Federal Court Sends 'Academi' Back To School: Finds Agreement Requiring Arbitration Of False Claims Act Retaliation Claims Unconscionable

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...