Arbitration Agreement Not Binding on Whistleblower, Says Ninth Circuit

On Monday, September 11, 2017, the U.S. Court of Appeals for the Ninth Circuit decided that a carefully drafted arbitration agreement between an employee and her employer did not cover the employee’s whistleblower action under the Federal False Claims Act (“FCA”) or Nevada’s state-law equivalent.[1] The court’s opinion in this case demonstrates that even the strong presumption in favor of arbitration under the Federal Arbitration Act may not be enough to keep FCA disputes out of the courtroom.

Case Background

When she began working for a children’s therapy provider in Nevada (the “Provider”), Mary Kaye Welch signed an arbitration agreement (the “Agreement”) that appeared to have been carefully and broadly drafted to include all disputes that might be connected to Welch’s employment. The Agreement specifically provided as follows:

I agree and acknowledge that the Company and I will utilize binding arbitration to resolve all disputes that may arise out of the employment context. Both the Company and I agree that any claim, dispute, and/or controversy that either I may have against the Company . . . or the Company may have against me, arising from, related to, or having any relationship or connection whatsoever with my seeking employment by, or employment or other association with the Company shall be submitted to and determined exclusively by binding arbitration under the Federal Arbitration Act . . . . To the extent permitted by applicable law, the arbitration procedures stated below shall constitute the sole and exclusive method for the resolution of any claim between the Company and Employee arising out of or related to the employment relationship.

The Agreement added:

Included within the scope of this agreement are all disputes, whether they be based on the state employment statutes, Title VII of the Civil Rights Act of 1964, as amended, or any other state or federal law or regulation, equitable law, or otherwise, with exception of claims arising under the National Labor Relations Act which are brought before the National Labor Relations Board, claims brought pursuant to state workers compensation statutes, or as otherwise required by state or federal law.

Welch quit her job after only a few years. Shortly before doing so, she filed a sealed complaint alleging that the Provider and its owners violated the FCA by presenting fraudulent claims to both Medicaid and Tricare. Neither the state nor federal government exercised its right to intervene in the case. The Provider moved to compel Welch to settle the dispute through arbitration, arguing that she was required to do so under the Agreement.

The Courts’ Analysis

In determining whether to enforce an arbitration agreement, a court must consider two questions: first, whether a valid agreement to arbitrate exists; and second, whether the agreement encompasses the dispute at issue. If the answer to both questions is “yes,” then the Federal Arbitration Act typically requires the agreement to be enforced.

Before the District Court, the Provider argued that the Agreement was valid and that it covered the FCA claims. The Provider further argued that the government cannot prevent the enforcement of an arbitration agreement between private parties when it declines to intervene in an underlying FCA suit. The District Court rejected this argument and found that the Agreement did not extend to the state or federal governments, which owned the underlying claims. The Provider appealed the District Court’s decision.

On appeal, Welch acknowledged that the Agreement was a valid agreement to arbitrate, and she did not dispute that the FCA would be included within the broad description of the laws that the Agreement purported to cover. Instead, she argued that the FCA claims were not covered by the Agreement because none of them were related to, arose out of or were connected with her employment.

The Court of Appeals ruled in Welch’s favor on those grounds. In doing so, it engaged in a close technical analysis of the Agreement’s language, the result of which was to entirely dismiss the broad description of laws that the Agreement purported to cover. Instead, the court determined that the Agreement was actually an agreement to arbitrate three specific types of claims: (i) those arising “out of the employment context”; (ii) claims belonging to either party “arising from, related to, or having any relationship or connection whatsoever with [Welch’s] seeking employment or other association” with the Provider; and (iii) “any claim between [the Provider and Welch] arising out of or related to the employment relationship.” The court held that the first and third provisions did not cover the FCA claims because the claims did not “relate to” or “arise out of” the employment relationship since the Provider could have engaged in the same conduct and Welch could have brought the same claims, even in the absence of the employment relationship.

The court then analyzed whether the second provision covered the FCA claims and determined that it did not. The FCA claims, the court reasoned, did not belong to Welch, but instead belonged to the state and federal governments. As a qui tam relator, Welch brought those claims on the governments’ behalf. Therefore, the FCA claims could not be said to belong to Welch, so the second provision did not apply.

Practical Takeaways

A provider should not presume that any arbitration agreement will prevent it from becoming an FCA defendant. Despite the strong presumption in favor of arbitration under the Federal Arbitration Act, courts have been reluctant to enforce arbitration agreements involving the FCA, and, as demonstrated here, they are willing to use technical analyses to pick apart even the most carefully drafted arbitration agreements when FCA claims are involved. Ultimately, the government, not the whistleblower, is the real party in interest in FCA cases, and an arbitration agreement between the whistleblower and her employer will not be enforceable under the Act.

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