Eastern District of Virginia rules that employer cannot arbitrate False Claims Act retaliation claims. Arbitration clause held Unconscionable.

On Wednesday, the Eastern District of Virginia declared an arbitration provision in an independent contractor agreement unconscionable, clearing the way for two plaintiffs to bring their False Claims Act (FCA) retaliation claims in Federal court.

The plaintiffs were two firearms instructors previously employed by Academi Training Center, a Blackwater successor. They claimed they witnessed other Academi contractors submitting false firearm certification records to the State Department. Academi fired both instructors the day after they reported the fraudulent activity to their supervisor. Academi claimed the instructors had failed to report the fraud in a timely manner, and had participation in the fraud.

The two instructors brought their retaliation claims in Federal court. Academi moved to dismiss or to stay the action on the ground that the instructors’ independent contractor agreements contained a mandatory arbitration provision. The court acknowledged the strong presumption in favor of arbitrating claims arising under federal law, but ruled that the FCA claims were not subject to arbitration under this arbitration provision.

The Court found that the terms of the provision precluded almost any chance of success for plaintiffs in arbitration. First, a clause in the provision barred any discovery. The instructors’ FCA claims would depend on the veracity of the certification records Academi had submitted to the State Department. It would be difficult, if not impossible, to prove those claims without the allegedly falsified certifications. And it would be difficult, the court held, if not impossible, to obtain those certifications without discovery.

A second clause in the arbitration provision required the instructors to pay all costs and attorney’s fees, regardless of the success of their claims. The FCA, on the other hand, provides attorney’s fees to successful plaintiffs. That clause, therefore, frustrated the clear intent of Congress. As a result, the Court found that the instructors’ FCA claims were not subject to arbitration.

The instructors had also brought retaliation claims under state law. Academi claimed these should be subject to mandatory arbitration. However, the court ruled that the clause prohibiting discovery and the costs and fees clause were unconscionable. The court declined to sever those clauses from the arbitration provision and, instead, declared the provision unenforceable in its entirety. As a result, the plaintiffs are free to bring their retaliation claims in federal court.