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Article Summary

In a False Claims Act case last month, the Ninth Circuit rejected a company’s attempt to push its former employee into arbitration under a very broadly worded agreement that she had signed at hiring. The ruling in U.S. ex rel. Welch v. My Left Foot Children's Therapy offers pointers for employees wishing to avoid the tilted field of forced arbitration. It also signals that qui tam claims are likely, by their very nature, beyond the reach of private arbitration agreements.

This expert analysis by TELG managing principal R. Scott Oswald was published by Law360 on October 23, 2017.

Reprinted from:

Arbitration Agreements And FCA: Lessons From 9th Circ.

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By R. Scott Oswald and Andrew M. Witko

Most arbitration provisions are a naked power play, wresting legal options away from the consumers, employees, and small business owners who must sign take-it-or-leave-it contracts with larger entities. The U.S. Supreme Court has been disappointingly tolerant of such maneuvers, implying in cases such as American Express Co. v. Italian Colors Restaurant that the Federal Arbitration Act (FAA) will enforce virtually any litigation waiver that sports a fig leaf of mutual consent.

All the more notable, then, is a little-remarked opinion last month from the U.S. Court of Appeals for the Ninth Circuit, which rejected a company’s attempt to push its former employee into arbitration under a very broadly worded agreement that she had signed at hiring. The ruling built upon decisions by the Fifth and Eleventh Circuits, and it offers some pointers for employees wishing to avoid the tilted field of forced arbitration.

Among the appeals court’s most useful holdings, which will apply mostly when employees want to sue on disputes that are tangential to their employment:

  • Even if an employee wouldn’t have asserted a claim but for his or her employment, such a claim doesn’t necessarily “relate to” that employment; and
  • If the facts underlying a legal claim would exist independent of the employee’s employment, such a claim doesn’t “relate to” that employment.

Along the way, the 3-0 decision in U.S. ex rel. Welch v. My Left Foot Children’s Therapy also signaled that so-called qui tam claims are likely, by their very nature, beyond the reach of private arbitration agreements — a timely carve-out as the Supreme Court mulls recent arguments in Epic Systems Corp. v. Lewis, another case that seeks to limit what employers can force into arbitration under the FAA.

Background on the Case

At issue in My Left Foot was whether the arbitration agreement between Mary Kaye Welch and her former employer — My Left Foot, a therapy provider based in Las Vegas, Nev. — covered a later fraud claim brought by Ms. Welch on behalf of taxpayers under the False Claims Act (FCA). Borrowing a graceful phrase from the Eleventh Circuit, the panel unanimously concluded that, while broad, the language of these arbitration provisions cannot “stretch to the horizon.”

Ms. Welch, a speech pathologist, didn’t challenge the basic validity of her agreement, which in one provision purported to cover “any claim, dispute, and/or controversy … having any relationship or connection whatsoever with [her] … employment or other association with [My Left Foot].” Instead, she argued that her qui tam complaint wasn’t covered by this broad waiver or, alternatively, that the waiver couldn’t be enforced.

The essence of Ms. Welch’s FCA complaint was that My Left Foot had been submitting fraudulent claims for payment to the Medicaid insurance program. Originally signed by Abraham Lincoln in 1863, the FCA makes it illegal to deceive the federal government for financial gain; it includes a qui tam provision that allows whistleblowers to file an action on behalf of the government and — if they prevail — to receive a share of any recovery.

Nevada has a similar state law, which Ms. Welch’s complaint also invoked; the Ninth Circuit treated the statutes identically.

Both the U.S. and Nevada investigated Ms. Welch’s case but declined to assume control, so she opted to continue litigation on her own, which is allowed under both statutes. Soon afterward, My Left Foot moved to compel arbitration under the FAA. The company argued that, since both Nevada and the U.S. had declined to intervene, only Ms. Welch and My Left Foot remained as parties — and that their arbitration agreement applied.

At the trial level, Judge Miranda M. Du of the U.S. District Court for the District of Nevada disagreed and refused to compel arbitration. Judge Du found that Ms. Welch’s arbitration agreement covered her FCA lawsuit — but that it couldn’t be enforced nonetheless, since the lawsuit’s claims were never Ms. Welch’s to dispose of.

According to Judge Du, FCA claims remain owned by the government even after a non-intervention. Sending this dispute to arbitration would improperly bind the U.S. and Nevada to an agreement that they had neither reviewed nor signed, she held.

Last month, the Ninth Circuit affirmed Judge Du’s decision on alternative grounds, holding that the arbitration agreement simply didn’t reach Ms. Welch’s FCA claims. In doing so, the court introduced a new rigor to the parsing of litigation waivers — and it raised the odds of beating an arbitration clause without offending the all-powerful FAA.

A Close Textual Analysis

Briefing the case for the Ninth Circuit, both sides focused mainly on ownership of FCA claims and whether a third party — here an FCA relator — may waive the government’s stake in litigation. In its decision the court called this an “interesting” debate, but didn’t feel obliged to weigh in. Instead, it relied on a close reading of Ms. Welch’s agreement to conclude that, as written, it didn’t apply to FCA claims.

The court drilled down on three provisions of the arbitration agreement — all of them fairly typical in employment contracts:

  • One provision specified arbitration for “all disputes that may arise out of the employment context.”
  • Another provision called for arbitration of “any claim between the Company and Employee arising out of or ‘related to’ the employment relationship.”
  • The broadest provision prescribed arbitration for “any claim, dispute, and/or controversy that either [Ms. Welch] may have against [My Left Foot] … or [My Left Foot] may have against [Ms. Welch] arising from, related to, or having any relationship or connection whatsoever with [Ms. Welch’s] seeking employment by, or employment or other association with [My Left Foot].”

Limiting the discussion to these three provisions was an early victory for Ms. Welch: My Left Foot had argued that an even broader provision ruled, covering “all disputes.” The court disagreed, saying that this uber-provision didn’t specify arbitration and was limited by more specific language elsewhere.

(Practitioners studying the opinion should brush up on their Latin: The panel leaned heavily on rules of construction such as generalia specialibus non derogant and verba cum effectu sunt accipienda.)

The court then grappled with the meaning of “arising out of” and “related to,” the operative phrases in the first two provisions listed above. While such language is broad, wrote Judge D. Michael Fisher, the opinion’s author and a Third Circuit judge sitting by designation, it is “not boundless.”

Both phrases “mark a boundary by indicating some direct relationship” between Ms. Welch’s claims and her employment, said Judge Fisher. To identify the boundary, he looked to cases from the Fifth and Eleventh Circuits, both involving employees who were raped: A claim does not “arise out of” or “relate to” a plaintiff’s employment, he said, if the defendant could have engaged in the alleged wrongdoing even without an employment relationship.

Indeed, the opinion continued, in such cases the claim arises from the defendant’s alleged wrongdoing itself: Here, the fact that Ms. Welch observed fraud while she was employed by My Left Foot is “immaterial.” The legal basis of her FCA claim “would exist regardless of where [she] worked or observed fraud.”

Ownership of FCA Claims

OK, but what about the last provision above, which specified arbitration for claims with “any connection whatsoever” with Ms. Welch’s employment? While the Ninth Circuit admitted that this phrase is broader than “related to,” it avoided knotty distinctions by focusing on another part of the provision — its explicit statement that, for claims to be arbitrable, either Ms. Welch or My Left Foot must “have” them.

Here the panel agreed with Judge Du’s opinion below, up to a point: For qui tam claims, it said, the government remains the party in interest — it still “has” the claims, in other words — even after declining to intervene. But where Judge Du concluded that Ms. Welch’s arbitration agreement applied but couldn’t be enforced (since neither the U.S. nor Nevada agreed to it), the Ninth Circuit concluded that the agreement simply didn’t apply:

[T]hough the FCA grants the relator the right to bring [an] FCA claim on the government’s behalf, an interest in the outcome of the lawsuit, and the right to conduct the action when the government declines to intervene, our precedent compels the conclusion that the underlying fraud claims asserted in [an] FCA case belong to the government and not to the relator. … Consequently, … Welch cannot be said to own or possess them [and so] this suit does not fall within the scope of Welch’s arbitration agreement and is not arbitrable.

This close reading was a fitting response to the one-sided nature of arbitration clauses. Such provisions are, in general, contracts of adhesion that must be scrutinized strictly and, where viable under contract law, construed in favor of the weaker party. The FAA adds an extra dictate, according to the Supreme Court — to resolve ambiguities in favor of arbitration — but in My Left Foot the Ninth Circuit saw no ambiguity at all, demonstrating its clear-eyed view of the outcome demanded by justice.

“[W]e construe a contract that is clear on its face from the written language,” Judge Fisher wrote, quoting the Nevada Supreme Court, “and it should be enforced as written.”

The resulting strategy for employees is obvious, if they have a case that isn’t directly an employment matter: Rely on contract law as heavily as possible, pouncing on the textual weaknesses and drafting errors that are inevitable in any arbitration agreement. Then look to the Ninth Circuit’s interpretation of what is (and isn’t) “related to” employment — especially if the employee can vindicate a third-party harm.

Do Defendants Just Need Better Waivers?

My Left Foot leaves an unanswered question: What if the defendant’s waivers had been written even more broadly, omitting the usual limitation to matters “related to” employment? In a footnote on the opinion’s last page, for instance, Judge Fisher conjured an imaginary arbitration agreement that covers “any lawsuits brought or filed by the employee whatsoever.”

Would this send an FCA claim to arbitration? After all, Ms. Welch’s qui tam complaint is a “lawsuit brought or filed” by her.

As Judge Fisher noted, employers are “free” to test this approach if they dare. Indeed, My Left Foot may prompt a wave of revisions to employment agreements across the U.S., dropping the “related to” limitation. We believe that courts will find such sweeping surrenders of rights to be unconscionable, however — especially when imposed at the moment of hiring, when a prospective employer holds so much power.

Plus, of course, a badly drafted waiver of all litigation rights runs the risk of being held invalid with nothing to backstop it. Employers should tread carefully.

How about slightly different language, also hypothesized by Judge Fisher in the same footnote: An agreement to arbitrate “all cases Welch brings against [My Left Foot], including those brought on behalf of another party”? Such a provision has identical problems of overbroadness — but it also raises the FCA matter squarely, purporting to waive a third party’s claim.

In our view, even the all-conquering FAA can’t hope to overcome the legal and policy arguments against a third-party waiver, particularly when the third parties are, under the FCA, millions of defrauded U.S. taxpayers.

Remember that the Ninth Circuit was clear on the underlying issue: An FCA claim belongs to the government. Since employee whistleblowers are often the only people with enough information to launch such claims, it’s hard to imagine a judge who’ll find that adhesion contracts can grant corporations an FAA-enforced pass on literally billions of dollars in fraud each year.

A good parallel — already settled law — is California’s Private Attorneys General Act (PAGA), which allows employees to file suit against their employers on behalf of the state, alleging labor law violations. As the Supreme Court of California has ruled, “a PAGA claim lies outside the FAA’s coverage … [A]n action to recover civil penalties is fundamentally a law enforcement action designed to protect the public.”

The same is true of the federal False Claims Act.

Meanwhile, My Left Foot doesn’t affect other disputes that are presumptively arbitrable via mutual agreement, including employee challenges to firings and other adverse actions. In a qui tam case, it’s unclear what would happen to a claim of retaliatory firing under the FCA — a frequent accompaniment to fraud allegations. Plaintiffs certainly should start both claim types in federal court, but should be prepared to move the employment claim to arbitration, if required.

(Ms. Welch didn’t make an FCA retaliation claim in her case.)

The bottom line: We’re still not certain, even in the Ninth Circuit, whether an arbitration agreement can apply to claims filed on behalf of a third party — and if it can, whether such an agreement is legally enforceable, especially in the qui tam arena.

Similarly, we don’t know for sure whether courts would support an arbitration agreement that purported to cover every single dispute a company has with its employees, regardless of any link to their employment.

We believe, however, that the answer in all cases must be “No.” Faced with test cases where public policy demands the avoidance of arbitration — the FAA notwithstanding — appellate courts so far have construed contracts to provide a narrow but hard-to-dispute basis for the right outcome. In this regard, My Left Foot follows the employee rape cases in the Fifth and Eleventh circuits.

Will employers press the issue by widening the scope of their forced arbitration provisions, in the hope that judges are reaching these decisions only reluctantly, because of leaky contract language? Likely so: FCA cases have the highest possible stakes — companies have been debarred from contracting, forced into bankruptcy, and shuttered after losing a big case. Anything is worth a shot, and defense counsel may see Judge Fisher’s footnoted hypotheticals as an invitation.

We believe they’ll discover that My Left Foot was, instead, a polite warning.

—–

R. Scott Oswald is managing principal and Andrew M. Witko is an associate in the Washington, D.C., office of The Employment Law Group PC, a law firm that represents employees who claim wrongdoing by their employers. Oswald is also vice chair of the Federal Bar Association’s Qui Tam Section.

DISCLOSURE: Oswald argued for Welch before the Ninth Circuit in U.S. ex rel. Welch v. My Left Foot Children’s Therapy. Witko was the primary author of the brief submitted to the Ninth Circuit on behalf of Welch.

(Note: This version has been slightly edited from the version published by Law360.)

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