of Commerce Tax Institute, told the Record. But they would still be entitled to a reward if the report leads to recovered taxes. 

Chicago attorney Stephen B. Diamond — an “enterprising” man, Staats said — has brought nearly every IFCA claim against businesses for not paying the right amount of shipping and handling tax. 

“This particular attorney has been filing lawsuits like this for a long time," Akin said. 

"He basically finds mistakes in shipping and handling tax collection and uses the whistleblower statutes to force a settlement which ultimately ends up in a big payday. The cost of litigating these lawsuits often far exceeds the cost of settling. Most small businesses do not have the resources to defend against these lawsuits and so they are left with little choice but to pay a settlement for the lawsuit to go away.”

Diamond declined to comment for this story.

Between July 2014 and September 2015, Diamond filed more than 500 IFCA lawsuits in Cook County Circuit Court against out-of-state liquor sellers. The state moved to dismiss 350 while Diamond voluntarily dismissed an additional 80.

Cook County Associate Judge James Snyder dismissed 201 of those claims against out-of-state liquor retailers at the end of May. The state requested the dismissal because the complaints admitted that the defendants don’t have a presence in the state that could establish tax liability.

Illinois Attorney General Lisa Madigan doesn’t agree that reform is necessary, a spokesperson for the AG’s office told the Record.

“The state already has the tools to manage Illinois False Claims Act cases that may lack merit, as evidenced by our recent success in dismissing approximately 350 cases filed by Steve Diamond’s law firm,” Boyce said. 

“In addition, we believe it is important to maintain the ability to bring tax fraud claims under the Illinois False Claims Act because the statute is a valuable tool for bringing tax fraud to light.”

But business advocates and attorneys support proposed legislation. Staats said the State Chamber of Commerce agrees that the Department of Revenue is most qualified to judge whether taxes have been properly charged and paid.

“Under the current scheme, when you allow the third party to go directly into court, it throws that whole process off,” he said.

Rob Karr, president and CEO of the Illinois Retail Merchants Association, told the Record the association would like to simplify the law even further by fully exempting sales tax from the IFCA. He said the whistleblower law “was always meant to apply to vendors of the state.”

He said businesses follow the revenue department’s interpretation and guidance on sales tax, which is why the association has fought these lawsuits from the beginning.

“We continue to fight for fairness instead of being held hostage by this attorney,” he said.

Akin said the lawsuits harm the business climate, which already compares poorly to other states. Chief Executive magazine ranks Illinois as the third worst state for business.

“These lawsuits only add to Illinois’ already bad reputation when it comes to business,” Akin said. “The False Claims Act was not intended to be a weapon against retailers for inadvertent mistakes and errors nor was it intended to be a get-rich-quick scheme for personal injury lawyers. Unfortunately, we will keep seeing lawsuits like this until the Illinois legislature does something about it.”

Mary Kay Martire, an attorney at McDermott Will and Emery in Chicago who focuses on state and local tax disputes, told the Record legislative reform would make “a significant improvement” for business in the state. She represented about 30 of the cases recently dismissed by the court. In all, she estimates she’s defended against 60 IFCA lawsuits. A number of her clients chose to settle because of the expense of fighting the claims.

“We have had really dozens of clients subjected to this type of litigation. Unfortunately, even if the cases lack merit, they are expensive to get rid of,” Martire said, adding that her clients grow disenchanted with the state for allowing this kind of litigation to occur.

“They get quite a black eye in the minds of our clients," she said. "It’s just abusive. … It’s like highway robbery.”

Want to get notified whenever we write about any of these organizations ?

Sign-up Next time we write about any of these organizations, we'll email you a link to the story. You may edit your settings or unsubscribe at any time.

Organizations in this Story

Illinois Chamber of Commerce Illinois Retail Merchants Association

More News

The Record Network