United State and Nevada ex rel. Welch v. My Left Foot Childrens Therapy, LLC, 871 F.3d 791 (9th Cir. Sep. 11, 2017). “Arising out of” and “related to” define a broad scope of claims subject to arbitration, but that scope is not unlimited. Employer’s motion to compel arbitration of former employer’s qui tam action denied because the False Claims Act claims had no connection action to the former employer’s employment. She could have brought the suit whether or not she was ever employed by the defendant.
This case is a good illustration of how very important simple, clear and consistent drafting is when dealing with arbitration clauses, and the need to always bear in mind the black letter rules governing the creation and enforcement of contracts in general.
The backdrop for this case is the False Claims Act (FCA), which establishes a scheme that permits either the Attorney General, 31 U.S.C. § 3730(a), or a private party, 31 U.S.C. § 3730(b), to maintain a civil action against “any person” who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment” to the United States government. 31 U.S.C. § 3729(a). When brought by a private party, an enforcement action under the FCA is called a qui tam action, and the private party is referred to as the “relator.” When a relator initiates an FCA action, the United States has the right to intervene in the case. 31 U.S.C. § 3730(b)(2), (4). When the government intervenes, it assumes responsibility for prosecuting the action and is not bound by any act of the relator. 31 U.S.C. § 3730(c)(1). When the government does not intervene, it is not a party to the action, but still retains its status as the “real party in interest.” United States ex rel. Eisenstein v. City of New York, 556 U.S. 928, 930 (2009).
Welch, a former employee of My Left Foot Childrens Therapy LLC (MLF), brought an action against her former employer alleging that it had presented fraudulent Medicaid and Tricare claims in violation of the FCA and Nevada’s state law equivalent. Neither the United States government nor the state of Nevada opted to intervene in the case. MLF then moved to compel arbitration of the qui tam claims based upon an arbitration agreement Welch signed at the outset of her employment. The district court denied MLF’s motion because it found that the FCA claims belonged to the government and neither the United States nor Nevada had agreed to arbitrate their claims. Accordingly, the district court reasoned that sending the dispute to arbitration would operate to bind them to a pre-dispute arbitration agreement that never agreed to.
The Ninth Circuit affirmed the district court’s ruling, but did so on alternative grounds based on what it termed to be the “textual requirements” of the arbitration agreement at issue. “Though the question of the enforceability of a relator’s agreement to arbitrate FCA claims is interesting, our holding rests on a rather unremarkable textual analysis.” 871 F.3d at 794. Based on the discussion of the case that follows, I think you will find that the Ninth Circuit’s reasoning is remarkable because it holds that words that have typically been used in drafting arbitration agreements to define a broad scope of arbitrability – i.e., “arising out of” and “relating to” – should properly be construed as setting “a boundary by indicating some direct relationship” because to do otherwise would allow the term to “stretch to the horizon” and that would result in a meaningless and empty term because relations would then stop nowhere. Id, citing New York State Conference, Etc. v. Travelers Ins. Co., 514 U.S. 645, 655 (1995). In this regard, the court acknowledged that it has previously interpreted “relating to” as being broader in scope than “arising out of” or “arising under,” but held that there is a difference between a clause being “broad” versus “unlimited.” Id. at 798, citing N. Cal. Newspaper Guild Local 52 v. Sacramento Union, 856 F.2d 1381, 1383 (9th Cir. 1988). The court went on to conclude that the FCA suit had no direct connection with Welch’s employment with MLF, and was a set of claims would be eligible to bring without ever being employed by MLF. Id. at 799..
Looking at the text of the arbitration agreement in question, the court found that it contained “two key sections.” The first section was titled “Agreement” and stated three iterations of the contractual duty to arbitrate: (1) “all disputes that may arise out of the employment context;” (2) “any claim, dispute and/or controversy that [Welch] may have against the Company … or the Company may have against [Welch], arising from, related to, or having any relationship or connection whatsoever with [Welch] seeking employment by, or employment or other association with the Company;” and (3) “any claim between the Company and Employee arising out of or related to the employment relationship.” The second section was titled “Included Claims” and stated that minus limited exceptions not applicable here, the scope of the arbitration agreement included “all disputes, whether they be based on the state employment statutes, Title VII of the Civil Rights Act of 1964 … or any other state or federal law or regulation.”
On appeal, MLF argued that the two sections must be read together and that the breadth of the “Included Claims” section clearly covered Welch’s FCA claims. The Ninth Circuit said “no” and provided somewhat circular reasoning its decision after acknowledging that the “Included Claims” section provides that “all disputes,” including those based on “any … federal law” fall within the scope of the arbitration agreement. Id. at 797. Ultimately, what seems to have driven the Ninth Circuit’s decision was its reasoning that if the parties had intended to arbitrate every conceivable dispute that might arise, as encompassed in the “Included Claims” section, then the scope of arbitration as worded in the “Agreement” section should have simply said “any and all disputes whatsoever.” Id.
Having chosen to include language in the “Agreement” section that imposed a “textual limitation” that – to be arbitrable – the dispute must arise from, relate to, or be connected with Welch’s employment with MLF, the court found that it was bound to define the scope of the arbitration agreement by those stated limitations under two “cardinal rules” of contract interpretation: First, that the specific governs the general and, in this case, the “Agreement” section was held to be more specific than the “Included Claims” section. Second, that if possible, every word and every provisions is to be given effect and, in this case, if the language about arising out of and relating to employment did not limit the scope of the arbitration agreement, then those provisions would have no purpose. Id. at 798,
In a nutshell, this is a fact-specific case in which the Ninth Circuit drilled down on the language used in the arbitration agreement, and does not stand for any general proposition about the arbitrability of claims asserted under the FCA. As discussed above, the employer’s arbitration clause was found to have not been phrased broadly enough to encompass Welch’s statutory claims unrelated to her employment.