THIRD DIVISION December 6, 2006
No. 1-05-3824
THE STATE ex rel. BEELER, SCHAD AND ) Appeal from the DIAMOND, P.C., ) Circuit Court of ) Cook County Plaintiff, ) ) v. ) ) BURLINGTON COAT FACTORY WAREHOUSE ) CORPORATION and BURLINGTON COAT ) FACTORY DIRECT CORPORATION, ) ) Defendants-Appellees ) ) Honorable (The State of Illinois, Appellee; Beeler, Schad and ) Ronald F. Bartkowicz, Diamond, P.C., Appellant). ) Judge Presiding.
JUSTICE KARNEZIS delivered the opinion of the court:
Plaintiff-relator Beeler, Schad and Diamond, P.C. (relator), filed a qui tam action
in the name of the State of Illinois (the state) against defendants Burlington Coat
Factory Warehouse Corporation (Burlington Corporation) and Burlington Coat Factory
Direct Corporation (Burlington Direct) (collectively defendants) pursuant to the
Whistleblower Reward and Protection Act (740 ILCS 175/1 et seq. (West 2002)).
Relator alleged that Burlington Direct, an Internet sales company incorporated in New
Jersey, violated the Act when it failed to collect and remit use tax to the state on its
Internet sales to customers in Illinois. The Attorney General of the State of Illinois 1-05-3824
intervened and moved for voluntary nonsuit and dismissal. The court granted the
motion to dismiss. Relator appeals, arguing that the court erred in denying relator's
request for discovery and in granting the motion to dismiss. We affirm.
Background
Burlington Corporation is a Delaware corporation with its principal place of
business in New Jersey. There are 19 Burlington Coat Factory (BCF) stores in Illinois,
each incorporated separately as an Illinois corporation. Burlington Direct is a
subsidiary of Burlington Corporation and sells BCF merchandise on the Internet.
Consumers shopping for BCF merchandise on the Burlington Corporation website are
automatically directed to the Burlington Direct website in order to select and complete
their purchases. Customers who purchase merchandise from the Burlington Direct
website can return the merchandise to a BCF store for exchange or store credit if they
have prior approval from Burlington Direct. They cannot get a refund of the purchase
price from the stores.
Pursuant to the Use Tax Act (35 ILCS 105/1 et seq. (West 2002)), if an out-of-
state retailer maintains a place of business in Illinois, it has a duty to collect and remit
use tax to the state for sales it makes to customers in Illinois. 35 ILCS 105/3-45 (West
2002). Burlington Direct makes sales to Illinois customers through its website. From
1998 through 2003, it did not collect and remit use tax on those sales. Relator filed suit
against defendants in the name of the state, alleging defendants knowingly made false
claims about their use tax liability in violation of the Whistleblower Reward and
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Protection Act. Relator contended that Burlington Direct had a duty to collect and remit
use tax on the sales because it maintains a place of business in Illinois through the 19
BCF stores in Illinois, asserting that Burlington Corporation controls the 19 BCF stores
in Illinois as well as Burlington Direct and that they are all the same business. As proof
that the stores operate in tandem with Burlington Direct and are, therefore, a place of
business for Burlington Direct in Illinois, relator points out that Burlington Direct and the
stores sell the same merchandise; operate under the same management, distribution
and ordering systems; use common advertisements in newspapers and on Burlington
Corporation's website; cooperate in making exchanges and refunds; and facilitate sales
on the Burlington Corporation website by automatically redirecting customers to the
Burlington Direct website for purchases of any Burlington Coat Factory merchandise.
The Whistleblower Reward and Protection Act (the Act) is an anti-fraud statute.
Pursuant to section 3 of the Act, 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 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
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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).
Relator's qui tam action alleged that Burlington Direct's Internet order
confirmations falsely stated that no tax was due from its customers, defendants' failure
to collect and remit the tax Burlington Direct caused damages to the State of Illinois
and defendants knowingly made false records and statements to conceal their use tax
obligation and their failure to satisfy it. The Attorney General intervened in the action.
Almost two years later, after numerous agreed to extensions, the Attorney General
moved for nonsuit and voluntary dismissal, asserting that there was probably not a
sufficient nexus with Illinois under the commerce clause for Burlington Direct, an out-of-
state company, to collect use tax on sales to customers in Illinois. Relator objected.
Under section 4(c)(2)(A) of the Act, the state may dismiss a qui tam action
notwithstanding the objections of the relator if the relator has been notified of the filing
to the motion to dismiss and the court has provided the relator an opportunity for a
hearing on the motion. 740 ILCS 175/4(c)(2)(A) (West 2002). The court held such a
hearing here. It first determined that section 4(c)(2)(A) does not give the Attorney
General unfettered discretion to dismiss a qui tam action under the Act. It then applied
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the standard for dismissal of a qui tam action articulated in United States ex rel.
Sequoia Orange Co. v. Baird-Neece Packing Corp., 151 F.3d 1139 (9th Cir. 1998).
The Act "closely mirrors" the federal False Claims Act (31 U.S.C. §3729 et seq.
(2000)) (FCA), which provides that a person may bring a civil action for a violation of
the federal act for the person and for the United States government. Scachitti v. UBS
Financial Services, 215 Ill. 2d 484, 506-07, 831 N.E.2d 544, 557 (2005); 31 U.S.C.
3730 (2000). In a dismissal provision substantially similar to the dismissal provision in
section 4(c)(2)(A) of the Act, the FCA provides that the federal government may dismiss
a qui tam action despite objections by the relator as long as the relator is notified and
has been provided an opportunity for a hearing on the dismissal. 31 U.S.C.
§3730(c)(2) (2000). Sequoia Orange interprets this provision and sets out a two-part
test for determining whether the government's motion to dismiss a qui tam action
should be granted. Sequoia Orange, 151 F.3d at 1145. Under Sequoia Orange, the
government must first identify a valid governmental purpose for the dismissal and then
show a rational relation between dismissal and accomplishment of that purpose.
Sequoia Orange, 151 F.3d at 1145. If this two-part test is satisfied, then the burden
shifts to the relator to show that dismissal is fraudulent, arbitrary and capricious, or
illegal. Sequoia Orange, 151 F.3d at 1145.
The court here found relator failed to successfully rebut the reasons advanced
by the Attorney General under the Sequoia Orange test and granted the Attorney
General's motion to dismiss the action. Relator appeals.
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Analysis
Relator first argues that the court erred in granting the dismissal because,
applying the Sequoia Orange test, (1) the Attorney General's assertion of insufficient
nexus does not demonstrate a valid government purpose such that dismissal would be
rationally related to that purpose and (2) the Attorney General's decision to move for
dismissal was arbitrary and capricious. It may be that relator is correct on both counts.
However, we do not reach these arguments because we decline to follow Sequoia
Orange. The circuit court applied the Sequoia Orange test because, in its
determination, the state does not have unfettered discretion to voluntarily dismiss a qui
tam action and, unless some system of checks and balances on the state's power to
dismiss is in place, the relator's interest in the suit is undermined and the court's
function during the hearing on relator's objections to dismissal is meaningless.1 While
1 The court based its decision to apply the Sequoia Orange test as the standard
for voluntary nonsuit and dismissal of qui tam cases by the state on its earlier decisions
in two other qui tam cases also filed by relator, State of Illinois ex rel. Beeler, Schad &
Diamond, P.C. v. Mikasa, Inc., No. 02 L 006701, and State of Illinois ex rel. Beeler,
Schad & Diamond, P.C. v. Lego Brand Retail, Inc., No. 03 L 010997. In Mikasa and
Lego, as in the case at bar, relator sought to recover use tax from the defendants for
internet sales to Illinois customers and the state intervened and moved for voluntary
nonsuit and dismissal. On May 24, 2005, the court issued a thoughtful written analysis
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we agree that the state's discretion to dismiss is not entirely unfettered, it is, however,
only minimally qualified by the Act and not subject to a Sequoia Orange "checks and
balances" test.
Section 4(c)(2)(A) provides: "The State may 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 2002). The
court found this language ambiguous because the Act fails to discuss the purpose and
intent for the requisite hearing. We find the dismissal provision categorical: the state
may dismiss the action notwithstanding the relator's objections as long as the realtor
has been notified of the state's motion to dismiss and has had an opportunity to be
heard on its objections. Granted, section 4(c)(2)(A) does not specify the court's role
during the hearing or set forth what a hearing must encompass. However, reading 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.
In Scachitti v. UBS Financial Services, 215 Ill. 2d 484, 831 N.E.2d 544 (2005),
our supreme court considered whether a private person has standing to bring suit
determining that the two-part Sequoia Orange test should be applied in Mikasa and
Lego. It denied relator's motion for reconsideration on September 29, 2005.
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under the Act and whether the qui tam provisions of the Act usurp the constitutional
powers of the Attorney General to represent the state. Scachitti held that the qui tam
provisions do not usurp the Attorney General's constitutional power because, through
the significant restrictions placed on qui tam plaintiffs by the Act, the Attorney General
retains authority to control litigation at every stage. Scachitti, 215 Ill. 2d at 510-11, 831
N.E.2d at 559-60. "Rather than usurping the constitutional power of the Attorney
General, the qui tam provisions of the Act support the Attorney General's law
enforcement duties." Scachitti, 215 Ill. 2d at 513, 831 N.E.2d at 561. As relator points
out, Scachitti did not specifically analyze the section 4(c)(2)(A) dismissal provision.
However, it is clear from Scachitti that the Attorney General has almost complete
control over a qui tam action. Concomitant with that control is the decision whether to
dismiss a qui tam action.
The Attorney General is the chief legal officer of the state " 'and the only officer
empowered to represent the people in any suit or proceeding in which the State is the
real party in interest, except where the constitution or a constitutional statute may
provide otherwise.' " (Emphasis omitted.) Scachitti, 215 Ill. 2d at 514, 831 N.E.2d at
561, quoting Fergus v. Russel, 270 Ill. 304, 342, 110 N.E. 130 (1915). Section 4(b)(1)
of the Act provides such an exception, permitting a relator to file a civil action in the
name of the state for false claims made to the state, on his own behalf and on behalf of
the state. 740 ILCS 175/4(b)(1) (West 2002). But the Act, as a whole, makes clear that
"qui tam plaintiffs, acting as statutorily designated agents for the state, may proceed
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only with the consent of the Attorney General, and remain completely subordinate to
the Attorney General at all times." Scachitti, 215 Ill. 2d at 515, 831 N.E.2d at 562.
Standing alone, a relator has suffered no direct injury as a result of false claims
under the Act. Scachitti, 215 Ill. 2d at 507-08, 831 N.E.2d at 557-58. Only the state
has been injured by the false claims and is the real party in interest. Scachitti, 215 Ill.
2d at 507-08, 831 N.E.2d at 557-58. The Act operates to give the relator a personal
stake in the case, a percentage of the state's recovery under the Act, and the right to
bring an action for himself and the state. Scachitti, 215 Ill. 2d at 508, 831 N.E.2d at
558. But relator's recovery is entirely incidental to that of the state. Only through a
partial assignment of the state's right to bring suit does the Act make a relator a real
party in interest together with the state. Scachitti, 215 Ill. 2d at 508-09, 831 N.E.2d at
558-59, following Vermont Agency of Natural Resources v. United States ex rel.
Stevens, 529 U.S. 765, 146 L. Ed. 2d 836, 120 S. Ct. 1858 (2000) (analyzing the issue
of standing of a qui tam plaintiff under the substantially similar federal False Claims
Act).
Under "the plain language of the Act," "the Attorney General in all circumstances
effectively maintains control over the litigation, consonant with the Attorney General's
constitutional role as the chief legal officer of the state." Scachitti, 215 Ill. 2d at 513,
831 N.E.2d at 561. The Act provides that "[i]f the State proceeds with an action, it shall
have the primary responsibility for prosecuting the action, and shall not be bound by an
act of the person bringing the action." (Emphasis added.) 740 ILCS 175/4(c)(1) (West
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2002). The state determines the timetable for the action, because a relator's complaint
must be filed in camera and remain under seal for at least 60 days while the state
considers its options (740 ILCS 175/4(b)(2) (West 2002)) and the state may, for good
cause shown, move for extensions of the time during which the complaint remains
under seal (740 ILCS 175/4(b)(3) (West 2002)). The state can decide whether to
prosecute the action or not. If it chooses to intervene, the action shall be conducted by
the state (740 ILCS 175/4(b)(4)(A) (West 2002)); if it chooses not to intervene, the right
to conduct the action is left to the relator (740 ILCS 175/4(b)(4)(B) (West 2002)).
If the state proceeds with the action, it has the primary responsibility for
prosecuting the action, and is not bound by any act of the relator. 740 ILCS 175/4(c)(1)
(West 2002). Although the relator has the right to continue as a party to the action
once the state intervenes, that right is subject to the limitation that the state "may
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." (Emphasis
added.) 740 ILCS 175/4(c)(2)(A) (West 2002). Similarly, the state may settle the action
notwithstanding the objections of the relator if "the court determines, after a hearing,
that the proposed settlement is fair, adequate, and reasonable under all the
circumstances." 740 ILCS 175/4(c)(2)(B) (West 2002). It has veto power over a
relator's attempts to dismiss, because a qui tam action "may be dismissed only if the
court and the Attorney General give written consent to the dismissal and their reasons
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for consenting." (Emphasis added.) 740 ILCS 175/4(b)(1) (West 2002). It can also
decide to pursue the case through an alternate forum (740 ILCS 175/4(c)(5) (West
2002)).
Even where the state initially declines to intervene and conduct the action, it has
the right to receive copies of all pleadings and depositions and to intervene at a later
date upon a showing of good cause. 740 ILCS 175/4(c)(3) (West 2002). Only the
state may intervene or bring a related action based on the facts underlying a pending
qui tam action. 740 ILCS 175/4(b)(5) (West 2002). With court approval, the state can
prosecute the action without interference from or participation by a relator and restrict a
relator's participation in the case. 740 ILCS 175/4(c)(2)(D) (West 2002). 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).
As shown above, except for a relator's statutorily assigned standing to bring a
qui tam action and prerogative to conduct the case should the state decline to
intervene, all actions by the relator regarding a qui tam action are subject to the state's
review and approval. "[T]he Act's qui tam provisions ensure the Attorney General
retains authority to control the litigation at every stage of the proceedings." Scachitti,
215 Ill. 2d at 510-11, 831 N.E.2d at 560. Although a relator may "conduct" a qui tam
action on the state's behalf, the Attorney General retains authority to "control" the
litigation. Scachitti, 215 Ill. 2d at 510, 831 N.E.2d at 560. And, since the Act does not
provide otherwise, part of that control necessarily entails dismissing an action over a
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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. There is no case law in Illinois
specifically addressing the standard to be applied, if any, to a dismissal request.
Federal cases analyzing the similar dismissal provision in the FCA vary in their
treatment of the provision. For example, as previously discussed, in Sequoia Orange,
the Ninth Circuit Court of Appeals determined that the government does not have
unlimited discretion to dismiss an action and it was for the court to determine whether
dismissal should be granted, applying a two-part test under which the government must
show a valid government purpose and a rational relationship between the proposed
dismissal and that purpose. Sequoia Orange, 151 F.3d at 1145.
In contrast, in Swift v. United States of America, 318 F.3d 250 (D.C. Cir. 2003),
the District of Columbia court of appeals held that the FCA dismissal provision does not
give the judiciary general oversight of the executive branch's judgment regarding
whether an action brought in its name should be dismissed. Swift, 318 F.3d at 252-53.
It read the dismissal provision as giving the government an essentially unfettered right
to dismiss an action, limited only by the requirement that a relator has a right to a
hearing or if there is evidence of fraud on the court. Swift, 318 F.3d at 252-53. "The
relator's right to a hearing * * * is all that points to a role for the courts in deciding
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whether the case must go forward despite the government's decision to end it." Swift,
318 F.3d at 253. Swift rejected Sequoia Orange's view that the dismissal provision
authorized judicial review of the government's reasons for dismissal, finding instead
that nothing in the provision purported to deprive the executive branch of its historical
prerogative to decide which cases should go forward in the name of the United States.
Swift, 318 F.3d at 253. The court considered the dismissal provision of the FCA in light
of the separation of powers doctrine. Swift, 318 F.3d at 252. Noting the presumption
that the executive is acting rationally and in good faith, Swift found the government's
discretion to dismiss an action is, generally, committed to the government's absolute
discretion and "the function of a hearing [on the relator's objections to the executive's
decision to dismiss] * * * is simply to give the relator a formal opportunity to convince
the government not to end the case." Swift, 318 F.3d at 253.
In Ridenour v. Kaiser-Hill Co, 397 F.3d 925 (10th Cir. 2005), the Tenth Circuit
Court of Appeals declined to follow Swift and, instead, followed Sequoia Orange,
finding the two-part test the appropriate standard of review for a government motion to
dismiss a qui tam action. Ridenour, 397 F.3d at 935-36. Ridenour distinguished Swift
because, although the government had not intervened in either Swift or Ridenour, it had
served the Ridenour defendants with a complaint while it had not so served the Swift
defendants. Ridenour, 397 F.3d at 935. The court determined that service on the
defendants necessitated construing the hearing language in the dismissal provision as
imparting more substantive rights for a relator and that the Sequoia Orange test
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protected the rights of the relator to judicial review of a government motion. Ridenour,
397 F.3d at 935-36. Interestingly, notwithstanding its decision to follow Sequoia
Orange rather than Swift, the court noted "[i]t is not clear whether in practice this notice
and hearing requirement [in the FCA dismissal provision] has amounted to much of a
hurdle for the government. However, we note that Congress apparently intended that
the provision authorizing relators to formally object to any motions to dismiss or
proposed settlements between the government and a defendant should not pose a
significant burden for the government or court." Ridenour, 397 F.3d at 931 n.10.
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. Lyons v. Ryan, 201 Ill. 2d 529, 541, 780 N.E.2d 1098, 1105-06
(2002). 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.
Lyons, 201 Ill. 2d at 541, 780 N.E.2d at 1106. 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,
whether through application of the Sequoia Orange test or any other "checks and
balances" approach, we give the court 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
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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 "rubberstamp" 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. Neither fraud nor
bad faith was alleged here. Accordingly, we affirm the circuit court's dismissal of the
action, albeit on another basis than that found by the court.
Relator also argued that the court erred in denying its request for discovery.
Given our determination that evidence of the state's reasons and the spuriousness
thereof was not relevant in the hearing, the court did not err in denying relator's request
for discovery.
For the reasons stated above, we affirm the decision of the circuit court.
Affirmed.
THEIS, P.J., and GREIMAN, J., concur.