The False Claims Act: A Potential Vehicle For Alleging Contractor Misclassification

On September 30, 2024, a federal district court in Nevada allowed a Nevada False Claims Act (“NFCA”) suit against the rideshare service Lyft to proceed to discovery. The case alleges fraud associated with Lyft’s classification of its drivers. In Dep’t of Emp. Training & Rehab. ex rel. Chagolla v. Lyft, Inc., No. 3:23-CV-00442-ART-CLB (D. Nev. Sept. 30, 2024), the court denied Lyft’s motion to dismiss a purported whistleblower’s NFCA complaint alleging that Lyft knowingly misclassified its drivers as independent contractors. The whistleblower premised her complaint on a “reverse false claims” theory. Under the NFCA, which is modeled after the federal False Claims Act (“FCA”), a reverse false claim occurs when a person “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State or a political subdivision.” See NRS 357.040(1)(g). Here, the plaintiff argued that Lyft knowingly misclassified its drivers “and has thus unlawfully avoided paying unemployment taxes to the State of Nevada.” Chagolla, No. 3:23-CV-00442, ECF No. 14, at 1. Lyft argued that the court lacked jurisdiction over the claims under the NFCA’s public disclosure bar, and furthermore that the claims did not meet Federal Rule of Civil Procedure (“Rule”) 9(b)’s heightened pleading requirements for allegations of fraud. The court denied Lyft’s Rule 12(b)(6) motion, and found, inter alia, that: (i) the claims were not barred under the public disclosure bar because there was no public disclosure of plaintiff’s allegation that Lyft knowingly misclassified drivers to avoid Nevada unemployment tax; and (ii) a reverse false claim under the NFCA does not require pleading the defendant made any affirmative false statement to the State. The whistleblower’s theory and the court’s decision might signal a new tactic for plaintiffs to challenge the classification of independent contractors using the federal and state False Claims Acts.

Qui Tam Litigation

The NFCA and the FCA allow private whistleblowers, called “qui tam relators,” to file lawsuits on behalf of the government alleging false claims made to the government. Although there is growing debate over the constitutionality of these qui tam provisions,¹ the provisions presently allow a relator to file a complaint that is initially sealed for 60 days (or longer if the government seeks extensions). During this period, the government is required to investigate the allegations and decide whether to intervene. After its investigation, the government must inform the court whether it is intervening in the action or declining to take over the action (in which case the relator may move forward with the litigation on behalf of the government). The complaint is then unsealed and served upon the defendant, assuming it is not dismissed. The NFCA and the FCA provide relators with a financial reward of between fifteen percent (15%) and thirty percent (30%) of any recovery obtained, dependent on whether the government intervenes.

The Chagolla Allegations

Lyft operates a mobile-based ridesharing marketplace platform that matches riders and drivers. Lyft contracts with drivers as independent contractors to provide services to its customers across the United States, including in Nevada. Lyft is a “frequent target” of misclassification claims from plaintiffs who allege drivers are employees who are improperly classified as independent contractors. See Chagolla, No. 3:23-CV-00442, ECF No. 14, at 3. 

Relator Christina Chagolla (“Relator”), a former driver on the Lyft platform, brought a qui tam action against Lyft in Nevada state court pursuant to the NFCA. The Nevada Attorney General did not intervene in the action. Lyft removed the action to federal court after which Relator amended her complaint to allege a single count of alleged reverse false claims under the NFCA. Specifically, Relator alleged Lyft knowingly misclassified its drivers as independent contractors to avoid paying Nevada unemployment tax. Relator argued that Lyft’s drivers do not fall under the independent contractor tax exemption and must instead be considered as employees pursuant to NRS 612.086. Relator further argued that Lyft “defrauded the state of Nevada by failing to pay monies to the state of Nevada’s unemployment compensation system.” See Chagolla, No. 3:23-CV-00442, ECF No. 28, at 2.

Lyft moved to dismiss Relator’s complaint pursuant to Rule 12(b)(6), contending that Relator failed to state a claim upon which relief can be granted. Lyft’s motion to dismiss argued, among other reasons for dismissal, that: (i) the court lacked jurisdiction over Relator’s claim under the NFCA’s public disclosure bar; and (ii) her claim did not meet the pleading requirement of Rule 9(b) because she did not allege that Lyft made any false statement directly to the government.

The Public Disclosure Bar

The NFCA’s public disclosure bar prevents relators from bringing NFCA claims based on information that is already available through certain public sources. The NFCA’s public disclosure bar, which mirrors that of the FCA, provides that, unless the attorney general objects, a court shall dismiss an NFCA claim that is “substantially based on the same allegations or transactions that have been disclosed publicly” in (1) a criminal, civil, or administrative proceeding in which the state is a party, (2) in an investigation, report, hearing, or audit conducted by or at the request of a governmental body, or (3) by news media. See NRS 357.100. If these elements are met, the public disclosure bar requires dismissal unless the relator is an “original source” of the information. See United States v. My Left Foot Children’s Therapy, LLC, No. 2:14-CV-01786 (D. Nev. May 9, 2017). 

In Chagolla, Lyft argued that Relator’s claim was based upon information disclosed in the news media. Specifically, Lyft argued that the drivers’ independent contractor status is widely known and many news articles have discussed the implication of this contractor classification on unemployment benefits. Relator argued that the public disclosure of the drivers’ classification status is not a disclosure of the allegation that Lyft is knowingly using this classification to avoid paying unemployment taxes. The court agreed that Lyft did not sufficiently show public disclosure of Relator’s allegation on this basis. Finding that Lyft had not shown public disclosure of the NFCA claim, the court did not address the issue of whether Relator is an “original source.”

Not Required to Plead a False Statement

Lyft also argued that Relator failed to plead her NFCA claim with the level of specificity required by Rule 9(b) because a reverse false claim under the NFCA requires an allegation that the defendant made a false statement. The court rejected this argument, noting that the 2013 amendments to the NFCA are nearly identical to the 2009 amendments to the FCA, and those amendments provide that a reverse false claim arises “when a person knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the State or a political subdivision.” See NRS 357.050(1)(g). The court reasoned that neither the plain language of the FCA nor of the NFCA requires a false statement in order to plead a reverse false claim. Accordingly, Relator was not required to plead that Lyft submitted a false statement; it was sufficient that Relator alleged Lyft knowingly avoided its obligation as an employer to pay unemployment taxes to the State of Nevada.

The Consequences of Chagolla for Businesses Using Independent Contractors

The Chagolla litigation could illustrate a new tactic through which plaintiffs may attack alleged misclassification of independent contractors: through qui tam suits, under which a successful relator stands to benefit financially. Businesses who contract with independent contractors may encounter similar types of reverse false claims qui tam lawsuits, which present the potential for treble damages (i.e. damages equaling three times the amount deemed to be withheld from the government in violation of the FCA) and statutory penalties. This development is of particular note given that the court in Chagolla ruled that Relator was not barred by the “public disclosure bar” despite the extensive and well-publicized debate over the so-called “gig economy’s” use of independent contractors. 

¹Notably, also on September 30, 2024, a federal judge in the Middle District of Florida dismissed a qui tam suit on the grounds that the FCA’s qui tam provisions are unconstitutional. In United States ex rel. Zafirov v. Florida Medical Associates, LLC, Case No. 8:19-cv-01236, 2024 WL 4349242 (M.D. Fla. Sept. 30, 2024) (Mizelle, J.), the court granted a motion by O’Melveny and co-defendants’ counsel to dismiss the lawsuit after determining that the relator exercised core executive power but lacked proper appointment, a violation of the Appointments Clause of Article II of the Constitution. 

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Adam P. KohSweeney, an O'Melveny partner licensed to practice law in California and New York; Amanda M. Santella, an O'Melveny partner licensed to practice law in the District of Columbia and Maryland; Stephen M. Sullivan, an O'Melveny partner licensed to practice law in California; Hannah E. Dunn, an O'Melveny counsel licensed to practice law in the District of Columbia and California; and Katy Ho, an O'Melveny counsel licensed to practice law in the District of Columbia and California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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