Wine Trade Associations Girding For Battle With Illinois Lawsuit Troll

The Wine Institute and the Oregon Winegrowers Association are preparing to move against Stephen B. Diamond, an Illinois attorney who has filed hundreds of lawsuits against wineries and other Internet shipping companies in “qui tam” litigation brought in the name of the state Attorney General.

A spreadsheet listing 214 of those cases dating back to 2013 is available at this link (with live internet links to case dockets) for Wine Executive News premium subscribers. At least 91 of those are wineries and another 51 are wine retailers including such nationally prominent sellers as Zachys, Sherry Lehmann, and Morrell

The Oregon action, which may launch within a week, follows on the heels of an Illinois Appellate Court that invalidated one of the two main charges that Diamond has used in his “cut-and-paste” litigation marathon.

A spokesperson for the Wine Institute told Wine Industry Insight, “We are actively working on solutions but are unable to share details at this point as we don’t want to jeopardize the outcome.”

Sources outside the WI said that the nation’s largest wine trade group is working on a “legislative solution.”

Family Winemakers of California sources tell WII that FWC directors have considered requests from its members hit with the lawsuits, but has decided not to take action yet, possibly waiting for results of the Wine Institute efforts.

Qui Tam Abuse

Qui tam is a legal process that allows a private individual who brings or assists with a prosecution to receive part or all of any penalty that might be imposed after a trial. More about this at: qui tam.

In Illinois, law firms using qui tam, are known as “relators”  and use the Illinois False Claims Act as the basis for their lawsuits.

Diamond and his Chicago law firm, Schad, Diamond & Shedden, P.C. have used qui tam to file against businesses,  alleging failure to collect taxes on shipping charges and — of particular interest to wineries — failure to pay excise taxes.

According to this National Law Review article:

“To date, the Relator law firm [Diamond] has filed more than 200 “shipping and handling” lawsuits in the Circuit Court of Cook County.

“The lawsuits all seek damages equal to three times the Illinois use tax on the shipping and handling charges, and fines ranging from $5,500 to $11,000 for each allegedly false use tax return filed by the retailer.

“Roughly 20 percent of the tax and fines are payable to the Relator law firm.  In addition, the Relator seeks costs and attorneys’ fees for itself and the State of Illinois.”

A 2012 bill to end qui tam abuse by Diamond and other relators was sponsored by State Rep. Mike Zalewski, D-Chicago. That bill went nowhere.

Sources in Illinois told WII that the bill was opposed by the state Attorney General and a number of legislators because it, “was a moneymaker … free money the state could spend without taxing residents.”

A Question Of Ethics

That Law Review article also noted that:

“Many retailers settled their claims with the Relator law firm rather than incurring the cost and trouble of defending against the litigation, particularly after the circuit judge to whom the cases were assigned (Thomas R. Mulroy) refused grant defendants’ motions to dismiss filed prior to discovery. “

Wine Industry Insight has spoken with more than a dozen of the wineries blindsided by Diamond’s lawsuits. None of them were willing to go on the record, “Because all we need to do is draw attention to ourselves and have that asshole pay special attention to us. We’re still hoping one of our associations will do something.”

All of the winery lawsuits WII examined were boilerplate, cut-and-pasted documents. In all the cases, the legal complaint was accompanied by exhibits showing that wine purchases were made by Diamond or a surrogate.

All of them charged wineries with failing to charge tax on shipping (since outlawed) and with failure to charge excise taxes on the wine or failing to file the required tax returns.

According to every one of the wineries WII interviewed, Diamond’s accusations are false because they say they all paid the taxes required under their winery shipping licenses. Winery explanations used different words, but were all congruent with this winery owner’s comments:

“Diamond sued us without checking with the state to see if we filed our ST-1 Tax forms.  He never checked. He just assumed we didn’t pay them – so in my mind this is an ethical issue. One should not be able to file lawsuits willy-nilly without any proof whatsoever of wrongdoing. That’s dishonest.

“With our invoices, we calculate what the tax would be and we pay the state. On our invoices, until now, there was no way of knowing that we pay the taxes because we ate the taxes as a courtesy to our customers. We don’t charge them (because they pay shipping). Now our invoices state that we pay the tax on the purchase and the shipping.”

That vintner’s amended invoices would not have made any difference. WII viewed other filings of wineries who have been sued that had clearly stated  the taxes charged.

 Washington Wine Institute Goes After “Phantom Use Taxes”

According to an April 2, 2015 memo received by Wine Industry Insight,

The Oregon Winegrowers Association (‘OWA’) has determined to proceed with an action to enjoin Stephen B. Diamond, P.C. from filing lawsuits against wineries on the basis that they have failed to pay sufficient use tax on shipping charges and other speculated use taxes (‘Phantom Use Tax’).

The memo, to OWA from its outside legal counsel Davis Wright Tremaine, to Tom Danowski and Jana McKamey, said,

“Oregon wineries and OWA members are at risk of losing their ability to securely deliver wine in accordance with the plain terms of the Winery Shipper Statute.

“Merely by complying with the letter of the law, winery shipper licensees face an indeterminate litigation threat.

“OWA and similarly situated trade associations are in the best position to eliminate this risk on behalf of all wineries in their respective regions and fully restore their members’ ability to freely use their Illinois winery shipper license privileges without fear of further action by Mr. Diamond.”

Because of that, the memo discusses finding an appropriate legal vehicle to enjoin the state of Illinois and Diamond from continuing to file nuisance qui tam lawsuits.

The memo suggested a filing date of April 30. WII reached out to the Oregon Winegrowers for comment and an update, but has received no reply as yet.

Premium Offering

The table, below, is a small excerpt from a 214-case table of qui tam cases brought by Stephen Diamond in the name of the state of Illinois.

The full table, with internet links to the case dockets, is available to Wine Executive News premium subscribers at: Diamond Law Firm Qui Tam Targets In Cook County Circuit Court

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