Arbitration of Retaliation Claims under the False Claims Act and Dodd-Frank.

Arbitration has become the preferred method of resolving employment disputes for many businesses because of a perception, whether real or imagined, that it costs less than litigation in the court system. As a result, many employment agreements signed by new employees require mandatory arbitration of disputes arising out of their employment at the company.

Businesses also may ask employees to sign an agreement to arbitrate disputes as part of a severance package. They are commonly referred to as post-dispute arbitration agreements. Although it might seem like the same language that was required to be signed upon hiring, this waiver may be treated differently by the law and warrants special consideration before signing.

picture of magnifying glass over employment contract

In some instances, the law or a court will allow an individual who has signed one of these contracts to still bring their whistleblower retaliation claim through the judicial system. Depending on whether the law recognizes the waiver of the right to sue in court and the language of the contract, the lawsuit may still be allowed to proceed without arbitrating the claim.

Arbitration Under The False Claims Act

The False Claims Act does not prohibit arbitration of retaliation lawsuits under section 3730(h). Valid waivers of litigation rights in a contract will require a whistleblower under this federal law to proceed in arbitration. However, the judiciary will perform a limited review of the agreement to analyze two questions:

1. Did the parties intend for the arbitration agreement to include disputes arising from the False Claims Act?

2. Do the terms of the arbitration limit the protections of the statute?

The Contract Language

A contract with a waiver of litigation rights does not automatically mean that retaliation claims under the False Claims Act must be arbitrated. The language of the contract will be examined to determine whether arbitration is required.

If the language of the waiver is not broadly worded, it may not include the retaliation claim. In U.S. ex rel Paige v. BAE Systems Technology Solutions & Services Inc., No. 13-2237 (6th Cir. May 22, 2014), arbitration was not required because a §3730(h) claim did not arise “under the terms of this agreement.” Contrasting the narrow language to other contracts which also included claims “related to” the employment agreement, the Sixth Circuit concluded that the language was limited in scope and nowhere in the agreement did it refer to the FCA or retaliation.

Fairness

Federal law favors arbitration when it is merely an alternate forum to resolve the dispute between the parties. If the language of the contract hampers the ability of a whistleblower to vindicate their rights, it will not be enforced.

Whether the forum is fair depends on whether it provides for neutral arbitrators, adequate discovery, reasonable costs and all relief available through the courts. When courts have invalidated arbitration agreements in retaliation lawsuits, they have typically done so because it provided for limited discovery and unreasonable fee shifting. There has been recognition that no or limited discovery may be inadequate in these lawsuits. Also, a requirement that the plaintiff pay fees and costs of the defendant is contrary to the fee shifting provision in the False Claims Act allowing a successful plaintiff attorney fees.

Arbitration of Retaliation Claims Under the Securities Laws

When Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, it amended section 806 of the Sarbanes-Oxley Act to bar arbitration for whistleblower claims and included a similar provision in the Commodity Exchange Act. This provides securities whistleblowers with a greater chance to avoid arbitration of their retaliation claims than they would have if their lawsuit arose under the FCA.

However, the scope of the arbitration bar has been challenged and there are a few open questions that create the possibility that some will not have access to the courts for their retaliation claim. These issues relate to the law’s retroactivity, its effect on post-dispute waivers, and the possibility that an SEC whistleblower would not be covered by the SOX protections.

SEC

Congress did not explicitly ban arbitration in 15 U.S.C. § 78u-6 even though it did so in the corresponding section of the Commodity Exchange Act. When the SEC adopted its rules for the whistleblower program, it also did not create a regulation that prohibited arbitration of retaliation claims. This leaves open the possibility that a securities whistleblower without a SOX claim would have to arbitrate pursuant to their agreement.

This was the result in Murray v. UBS Securities, LLC, Case No. 12-cv-05914 (S.D.N.Y. Jan. 27, 2014), where the District Court, noting the absence of a specific rule barring arbitration, required the plaintiff to arbitrate their retaliation claim under 15 U.S.C. § 78u-6(h) pursuant to their employment agreement.

However, in the implementation of Section 21F of the Securities and Exchange Act of 1934, the SEC indicated that a rule was not necessary because Section 29(a) of the Exchange Act already invalidates certain contracts contrary to the law and rules. It remains an open question whether the judiciary will conclude that the language of the section supports this interpretation.

CFTC

The Commodity Exchange Act limits the waiver of rights and remedies available to whistleblowers by agreement or condition of employment. 7 U.S.C. § 26(n). It also invalidates predispute arbitration agreements. Id. This is reiterated by 17 C.F.R. § 165.19.

When whistleblowers are retaliated against for their Form TCR, they can file a lawsuit in a U.S. District Court. 7 U.S.C. § 26(h)(B)(i). Absent a reason that the statute does not apply, such as the retroactivity of the law or a limitation to waivers in predispute agreements, arbitration would be avoidable.

SOX

Employees or contractors of publicly traded companies, or their subsidiaries, who wait 180 days after filing their retaliation complaint with the Secretary of Labor related to conduct specified in 18 U.S.C. § 1514A(a) can bring their lawsuit to an appropriate federal district court. Waiver of this right by agreement is prohibited in 18 U.S.C. § 1514A(e). Although there are some possible exceptions, discussed above, Dodd-Frank has put a halt to the widespread enforcement of arbitration agreements in this area of SOX by the judicial system prior to Dodd-Frank.

When was the Agreement Signed?

One early area where there has been disagreement is on the retroactive application of the law.

Some courts have applied the Dodd-Frank arbitration rules retroactively under the theory that the change is only one of procedure and it does not alter the substantive rights in the contract between the parties. They contend that the statute is one that confers jurisdiction which can properly be applied retroactively. See Pezza v. Investors Cap. Corp., 767 F. Supp. 2d 225, 234 (D. Mass. 2011); Wong v. CKX, Inc., 890 F. Supp. 2d 411, 422–23 (S.D.N.Y. 2012).

Others have held that Dodd-Frank did not invalidate arbitration clauses retroactively. See Khazin v. TD Ameritrade Holding Corp., Case No. 13-cv-4149, 2014 WL 940703 (D.N.J. March 11, 2014); Henderson v. Masco Framing Corp., No. 3:11-CV-00088-LLRH, 2011 WL 3022535 (D. Nev. July 22, 2011). They note that retroactive application of laws is generally disfavored and altering the forum would interfere with the contractual rights of the parties. In other words, an employment contract signed prior to the passage of the law in July 2010 could still require arbitration of a dispute.

Would a Post-Dispute Arbitration Agreement Be Enforced?

It is not yet clear whether such a contract would be valid.

Some have argued that the Dodd-Frank Act applied its restrictions on waiver of rights only to future waivers. Because of the specific inclusion of predispute arbitration agreements, they contend that waivers of existing claims, such as an arbitration clause contained in a severance agreement, would still be valid and enforceable.

However, the terms of the statute do explicitly prohibit waiver “by any agreement, policy, form or condition of employment….” So although it is an open question, the terms of the statute are favorable to whistleblowers who wish to avoid arbitration.

Internal Revenue Service

Wondering why we did not discuss the arbitration of IRS retaliation claims? It is because Congress has not provided for retaliation suits yet.

Summary

Agreements to arbitrate retaliation claims will continue to be enforced by the courts where the terms apply and Congress has not invalidated them.

Other Frequently Asked Questions

We hope this information proves helpful in your search for information about whistleblower law.

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