In a ruling last month, a federal district court sent a warning signal to companies that mandatory arbitration provisions in their agreements with employees and independent contractors may not stand up when an employee or contractor cries foul under the anti-retaliation provision of the False Claims Act (FCA). Winston v. Academi Training Ctr., Inc., 2013 WL 989999, No. 1:12-cv-767 (E.D. Va. Mar. 13, 2013). Many companies negotiate such agreements to inoculate the company from the uncertainty and costs of litigation, but the Academi decision must cause these companies to consider – would our arbitration provisions pass muster?

Mandatory arbitration provisions that contain terms designed to create a fair process, do not overreach, and are clearly articulated have the best chance to be enforced. Because the Federal Arbitration Act (FAA) reflects a strong federal policy in favor of arbitration, there is a presumption of validity for arbitration agreements that follow this model. Yet as the Academi court found, that presumption can be overcome where the claims to be arbitrated are brought under the FCA anti-retaliation provision.

Under the FCA, an employee who uncovers a fraud against the federal government may sue in the government's name for the wrongdoing, and in return for his efforts, receive a share of any damages awarded to the government. See 31 U.S.C. § 3730. The FCA includes an anti-retaliation provision that prohibits the employer from retaliating against the employee "because of lawful acts done by the employee . . . in furtherance of an action" to expose false claims through investigation or internal complaints of fraud. Id. § 3730(h). Prohibited retaliation includes termination, suspension, demotion, harassment, or any other discrimination in the terms and conditions of employment. Id.

The court held that the Academi arbitration provisions were so restrictive that they would frustrate the purpose of the FCA, were unconscionable and, therefore, also were unenforceable. 2013 WL 989999, at *2-4. Plaintiffs were two independent contractors engaged by Academi as firearms instructors for a contract to provide private security for the State Department. The instructors claimed they witnessed other Academi contractors submitting false firearm certification records to the State Department. Id. at *1. Plaintiffs alleged that one day after they reported the fraudulent activity, Academi fired them for failing to report the fraud in a timely manner and participating in the fraud. Id.

The two instructors filed FCA retaliation claims in federal court and Academi moved to dismiss or to stay the action on the grounds that the instructors' independent contractor agreements contained unenforceable mandatory arbitration provisions. Id.1 Although the court acknowledged the strong presumption in favor of arbitrating claims arising under federal law, it refused to enforce the arbitration provisions, finding that they would preclude the effective vindication of the plaintiffs' rights under the FCA for two reasons. Id. at *1-2. First, the agreements barred all discovery, but the court found that it would be difficult, if not impossible, for plaintiffs to prove their false certification claims without obtaining the allegedly falsified certifications through discovery. Id.2 Second, the arbitration provisions required the instructors to pay all costs and attorney's fees, regardless of the success of their claims. The court found that this fee shifting provision frustrated the clear intent of Congress since the FCA provides attorney's fees to successful plaintiffs. Id. As a result, the court ruled that the clauses were unconscionable and that the instructors' FCA claims were not subject to arbitration. Id.

In reaching its decision, the court considered whether the arbitration provisions violated certain principles under the Federal Arbitration Act (FAA). Id. An employee's agreement to arbitrate an FCA retaliation claim should be enforced, provided that the employee would not be required to forego substantive rights afforded under the FAA. See Morgan v. Sci. Applications Int'l. Corp., 612 F. Supp. 2d 81, 83 (D.D.C. 2009).3 There are five factors to be considered in determining whether an agreement to arbitrate satisfies the FAA — whether the agreement:

  • provides for neutral arbitrators;
  • provides for more than minimal discovery;
  • requires a written award;
  • provides for all types of relief that would otherwise be available in court; and
  • does not require an employee to pay either unreasonable costs or any arbitrator's fees or expenses as a condition of access to the arbitral forum.

Id. The Academi agreement failed to meet two of the factors and the court refused to enforce it.

Prior to Academi, only one other court had refused to enforce an agreement to arbitrate an FCA retaliation claim. See Nguyen v. City of Cleveland, 121 F. Supp. 2d 643 (N.D. Ohio 2000) (denying defendants' motion to compel arbitration of Section 3730(h) claims), appeal dismissed, 312 F.3d 243 (6th Cir. 2002). The Nguyen court found that an inherent conflict existed between the mandatory arbitration clause and the underlying purposes of the FCA, and noted that employment contracts — with their arbitration clauses — are the result of unequal bargaining power. Id. at 646-47. Given the policies of the FCA, the court held that an employee who brings a claim against his employer on behalf of the federal government should not be forced by unequal bargaining power to accept a forum demanded as a condition of employment by the very party on which he blew the whistle, and refused to enforce the arbitration agreement. Id.

In contrast, other federal courts have consistently held that FCA retaliation claims may be arbitrated, and that compelling arbitration of such claims does not undermine the FCA's purposes or public policy generally. See United States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 381 (4th Cir. 2008) (noting other courts "have not found Nguyen persuasive" and holding FCA retaliation claims are arbitrable); United States ex rel. Cassaday v. KBR, Inc., 590 F. Supp. 2d 850, 862-63 (S.D. Tex. 2008) (same); McBride v. Halliburton Co., 2007 WL 1954441, at *4-5 (D.D.C. July 5, 2007) (finding reasoning of Nguyen is "unpersuasive"); Orcutt v. Kettering Radiologists, Inc., 199 F. Supp. 2d 746, 753-56 (S.D. Ohio 2002) (same); Mikes v. Strauss, 889 F. Supp. 746, 755-57 (S.D.N.Y. 1995) (compelling arbitration of FCA retaliation claim); see also Nudelman v. Int'l Rehab. Assoc., Inc., 2006 WL 3098009 (E.D. Pa. Oct. 30, 2006) (same).

To be sure, Nguyen and Academi are outliers, and Academi is on appeal. But absent some contrary ruling from the Fourth Circuit, Academi provides a clear warning for employers about provisions that could render their arbitration agreements unenforceable. The decision underscores the importance for companies to consider whether their arbitration provisions would survive scrutiny under the FAA five factor test so they do not run the risk that a court would refuse to enforce it.

Footnotes

1 In 2009, the Fraud Enforcement and Recovery Act (FERA) expanded the anti-retaliation provision of the FCA to cover contractors and agents in addition to employees. FERA, Pub. L. No. 111-21, 123 Stat. 1617.

2 The court's ruling on this point was somewhat inconsistent with the statute since plaintiffs need not prove that Academi committed a substantive violation of the FCA in order to prevail in their retaliation claims. See 31 U.S.C. § 3730(h).

3 Under the FAA, a written provision requiring arbitration of any controversy arising under a contract or transaction affecting commerce is valid and enforceable. 9 U.S.C. § 2.

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