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Court rules mandatory employee arbitration agreement does not apply in whistleblower lawsuit

The Ninth Circuit Court of Appeals ruled that an employee arbitration agreement signed by a whistleblower is unenforceable in this False Claims Act case because the claims of fraud "belong to the government.”

The Ninth Circuit Court of Appeals ruled this week that a Nevada company could not use an arbitration agreement it required an employee to sign when she applied for a job to prevent a False Claims Act (FCA) lawsuit against the company from being litigated in court.

The decision will force My Left Foot Children’s Therapy LLC, a children’s speech and physical therapy provider in Las Vegas, to continue defending allegations of Medicaid fraud in court — where the case belongs — rather than in a non-public proceeding before a private arbitrator.

Arbitration agreements are common features of many employment and consumer contracts that require workers and consumers to resolve any disputes before a private arbitrator rather than in court.

The appeals court said that even though whistleblowers are entitled to a percentage of the government’s recovery in FCA lawsuits, the underlying claims of fraud in those cases “belong to the government.” As a result, the court found, the lawsuit did not involve a “claim, dispute, and/or controversy” the whistleblower had against the company – which could have required arbitration – but instead was a dispute between the government and the company.

The “qui tam” case was filed by a speech and language pathologist in 2014 under the US False Claims Act and the Nevada False Claims Act alleging that My Left Foot was unnecessarily treating patients and overbilling the government. After the federal government and Nevada decided not to join the lawsuit, the case was unsealed and served on My Left Foot.

At that point, the company asked the court to dismiss the case and force the whistleblower to arbitrate the allegations because of an agreement she was required to sign when she applied for her job with My Left Foot. The company argued that the whistleblower’s fraud allegations were connected to her employment and therefore fell within the scope of the arbitration agreement.

The appeals court disagreed, finding that the language of the key parts of the agreement was narrow enough that it did not encompass a whistleblower lawsuit alleging Medicaid fraud. Allegations of Medicaid fraud were not directly related to the whistleblower’s employment with the company, the court reasoned, because the whistleblower could have filed the lawsuit even if she had not worked for the company.

The federal government and Nevada filed friend-of-the-court briefs arguing in part that a defendant cannot force False Claims Act cases into arbitration because the government is not a party to any arbitration agreements between whistleblowers and defendants. The court largely sidestepped that argument, ruling instead on the narrower grounds of the language of the arbitration agreement in this particular case.

Nonetheless, the Ninth Circuit’s interpretation of the language of the arbitration agreement and its reasoning that substantive fraud claims under the FCA “belong to the government” may help other whistleblowers fend off defendants’ attempts to hide those allegations behind the closed doors of arbitration.

Given the important role the False Claims Act plays in returning money to the government and in deterring fraud across numerous industries, it is critical that these cases be overseen by courts and not kept behind closed doors that allow problems to remain hidden.

The case is titled United States ex rel. Welch v. My Left Foot Children’s Therapy, LLC, — F.3d —- , 2017 WL 3976314 (9th Cir. Sept. 11, 2017).

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