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People ex rel. Schad, Diamond & Shedden, P.C. v. QVC, Inc.

Court of Appeals of Illinois, First District, Second Division

April 21, 2015

THE PEOPLE ex rel. SCHAD, DIAMOND AND SHEDDEN, P.C., Plaintiff-Appellant,
v.
QVC, INC., Defendant-Appellee, The State of Illinois, Intervenor-Appellee

Page 364

Appeal from the Circuit Court Of Cook County. No. 11 L 8553. The Honorable Thomas R. Mulroy, Judge Presiding.

For PLAINTIFF-APPELLANT: Stephen B. Diamond, Tony Kim, Stephen B. Diamond, P.C., Chicago, Illinois; David A. Genelly, Vanasco, Genelly & Miller, Chicago, Illinois.

For DEFENDANT-APPELLEE: Clifford W. Berlow, Lisa Madigan, Attorney General State of Illinois, Chicago, Illinois; Mary Kay M. Martire, Lauren A. Ferrante, McDermott Will & Emery LLP, Chicago, Illinois.

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

OPINION

Page 365

NEVILLE, JUSTICE.

[¶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 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

Page 366

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 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., 235 Ill.2d 351, 919 N.E.2d 926, 336 Ill.Dec. 1 (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

Page 367

2011 concerning 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. Pileggi swore that he had no conversation with State officials, and the State made no ...


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