Qui tam actions can avoid arbitration in California

State of California ex rel. Aetna Health of California, Inc. v Pain Management Specialist Medical Group, 2020 DJDAR 132530 (Cal. App. 2nd Dist., Dec. 21, 2020), an opinion penned by Justice Arthur Gilbert, holds that a qui tam action involving the California Insurance Fraud Protection Act to combat insurance fraud, avoids a binding arbitration agreement. The case is significant because it aligns with other California law on qui tam actions, runs counter to federal trends to enforce arbitration agreements, and carves out a niche in California for qui tam cases that may avoid arbitration. Furthermore, while not addressed in the case, the holding may point a way for California legislators, in furtherance of the public interest, to create private attorneys general who can avoid binding arbitration.

Blacks Law Dictionary has defined a qui tam action as, "An action brought under a statute that allows a private person to sue for a penalty, part of which the government or some specified public institution will receive." "The term 'qui tam' comes from the Latin expression 'qui tam pro domino rege quam pro se ipso in hac parte sequitur,' which means, '"who pursues this action on our Lord the King's behalf as well as his own."'" People ex rel. Allstate Ins. Co. v. Weitzman, 107 Cal. App. 4th 534, 538 (2003). The "relator" is the real person in interest who brings suit on behalf of the state or attorney general. The relator seeks to bring a recovery for the state, and in the process, obtain a portion of the award and attorney fees.

In the Aetna case, the relator, an insurance company, sued on behalf of California to recover damages and fees based on a claim that a surgical center engaged in fraudulent billing practices. Defendant Pain Management filed a motion to compel arbitration that the trial court denied, concluding that California was the real party and had not agreed to arbitrate -- thus, California could not be compelled to arbitrate. The order denying the motion to compel arbitration was affirmed on appeal.

As Justice Gilbert explains, this outcome is in accord with reasoning in the related context of the California Private Attorneys General Act of 2004, a statute that allows employees to sue on behalf of the state for violations of the Labor Code. PAGA incentivizes the individual bringing the qui tam action by splitting civil penalties recovered with the state (the individual gets 25%) and by allowing recovery of attorney fees. "Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 386-387, concluded that a private attorney general claim is not a dispute between an employee and an employer, but is a dispute between the employer and the State. A private attorney general claims is a type of qui tam action. ... The government entity on whose behalf the plaintiff files suit is always the real party in interest in the suit. ... Thus, the State is the owner of the qui tam action, the real party in interest, and cannot be compelled to arbitrate without its consent." So now we have a California Supreme Court case concerning PAGA, and a California appellate decision concerning the IFPA, explaining why qui tam actions may be exempt from arbitration.

In Aetna, Pain Management relied on "an unpublished federal case, Deck v. Miami Jacobs Bus. College Co., 3:12-cv-63 (S.D. Ohio 2013), holding that a federal False Claims Act may be subject to arbitration." Justice Gilbert finds the case "not persuasive" and distinguishable, because "Deck concerned the federal False Claims Act, a different statutory scheme from the IFPA [Insurance Fraud Protection Act] in its purpose, scope of liability, victims, and recoveries." Justice Gilbert points out the only direct victim of the federal False Claims Act is the government, whereas the IFPA seeks to prevent insurance fraud; insurers are the direct victims, insureds are indirect victims, and "[t]he government does not necessarily recover funds lost to it because of a fraud perpetrated on it" (citing Weitzman, 107 Cal. App. 4th at 561).

Those distinctions between the federal False Claims Act and the IFPA exist, and the fact that it is not only the government, as in the case of the False Claims Act, but also the insurer and the insured who are injured by violations of the IFPA, strongly supports the need for the private attorney general qui tam cause of action in the case of the IFPA. But it is difficult to see how those distinctions prevent the relator in an IFPA qui tam case from being compelled to arbitrate.

Perhaps stronger arguments are to be found in another unpublished federal case specifically addressing the Deck case but not mentioned in the Aetna opinion. The case is United States v. My Left Foot Children's Therapy LLC, 2:14-cv-01786-MMD-GWF (D. Nev. 2016). In the My Left Foot case, Judge Miranda Du explained that the Deck case involved a situation where the government never objected to arbitration and simply asked the court to clarify that arbitration was non-binding. My Left Foot, which denied defendants' motion to arbitrate a False Claims Act claim, was a situation where the government had not consented to arbitrate and in fact had objected to arbitration. The Aetna case, like the My Left Foot case, is one in which the government has not consented to arbitrate (though in fairness, the government also did not object).

One can imagine that in a budget-straightened state, the qui tam exception to binding arbitration could clear a path for creative legislators wanting to protect consumers or other groups, but not wanting to spend public funds or use state employees to prosecute or to regulate. Private arbitration presents a significant disincentive to the litigation of class action consumer and employee claims. Rare and unusual is the person who would arbitrate a consumer claim to recover $50. However, qui tam litigation that may not yet exist could allow a relator in California to bring a claim as a representative of the state, a claim that now, in the case of PAGA and the IFPA, may avoid arbitration.

Qui tam legislation could be supported by statements of legislative intent describing the intention to create a cause of action belonging to the state, a private attorney general who can sue on behalf of the state, insufficient state resources necessary to protect the public without the vigilance of private attorneys general, a qui tam recovery belonging to the state, a private attorney general entitled to share in a portion of civil penalties recovered and to recover attorney fees, and a state which, as a non-signatory to any arbitration agreement, does not agree to arbitrate, unless it explicitly agrees to do so. Such a statement could make it difficult, at least in the short-term, to compel arbitration of claims enabled by qui tam legislation.

California legal opinions finding exceptions to arbitration are susceptible to arguments that the Federal Arbitration Act preempts state rules unduly burdening arbitration. Thus far, however, Iskanian is well-established law in California. The U.S. Supreme Court denied certiorari in 2015. The robustness of California state court decisions exempting qui tam actions from arbitration may yet be tested one day by a Supreme Court that has strongly favored enforcing arbitration agreements. 