In a recent decision, the First District of the Illinois Appellate Court reversed the dismissal of a complaint brought pursuant to the Illinois False Claims Act (the “IFCA”). The circuit court had held that relators satisfied the public disclosure bar because their claims were not substantially the same as publicly disclosed allegations or transactions, but that relators had failed to plead their claim with specificity. The First District agreed with the circuit court’s ruling regarding the public disclosure bar, but found that the circuit court had erred in holding that relators had failed to state a claim. This decision is the third Illinois Appellate Court decision in the last thirteen months reversing dismissals of IFCA actions (see People ex rel. Lindblom v. Sears Brands, LLC et al., No. 1-17-1468 (Ill. App. Ct), and Phone Recovery Services of Illinois, LLC ex rel. State of Illinois v. Ameritech Illinois Metro, Inc. et al., No. 1-17-0968 (Ill. App. Ct.)), and the language used by the court reflects a high threshold for dismissal.
In State of Illinois ex rel. Lindblom v. Sears Brands, LLC et al., No. 1-18-0588 (Ill. App. Ct.), appliance company owners Richard and Ralph Lindblom filed an IFCA suit alleging that several large appliance retailers, including Home Depot U.S.A., Inc., engaged in a scheme to avoid payment of retailers’ occupation tax to the Illinois Department of Revenue by treating the sale and installation of dishwashers and over-the-range microwave ovens as a construction contract, the latter not being subject to the collection of sales tax from purchasers.
Home Depot moved to dismiss the claims against it under the public disclosure bar. Specifically, Home Depot argued that a 2011 article published in the Milwaukee Journal Sentinel raised the same allegations regarding the proper sales tax treatment of built-in appliances. The First District agreed with the circuit court that this article did not constitute a public disclosure under the IFCA because the article focused on a different retailer, and on that retailer’s sales tax treatment of appliances sold and installed by the retailer under Wisconsin law. Moreover, because Wisconsin law does not require the charging of sales tax on built-in appliances, the article discussed the fact that the retailer improperly charged customers sales tax on household appliances when the retailer installed the appliance. Even though the article noted that representatives from Home Depot stores in Wisconsin stated that Home Depot did not charge sales tax on dishwashers it installed, the First District did not find such information sufficient to constitute a public disclosure. The First District also held that various general information letters and private letter rulings issues by the Department were not public disclosures because they did specifically name or identify Home Depot as engaging in any wrongful conduct.
In its holding, the First District quoted from some federal circuit courts to hold that for there to be a public disclosure, the prior disclosure “must have…revealed the same kind of fraudulent activity against the government as alleged by the relator.” Opinion at 13 (quoting United States ex rel. Poteet v. Medtronic, Inc., 552 F.3d 503, 511 (6th Cir. 2009)). The court also stated that “the public disclosure may either include an allegation of fraud or describe a transaction that raises an inference of fraud consisting of both the allegedly misrepresented facts that the true state of facts.” Id. (quoting United State v. Omnicare, Inc., 903 F.3d 78, 83 (3d Cir. 2018). This is a standard that has been referred to by many courts as the “X + Y=Z” standard (see, e.g., United States ex rel. Springfield Terminal Ry. Co., 14 F.3d 64, 651 (D.C. Cir. 1994)), and has not been explicitly adopted before by either the Illinois Supreme Court or the Seventh Circuit.
The First District went on to hold that even if there had been a public disclosure, relators qualified as an original source because they voluntarily provided information to the government prior to the public disclosure.
The First District also reaffirmed its position on the government action bar. Specifically, last year, the First District rejected an argument in this same case by another defendant that the Illinois Department of Revenue’s ongoing audit of its tax treatment of sales transactions triggered the government action bar in the IFCA because the audit qualifies as an administrative civil money penalty proceeding in which the State was already a party. (See People ex rel. Lindblom v. Sears Brands, LLC et al., No. 1-17-1468 (Ill. App. Ct)). Home Depot made the same argument here and the First District declined to revisit its prior ruling in this regard.
Finally, the First District considered the sufficiency of relator’s pleading and reversed the circuit court’s decision dismissing the claim for lack of specificity. The First District found that relators’ allegations were supported by information from Home Depot employees and when combined with the complaint’s other allegations constituted specific allegations of facts from which fraud was the necessary or probable inference. In addition, the First District held that an actual completed transaction in which sales tax was not charged was not necessary to plead a violation of the IFCA. Instead, allegations creating the probable inference that Home Depot devised a scheme to knowingly misclassify itself as a construction contractor, even though it was a retailer, to purposely evade its responsibility to charge customers sales tax on appliances, were sufficient.
This opinion continues the trend of relator-friendly opinions in the Illinois Appellate Court.