A recent decision by an Illinois Cook County Circuit Court judge signals a positive move in the ongoing saga of qui tam False Claim cases in Chicago brought by attorney Stephen B. Diamond, which have been plaguing wineries.
As originally reported by David Ruskin, an attorney with Horwood Marcus & Berk, Judge Margaret Ann Brennan recently granted Motions to Dismiss with prejudice in favor of two winery co-defendants.(The ‘motion to dismiss with prejudice’ part means, basically, the judge decided the law is clear enough that the co-defendant can’t be liable. There’s nothing at issue that needs to be proven in a trial, and it’s a final decision–but it can still be appealed.)
This decision, if applied to other False Claims suits, may be a very positive development for many wineries who are named defendants involved in Diamond’s False Claim suits.
The False Claims Act (740 ILCS 175/3) makes it a violation of Illinois law for a party to “knowingly” present false claims or reports when filing in Illinois. In granting the co-defendants’ motion to dismiss this claim, Judge Brennan stressed the “knowing” element, finding that this required a clear demonstration of the party’s intention to defraud Illinois by actively concealing taxable charges. The co-defendants showed that they had, in fact, disclosed the shipping and handling charges they had deducted from their net receipts on their reports–the data they were accused of falsifying. This disclosure, even if it were later determined in an audit to be in error and that taxes were actually due, was sufficient to be a truthful, and therefore not “knowingly false,” statement. Because she concluded there was no intent to deceive, Judge Brennan determined that further litigation was unnecessary, dismissing the case.
Judge Brennan’s reasoning may apply to wineries that have used ShipCompliant to generate their ST-1 reports. This will be a case-by-case determination, though, and wineries should consult with their personal legal counsel to understand their individual circumstances.
Judge Brennan’s ruling, however, is far from a final resolution in these False Claim cases as she is only one of the judges presiding over these cases. The vast majority are before Judge Thomas Mulroy, who appears to not share Judge Brennan’s reasoning. As Ruskin reported in June, Judge Mulroy denied a Motion to Dismiss in which the defendant had argued the same position recently favored by Judge Brennan. Even though the defendant in that case had clearly reported the amount of shipping charges it had deducted, Judge Mulroy ruled that questions of fact still had to be resolved (through costly litigation) and so dismissal was inappropriate.
Judges Brennan and Mulroy operate at the same tier in the Circuit Court, so unfortunately Judge Mulroy is not required to follow Judge Brennan’s reasoning in evaluating similar cases before him. A ruling from the Illinois Court of Appeals would give Judge Brennan’s reasoning precedential authority that Judge Mulroy would have to follow. But the appellate court could only rule on Judge Brennan’s decision if the plaintiffs decided to appeal. Ruskin sees such an appeal as highly unlikely, as the consequence of an appellate decision upholding Judge Brennan’s ruling would be devastating to the plaintiff’s other False Claims cases. In essence, the plaintiffs would likely cede this particular battle so as to not risk their broader efforts in the war.
David Ruskin notes that wineries may have the potential to move their cases out of Judge Mulroy’s court and seek to have the heard before a different judge; there is no guarantee, though, that the new judge would be Judge Brennan. Illinois law (at 735 ILCS 5/2-1001(2)) permits a party in a civil action to move for a substitution of a judge as a matter of right. That is, a party may petition the court to permit a change of the judge without otherwise justifying their request. Such a substitution can only be made before any substantive ruling has been made in their case. If a party moves for substitution, it must do so before filing a motion to dismiss.
For further background on this issue, including a long list of resources and information, please see our previous blog post.