Court of Appeals of Illinois, First District, Fourth Division
THE PEOPLE ex rel. SCHAD, DIAMOND & SHEDDEN, P.C., Plaintiff-Appellee,
MY PILLOW, INC., Defendant-Appellant.
from the Circuit Court of Cook County Nos. 12 L 7874, cons.
with 12 L 6782 Honorable Thomas R. Mulroy Judge Presiding.
PRESIDING JUSTICE ELLIS delivered the judgment of the court,
with opinion. Justices McBride and Burke concurred in the
judgment and opinion.
1 This case requires us to consider matters of first
impression arising under the Illinois False Claims Act,
including whether damages paid by defendant prior to final
judgment should be included in, or credited against, the
amount of "damages" to be trebled under the Act and
whether a law firm serving both as client and attorney may
recover statutory attorney fees under the Act.
2 Relator, Stephen B. Diamond, P.C., formerly Schad, Diamond
& Shedden, P.C. (relator), brought this qui tam
action, on behalf of the State of Illinois, under the
Illinois False Claims Act. 740 ILCS 175/1 et seq.
(West 2012). Relator alleged that defendant, My Pillow, Inc.
(My Pillow), knowingly failed to collect and remit use taxes
on merchandise sold at craft shows in Illinois and on
Internet and telephone sales to Illinois customers, as
required by State law.
3 After a bench trial, the circuit court found in favor of
relator as to the claims regarding Internet and telephone
sales. The court awarded relator treble damages and attorney
fees totaling $1, 383, 627.
4 We affirm the judgment in favor of relator. The evidence
was sufficient to demonstrate that My Pillow acted in
reckless disregard of its obligation to collect and remit use
taxes on its Internet and telephone sales. The damages found
by the trial court were supported by the evidence, and the
trial court properly included, within the amount of damages
to be trebled, those tax payments made by My Pillow before
final judgment. We reverse that portion of the attorney-fee
award that granted fees to relator for legal work performed
by its own attorneys but otherwise affirm the fee award. We
remand to the circuit court only for a recalculation of the
5 I. FALSE CLAIMS ACT
6 The Illinois False Claims Act (Act), formerly known as the
Whistleblower Reward and Protection Act, allows the Attorney
General or a private individual to bring a civil action on
behalf of the State for false claims. See, e.g.,
State ex rel. Pusateri v. Peoples Gas Light &
Coke Co., 2014 IL 116844, ¶ 16; see also 740 ILCS
175/1, 4 (West 2008). The Act closely mirrors the federal
False Claims Act originally enacted in 1863. Scachitti v.
UBS Financial Services, 215 Ill.2d 484, 506 (2005); see
also 31 U.S.C. §§ 3729 through 3733 (2000). Both
acts provide for qui tam actions brought by
citizens seeking to reveal fraud against the government.
People ex rel. Schad, Diamond & Shedden,
P.C. v. QVC, Inc., 2015 IL App (1st) 132999, ¶ 30.
7 Thus, in construing the Act, Illinois courts have relied on
federal courts' interpretation of the Federal False
Claims Act for guidance. See id. (and cases cited
therein); accord United States ex rel. Geschrey
v. Generations Healthcare, LLC, 922 F.Supp.2d 695, 702
n.4 (N.D. Ill. 2012) (court's reasoning on false claim
under Federal False Claims Act applied equally to state act,
because "Illinois courts interpreting the state act look
to interpretations of the similarly worded federal
8 Relator's claim is based on section 3 of the Act. 740
ILCS 175/3 (West 2012). Section 3 states, in relevant part,
that a person is liable under the Act when he "knowingly
makes, uses, or causes to be made or used, a false record or
statement material to an obligation to pay or transmit money
or property to the State, or knowingly conceals or knowingly
and improperly avoids or decreases an obligation to pay or
transmit money or property to the State." 740 ILCS
175/3(a)(1)(G) (West 2012). For purposes of section 3, the
term "knowingly" means that a person, "with
respect to information: (i) has actual knowledge of the
information; (ii) acts in deliberate ignorance of the truth
or falsity of the information; or (iii) acts in reckless
disregard of the truth or falsity of the information."
740 ILCS 175/3(b)(1)(A) (West 2012). "[N]o proof of
specific intent to defraud" is required. 740 ILCS
175/3(b)(1)(B) (West 2012).
9 This case concerns a unique form of false claim involving
the failure to collect and remit use taxes on the sale of
merchandise in Illinois under the Retailer's Occupation
Tax Act (ROTA) (35 ILCS 120/1 et seq. (West 2012))
and the Use Tax Act (35 ILCS 105/1 et seq. (West
2012)). "ROTA and the Use Tax Act are complementary,
interlocking statutes that comprise the taxation scheme
commonly referred to as the Illinois 'sales tax.'
" Kean v. Wal-Mart Stores, Inc., 235 Ill.2d
351, 362 (2009). "[B]ecause of the impracticality of
collecting the tax from individual purchasers, the burden of
its collection is imposed upon the out-of-state vendor."
Brown's Furniture, Inc. v. Wagner, 171 Ill.2d
410, 418 (1996).
10 The gist of relator's complaint is that My Pillow was
required to collect and remit use taxes to the State but
failed to do so. This specimen of false claim is known as a
"reverse false claim, " in that the defendant is
not alleged to have obtained money fraudulently from the
government but, rather, to have failed to pay money duly
owed. See, e.g., People ex rel. Beeler, Schad
& Diamond, P.C. v. Relax the Back Corp., 2016 IL App
(1st) 151580, ¶ 19 (reverse false claim is where
material misrepresentation is made to avoid paying money owed
to government); State ex rel. Beeler Schad & Diamond,
P.C. v. Ritz Camera Centers, Inc., 377 Ill.App.3d 990,
996 (2007) ("[t]he reverse false claims provision was
added to provide that an individual who makes a material
misrepresentation to avoid paying money owed to the
Government would be equally liable under the Act as if he had
submitted a false claim to receive money" (internal
quotation marks omitted)).
11 II. BACKGROUND
12 My Pillow is a Minnesota corporation involved in the
sales, marketing, and distribution of pillows. The company
was founded in 2004 by Mike Lindell, who is the company's
chief executive officer. Lindell says he sewed the first
pillows himself by hand. By 2009, the company had between 5
and 20 employees.
13 Beginning in 2010, independent contractors began selling
My Pillow's products at craft shows in Illinois and
throughout the country. Between April 2010 and July 2012, My
Pillow sold its products at 44 craft shows in Illinois. It is
no longer disputed that My Pillow collected use tax on its
craft show sales and remitted all the tax to the Illinois
Department of Revenue (IDOR). (Relator alleged otherwise at
trial, but the court ruled in favor of My Pillow on the
craft-show use taxes, and relator does not challenge that
ruling on appeal.)
14 In June 2010, My Pillow began selling its products through
the Internet. My Pillow did not collect sales or use tax on
Internet or telephone sales to Illinois purchasers. Relator
began its investigation of My Pillow in August 2011.
15 In October 2011, Lindell created and launched a detailed
infomercial, for which he paid a marketing company close to
$200, 000. In 2011, as a result of the infomercial, the
company expanded impressively. Monthly sales increased from
$200, 000 to $10 million. The number of employees grew from
20 in October 2011 to 500 in a very short period of time. By
February 2013, My Pillow had 650 employees.
16 My Pillow registered to do business in Illinois in July
2012. On July 13, 2012, relator filed its initial complaint
under the Act, claiming that My Pillow failed to collect and
remit Illinois use tax on merchandise sold at craft shows in
Illinois and on its Internet sales and telephone sales to
Illinois customers. Relator filed an amended complaint on
October 31, 2012. The State declined to intervene, and the
amended complaint was unsealed on January 15, 2013.
17 Relator filed a second amended complaint on February 26,
2013. My Pillow was served with process in March 2013.
18 In November 2013, My Pillow began to collect and remit use
tax on Internet and telephone sales. My Pillow amended its
sales and use tax returns, i.e., the IDOR Form
ST-1s, and paid a total of $106, 970 in taxes it owed to
Illinois on Internet and telephone sales for 2012 ($61, 218)
and 2013 ($45, 752).
19 Relator filed a third amended complaint on April 28, 2014.
In its third amended complaint, relator alleged in count I
that, although My Pillow collected tax on craft show sales,
it did not remit the tax to IDOR. In count II, relator
alleged that My Pillow failed to collect and remit use tax on
website and telephone sales.
20 A two-day bench trial began on September 22, 2014. Four
witnesses testified at trial: Lindell, Nicole Oestrich,
Stephen Diamond, and David Kim.
21 Lindell testified that, in April or May 2010, he asked an
accountant, who had been doing his tax returns for 30 years,
whether he had to charge sales tax on Internet sales.
According to Lindell, it was his understanding that he would
have to charge sales tax on Internet purchases within
Minnesota but not on those that were shipped out of state.
Lindell, however, never sought his accountant's advice or
consulted with anyone about the collection, remittance, or
payment of Illinois sales and use tax.
22 Lindell testified that, in July 2013, he told an employee,
David Boyd, to begin collecting tax on Internet and telephone
sales. Boyd did not follow Lindell's directions, and
Lindell fired him for insubordination in November 2013.
Lindell also testified that My Pillow contacted its customers
and collected tax on Internet and telephone sales to Illinois
customers for the prior years.
23 Nicole Oestrich was the My Pillow employee who filed its
Form ST-1 with IDOR. Both Lindell and Oestrich testified that
the independent contractors at the craft shows collected tax
on the products they sold and either remitted the tax at the
shows or gave it to My Pillow to remit with its monthly Form
24 Stephen Diamond testified regarding relator's
investigation of My Pillow and the discovery obtained from My
25 Relator's attorney, David Kim, testified regarding
relator's investigation of My Pillow. He also testified
as to relator's damages calculations.
26 The trial court found that My Pillow did not violate the
Act with respect to the craft shows, because relator failed
to meet its burden of proving that My Pillow did not remit
all of the taxes it received from the 44 craft shows it
attended from April 2010 through July 2012. But the court
found in favor of relator on its claims concerning My
Pillow's Internet and telephone sales. The court found
Lindell was not credible and further found that, "based
on all the evidence, My Pillow knowingly violated [the Act]
because it recklessly disregarded its obligation to remit tax
on Internet and telephone sales."
27 The court reserved ruling on damages until after the
matter had been fully briefed. The court awarded relator
treble damages and attorney fees totaling $1, 383, 627. This
calculation came from computing the damages, trebling them,
and adding penalties, for an amount of damages-the proceeds
of the action-of $889, 637. Then the court subtracted the
$106, 970 in taxes My Pillow paid prior to trial for a final
amount of damages of $782, 667. To this number, the court
added attorney fees, expenses, and costs of $600, 960 for a
total award against My Pillow of $1, 383, 627.
28 Of that amount, relator received $266, 891 in damages (30%
of the proceeds of the action, or $889, 637) and attorney
fees in the amount of $600, 960.
29 III. ANALYSIS
30 A. Standard of Review
31 After a bench trial, our standard of review is whether the
order or judgment is against the manifest weight of the
evidence. Reliable Fire Equipment Co. v. Arredondo,
2011 IL 111871, ¶ 12. We also review an award of damages
made after a bench trial under the manifest-weight standard.
1472 N. Milwaukee, Ltd. v. Feinerman, 2013 IL App
(1st) 121191, ¶ 13. A trial court's judgment is
against the manifest weight of the evidence "only if the
opposite conclusion is clearly evident or if the finding
itself is unreasonable, arbitrary, or not based on the
evidence presented." Best v. Best, 223 Ill.2d
342, 350 (2006). Under the manifest-weight standard, we give
deference to the trial court as the finder of fact because it
is in the best position to observe the conduct and demeanor
of the parties and witnesses. Id. Accordingly, we
will not substitute our judgment for that of the trial court.
Id. at 350-51.
32 B. Issues on Appeal
33 My Pillow raises several issues on appeal. First, My
Pillow challenges the trial court's finding that My
Pillow violated the Act, claiming that it could not possess
the requisite scienter because the issue of whether
My Pillow had an obligation to collect and remit tax on its
Internet and telephone sales is a disputed legal issue. My
Pillow next argues that the circuit court erred in
calculating damages where it (1) trebled amounts paid prior
to trial and (2) awarded relator damages for periods prior to
its investigation. My Pillow additionally contends that the
court erred in awarding attorney fees because relator is a
pro se litigant who cannot recover its own attorney
fees. My Pillow's final argument is that, because relator
did not prevail on any claims related to craft shows, the
trial court erred in awarding attorney fees for legal work
related to craft shows.
34 1. Whether My Pillow Acted With Reckless Disregard
35 We first address My Pillow's argument that it could
not possess the requisite culpable state of mind of
"knowingly" violating the Act, because the
underlying issue of whether My Pillow had an obligation to
collect use taxes on its Internet and telephone sales was,
itself, a disputed legal issue. To reiterate, section 3,
relevant to this lawsuit, defines "knowingly" as
acting "in reckless disregard of the truth or falsity of
the information." 740 ILCS 175/3(b)(1)(A)(iii) (West
36 My Pillow is referring to the constitutional requirement
that before a state may impose a sales tax on an out-of-state
company's sale within the state that company must have a
"substantial nexus" with the state. See Quill
Corp. v. North Dakota, 504 U.S. 298 (1992);
Brown's Furniture, Inc. v. Wagner, 171 Ill.2d
410, 421 (1996). My Pillow is arguing here that the initial
question of whether My Pillow owed a duty to collect and
remit use taxes in Illinois at all-whether a
"substantial nexus" existed-is a disputed and
complicated legal question, and thus, My Pillow could not
possibly have acted with reckless disregard of its obligation
to collect and pay sales taxes. The reasoning, in essence, is
that one cannot recklessly disregard an obligation when it is
debatable whether that obligation exists in the first
37 We should clarify at the outset that My Pillow does not
deny that it had a duty to collect and remit use taxes on the
sales of its products in Illinois. That point was conceded.
As we noted in the factual background, My Pillow began
collecting and remitting use taxes in response to
relator's lawsuit sometime in 2013 (and had intended to
start in 2012). My Pillow's argument is that this
liability was not sufficiently clear, during the relevant
time period before it began to "voluntarily"
collect and remit, for My Pillow to be found to have
recklessly disregarded its tax obligations.
38 We do not quarrel with the proposition that the
"substantial nexus" requirement is far from a clear
requirement, especially in this digital age. We are
instructed that the out-of-state vendor must have a
"physical presence" in the taxing state. Quill
Corp., 504 U.S. at 317; Brown's Furniture,
Inc., 171 Ill.2d at 423. But what, precisely, a
"physical presence" means these days has proven
difficult to pin down.
39 The " 'slightest' physical presence within a
state will not establish substantial nexus."
Brown's Furniture, Inc., 171 Ill.2d at 423
(quoting Quill Corp., 504 U.S. at 315 n.8). On the
other hand, the physical presence " 'need not be
substantial.' " Id. at 424 (quoting
Orvis Co. v. Tax Appeals Tribunal, 654 N.E.2d 954,
960-61 (N.Y. 1995)). Ultimately, "[l]eft unclear after
Quill *** is the extent of physical presence in a
state needed to establish more than a 'slight'
physical presence." Id. at 423; accord
Relax the Back Corp., 2016 IL App (1st) 151580,
¶ 22 ("the law on what constitutes sufficient
physical nexus to justify collection of the use tax is far
from clear"). It is a decision to be made on a
case-by-case basis. Irwin Industrial Tool Co. v.
Department of Revenue, 394 Ill.App.3d 1002, 1014 (2009),
aff'd, 238 Ill.2d 332 (2010).
40 If the only question were whether this is a nebulous area
of the law, My Pillow would win the debate, hands down. But
the question is more subtle. The question is not only
whether, under the facts of a specific case, the existence of
a sufficient nexus is difficult or simple, but also what the
company did to try to figure out the answer to that question.
After all, if we are to determine whether a company acted in
"reckless disregard" of its obligation to collect
and remit taxes, it stands to reason that our focus, at least
in part, must be on that company's conduct. This court
previously recognized that, given the murky nature of use-tax
law in this context, a company is not automatically
deemed to have "knowingly" violated the False
Claims Act (then the Whistleblower Reward and Protection Act)
by failing to collect and remit use taxes on its Illinois
sales, but rather "necessary factual determinations ***
must be made regarding defendants' knowledge" in
each particular case. Ritz Camera, 377 Ill.App.3d at
41 Thus, though we agree with My Pillow that this area of
use-tax law is imprecise, we must also consider My
Pillow's conduct in this case before determining whether
it acted in reckless disregard of its use-tax obligations in
42 "Reckless disregard" under section 3 requires
more than " '[i]nnocent mistakes or negligence.'
" State ex rel. Schad, Diamond & Sheddon, P.C.
v. National Business Furniture, LLC, 2016 IL
App (1st) 150526, ¶ 33 (quoting United States v.
King-Vassel, 728 F.3d 707, 712 (7th Cir. 2013)). It
refers to "the failure ' "to make such inquiry
as would be reasonable and prudent to conduct under the
circumstances, " ' " a " '
"limited duty to inquire as opposed to a burdensome
obligation." ' " Id. (quoting
United States ex rel. Williams v. Renal Care Group,
Inc., 696 F.3d 518, 530 (6th Cir. 2012), quoting S.
Rep. No. 99-345, at 20-21 (1986)).
43 "Reckless disregard" under section 3 has been
aptly described as " 'the ostrich type situation
where an individual has buried his head in the sand and
failed to make simple inquiries which would alert him that
false claims are being submitted.' " Relax the
Back Corp., 2016 IL App (1st) 151580, ¶ 27 (quoting
National Business Furniture, 2016 IL App (1st)
150526, ¶ 33). "Thus, one acting in reckless
disregard ignores 'obvious warning signs' and
'refus[es] to learn of information which [it], in the
exercise of prudent judgment, should have discovered.'
" Id. (quoting United States ex rel. Ervin
& Associates, Inc. v. Hamilton Securities Group,
Inc., 370 F.Supp.2d 18, 42 (D.D.C. 2005)).
44 For example, in National Business Furniture, 2016
IL App (1st) 150526, ¶ 7, the defendant was a Wisconsin
company that sold furniture by phone, catalog, or the
Internet and shipped its product to customers. Customers
selected a shipping method, and a delivery charge was
calculated at the completion of the purchase. Id.
¶ 8. The defendant did not collect and remit use tax on
the shipping charges, but the relator (the same one as in
this case) alleged that the defendant was in violation of
Illinois law. Id. ¶¶ 10-11.
45 The evidence at trial showed that the defendant collected
and remitted taxes on shipping charges in some states but not
others, depending on the defendant's interpretation of
the applicable state's laws and regulations, and that the
defendant interpreted Illinois's administrative rule as
not requiring the tax's imposition. Id.
¶¶ 13-14. The defendant subscribed to a publication
that tracked changes in sales tax rules by state and used
software that did the same. Id. ¶¶ 15-16.
In addition, the Illinois Department of Revenue (IDOR) had
conducted an "Illinois Sales Tax audit" for a
one-year period, and the defendant opened up its books to
IDOR. Id. ¶ 18. Those records included a
document plainly showing that the defendant was collecting
the use tax on the sale of merchandise but not on shipping.
Id. ¶ 21. The former chief financial officer
testified that he believed, at all relevant times, that the
company was complying with Illinois tax laws. Id.
46 At the close of trial, the circuit court found that the
relator had failed to prove that the defendant acted with
reckless disregard, that instead the defendant had reasonably
relied on the IDOR audit and its own interpretation of the
applicable Illinois administrative rule to determine that it
owed no duty to collect use tax on shipping charges in
Illinois. Id. ¶ 23. We affirmed, finding that
the trial judge's findings were not against the manifest
weight of the evidence. Id. ¶¶ 37-39. We
reasoned that the relator failed to "prove that
defendant ignored obvious warning signs, buried its head in
the sand, and refused to learn information from which its
duty to pay money to the State would have been obvious."
Id. ¶ 39.
47 In Relax the Back, 2016 IL App (1st) 151580,
¶¶ 6-7, another recent case involving the same
relator, the question was whether the defendant was liable
for failing to collect and remit use taxes for catalog and
Internet sales for its neck and back care products (chairs,
massage products, books, and videos). The claim regarding
Internet sales was rejected because the trial court
determined that no use taxes were owed in the first instance
due to a lack of sufficient nexus. Id. ¶ 13.
But as to catalog sales, the trial court found a sufficient
nexus to impose tax liability, based on evidence that
defendant's franchises in Illinois distributed a thousand
catalogs to customers in Illinois every year. Id.
Thus, as to catalog sales, the trial court proceeded to the
question relevant here, whether the defendant recklessly
disregarded its obligation to collect and remit those use
48 The evidence showed that the defendant's chief
financial officer (CFO) consulted with an outside tax
attorney, who concluded that the defendant lacked a
sufficient nexus to Illinois and owed no duty to collect and
remit use taxes. Id. ¶ 8. The CFO likewise
consulted with a "sales tax specialist in
accounting" who reached the same conclusion.
Id. ¶ 9. The CFO testified that outside
certified public accountants audited the defendant's
financial statements annually, and he understood that they
would not have approved the financial statements had they
believed the company should be collecting use taxes.
Id. ¶ 10. Finally, the defendants presented an
opinion witness, a former bureau manager of the audit bureau
of IDOR, who testified that the defendant's investigation
of its Illinois tax obligations was reasonable. Id.
49 The trial court found that the defendant's CFO "
'made an honest effort to determine whether or not any
tax liability occurred as a result of its Internet
operations.' " (Emphasis added.) Id. ¶
13. The trial court noted, however, that the defendant's
investigation of its tax liability concluded in 2004 or 2005,
and that its new requirement to Illinois franchises to mail
catalogs to Illinois residents (the act that gave it a
"substantial nexus" and triggered its use-tax
obligation) began in either 2005 or 2006. Id.
¶¶ 14-15. Thus, because the defendant failed to
re-examine its potential tax liability regarding catalog
sales after imposing that new "catalog requirement"
on its Illinois stores, the trial court found that the
defendant recklessly disregarded its use-tax obligation as to
catalog sales and was liable under the False Claims Act.
Id. ¶¶ 15-16.
50 This court reversed the judgment in the relator's
favor on the catalog sales. Id. ¶ 30. We
reasoned that a mistaken interpretation of a somewhat gray
area of the law was not reckless disregard. Id.
Though we acknowledged that the defendant "did not
actively seek the opinion of the IDOR or reevaluate [its] use
tax obligation in light of its catalog requirement, this
failure to ensure ...