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                                     Appellate Court                          Date: 2019.06.19
                                                                              15:37:18 -05'00'




                  State ex rel. Stephen B. Diamond, P.C. v. SR/Ecom, Inc.,
                                   2018 IL App (1st) 172431



Appellate Court          THE STATE OF ILLINOIS ex rel. STEPHEN B. DIAMOND, P.C.,
Caption                  Plaintiff-Appellant, v. SR/ECOM, INC.; SR/ECOM, LLC;
                         SAUCONY/ECOM, INC.; SRCG/ECOM, INC.; STS/ECOM, INC.;
                         and ROBEEZ LOGISTICS, INC., Defendants-Appellees.



District & No.           First District, Second Division
                         Docket No. 1-17-2431



Filed                    December 4, 2018



Decision Under           Appeal from the Circuit Court of Cook County, No. 13-L-13198; the
Review                   Hon. Thomas R. Mulroy, Judge, presiding.



Judgment                 Affirmed.


Counsel on               Stephen B. Diamond, of Stephen B. Diamond, P.C., Tony Kim and
Appeal                   Matthew Burns, of Kim & Burns LLP, Matthew W. Rathsack, and
                         David A. Genelly, of David A. Genelly, Ltd., all of Chicago, for
                         appellant.

                         Mary Kay Martire and Lauren A. Ferrante, of McDermott Will &
                         Emery, LLP, of Chicago, for appellees.
     Panel                    JUSTICE HYMAN delivered the judgment of the court, with opinion.
                              Justices Lavin and Pucinski concurred in the judgment and opinion.


                                                OPINION

¶1          A lawyer serving as both relator and counsel in a qui tam action under the Illinois False
       Claims Act (740 ILCS 175/1 et seq. (West 2014)) has himself or herself as the client. In State
       of Illinois ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2018 IL 122487, a case
       raising the same issue by the same relator/counsel as here, the Illinois Supreme Court, as a
       matter of first impression, held that the relator/counsel in a successful qui tam case may not
       collect attorney fees for representing itself.
¶2          Relator law firm, Stephen B. Diamond, P.C., contends My Pillow does not bar its petition
       for attorney fees because (i) the holding applies only prospectively under the test in Aleckson v.
       Village of Round Lake Park, 176 Ill. 2d 82 (1997), and (ii) the parties’ settlement agreement
       expressly barred later court rulings from applying to it. We conclude Diamond fails to
       overcome the legal presumption that appellate court opinions apply both retroactively and
       prospectively. And, contrary to Diamond’s reading, nothing in the settlement agreement
       precludes denying the fee petition.

¶3                                           BACKGROUND
¶4          Stephen B. Diamond P.C., as relator, filed a complaint under the False Claims Act (740
       ILCS 175/1 et seq. (West 2014)) alleging the defendants, several online shoe companies, failed
       to collect and remit taxes on Internet sales to Illinois consumers. The State declined to
       intervene and the trial court entered an order allowing Diamond to proceed. When defendants’
       attempt at settlement with Diamond proved unsuccessful, they began discussions with the
       State. After defendants and the State reached an agreement, they jointly moved for the trial
       court’s approval.
¶5          The settlement agreement required defendants to pay $978,453.63, three times the tax on
       its Illinois sales from October 9, 2012, to May 31, 2014, the date defendants began collecting
       and remitting Illinois sales tax. (Defendants paid $694,702.08 to the State and $283,751.455 to
       Diamond’s firm, as relator.) Pertinent to this appeal, paragraph 5 of the settlement agreement
       provides that Diamond “has the option” of filing a petition for attorney fees and expenses for
       his firm’s work, as well as the work of outside counsel. And paragraph 14 states the agreement
       was “not revocable in the event of any changes to the [False Claims Act] or to any applicable
       tax statute or regulation or any subsequent rulings by a court, at any level, regarding the [False
       Claims Act].”
¶6          Over Diamond’s objection, the trial court approved the settlement, finding it to be fair,
       adequate, and reasonable. Diamond then filed a petition for attorney fees and expenses in
       excess of $1 million for services performed by employees or principals of the firm. Documents
       submitted in support of the fee petition indicated that Diamond’s outside counsel, Vanasco,
       Genelly & Miller, spent no time on the case, although listed as counsel on all pleadings.
¶7          Defendants filed a motion objecting to the fee petition arguing, in part, that Diamond was
       precluded as a matter of law from an award of fees for self-representation under the False


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       Claims Act because he was serving as both client and attorney. The trial court denied
       defendants’ motion and awarded Diamond $974,914 for attorney fees and expenses, after
       deducting several travel-related expenses. Diamond moved to reconsider the portion of the fee
       petition the trial court denied and filed a supplemental fee petition, seeking additional fees
       related to its motion to enforce the settlement agreement. Defendants filed a motion to
       reconsider, again arguing the trial court should deny Diamond’s fee petition as a matter of law
       because a relator is not entitled to fees under the False Claims Act for self-representation.
¶8          While those motions were pending, the appellate court issued a decision in People ex rel.
       Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2017 IL App (1st) 152668, holding, as a
       matter of first impression, that a relator who acts as his or her own attorney cannot seek
       attorney fees under the fee shifting provision of the False Claims Act. Id. ¶ 148. Justice David
       Ellis, writing for the court, found that awarding attorney fees to a self-represented relator
       violated public policy regardless of the work done by the self-represented relator or the benefit
       the work conferred on the State thereby. Id. ¶¶ 143-48. The court noted that the statutory
       fee-shifting provisions intend to “incentivize[ ] individuals to ferret out *** fraud [against the
       government] by removing the burden of legal fees as a deterrent.” Id. ¶ 132. The False Claims
       Act rewards prevailing relators by providing an award of between 25% and 30% of the
       lawsuit’s proceeds if a relator handles the litigation from start to finish, without the State’s
       intervention. Id. So to then “reward that law firm for its efforts again, this time based on an
       hourly fee rate, strikes us as a double recovery.” (Emphasis omitted.) Id.
¶9          Further, because a relator/counsel serves in both capacities, the arrangement lacks
       independence. Id. ¶¶ 138-39. The court also cited the potential for abusive fee generation and
       noted that Illinois public policy does not support allowing law firms to create a business out of
       filing lawsuits under statutes with fee-shifting provisions. Id. ¶ 142.
¶ 10        After ordering additional briefing and hearing arguments on the applicability of My Pillow,
       the trial court granted the defendants’ motion for reconsideration, reversed its earlier fee
       award, and denied Diamond’s motion for reconsideration and supplemental fee petition. The
       trial court agreed with defendants on My Pillow applying retroactively under Aleckson v.
       Village of Round Lake Park, 176 Ill. 2d 82 (1997), reasoning that a prospective-only
       application would hinder the public policy concerns identified in My Pillow. The trial court
       also found that the statement of public policy in My Pillow prohibiting a self-represented
       relator from recovering legal fees foiled the settlement agreement’s provision blocking the
       effect of later court rulings regarding the Act.
¶ 11        After Diamond appealed, the Illinois Supreme Court issued its opinion in State of Illinois
       ex rel. Schad, Diamond & Shedden, P.C. v. My Pillow, Inc., 2018 IL 122487, affirming the
       appellate court. The supreme court’s opinion highlighted some of the same public policy
       reasons the appellate court identified, including the free rein afforded lawyers pursuing the
       litigation and the need to avoid abusive fee generation practices. See id. ¶¶ 25-26. (citing
       Hamer v. Lentz, 132 Ill. 2d 49, 62-63 (1989)).
¶ 12        Defendants filed a motion to cite the supreme court’s opinion as controlling authority. In
       reply, Diamond argued (i) My Pillow applies prospectively only and thus does not bar him
       from receiving attorney fees and (ii) the settlement agreement barred application of any later
       court rulings.



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¶ 13                                              ANALYSIS
¶ 14                                 Prospective Application of My Pillow
¶ 15        Diamond contends My Pillow cannot be applied retroactively. This is a question of law
       reviewed de novo. Schmidt v. Ameritech Illinois, 329 Ill. App. 3d 1020, 1027 (2002).
¶ 16        In the civil context, generally, an opinion issued by a court presumably applies both
       retroactively and prospectively. Aleckson, 176 Ill. 2d at 86. This presumption can be overcome
       if three criteria are met: (i) the decision established a new principle of law, either by overruling
       past precedent on which the parties relied or by deciding an issue of first impression the
       resolution of which was not clearly foreshadowed; (ii) given the purpose and prior history of
       the new principle of law, its operation will be promoted by prospective only application; and
       (iii) substantial inequitable results would be produced by applying the decision retroactively.
       See id. at 87-88; Chevron Oil Co. v. Huson, 404 U.S. 97, 106-07 (1971).
¶ 17        Defendants contend the trial court did not retroactively apply My Pillow because the
       parties’ motions to reconsider remained pending when the supreme court issued My Pillow.
       Diamond argues that, since the trial court had already approved the settlement agreement and
       granted the fee petition, My Pillow did involve an impermissible retroactive application under
       Aleckson.
¶ 18        But even accepting Diamond’s position does not satisfy the three prongs of the Aleckson
       test. Although My Pillow decided an issue of first impression, satisfying the first prong, the
       purposes of the new principle of law—to avoid double recovery and deter abusive fee
       practices—will not be promoted by prospective only application. To allow Diamond to recover
       attorney fees in addition to a portion of the settlement he already received would amount to
       double recovery, which the supreme court’s My Pillow holding expressly seeks to avoid.
¶ 19        And prior history does not support an argument for prospective only application of the new
       principle of law. Diamond argues the trial court was following a long line of cases awarding
       attorney fees to self-represented relators when it initially approved his fee petition and it would
       be unfair to retroactively rescind the fee award. But he cites circuit court cases only, which
       have no precedential value. Once the appellate court issued its opinion, which the supreme
       court affirmed, the trial court properly applied the new principle of law to deny Diamond’s
       petition for attorney fees.
¶ 20        Further, retroactive application does not result in a substantially inequitable result.
       Diamond received 29% (or $283,752) from the settlement and, thus, received recompense for
       bringing the lawsuit. Moreover, Diamond knew in litigating this case that the issue of attorney
       fees for law firms serving as relators in pro se qui tam lawsuits was unsettled—the My Pillow
       defendants had filed a motion objecting to the fee petition, maintaining, as a matter of law,
       Diamond was precluded from an award of fees for self-representation. And, at the time
       Diamond submitted his fee petition to the trial court, the attorney fees issue was unsettled and
       pending before the appellate court. Thus, Diamond had good reason to know the trial court
       might not award his firm attorney fees.

¶ 21                             Terms of the Settlement Agreement
¶ 22       Diamond asserts the trial court erred in applying My Pillow due to the settlement
       agreement’s express bar on applying later court rulings. Specifically, Diamond cites paragraph
       14, “The Settlement Agreement is binding on the parties hereto and is not revocable in the


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       event of any changes to the [False Claims Act] or to any applicable tax statute or regulation, or
       any subsequent court rulings by a court at any level, regarding the [False Claims Act].”
       (Emphasis added.)
¶ 23       Diamond asserts My Pillow falls squarely within the definition of “any subsequent rulings
       by a court” regarding the False Claims Act and that paragraph 14 bars it from being applied. To
       the contrary, paragraph 14 does not say that at all. As the italicized language reveals, the
       agreement is not revocable should a court makes changes to the False Claims Act. Defendants
       did not attempt to revoke the settlement agreement due to subsequent court rulings. Indeed,
       defendants complied with the terms of the settlement agreement, paying the amounts owed to
       Diamond and the State. Nor does paragraph 5 of the settlement agreement help. Paragraph 5
       simply allows the firm to submit a petition. Thus, the language of the settlement agreement did
       not preclude the trial court from applying the My Pillow holding to deny Diamond’s attorney
       fees petition.

¶ 24      Affirmed.




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