On September 11, 2017, the Ninth Circuit in US and State of Nevada ex rel. Welch v. My Left Foot Children’s Therapy, LLC, upheld the denial of the defendant’s motion to compel arbitration in a False Claims Act (FCA) relator case, holding that an employee-relator’s FCA claims did not fall within the scope of the arbitration agreement with her former employer.  The FCA claims were based on allegations that the employer had filed fraudulent Medicaid claims.

The Court first looked to the Federal Arbitration Act (FAA) in determining that interpretation of the arbitration agreement would generally be a matter of state law.  Nevertheless, the Court also applied certain guiding principles of the FAA, including the rule as interpreted by the U.S. Supreme Court  that “’questions of arbitrability must be addressed with a healthy regard for the federal policy favoring arbitration’” (quoting Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)).

In issuing its ruling, however, the Court did not foreclose the potential for arbitration agreements to include FCA claims within their scope.

The arbitration language at issue contained the following sections, which the Court described as an “Agreement” section and an “Included Claims” section (emphasis added):

  1. “Agreement” Section

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.

  1. “Included Claims” Section

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.

In the “Included Claims” section, the Court found the language “included within the scope of this agreement are all disputes” was broad enough to encompass the FCA claims.  However, the Court refused to read this in isolation from the rest of the arbitration agreement, which contained language that was more narrow, including language restricting the arbitration to disputes “arising from, related to, or having any relationship or connection whatsoever with my seeking employment by, or employment or other association with the Company.”  The Court found that that this language marked a boundary by indicating some direct relationship and was “relatively narrow as arbitration clauses go.” The Court noted this was “particularly critical because had the parties wished to arbitrate every dispute encompassed in the ‘Included Claims’ section it could have left the scope of the ‘Agreement’ section at ‘any and all disputes whatsoever.’”  Instead, the specific terms of the “Agreement” section controlled over the general terms in the “Included Claims” section.  The Court also found that the FCA suit had no direct connection with the employee’s employment; she would have been able to bring the FCA suit regardless of whether she was employed by the defendants.  Similarly, just because the employee observed the fraudulent conduct while employed, does not mean that such observation was related to her employment because she could have made the same observations in a non-employee capacity. In addition, the Court explained, in interpreting contract terms, “if possible, every word and every provision is to be given effect.”  Otherwise, the language would have no purpose.

Finally, the Court found that because the FCA grants relators the right to bring a claim on the government’s behalf, the employee’s FCA claims were not a “claim, dispute, and/or controversy” that the employee had “against the Company,” or that “the Company may have against [the employee],” as set forth in the arbitration agreement.  Accordingly, the Court concluded that the FCA claims were not arbitrable on this basis as well because the “underlying fraud claims asserted in a FCA case belong to the government and not to the relator.”

The Court noted in dicta, “had the parties wished to agree to arbitrate FCA claims, they were free to draft a broader agreement that covers ‘any lawsuits brought or filed by the employee whatsoever’ or ‘all cases [the employee] brings against [the employer], including those brought on behalf of another party.’”