Illinois Appellate Court Reports

STATE v. BURLINGTON COAT FACTORY, 1-05-3824 (Ill.App.
12-6-2006) THE STATE ex rel. BEELER, SCHAD AND DIAMOND,
P.C., Plaintiff, v. BURLINGTON COAT FACTORY WAREHOUSE
CORPORATION and BURLINGTON COAT FACTORY DIRECT
CORPORATION, Defendants-Appellees. (The State of Illinois,
Appellee; Beeler, Schad and Diamond, P.C., Appellant). No.
1-05-3824. Appellate Court of Illinois, First District,
Third Division. December 6, 2006.

Appeal from the Circuit Court of Cook County., Honorable
Ronald F. Bartkowicz, 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
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 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 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 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.

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.[fn1] While 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 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 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 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 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 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 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 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 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.

[fn1] 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 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.