The Illinois False Claims Act (“IFCA”) has been perpetually abused by parasitic litigants seeking to force businesses into unwarranted tax claims. In the latest example, The People ex rel. Stephen B. Diamond v. Henry Poole & Co., Ltd., the Illinois Appellate Court (the “Court”) rejected an action filed by a well-known IFCA litigant against a UK-based tailor, Henry Poole & Co (“Poole”), for failure to collect Illinois use tax on custom clothing sold and shipped to Illinois customers from outside the U.S.
The IFCA allows private individuals (“relators”) to bring civil actions on behalf of the State of Illinois for false claims. A business that perpetuates fraud against the State is liable for penalties and treble damages. If the action is successful, the relator is entitled a percentage of the proceeds.
Poole’s Illinois activities consisted of roughly 14 hours in total per year at a Chicago hotel taking measurements and preferred fabric options from potential customers. After the visits, Poole returned to London and determined if the customer’s preferred fabric was available. If so, Pool sent a proposal to the customer with a purchase price. When the proposal was accepted, Poole invoiced the customer in British Pounds, processed the customer’s credit card and did all of the work (e.g., construction, adjustments, altercations, etc.) onsite in the UK. Once finalized, Poole shipped the items to the customer’s Illinois address. The Relator asserted that Poole’s failure to charge Illinois tax on its invoices to Illinois customers constituted a false claim under the IFCA.
In rejecting the false claims action, the Court clarified that the IFCA’s required showing of “reckless disregard” demands a heightened standard beyond mere negligence and that those bringing false claims actions must prove more than a mere failure of a business to meet its tax obligations. Instead, those bringing false claims actions are required to show the business “intentionally choose[s] not to meet [its] tax obligation[s].” In this case, there was no question Pool failed to properly report Illinois tax due. However, given Pool’s limited contacts/connections with the State, the Relator was unable to prove Poole acted with the requisite intent to avoid any Illinois tax obligations.
The Illinois Appellate Court’s ruling in Poole provides much needed clarity regarding the heightened standard of proof required before a business will be found liable under the IFCA and is a positive development in rebuffing efforts to pursue false claims actions in Illinois.
Contact the Authors: Ted Bots and Drew Hemmings
