Sanford Heisler Sharp LLP | 20th Anniversary 2004 - 2024
Sanford Heisler Sharp LLP | 20th Anniversary 2004 - 2024

Can I Bring Qui Tam Claims in Court Even Though My Employment Contract Contained a Binding Arbitration Clause? The Ninth Circuit Says “Yes.”

On Behalf of | November 7, 2017 | Whistleblower Law

When a private party brings an action under the False Claims Act, he or she sues not “only for himself but the king” in what is known as a qui tam lawsuit. The private plaintiff is called the relator. United States ex rel. Eisenstein v. City of New York, 556 U.S. 928, 932 (2009). As a synopsis, the process works like this: first, the complaint is filed under seal with the U.S. Attorney’s office; next, the Department of Justice investigates the claims; afterward, the United States decides to intervene as a party-plaintiff, declines to join as a named party to the suit, or postpones its decision until later litigation ensues. § 3730(b)(2), (4). Represented by a qui tam attorney, the relator as a named plaintiff prosecutes the action on behalf of the United States. However, the government remains a “real party in interest” —that is, an entity whose substantive interests are represented in the litigation by another individual. United States ex rel. Eisenstein v. City of New York, 556 U.S. at 932. In other words, even when a federal or state government declines to intervene as a named party in the qui tam lawsuit, the relator proceeds on the United States’ behalf.

When an individual signs any type of take-it-or-leave-it contract, it more often than not includes a binding arbitration agreement. Many consumers of financial service providers may be all too familiar with these binding arbitration provisions that companies bury in the fine print of online contracts. Take, for example, Equifax, a credit reporting agency now infamous after hackers breached its databases and accessed the personal and financial information of about 143 million individuals. Equifax’s user terms of service agreement included an obscure provision that required that consumers surrender certain rights to sue in federal court for harms arising out of the recent data breach. But Equifax has now publicly vowed that it will not enforce this provision for breach-related harms.

However, employees who are signatories to these provisions are probably not wondering how those terms might affect their rights to bring a future qui tam action against their employer. Often, relators that bring suits under the False Claims Act are whistleblowers who, through their employment, discover their employer is perpetrating fraud in violation of federal and state statutes. Once a relator’s claim is filed in federal or state court, the employer-defendant may point to that contract—specifically, the language where employees agreed to arbitrate any claims arising out of the scope of their employment—and move to compel arbitration rather than to litigate in court.

Stated differently, this presents the somewhat obscure question of whether courts must enforce those provisions and require the parties to arbitrate the employee-relator’s False Claims Act claims. The Ninth Circuit recently addressed that question in Welch. In that case, during the hiring process, the employee-relator signed a contract that included “a mutually binding arbitration provision,” required as a condition of her employment with a therapy center. After learning that the company defrauded taxpayers by overfilling Medicaid for unnecessary procedures, the employee-relator brought qui tam claims and related state claims. In order to force arbitration, the defendant relied on language in the employee’s contract which required the parties to arbitrate any claim, dispute, or controversy arising from, related to, or having any connection whatsoever with her employment. Because the United States never intervened in the suit, the defendant argued—unsuccessfully—that the “government cannot prevent enforcement of an arbitration agreement covering False Claims Act claims where, as here, it has declined to intervene in the underlying FCA suit.”

The Ninth Circuit, however, was unconvinced. Ruling in favor of the employee-relator, the Ninth Circuit found that the United States, as a party in interest, never agreed to those arbitration terms and, therefore, the qui tam claims fell outside the scope of that agreement.

While in some circumstances, unlike the facts of Welch, courts first send qui tam claims to arbitration, see Halley Deck v. Miami Jacobs Business College Company, No. 3:12-CV-63, 2013 WL 394875 at *1 (S. D. Ohio, Jan. 31, 2013), signatories of these take-it-or-leave-it agreements are not bound per se by their arbitration terms. This means that individuals may still pursue qui tam claims in court because federal courts have carved out exceptions to the overarching pro-enforcement policy of the False Claims Act. For example, federal courts have not only scrutinized the particular terms of employment agreements with arbitration provisions, as the court did in Welch, but also have looked to other principles in contract law and public policy interests to narrow the scope of or invalidate, the terms for arbitration in their entirety.

After all, should an individual be “forced by unequal bargaining power to accept a forum demanded as a condition of employment” by the party perpetrating the very fraud which the individual exposed? Orcutt v. Kettering Radiologists, Inc., 199 F. Supp. 2d 746, 755 (S.D. Ohio 2002). Not employees or other similarly situated individuals subject to these agreements.

If a potential relator or whistleblower signs an arbitration agreement, and later discovers fraudulent behavior by the other party to the agreement, it is important to first consult with an experienced qui tam lawyer or employment attorney to navigate the validity of those provisions.

The Ninth Circuit’s opinion is available here.