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A Shield, Not a Sword: Arbitration in Consumer Tax Cases

Posted on Sep. 21, 2020
Nathaniel A. Bessey
Nathaniel A. Bessey
David Swetnam-Burland
David Swetnam-Burland
David W. Bertoni
David W. Bertoni

David W. Bertoni, David Swetnam-Burland, and Nathaniel A. Bessey are partners at Brann & Isaacson in Maine.

They advise the firm’s business clients in state and local tax, privacy, false claims, and other litigation matters. Two of the authors were part of a Brann & Isaacson team that has represented Wayfair Inc., Newegg Inc., Overstock.com Inc., and the Direct Marketing Association in cases before the Supreme Court.

In this installment of Eyes on E-Commerce, the authors explain how arbitration agreements can minimize exposure to class claims in private lawsuits regarding tax over-collection but may have limitations in protecting against false claims litigation for tax under-collection.

Copyright 2020 David W. Bertoni, David Swetnam-Burland, and Nathaniel A. Bessey.
All rights reserved.

Companies doing business online increasingly rely on arbitration clauses as their best defense against costly collective litigation. Indeed, courts have consistently shown a willingness to enforce such agreements provided that consumers manifest an agreement to be bound by an online seller’s terms and conditions that require alternative dispute resolution. However, it is imperative to understand the benefits — and limits — of arbitration agreements. This is especially true of state tax claims purportedly brought on behalf of the government under state false claims acts, most prominently in Illinois and New York. These private claims on behalf of public actors may not be arbitrable — adding to the list of reasons why such claims make bad public policy.

Online Arbitration Agreements

During the last 20 years, the U.S. Supreme Court has sent an unmistakable message that the law strongly favors arbitration agreements, notwithstanding a plethora of state laws that purport to impose restrictions on their enforceability in consumer transactions. Moreover, the Federal Arbitration Act (FAA) applies to all agreements “involving commerce,” and the Supreme Court has held that this phrase embodies the furthest extent of Congress’s commerce clause powers.1 As a result, even contracts made in a state by residents of the same state are subject to the FAA except in limited cases involving reverse preemption under another federal statute.2

While determining whether the parties have reached a valid agreement to arbitrate is a matter of state law,3 a national consensus is emerging on how to obtain a binding agreement with website visitors. As the U.S. Court of Appeals for the Ninth Circuit explained in Dohrmann v. Intuit:

The internet has “not fundamentally changed the requirement that mutual manifestation of assent, whether by written or spoken word or by conduct, is the touchstone of contract.” Mutual assent does not require that the offeree have actual notice of the terms of an arbitration agreement. Instead, an offeree is bound by an arbitration clause if “a reasonably prudent Internet consumer” would be put on “inquiry notice” of the “agreement’s existence and contents.”4

In this regard, courts around the country are increasingly enforcing so-called clickwrap (or click-through) agreements in which a consumer is advised that in placing an order, they are agreeing to website terms and conditions to which a clear and adjacent link is provided.5 A good example — complete with illustrations — is presented in Gorny v. Wayfair, a putative class action filed against an online retailer in the U.S. District Court for the Northern District of Illinois.6 In granting the defendant’s motion to compel arbitration, the court upheld the arbitration provision in the defendant’s terms of use, explaining that the customer was “specifically notified before ordering the headboard — and before making his two previous orders — that, ‘by placing an order, you are agreeing to our Privacy Policy and Terms of Use.’ This message appeared immediately below the large purple ‘Place Your Order’ button that Gorny had to press in order to initiate his order.”7 As always, there are traps for the unwary. For example, some courts have refused to find the existence of a binding agreement when the website did not make clear that the action taken by the consumer, for example, the “clicking” of an order button, constituted a manifestation of an agreement to the terms and conditions, or where the link to those terms was insufficiently prominent or contiguous.8

Beyond the threshold question whether adequate notice of the applicability of a website’s terms was provided together with the requisite acceptance of those terms, companies seeking to enforce online arbitration agreements will also face a number of contract-based defenses, including claims of unconscionability or unenforceability, such as the claim that the agreement is “illusory” when one party has the unilateral right to amend it.

These kinds of arguments counsel careful drafting and avoiding even the perception of overreach. For example, any clauses providing an online seller with a right to amend should, as a best practice, make clear that any changes will not apply retroactively and that the obligation to arbitrate is a mutual one. In addition, because of the non-negotiable and often one-sided nature of online terms, many courts will seek to interpret them against the retailer. Finally, a company that chooses to include a mandatory arbitration clause should also include a “delegation clause” making the arbitrator, not the courts, responsible for determining the enforceability and scope of the clause.9 The good news is that, despite all of this, courts appear to be converging on a consensus approach to these issues that should provide some comfort to businesses about how to present their terms and conditions to online consumers in a manner likely to be deemed enforceable.

Class Action Lawsuits: Tax Refund Claims

A primary benefit of arbitration agreements is the protection they can provide against the risk of costly high-risk class action litigation. In this regard, these agreements have been extraordinarily effective across the United States, in both state and federal courts. For example, they have been successfully interposed in cases involving a wide variety of claims, from allegedly unlawful telemarketing under the Telephone Consumer Protection Act,10 and analogous state laws,11 to alleged unfair business practices prohibited by state consumer protection laws.12

In the tax context, the class action risk arises in cases alleging an overcollection of taxes. In such cases, a customer, taking on the role of a “representative plaintiff,” will contend that an online seller collected excessive taxes on a category of transactions and seek to assert a claim on behalf of all “similarly situated” consumers. Such claims can be asserted even if the seller has received a clean bill of health in a state tax audit. We previously addressed such cases in an Eyes on E-Commerce article, noting the wide variety of overcollection theories that can be asserted and potential defenses that exist unique to these class action refund claims.13 Since we wrote that article, courts have rejected consumer class actions for a variety of reasons, including lack of subject matter jurisdiction, failure to exhaust administrative remedies, and the so-called voluntary payment doctrine.14

Despite such defenses, however, some courts have allowed class action tax refund cases to proceed at the state and federal levels, and so the ability to block such lawsuits with an enforceable arbitration clause — requiring such tax claims to proceed on an individual basis outside of court — takes on paramount importance. For example, in Waters v. Home Depot USA Inc.,15 a federal judge rejected a national retailer’s attempt to dismiss a class action alleging tax overcollection of state and local sales taxes in connection with transactions in which the plaintiff contended that the lower use tax rate ought to have been charged. In Home Depot, the U.S. district court judge not only endorsed the ability of the plaintiff to file a class action refund claim, he further denied a motion to remand the case to state court both on grounds of comity and under the federal Tax Injunction Act.16

To the extent that a class action tax refund lawsuit is allowed to proceed in state or federal court, proof of a binding arbitration agreement provides a powerful defense given the scope and power of the FAA as interpreted and applied by the U.S. Supreme Court. A recent case bears this out. In Rolufs v. Wayfair LLC,17 a Missouri trial court granted Wayfair’s motion to stay pending arbitration in a case asserting the same claim made in Home Depot USA.18 In so doing, the court found that the parties’ arbitration agreement, and the delegation clause it contained, were enforceable agreements as a result of the clickwrap agreement created when the plaintiff placed her order. The arbitration clause defense offers promise for retailers seeking to avoid the unfair predicament of facing a claim for taxes they have allegedly over-collected, even though they have remitted the taxes they collected to appropriate tax authorities.19

A properly worded and noticed arbitration agreement does not, however, necessarily provide insulation from any and all lawsuits filed by taxpayers. We turn now to the flip side of the class action coin, false claims act litigation alleging under-collection of tax.

Arbitration Agreements and False Claims Litigation

Tax Notes State recently published “A Conversation on False Claims Act Expansion — Does It Make Sense?”20 The conversation closed with agreement on two basic points: (1) it is a bad idea to allow private parties to use state false claims acts to prosecute state tax cases; and (2) more states are likely to greenlight tax claims brought under state false claims acts. In this section, we ask how we got to a state of affairs in which what appears to be bad policy seems to be an inevitable future (and actual present) for tax practitioners, and whether and to what extent a binding arbitration agreement provides any protection. (Hint: It may not.)

The Federal False Claims Act

The story begins during the Civil War era when Congress passed the False Claims Act, an anti-fraud bill.21 As recounted by the Seventh Circuit Court of Appeals, this Civil War statute was designed “to enable the federal government to punish and deter fraudulent claims of war profiteers.”22 From its beginnings, the statute included a so-called qui tam provision, permitting a private party, commonly known as a relator, to bring a claim of fraud on the government’s behalf and receive a percentage of the recovery.23 The total recovery available in a successful action includes a percentage of the civil penalties and treble damages, along with attorney fees.24

The justification for the qui tam provision was “the theory, based on experience as old as modern civilization, that one of the least expensive and most effective means of preventing frauds on the treasury is to make the perpetrators of them liable to actions by private persons acting, if you please, under the strong stimulus of personal ill will or the hope of gain. Prosecutions conducted by such means compare with the ordinary methods as the enterprising privateer does to the slow-going public vessel.”25

In addition to these broad provisions, the federal act excludes the filing of false claims lawsuits based on alleged violations of the Internal Revenue Code.26 The federal government, then, has taken the view that tax matters are not the proper subject of false claims litigation.

States Follow Suit

Twenty-nine states and the District of Columbia have enacted state false claims acts modeled on the federal act.27 Most of these statutes mirror the federal act in excluding lawsuits based on tax fraud from the scope of their false claims acts, but not all.

Anatomy of a False Claim

False claims can take several forms, but for our purposes, we focus on the so-called reverse false claim. If a standard false claim involves submitting a false or fraudulent report to the government to receive a payment from the government that was not actually owed, a reverse false claim involves a false or fraudulent attempt to deceive the government that the submitting party does not owe a payment to the government that it actually does. In general, a defendant can be found liable under the act if it knowingly acts to conceal an obligation to pay money owed to the government. The required “knowledge” generally means actual knowledge or conduct taken in deliberate ignorance or reckless disregard of the obligation.

Whether the claim requires an affirmative false statement (as opposed to an omission) depends on the specific language of the applicable statute. An earlier version of the federal act required that the defendant submit an actual statement or record to the government intended to hide an obligation to pay the government.28 After a 2009 amendment, liability attaches if a defendant “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”29 This change makes a difference, as the Delaware case of Overstock.com v. State ex rel. French makes plain. The relator and state brought a case alleging that Overstock had violated the Delaware False Claims Act because, according to them, Overstock owed unclaimed property payments to Delaware and concealed that obligation by not filing annual unclaimed property reports with the state.

The trial resulted in a verdict for the relator and the state of $2,953,826 in damages.30 After a post-trial adjustment, the trial court entered a judgment for the relator and state for civil penalties, treble the damages, and attorney fees.31 The Delaware Supreme Court reversed the judgment, concluding that the trial judge had erred in instructing the jury that Overstock’s failure to file an unclaimed property report for the years in question constituted a reverse false claim under the statute at the time.32 The Delaware high court noted, however, that in 2013 the Delaware legislature had amended the state False Claims Act to track the new language of the federal act, under which the knowing concealment of an obligation to pay money to the government is a violation of the state act.33

The devil in these details has a direct impact on false claims cases brought to enforce state tax law because those cases allege that a business has violated a state false claims act by, for example, failing to register with the state revenue department to collect and remit state sales and use tax. Whether or not a state law requires an affirmative false statement as an element of a claim can matter a great deal.

Illinois and the Accidental Tax False Claims

The Illinois False Claim Act, once known as the Illinois Whistleblower Reward and Protection Act, is modeled closely on the federal act. So closely, in fact, that the tax bar adopted by the Illinois legislature excluded only state income tax matters from the scope of the act.34 That left open the door for false claims act litigation alleging failure to pay or collect other state taxes, including sales and use taxes. Literally hundreds of lawsuits were filed, almost all by the same private plaintiffs’ law firm (acting as both client and counsel) on behalf of the state alleging that retailers undercollected Illinois retailers’ occupation or use tax, whether because of an alleged failure to register with the state or for allegedly failing to collect tax on, for example, shipping and handling charges.35

While most of these cases resulted in some kind of settlement between the defendant and the relator and the state, some went to trial, with mixed results. In State ex rel. Schad, Diamond & Shedden PC v. My Pillow Inc., the relator and state won a total of $889,637 in damages and penalties on a theory that the defendant had avoided use tax obligations although it had nexus with Illinois.36 (The Illinois appellate courts did reverse the portion of the underlying judgment under which the relator, a law firm, had obtained an award of attorney fees for work it performed on behalf of itself as a client.37) In State ex rel. Schad, Diamond & Shedden PC v. National Business Furniture LLC, however, the trial and appellate courts agreed that the defendant was not liable under the state act for failing to collect use tax on shipping charges associated with the underlying sales of goods.38 In both cases, the cost of taking a false claims case to trial was high, and the result uncertain.

New York Weighs In

Unlike Illinois, New York deliberately amended its false claims statute to permit tax-based fraud claims.39 While the level of activity in New York has not approached Illinois’s, this amendment has led to some eye-popping results. In August 2018 the state obtained a criminal conviction and entered a false claims act settlement with Spa Castle Inc., which included a $2.5 million payment.40 In December 2018 the New York attorney general and tax commissioner announced a $330 million settlement with Sprint in false claims act litigation involving unpaid sales tax.41 And in November 2019 the state attorney general announced that it had filed suit against B&H Foto & Electronics Corp. under the state false claims act for the alleged failure to pay sales tax on tens of millions of dollars it received from electronics manufacturers in reimbursements for instant rebates.42 That case is ongoing.

California Rides the Fence

In a Tax Notes State article, Jeffrey Friedman and Dennis Jansen recently surveyed the potential harm that could be caused by a proposed California amendment to the state false claims act that would have, like New York’s, allowed false claims cases to be filed for alleged tax fraud.43 Shortly after that article, a California senate committee put that proposal on ice (again). This bill has been brought up in the State Legislature repeatedly, each time inching closer to passage. And with states looking far and wide for revenue sources, it seems certain that this is not the last effort that will be made in the Golden State to secure revenue by deputizing private attorneys as tax collectors.

Is Arbitration the Remedy?

As we have discussed, binding arbitration provisions may provide a defense to class action litigation alleging overcollection of tax, so long as the agreement to arbitrate is validly formed, supported by consideration, drafted broadly enough to encompass the type of claim asserted, and properly noticed. It is permissible, and consistent with the text and spirit of the Federal Arbitration Act for contracting parties to agree to forgo class action litigation and resolve their disputes through arbitration, and if a customer agrees to arbitrate disputes in the course of completing a taxable purchase transaction, it is appropriate to enforce that arbitration agreement if the customer later alleges excessive collection of tax.

An arbitration agreement is unlikely, however, to provide an effective shield against qui tam actions in court alleging the undercollection of tax. Fundamentally, the fraud claim underlying a qui tam action for undercollected tax belongs to the state taxing authority, not to the qui tam relator.44 Indeed, it is unlikely that a customer who has been charged too little sales tax on a taxable purchase has suffered any cognizable injury at all, and so would not have standing to bring suit against the company in his or her own capacity.

The consequences of this fact for potential arbitration-based defenses to lawsuits are twofold. First, a taxpayer may not have an opportunity to enter into an arbitration agreement with a potential plaintiff. Unlike class action lawsuits for overcollection, in which every class member made a taxable purchase, there is no requirement that a qui tam relator be in privity with the taxpayer at all.45 Second, even in cases in which a qui tam relator has signed an arbitration agreement (for example, as part of an employment agreement with the taxpayer), the agreement may not be broad enough to cover qui tam actions under a false claims act, because, again, the claim belongs to the government, and the relator is merely representing the government’s interests. This is true even if the government chooses not to intervene in a qui tam action, and even though the false claims act gives the relator a financial interest in the outcome of the litigation.46

Although the financial incentives provided to qui tam relators under false claims acts do not affect the ultimate analysis of who “owns” a false claims act claim (it is the government’s claim, not the relator’s), they are powerful enough to influence behavior in ways that impose burdens on both taxpayers and state revenue departments; and for this reason, it is bad tax policy to include tax claims among the types of “false claims” that can be brought as qui tam actions in court.

Typically, a business taxpayer would encounter an allegation that it has undercollected tax in the context of an audit. If, upon review of a taxpayer’s books and records, the revenue department determines that less tax was collected and remitted than was due, the department would provide notice of its determination of a tax deficiency and issue an assessment, including the tax due, interest, and penalties, if applicable. The taxpayer would then have the right to appeal the department’s determination through the administrative review process, and up through an appeal in the state courts. These processes provide a taxpayer with a measure of protection. The initial stage of an administrative review is often informal, meaning that a taxpayer can make its case without undue expense. The process is typically confidential, meaning a taxpayer can defend its position without compromising confidential and sensitive commercial information. And the taxing authority is tasked with determining the correct amount of tax; it has no incentive to obtain the maximum dollar amount of revenue.

False claims acts, on the other hand, provide outsize financial incentives for potential relators to pursue the maximum amount of recovery by granting to a relator a percentage of the total recovery. Provisions calling for double or treble damages, potential awards of attorney fees, and the opportunity for a qui tam plaintiff to recover a percentage of the total damages award create strong incentives for plaintiffs’ attorneys to pursue false claims act litigation, and they can encourage litigation of claims that are less than meritorious. Further, because qui tam lawsuits are filed initially in court, the taxpayer is forced to incur the significantly greater expense and risk of litigation, a fact that could lead taxpayers to compromise claims in order to avoid defense costs, even though they would have ultimately prevailed. And both the state and the taxpayer are deprived of the opportunity to work through the existing administrative process to determine the correct tax liability more quickly and efficiently.

The Multistate Tax Commission has noted the dangers of empowering third-party litigation over tax collection — both class action lawsuits alleging overcollection of tax and qui tam lawsuits alleging fraudulent undercollection. At its annual meeting in July, the MTC adopted a resolution recommending that all tax issues be carved out of state false claims acts.47 The MTC resolution urges instead that states adopt the American Bar Association’s Model Transactional Tax Overpayment Act,48 which would establish uniform refund procedures for customers who believe that too much tax was collected from them on their purchases and would prohibit plaintiffs from naming the seller, who collected and remitted the tax, as a defendant in a suit to recover alleged excessive tax paid to the state. In cases of alleged undercollection, the MTC resolution urges adoption of whistleblower acts, rather than an expansion of state false claims acts to permit qui tam litigation over tax collection.

Conclusion

A well-drafted, properly noticed arbitration agreement can limit exposure to liability from expensive consumer class action lawsuits. And most states have followed the spirit and letter of the federal False Claims Act by excluding all tax claims from their corresponding state statutes. While this is the right policy, for reasons we have discussed, that does not prevent enterprising attorneys in Illinois and New York, and possibly someday soon in California, from creating a cottage industry of state tax false claims.

We urge affected businesses to lobby state legislatures to do the right thing and leave or take tax collection out of the hands of bounty-hunting private parties and their attorneys. We also urge the offices of state attorneys general to exercise their statutory authority to take over — and dismiss — any such cases brought in their states. Thorny questions of tax compliance are not the proper subject for litigation by self-interested private parties with no incentive to consider the big picture.

FOOTNOTES

1 See, e.g., Allied-Bruce Terminix Companies Inc. v. Dobson, 513 U.S. 265, 274 (1995).

2 Citizens Bank v. Alafabco Inc., 539 U.S. 52, 56 (2003) (including in its analysis the fact that the goods securing a restructuring debt were “assembled from out-of-state parts and raw materials”).

3 See, e.g., Dohrmann v. Intuit Inc., No. 20-15466, 2020 WL 4601254, at *1 (9th Cir. Aug. 11, 2020).

4 Id. (citing Long v. Provide Commerce Inc., 245 Cal. App. 4th 855, 200 Cal. Rptr. 3d 117, 122-23 (2016)).

5 Clickwrap agreements should be distinguished from so-called browsewrap arrangements, in which a website presents its terms and conditions (usually in links appearing on the footers of its pages), but does not require the consumer to manifest his or her agreement to such terms in connection with a website registration or purchase. Browsewrap agreements are notoriously difficult to enforce, often requiring proof that the consumer was aware of the terms and conditions and agreed to them simply by using the website. See, e.g., Fteja v. Facebook Inc., 841 F. Supp.2d 829, 836 (S.D.N.Y. 2012) (noting that browsewrap agreements are most often enforced when users are businesses, rather than consumers); accord Nguyen v. Barnes & Noble Inc., 763 F.3d 1171, 1176 (9th Cir. 2014) (surveying cases).

6 No. 18 C 8259, 2019 WL 2409595, at *1 (N.D. Ill. June 7, 2019), appeal dismissed, No. 19-2276, 2019 WL 7486843 (7th Cir. July 30, 2019).

7 Id.

8 See, e.g., Anand v. Heath, No. 19-CV-00016, 2019 WL 2716213, at *3 (N.D. Ill. June 28, 2019) (consumer was “not placed on reasonable notice that she was manifesting assent to the terms and conditions by clicking the ‘Continue’ button”).

9 See, e.g., West Inc. v. Jackson, 561 U.S. 63, 73 (2010).

10 47 U.S.C. section 227.

11 Margulis v. HomeAdvisor Inc., No. 4:19-CV-00226-SRC, 2020 WL 4673783, at *1 (E.D. Mo. Aug. 12, 2020).

12 Maynez v. Walmart Inc., No. CV200023DSFJPRX, 2020 WL 4882414, at *1 (C.D. Cal. Aug. 14, 2020) (alleging of misrepresentations concerning in-store pricing).

13 David W. Bertoni and David Swetnam-Burland, “Barbarians at the Gates: Private State Tax Enforcement,” State Tax Notes, Nov. 21, 2016, p. 585.

14 See, e.g., BJ’s Wholesale Club Inc. v. Bugliaro, 273 So. 3d 1119, 1121 (Fla. Dist. Ct. App. 2019); and McIntosh v. Walgreens Boots Alliance Inc., 2019 IL 123626, para. 25, 135 N.E.3d 73, 81 (suit for tax refund brought under state consumer fraud statute barred by doctrine providing that “taxes paid voluntarily though erroneously may not be recovered without statutory authorization”). See also Porsch v. LLR Inc., No. 18CV9312 (DLC), 2019 WL 3532114, at *4 (S.D.N.Y. Aug. 2, 2019) (federal court class action concerning the alleged overcollection of state taxes failed to meet $5 million amount in controversy requirement under the Class Action Fairness Act, 28 U.S.C. section 1332(d)(2)).

15 446 F. Supp.3d 484, 487 (E.D. Mo. 2020).

16 28 U.S.C. section 1341. The federal court’s refusal to remand the case to state court, either on grounds of comity or under the Tax Injunction Act, was based on its conclusion that the plaintiff’s lawsuit would not “restrain the ‘assessment, levy, or collection’ of any Missouri tax.” Home Depot, 446 F. Supp.3d at 491. When a case is simply about a determination of the correct amount of a tax admittedly owed on a transaction, the court reasoned, it “does not restrain either the assessment or collection of tax by Missouri; rather, it effectuates those efforts.” Id. There is little doubt that this nuanced interpretation of comity and the reach of the Tax Injunction Act will be challenged in due course. The silver lining of this decision is that defendants may prefer to have state tax cases litigated in federal court, although removal of such a case to federal court would require meeting the requirements of the Class Action Fairness Act, 28 U.S.C. section 1332(d). See Porsch, No. 18CV9312 (DLC) at *1 (dismissing tax refund class action filed in federal court for failure to establish that the amount in controversy met the $5 million threshold for Class Action Fairness Act jurisdiction).

17 Case No. 19SL-CC02114 (Mo. Cir. Court 2019).

18 The authors’ firm, Brann & Isaacson, represents Wayfair in Rolufs.

19 See Bertoni and Swetnam-Burland, supra note 13 (describing the whipsaw faced by retailers being sued for taxes they dutifully paid to the states — and as to which they may have little opportunity to recover if the class action plaintiff prevails).

20 Nikki E. Dobay and Stephanie T. Do, “A Conversation on False Claims Act Expansion — Does It Make Sense?Tax Notes State, July 20, 2020, p. 293. See also Jeffrey A. Friedman and Dennis Jansen, “California’s Flawed Proposal to Expand False Claims Act to Tax,” Tax Notes State, Aug. 10, 2020, p. 593.

21 31 U.S.C. sections 3729-33.

22 U.S. ex rel. Mathews v. Bank of Farmington, 166 F.3d 853, 857 (7th Cir. 1999), overruled by Glaser v. Wound Care Consultants Inc., 570 F.3d 907 (7th Cir. 2009).

23 Id. The term “qui tam” derives from the Latin, qui tam pro domino rege quam pro se ipso in hac parte sequitur (“Who brings the action for the King as well as for himself”). Id.

24 31 U.S.C. section 3730.

25 U.S. ex rel. Marcus v. Hess, 317 U.S. 537, 541 n.5 (1943) (quoting United States v. Griswold, 24 F.361, 366 (D. Or. 1885)) (quotation marks omitted).

26 31 U.S.C. section 3729(d).

27 See Office of the Inspector General,State False Claim Act Reviews (listing state false claims acts); Office of the Attorney General for D.C., PL False Claims Act.

28 See Overstock.com Inc. v. State ex rel. French, 2020 WL 3464362, *5-*6 (Del. June 24, 2020). We note that our firm was trial counsel for Overstock.com in this action.

29 31 U.S.C. section 3729(a)(1)(G).

30 2020 WL 3464362 at *4.

31 Id.

32 Id. at *6.

33 Id. at *5.

34 See 740 ILCS 175/3(c).

35 We represented several defendants in these Illinois cases, including one in which our client prevailed at trial and on appeal. See State of Illinois ex rel. Schad, Diamond & Shedden PC v. National Business Furniture LLC, 2016 IL App (1st) 150526 (Aug. 1, 2016).

36 2018 IL 122487, para. 7.

37 Id., para. 37.

38 2016 IL App. 150526.

39 See N.Y. Fin. Law section 189(4).

40 See N.Y. State Office of the Attorney General, “A.G. Underwood and Acting Tax Commissioner Manion Announce Criminal Conviction and False Claims Act Settlement With Spa Castle, Inc. for Tax Fraud” (Aug. 23, 2018).

42 See N.Y. State Office of the Attorney General, “Attorney General Sues B&H Foto & Electronics for Defrauding New York Out of Millions in Sales Tax” (Nov. 14, 2019). A copy of the complaint filed against B&H Foto is available online.

43 Friedman and Jansen, supra note 20.

44 See, e.g., Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 773 (2000) (noting that the “FCA can reasonably be regarded as effecting a partial assignment of the Government’s damages claim” (emphasis added)); Stoner v. Santa Clara County Office of Education, 502 F.3d 1116, 1126 (9th Cir. 2007) (“The FCA makes clear that notwithstanding the relator’s statutory right to the government’s share of the recovery, the underlying claim of fraud always belongs to the government.”); Cedars-Sinai Medical Center v. Shalala, 125 F.3d 765, 768 (9th Cir. 1997) (a qui tam “plaintiff by definition asserts not his own interests, but only those of United States”).

45 If the false claims act claim relates to a contract with the government itself, and the contract contains an arbitration agreement, the arbitration provision may be enforced, depending on the particular facts. See U.S. v. Bankers Insurance Co., 245 F.3d 315 (4th Cir. 2001). However, because a retailer’s obligation to collect and remit the correct tax arises from statute, not from a civil contract with the government, a retailer facing allegations of undercollection of tax is unlikely to be able to point to a contractual arbitration agreement to which the government is a party.

46 United States ex rel. Welch v. My Left Foot Children’s Therapy LLC, 871 F.3d 791, 800 (9th Cir. 2017) (false claims act claim did not fall within the scope of arbitration provision contained in employment agreement of former employee because it was not a claim, dispute, or controversy between the ex-employee and his former employer).

47 MTC, “Resolution Recommending All Tax Issues Be Specifically Carved Out of State False Claims Acts” (2020). The Council On State Taxation has also adopted a policy statement urging that false claims acts should exclude state and local taxes.

END FOOTNOTES

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