No. 1-13-2999 April 21, 2015

SECOND DIVISION

IN THE

APPELLATE COURT OF ILLINOIS

FIRST DISTRICT

THE PEOPLE ex rel. SCHAD, ) Appeal from the Circuit Court DIAMOND AND SHEDDEN, P.C., ) Of Cook County. ) Plaintiff-Appellant, ) ) No. 11 L 8553 v. ) ) The Honorable QVC, INC., ) Thomas R. Mulroy, ) Judge Presiding. Defendant-Appellee, ) ) ) (The State of Illinois, ) ) Intervenor-Appellee). )

JUSTICE NEVILLE delivered the judgment of the court, with opinion. Justices Pierce and Liu concurred in the judgment and opinion.

OPINION

¶1 A decision of the Illinois Supreme Court inspired the law firm of Schad, Diamond &

Shedden, P.C. (Schad), to look for retailers who sold merchandise over the Internet without

collecting use taxes on shipping and handling charges. In 2011, Schad filed a qui tam action No. 1-13-2999

against QVC, Inc., under the Illinois False Claims Act (740 ILCS 175/1 et seq. (West 2010)),

alleging that QVC falsely claimed that it collected and remitted to the State of Illinois all

required use taxes. The circuit court granted the State leave to intervene. The State moved

to dismiss the complaint. Schad sought discovery to support its allegation that the State

settled the claim against QVC. The circuit court allowed limited discovery before granting

the motion to dismiss the complaint. The circuit court also denied Schad's petition for a

relator's share of the taxes QVC subsequently paid to the State, plus attorneys' fees, expenses

and costs.

¶2 In this appeal, we hold that the circuit court did not abuse its discretion when it limited

Schad's discovery to a deposition of the QVC official responsible for compliance with State

tax laws. Because Schad did not present glaring evidence that the State acted in bad faith

when it dismissed the qui tam action, we affirm the dismissal. We also affirm the decision

not to award Schad a share of taxes QVC subsequently paid to the State, as the taxes do not

count as proceeds of the lawsuit. Therefore, we affirm the circuit court's judgment.

¶3 BACKGROUND

¶4 In 1995, the State claimed that its law required QVC to collect and remit to the State use

taxes on merchandise delivered to customers in Illinois. The State agreed not to seek use

taxes from QVC for sales completed before the agreement, in exchange for QVC's promise to

collect and pay to the State use taxes on all sales after the date of the agreement of

merchandise delivered to customers in Illinois. In 2006, the State audited QVC to determine

whether it had complied with the 1995 agreement. QVC sent the State documents showing

its sales of merchandise delivered to Illinois and the remittance of use taxes collected for

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those sales. The documents explicitly listed the shipping and handling charges for the

merchandise and showed that QVC did not collect use taxes on the shipping and handling

charges. On its tax chart, QVC also showed that it treated shipping and handling charges as

nontaxable. On November 2, 2006, the State sent to QVC a letter informing QVC that the

State completed its audit and found QVC's returns "in order." The State required no

adjustments to the returns.

¶5 In 2009, the Illinois Supreme Court decided, in Kean v. Wal-Mart Stores, Inc.,

(2009), that purchasers who use items in Illinois purchased from sellers outside of

Illinois, under specified conditions applicable to many purchases made over the Internet,

must pay use taxes on shipping and handling charges paid for delivery of the merchandise.

In August 2011, Schad filed a qui tam action against QVC, alleging that QVC failed to

collect use taxes on shipping and handling charges. The State declined to intervene in the

case, thereby authorizing Schad to prosecute the action on its own. See 740 ILCS

175/4(b)(4)(B) (West 2010). Schad served its complaint on QVC in November 2011. Less

than two weeks later, QVC started collecting and remitting to the State use taxes on shipping

and handling charges. QVC did not seek to collect or remit use taxes for purchases made

before November 21, 2011.

¶6 QVC filed a motion to dismiss Schad's qui tam action based on the 2006 audit. After the

State received the motion, the State filed a motion to intervene in Schad's qui tam suit. The

circuit court granted the motion to intervene. In December 2012, the State moved to dismiss

the lawsuit against QVC. Schad opposed the motion to dismiss and filed a motion for leave

to discover all communications between the State and QVC after August 2011 concerning

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use tax collection and the State's decision to dismiss the qui tam case. In the motion for

discovery, Schad alleged that the State must have settled the cause of action against QVC,

exchanging dismissal of the qui tam lawsuit for QVC's promise to start collecting use taxes

on shipping and handling charges. Schad also sought leave to ask the State why it chose to

dismiss the action, what information led the State to the dismissal, and "whether QVC stated

it would stop collecting tax on sales to Illinois residents if the State did not move to dismiss

this action."

¶7 On April 30, 2013, Schad filed a petition for an award of a relator's share of amounts

QVC paid to the State. Schad cited section 4 of the Illinois False Claims Act (740 ILCS

175/4 (West 2010)) as the legal basis for the petition.

¶8 Thomas Pileggi, QVC's director of state taxes, said in an affidavit that QVC had no

discussions with the State about the litigation before QVC decided to start collecting taxes on

shipping and handling charges. Pileggi also said that QVC had not entered into an agreement

with the State to settle the qui tam lawsuit.

¶9 The circuit court allowed Schad to depose Pileggi, but the court disallowed any further

discovery regarding Schad's allegation that the State and QVC settled the qui tam action. In

the deposition, Pileggi explained his responsibility for collection of Illinois's use tax, and he

said that after he received the complaint Schad filed, he sought advice from QVC's attorneys.

On the advice of counsel, Pileggi decided that QVC would start collecting use tax on

shipping and handling charges for merchandise delivered to Illinois. He agreed that before

Schad filed suit, QVC had not considered collecting use tax on shipping and handling

charges, but QVC changed its practice less than two weeks after receiving the complaint.

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Pileggi swore that he had no conversation with State officials, and the State made no promise

to dismiss the lawsuit before QVC started collecting the tax. He also swore that QVC did not

threaten to stop collecting use taxes on all merchandise QVC delivered to Illinois purchasers.

¶ 10 By order dated May 22, 2013, the circuit court granted the State's motion to dismiss

Schad's complaint. The court retained jurisdiction to consider Schad's right to a relator's

share of QVC's tax payments to Illinois. In its final order, entered August 21, 2013, the

circuit court held that the use tax on shipping and handling that QVC collected and sent to

the State after November 21, 2011, did not qualify as "proceeds" of Schad's lawsuit within

the meaning of the Illinois False Claims Act. The court denied Schad's petition for a share of

QVC's payments of use taxes. Schad now appeals.

¶ 11 ANALYSIS

¶ 12 In this appeal, Schad argues that the trial court committed three errors. Schad claims that

(1) the court should have granted Schad's request for further discovery related to the alleged

settlement; (2) the court should not have granted the State's motion to dismiss Schad's

complaint against QVC; and (3) the court should have awarded Schad a relator's share of

taxes QVC paid to the State.

¶ 13 The Illinois False Claims Act sets the parameters for Schad's rights in this action. We

find a useful delineation of the applicable principles in State ex rel. Beeler, Schad &

Diamond v. Burlington Coat Factory Warehouse Corp.,

(2006). The

Burlington Coat court said:

"[A] person is liable to the state for civil penalties and triple damages for any damage

the state sustains as a result of fraud perpetrated by that person on the state, such as for

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knowingly making or using false records or statements to conceal, avoid or decrease an

obligation to pay or transmit money or property to the state. 740 ILCS 175/3(a)(7)

(West 2002). The Attorney General may bring a civil action in the name of the state for

violation of the Act. 740 ILCS 175/4(a) (West 2002). A private person, referred to as a

'relator,' may also bring a civil action in the name of the state for a violation of the Act,

for that person and for the state. 740 ILCS 175/4(b)(1) (West 2002). Such an action is

referred to as a 'qui tam' action. 740 ILCS 175/4(c) (West 2002). Once a relator files a

qui tam action, the state may intervene, proceed with the action and take over conduct

of the action; or it may decline to intervene, thus giving the relator the right to conduct

the action. 740 ILCS 175/4(b)(4) (West 2002). A relator is considered 'a party to the

action' and, if a suit is successful, is awarded a percentage of the proceeds or settlement.

740 ILCS 175/4(c)(1), (d) (West 2002)." Burlington Coat,

.

¶ 14 The Illinois False Claims Act expressly empowers the State to "dismiss the action

notwithstanding the objections of the person initiating the action if the person has been

notified by the State of the filing of the motion and the court has provided the person with an

opportunity for a hearing on the motion." 740 ILCS 175/4(c)(2)(A) (West 2012). The

Burlington Coat court explained:

"[R]eading the provision in context with the other provisions of the Act, it is clear

that the state has complete control over a qui tam action and, accordingly, almost

unlimited discretion to voluntarily dismiss such an action.

***

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*** '[Q]ui tam plaintiffs, acting as statutorily designated agents for the state, may

proceed only with the consent of the Attorney General, and remain completely

subordinate to the Attorney General at all times.' [Citation.]

***

*** Even if it declines to conduct an action, the state can control a relator's

discovery in the case. 740 ILCS 175/4(c)(4) (West 2002).

*** Although a relator may 'conduct' a qui tam action on the state's behalf, the

Attorney General retains authority to 'control' the litigation. [Citation.] And, since the

Act does not provide otherwise, part of that control necessarily entails dismissing an

action over a relator's objections after the relator has been given an opportunity to

address the dismissal in a hearing.

The Act is silent as to what the hearing should entail, what the court should

consider during the hearing or whether the court even has the power to deny the

Attorney General's request for dismissal of an action. ***

***

At its core, the issue here is whether the decision to proceed with a qui tam action

should be made by the executive branch or by the judicial branch. Only the Attorney

General is empowered to represent the state in litigation in which it is the real party in

interest. [Citation.] Legislation can add to the powers of the Attorney General but it

cannot reduce the Attorney General's common law authority to direct the legal affairs of

the state. [Citation.] If we interpret section 4(c)(2)(A) of the Act to require judicial

review of the Attorney General's decision to dismiss an action, *** we give the court 7 No. 1-13-2999

veto power over the state's decision to dismiss, essentially usurping the Attorney

General's power to direct the legal affairs of the state and putting that power into the

hands of the court. The section 4(c)(2)(A) requirement that the relator be given a

hearing on the state's decision to voluntarily dismiss a case necessarily gives the court

approval of that dismissal decision. It does not, however, require that the court second-

guess the state's decision to dismiss by conducting an inquiry into the state's

motivations. We hesitate to say that the court's role in a section 4(c)(2)(A) hearing is

solely to 'rubber-stamp' the state's decision to dismiss a qui tam action over the relator's

objections. However, the presumption is that the state is acting in good faith and,

barring glaring evidence of fraud or bad faith by the state, it is the state's prerogative to

decide which case to pursue, not the court's." Burlington Coat,

-

17.

¶ 15 If the State settles a qui tam action, the Illinois False Claims Act empowers the court to

determine whether "the proposed settlement is fair, adequate, and reasonable under all the

circumstances." 740 ILCS 175/4(c)(2)(B) (West 2012).

¶ 16 Discovery

¶ 17 Schad argues that the circumstances indicate that the State probably settled the claim

against QVC. Schad sought discovery to prove the settlement. The circuit court limited

Schad's discovery to the deposition of Pileggi, who testified that QVC did not settle the qui

tam action. We review the circuit court's decision to allow no further discovery for abuse of

discretion. Maxwell v. Hobart Corp.,

(1991).

8 No. 1-13-2999

¶ 18 The deposition of Pileggi allowed Schad to question the QVC official responsible for the

decision to start collecting use taxes on shipping and handling charges, and probe for the

reasons QVC changed its tax collection practices after Schad filed the qui tam action. Pileggi

explained that he based the decision to change tax collection practices on the advice of

QVC's attorneys, who told him about the effect of the Kean decision on use taxes. Schad

presented no grounds to believe that Pileggi lied in his deposition or that someone else

actually negotiated with the State and ordered Pileggi and QVC to start collecting the taxes

based on a settlement with the State.

¶ 19 Schad effectively seeks to have the court sanction extended discovery so that Schad can

seek evidence to contradict Pileggi and show that QVC settled the case with the State less

than two weeks after Schad served its complaint on QVC. In light of the State's right to

control discovery in qui tam actions (Burlington Coat,

), we cannot

say that the circuit court abused its discretion when it limited Schad's discovery to the

deposition of Pileggi. See Evers v. Edward Hospital Ass'n,

(1993).

¶ 20 Dismissal

¶ 21 As the Burlington Coat court explained, the State has primary responsibility for

conducting the qui tam action and the State has authority to dismiss the case over the relator's

objection. Burlington Coat,

. When the State so dismisses the

action, "the presumption is that the state is acting in good faith and, barring glaring evidence

of fraud or bad faith by the state, it is the state's prerogative to decide which case to pursue,

not the court's." Burlington Coat,

. Thus, Schad bears the burden of

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presenting "glaring evidence of fraud or bad faith by the state." Burlington Coat,

.

¶ 22 Schad does not claim that it has presented the requisite glaring evidence. Instead, it

claims only that if the court had allowed further discovery, it might have presented such

evidence. The State responds that it acted in good faith when it dismissed the action on the

basis of the 2006 audit. At the end of that audit, the State approved QVC's tax collection

practices, even though QVC expressly and repeatedly told the State that QVC was not

collecting use taxes on shipping and handling charges.

¶ 23 The Illinois False Claims Act provides, "In no event may a person bring an action under

subsection (b) [permitting qui tam suits] which is based upon allegations or transactions

which are the subject of a civil suit or an administrative civil money penalty proceeding in

which the State is already a party." 740 ILCS 175/4(e)(3) (West 2012). The rule bars qui tam

actions that duplicate the State's civil suits or administrative actions. Little v. Shell

Exploration & Production Co.,

(5th Cir. 2012). The State concluded that

its 2006 audit, in which it reviewed QVC's tax collection procedures, constituted an

administrative civil money penalty proceeding to which the State was a party. See

Foundation for Fair Contracting, Ltd. v. G&M Eastern Contracting & Double E, LLC,

(D.N.J. 2003). The State concluded that the 2006 audit barred the

qui tam action.

¶ 24 Schad contends that the State acted in bad faith, because the dismissal ignored the

holding of People ex rel. Levenstein v. Salafsky,

(2003). In Levenstein,

Levenstein filed a qui tam action, alleging that Salafsky, a dean at the University of Illinois at

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Chicago (UIC), knowingly presented false claims to the University and thereby induced the

University to overpay for land it bought and the construction and furnishing of a building on

that land. Levenstein,

. Salafsky moved to dismiss the complaint on

grounds that Levenstein had already sued Salafsky in federal court. But the federal lawsuit

concerned Levenstein's employment as a member of the UIC faculty. In the federal lawsuit,

Levenstein charged Salafsky with mishandling sexual harassment charges brought against

Levenstein, and with the imposition of an inordinately harsh sanction for Levenstein's alleged

misconduct. In the federal lawsuit, Levenstein claimed that Salafsky used the sexual

harassment charges to retaliate against Levenstein for his investigations into the financing of

the land and building at issue in the qui tam action. The Levenstein court held that "Section

4(e)(3) requires that the allegations of fraud be 'the subject' of the prior suit, not merely that

they be somehow implicated. Common usage dictates that the 'subject' of the federal suit is

whether Salafsky and the other defendants violated Levenstein's civil rights when they

disciplined him for alleged sexual harassment." Levenstein,

.

¶ 25 Here, the 2006 audit concerned QVC's practices for collecting use taxes on items shipped

to Illinois. The State considered and approved all of QVC's practices, including its explicit

practice of not charging use taxes on shipping and handling charges for merchandise shipped

to Illinois. Under the reasoning of Levenstein, the use tax on shipping and handling charges

apparently counts as part of the subject of the audit.

¶ 26 We need not here decide whether the 2006 audit qualifies as an administrative civil

money penalty proceeding within the meaning of the Illinois False Claims Act, and we need

not decide whether, in the 2006 audit, the State's failure to discuss the possibility of taxing

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the shipping and handling charges makes those charges not "the subject" of the audit. We

only conclude that the State did not act in bad faith when it decided, six years after it

completed an audit in which it approved QVC's explicit practice of not charging use tax on

shipping and handling charges, that it would not seek to penalize QVC for acting in accord

with the procedures the State approved. Schad has not met its burden of presenting glaring

evidence the State acted in bad faith when it moved to dismiss the qui tam action against

QVC, and the evidence in the record indicates that further discovery would not prove the

State acted in bad faith. Following Burlington Coat, we find that the circuit court properly

granted the State's motion to dismiss the qui tam action over Schad's objection.

¶ 27 Relator's Share of Proceeds

¶ 28 Schad contends that even if the circuit court properly dismissed its complaint, the Illinois

False Claims Act requires the State to pay Schad fees for its help in producing income for the

State. Section 4(d) of the Illinois False Claims Act provides:

"(1) If the State proceeds with an action brought by a person under [the False

Claims Act], such person shall *** receive at least 15% but not more than 25% of the

proceeds of the action or settlement of the claim ***.

(2) If the State does not proceed with an action under this Section, the person

bringing the action or settling the claim shall receive an amount which the court decides

is reasonable for collecting the civil penalty and damages. The amount shall be not less

than 25% and not more than 30% of the proceeds of the action or settlement ***." 740

ILCS 175/4(d) (West 2012).

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¶ 29 Because the State intervened in the action, we find that subsection (d)(1) applies, rather

than subsection (d)(2). See Scachitti, 215 Ill. 2d at 506. The evidence does not support an

inference that QVC and the State settled the claim. We decide only whether the State

received "proceeds of the action" within the meaning of section 4(d) of the Illinois False

Claims Act.

¶ 30 Illinois courts have relied on federal courts' interpretation of the federal False Claims Act

(

(2012)) for guidance in construing the Illinois False Claims Act. See State

ex rel. Beeler, Schad & Diamond, P.C. v. Target Corp.,

(2006);

State ex rel. Beeler Schad & Diamond, P.C. v. Ritz Camera Centers, Inc.,

(2007). The federal act, like the Illinois act, provides for qui tam actions

brought by citizens seeking to reveal fraud against the government, and for the government

to have the right to intervene in and control such actions. Like section 4(d)(1) of the Illinois

False Claims Act, section 3730(d)(1) of the federal act provides that if the government

intervenes, the relator "shall *** receive at least 15 percent but not more than 25 percent of

the proceeds of the action or settlement of the claim, depending upon the extent to which the

person substantially contributed to the prosecution of the action."

(d)(1)

(2012).

¶ 31 Federal courts have interpreted the federal act to restrict recovery under section

3730(d)(1) to prevailing parties. Miller v. Holzmann,

(D.D.C. 2008);

United States ex rel. Miller v. Bill Harbert International Construction, Inc.,

(D.D.C. 2011). The Bill Harbert court held that for the relator in that qui tam

action to recover under section 3730, he needed to prove that he "obtained some form of

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relief from the court." Bill Harbert,

. The Holzman court said,

"because relator's claims against Anderson were dismissed in their entirety, relator may not

recover attorneys' fees, costs, or expenses from Anderson under the [federal False Claims

Act]." Holzman,

.

¶ 32 Here, as in Holzman, the court dismissed Schad's claims against QVC in their entirety.

The court did not order QVC to pay any civil penalty or damages, or provide any relief for

the misconduct alleged in the complaint. Therefore, we hold that Schad does not qualify as a

prevailing party, and the payments QVC started to make after Schad filed this lawsuit do not

count as "proceeds" of this lawsuit.

¶ 33 Schad claims that due to the timing of QVC's decision to start collecting use taxes on

shipping and handling charges, the court should construe all of QVC's tax payments on

shipping and handling as proceeds of Schad's lawsuit and award Schad at least 15% of the

use taxes QVC collects for and pays to the State on shipping and handling charges. We find

Schad's broad interpretation of the proceeds of a lawsuit insupportable. In its complaint,

Schad sought damages including use taxes, interest and penalties that QVC allegedly owed

and had not paid to the State at the time Schad filed the lawsuit, plus additional penalties for

filing falsified forms with the State. The State has not and will not recover any use taxes that

QVC allegedly owed at the time Schad filed its lawsuit, and the State recovered no interest or

civil penalties from QVC. Instead, QVC started collecting use taxes on shipping and

handling charges on sales made after the date on which Schad served its complaint on QVC.

"[T]he term 'prevailing party' does not include a party who has achieved the desired result

because the lawsuit brought about a voluntary change in the defendant's conduct, but has

14 No. 1-13-2999

failed to secure a judgment on the merits or a court-ordered consent decree." Melton v.

Frigidaire,

(2004). We cannot construe the payment QVC

voluntarily started to make on sales after the filing of this lawsuit as part of the proceeds of

this lawsuit. We affirm the decision not to award Schad a relator's share of payments made

by QVC to the State after November 21, 2011.

¶ 34 CONCLUSION

¶ 35 The circuit court did not abuse its discretion by restricting Schad's discovery to the

deposition of the QVC officer responsible for the decision to begin paying use taxes on

shipping and handling charges. Schad did not meet its burden of showing that the State acted

in bad faith when it dismissed the qui tam action Schad filed against QVC. Use taxes on

shipping and handling charges for sales of items ordered after Schad served its complaint on

QVC do not qualify as proceeds of the lawsuit, and therefore the circuit court correctly

dismissed Schad's claim for a relator's share of the taxes QVC collected and paid to the State

after November 21, 2011. Accordingly, we affirm the circuit court's judgment.

¶ 36 Affirmed.

15