Employment Law

Arbitrator or Judge? California Supreme Court Weighs in

Why it matters

Yet again, the California Supreme Court considered arbitration in the context of an employment agreement, this time reflecting on whether a judge or an arbitrator should decide whether class arbitration is available where the agreement is silent on the matter. Refusing to adopt a bright line test for who answers the question, the majority said courts must consider the contract at issue using state law principles of interpretation. Applying the standard to the case at bar—involving Timothy Sandquist, a worker at an auto dealership who filed a putative class action alleging racial discrimination—the 4-3 majority said the arbitrator should make the decision, as it involved a non-"gateway" question. A dissenting opinion countered that the majority misinterpreted U.S. Supreme Court precedent that class arbitration is not merely a matter of procedure but a fundamental gateway issue for the court to decide.

Detailed discussion

In 2000, Lebo Automotive hired Timothy Sandquist to work as a salesperson at a car dealership. On his first day of work, he received about 100 pages of preprinted forms with instructions to fill them out as quickly as possible so he could get to work. Among the documents were three different arbitration agreements. None of the agreements—which contained substantively similar language—included an express class action waiver.

Twelve years later, Sandquist sued his employer, alleging that he and other non-Caucasian employees were subjected to racial discrimination, harassment, and retaliation. The putative class action sought injunctive and declaratory relief as well as damages. Lebo responded with a motion to compel individual arbitration based on the agreements signed by Sandquist.

A trial court judge granted the motion, ruling that state law required the court to decide whether class arbitration was available and determining it was not. An appellate court disagreed that existing precedent compelled the trial court to decide the question of whether class arbitration was available and, after examining the issue, held that the arbitrator should decide.

Adding to its long history of considering arbitration in the context of employment agreements, the California Supreme Court granted review and found that no "universal one-size-fits-all rule allocates that question to one decision maker or the other in every case. Rather, 'who decides' is a matter of party agreement. … And just as whether class arbitration is available depends on whether the parties agreed to allow or forbid it, so the question who has the power to decide the availability of class arbitration turns upon what the parties agreed about the allocation of that power."

The court began with an examination of the parties' agreements to determine what they said about the "who decides" question, siding with the employer that the review must be conducted through the prism of state law. The agreements at issue presented several features suggesting the "who decides" question was an arbitrable one, such as the "comprehensive" language covering a broad swatch of disputes or controversies and the fact the drafter of the agreements included a list of matters not for the arbitrator and failed to include a decisionmaker for class arbitration.

Given the lack of an express statement, however, the court moved on to other principles, including the parties' likely expectations about allocations of responsibility. Parties that enter into an arbitration agreement typically expect that their dispute will be resolved without necessity for any contact with the courts, the majority noted, relying on two other interpretive principles for support.

"First, under state law as under federal law, when the allocation of a matter to arbitration or the courts is uncertain, we resolve all doubts in favor of arbitration," the court said. "All else being equal, this presumption tips the scales in favor of allocating the class arbitration availability question to the arbitrator. Second, ambiguities in written agreements are to be construed against their drafters," in this case the employer.

No established contrary state law presumption allocating the class arbitration availability to a court existed and state law does not embrace a particular pro-court or pro-arbitrator presumption, the majority said. Turning to the Federal Arbitration Act (FAA), the court found nothing in the statute's text or its legislative history altering the conclusion made under state law.

Looking for guidance from the U.S. Supreme Court, the majority said it has only directly addressed the "who decides" issue once, in Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003), with the plurality in that case finding that nothing in the FAA subjects the question to any pro-court presumption. "The issue thus remains unresolved," the court said.

The justices have interpreted the FAA to impose two distinct presumptions, depending on the subject matter. Courts presume that the parties intend courts, not arbitrators, to decide disputes about whether an enforceable arbitration agreement exists or whether it applies to the dispute at hand, the Supreme Court has written, while arbitrators, and not courts, decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration.

Whether class arbitration is available falls into the latter category, the California Supreme Court said. "[T]he availability or unavailability of class arbitration has nothing to do with whether the parties agreed to arbitrate, either in general or with respect to a specific dispute," the court wrote. "Instead, the question is of the 'what kind of proceeding' sort that arises subsequent to the gateway issue of whether to have an arbitral proceeding at all."

Two other principles of FAA interpretation also weighed in favor of allocating the question to the arbitrator: the desire for expeditious results that motivates many an arbitration agreement and that any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.

The court declined to follow decisions cited by the employer that determined the availability of classwide arbitration is a "gateway question" for the court, including opinions from the Third and Sixth Circuits, emphasizing that the distinction between gateway and non-gateway questions does not focus on the question's significance.

"We conclude no universal rule allocates this decision in all cases to either arbitrators or courts," the majority wrote. "Rather, who decides is in the first instance a matter of agreement, with the parties' agreement subject to interpretation under state contract law. Under state law, these parties' arbitration agreement allocates the decision to the arbitrator. Under federal arbitration law, no contrary presumption requires a different result, so the issue remains one for the arbitrator."

The three-justice dissent argued that the "who decides" question more properly belongs in the courts as a "gateway" question rather than a subsidiary one, drawing on U.S. Supreme Court decisions after Green Tree that have undermined the plurality's premise.

In one opinion, the justices wrote that "class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator," the dissent noted, while another decision pointed out the differences between bilateral and class arbitration, such as a dramatic increase in the risk to defendants and the formality of the proceedings, making the process slower and more costly.

"If, because of the fundamental differences between bilateral and class arbitration, the court is unwilling to treat classwide arbitrability as a mere procedural matter—and thus unwilling to presume that parties' 'silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings'—it seems rather unlikely that the court would be willing to presume that the parties have consented to allow an arbitrator to make an essentially unreviewable determination to the same effect," the dissent argued. "That is particularly true because, as the court has emphasized, the decision is one that does not affect the named plaintiffs and defendant alone, but implicates whether other, absent plaintiffs will also be required to submit their claims to arbitration."

To read the opinion in Sandquist v. Lebo Automotive, click here.

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California Employee Can Pursue Termination Claims Over Marijuana Use

Why it matters

An employee who was fired for his use of medical marijuana can move forward with his lawsuit against his former employer, a federal court judge in California recently determined. Justin Shepherd had worked at Kohl's Department Stores for five years when he was diagnosed with acute and chronic anxiety and provided with a recommendation for medical marijuana use. Although he did not inform his employer about his drug use, the company subsequently updated its policies to state that employees in California would not be discriminated against for valid medical use of marijuana. Shepherd was injured on the job and a drug test revealed his drug use. He was terminated, and he sued alleging breach of an implied contract and covenant of good faith and fair dealing as well as defamation. The court denied Kohl's motion for summary judgment, finding that a reasonable jury could determine the employee would not be discriminated against for his medical marijuana use based on the employer's policy. The court did toss a number of claims under the state's Fair Employment and Housing Act, however. Employers attempting to walk the fine line between federal law (which continues to recognize marijuana as an illegal substance) and contrary state laws (permitting marijuana both for medical and recreational use) should take note of the decision.

Detailed discussion

Justin Shepherd was hired by Kohl's Department Stores as a material handler in June 2006. As part of his hiring, he signed a written agreement that included a provision stating he was an at-will employee. In 2011, Shepherd—who had since been promoted—was diagnosed with acute and chronic anxiety. His doctor recommended medical marijuana.

Shepherd did not disclose the recommendation or his use of medical marijuana to Kohl's. But in 2012, the company updated its personnel policies to include exceptions to its drug testing and substance abuse policies stating that employees in certain states (including California) would not be discriminated against with regard to hiring, termination, or other employment matters based on their drug use due to a valid medical marijuana recommendation. Shepherd said he relied on these policies when he elected to continue using the drug to treat his anxiety and not look for a new job.

In 2014, Shepherd was injured at work and sent to a healthcare provider that contracted with Kohl's. A drug test revealed trace amounts of marijuana metabolites. Shepherd showed management his recommendation for medical marijuana and explained that he only used it while off duty, but that metabolites can remain in the system for some time.

Shepherd was terminated for his drug use and told that he "should have chosen a different medication." He filed suit alleging three counts under the Fair Employment and Housing Act (FEHA), invasion of privacy, wrongful termination in violation of public policy, breach of implied contract and the covenant of good faith and fair dealing, and defamation.

Kohl's moved for summary judgment and U.S. District Court Judge Dale A. Drozd entered a mixed decision.

First, he dismissed the FEHA claims. Despite the passage of the Compassionate Use Act, which ostensibly legalized medical marijuana in California, employees were not granted new rights. "[I]t does not violate the FEHA to terminate an employee based on their use of marijuana, regardless of why they use it, and the Compassionate Use Act did not change that," the court said.

Neither was the employer required to accommodate Shepherd's medical marijuana use, the court added, and therefore could not be liable for a failure to accommodate or engage in the interactive process. Further, the plaintiff failed to provide any evidence of disability discrimination, instead offering evidence only as to how Kohl's acted with regard to how he chose to treat his condition. The invasion of privacy claim also failed, as the evidence established the plaintiff was aware he could be drug tested long before he was injured.

However, the court was persuaded that Shepherd's claims for breach of implied contract and the covenant of good faith and fair dealing should survive summary judgment. The plaintiff contended that the policies adopted by Kohl's in 2012 became terms of his employment agreement and part of an implied contract, binding the employer not to breach them.

The existence and content of employer agreements not to terminate based on certain assurances are particularly fact-driven inquiries, Judge Drozd noted, pointing out that Shepherd testified he abandoned his efforts to look elsewhere for a job because he understood the Kohl's policies "to very clearly say that as long as I used the [medical marijuana] at home and not close to a shift, I would be protected from getting fired even if I tested positive."

"Here, a reasonable jury could conclude from defendant's policies and plaintiff's testimony that the parties agreed, subsequent to his 2006 acknowledgement of the at-will nature of his employment, that plaintiff would not be discriminated against for his medical marijuana use, since he was a registered medical marijuana cardholder," the court wrote.

The court also allowed Shepherd's defamation claim to move forward. The parties did not dispute that the only evidence of the plaintiff's impairment at work was the positive test result for marijuana metabolites, which Shepherd countered remain in a user's system for up to 30 days after use. He also testified that he did not use marijuana within several days of working as a general rule and had not used it for days before he was injured in January 2014.

"Based on this evidence, a reasonable jury could find plaintiff was not in a condition unfit to perform his job, was not under the influence of alcohol or other drugs at work, and/or was not using, consuming, or selling alcohol or other drugs at work," the court said, referencing the reasons given by Kohl's for Shepherd's termination. "Further, given the dearth of evidence presented by the defendant of plaintiff's purported impairment, a reasonable jury could conclude these statements were made with a 'reckless or wanton disregard for the truth,' thus establishing malice."

To read the order in Shepherd v. Kohl's Department Stores, click here.

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Equal Pay Heads to Massachusetts

Why it matters

Joining California and New York, Massachusetts has enacted new equal pay legislation. Scheduled to take effect July 1, 2018, An Act to Establish Pay Equity prohibits employers from discriminating on the basis of gender in the payment of wages and other compensation for "comparable" work, with a few exceptions (a merit-based system, for example, or a seniority system, although leave due to pregnancy may not reduce seniority). An employee's previous wage or salary history cannot be used as a defense to a claim made under the law and employers may not ask about a worker's salary history or reduce the wages of an employee to comply with the new law, such as lowering a male worker's salary to match a female employee's. Employers should keep a close eye on the equal pay legislation trend that could be duplicated in other states.

Detailed discussion

The nationwide trend of enacting equal pay legislation—from California to New York—continued on August 1, when Massachusetts Governor Charlie Baker signed An Act to Establish Pay Equity into law.

The new law—set to take effect July 1, 2018—contains major changes. Most fundamentally, employers are prohibited from discriminating on the basis of gender in the payment of wages and other compensation for "comparable" work. The statute defines comparable work as that which is "substantially similar in that it requires substantially similar skill, effort and responsibility and is performed under similar working conditions; provided, however, that a job title or job description alone shall not determine comparability."

Exceptions exist for pay variations, including a merit-based system; a system that measures the quantity or quality of production, sales, or revenue; the geographic location where the job is being performed; education, training, or experience, to the extent these factors are reasonably related to the particular job; a seniority system (although leave for pregnancy as well as parental, family, and medical leaves may not act to reduce seniority); or travel, if it is a regular and necessary part of the job.

Wages may not be reduced for the sole purpose of complying with the law, and an employee's previous wage or salary history may not be used as a defense to a claim made under the law. In fact, the new law prohibits employers from seeking the wage or salary history of an applicant from a current or former employer in an attempt to reduce the effect of potential past salary inequity.

If the applicant voluntarily discloses the information in writing, however, the employer may confirm the wage or salary. Similarly, employers may confirm a wage or salary history after an offer of employment—complete with compensation—has been negotiated and made to the applicant.

The statute protects employees' right to discuss and inquire about wages with their coworkers and prohibits retaliation against workers for engaging in protected conduct including participating in an investigation into unequal pay allegations or opposing gender-based wage differentials.

Employees may pursue a claim of violations of the new law through the state Attorney General or file suit (individually or on a class basis) with the possibility of unpaid wages, liquidated damages, and attorneys' fees.

A three-year statute of limitations—lengthened from the prior one year—is based on the date of the "alleged violation," defined to include when the alleged discriminatory compensation decision and/or practice was adopted; when the employee became subject to the alleged discriminatory compensation decision and/or practice; or when the employee was affected by the application of the alleged discriminatory pay decision and/or practice—including each time wages were paid, restarting the time clock with each paycheck.

The statute does provide employers with the possibility of an affirmative defense. If within the prior three years and before the commencement of the employee's claim the employer has completed a self-evaluation of its pay practices in good faith and can demonstrate that it has made "reasonable progress" toward eliminating gender-based wage differentials, it may present the evaluation (which can be designed by the employer as long as it is reasonable in detail and scope) as an affirmative defense.

Employers may not enter into agreements with employees to avoid compliance with the statute.

To read An Act to Establish Pay Equity, click here.

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Seventh Circuit: Title VII Doesn't Cover Sexual Orientation Discrimination

Why it matters

Potentially foreshadowing U.S. Supreme Court review, a panel of the Seventh Circuit Court of Appeals held that Title VII does not permit sexual orientation discrimination claims, affirming dismissal of a professor's lawsuit against a university. Kimberly Hively alleged that Ivy Tech Community College did not renew her teaching contract or consider her for a permanent position because of her sexual orientation. But the federal appellate court said her claim was "beyond the scope of the statute." The issue is ripe for consideration by Congress or the U.S. Supreme Court, the panel noted, particularly with the "illogical result" of allowing "nearly indistinguishable" gender non-conformity claims. The current situation is "a somewhat odd body of case law that protects a lesbian who faces discrimination because she fails to meet some superficial gender norms—wearing pants instead of dresses, having short hair, not wearing make-up—but not a lesbian who meets cosmetic gender norms, but violates the most essential of gender stereotypes by marrying another woman. We are left with a body of law that values the wearing of pants and earrings over marriage," the Seventh Circuit said.

Detailed discussion

Kimberly Hively began teaching as a part-time adjunct professor at Ivy Tech Community College in 2000. In 2013, she filed a charge with the Equal Employment Opportunity Commission (EEOC) claiming that she had been discriminated against on the basis of sexual orientation. She alleged that although she had the necessary qualifications for full-time employment and had never received a negative evaluation, the college refused to even interview her for any of the six positions for which she applied and then failed to renew her contract.

The college told the court that Hively had made a claim for which there was no legal remedy because Title VII does not apply to claims of sexual orientation discrimination. A federal district court agreed and granted the motion to dismiss. With much consternation, the Seventh Circuit Court of Appeals affirmed.

To begin with, prior precedent in the circuit—beginning with a pair of cases from 2000—made clear that "harassment based solely upon a person's sexual preference or orientation (and not on one's sex) is not an unlawful employment practice under Title VII." Without exception, the circuit "has been unequivocal" in following this precedent, the court said, which is also in line with all other circuit courts that have opined on the matter, including the First, Second, Third, Fourth, Fifth, Sixth, Eighth, Ninth, Tenth, and D.C. Circuits.

"Our holdings and those of other courts reflect the fact that despite multiple efforts, Congress has repeatedly rejected legislation that would have extended Title VII to cover sexual orientation," the panel said. "Moreover, Congress has not acted to amend Title VII even in the face of an abundance of judicial opinions recognizing an emerging consensus that sexual orientation discrimination in the workplace can no longer be tolerated."

The court noted that it could end the discussion there but elected to respond to a recent EEOC decision where the agency concluded that sexual orientation "is inherently a 'sex-based consideration,' and an allegation of discrimination based on sexual orientation is necessarily an allegation of sex discrimination under Title VII," as well as recent legal developments and changing workplace norms.

The current legal situation is complicated, to say the least, the panel wrote, with a line of cases where courts recognize claims from gay, lesbian, bisexual, and transgender employees who framed their Title VII sex discrimination in terms of discrimination based on gender non-conformity and not sexual orientation. However, this distinction is elusive, and courts have either disallowed claims where sexual orientation and gender non-conformity are intertwined or tried to tease apart the two claims to focus only on the gender stereotype allegations.

"In sum, the distinction between gender non-conformity claims and sexual orientation claims has created an odd state of affairs in the law in which Title VII protects gay, lesbian, and bisexual people, but frequently only to the extent that those plaintiffs meet society's stereotypical norms about how gay men or lesbian women look or act—i.e., that gay men tend to behave in effeminate ways and lesbian women have masculine mannerisms," the Seventh Circuit wrote. "By contrast, lesbian, gay or bisexual people who otherwise conform to gender stereotyped norms in dress and mannerisms mostly lose their claims for sex discrimination under Title VII, although why this should be true is not clear."

The cases create a "paradoxical legal landscape in which a person can be married on Saturday and then fired on Monday just for that act," the court said. "For although federal law now guarantees anyone the right to marry any other person of the game gender, Title VII, to the extent it does not reach sexual orientation discrimination, also allows employers to fire that employee for doing so. From an employee's perspective, the right to marriage might not feel like a real right if she can be fired for exercising it."

Adding to the problem: a failure to recognize associational discrimination claims. While Title VII protects a white woman who is fired for romantically associating with an African-American man, a similar parallel is not found in the context of same-sex relationships. "[L]ogically it should also protect a woman who has been discriminated against because she is associating romantically with another woman, if the same discrimination would not have occurred were she sexually or romantically involved with a man," the court said, and yet the statute has not provided such protections.

Despite this, "the paradox is not our concern," the panel said, as "[o]ur task is to interpret Title VII as drafted by Congress." The legislature certainly has knowledge of the problem but "time and time again" has said "no" to every attempt to add sexual orientation to the list of categories protected from discrimination by Title VII.

Because of that, the court affirmed dismissal of the suit. However, it recognized that "[p]erhaps the writing is on the wall. It seems unlikely that our society can continue to condone a legal structure in which employees can be fired, harassed, demeaned, singled out for undesirable tasks, paid lower wages, demoted, passed over for promotions, and otherwise discriminated against solely based on who they date, love, or marry," the panel wrote. "The agency tasked with enforcing Title VII does not condone it, many of the federal courts to consider the matter have stated that they do not condone it and this court undoubtedly does not condone it. But writing on the wall is not enough. Until the writing comes in the form of a Supreme Court opinion or new legislation, we must adhere to the writing of our prior precedent."

To read the opinion in Hively v. Ivy Tech Community College, click here.

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SEC Continues Crackdown on Severance Agreements

Why it matters

The Securities and Exchange Commission (SEC) continued its efforts against anti-whistleblowing provisions in severance agreements, fining one employer $265,000 for the use of an allegedly illegal clause. Atlanta-based BlueLinx Holdings violated securities laws by using severance agreements that required outgoing employees to waive their rights to monetary recovery should they file a charge or complaint with the SEC or other federal agencies. The prohibitions were used after August 2011, when the agency adopted Rule 21F-17 forbidding any action impeding an individual from communicating with the SEC about possible securities law violations. But the employer forced employees to waive their whistleblower rights or risk losing other post-employment benefits, the agency said. "We're continuing to stand up for whistleblowers and clear away impediments that may chill them from coming forward with information about potential securities law violations," Stephanie Avakian, Deputy Director of the SEC's Enforcement Division, said in a statement about the BlueLinx action. "Companies simply cannot undercut a key tenet of our whistleblower program by requiring employees to forgo potential whistleblower awards in order to receive their severance payments," added Jane Norberg, Acting Chief of the SEC's Office of the Whistleblower.

Detailed discussion

In 2011, the Securities and Exchange Commission (SEC) promulgated Rule 21F-17, which provides in part: "(a) No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications." The Rule was intended to fulfill the purpose of the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

Both prior to August 2011, when Rule 21F-17 became effective, and after, BlueLinx entered into severance agreements with employees leaving the company and receiving some form of post-employment consideration. The Atlanta-based company has about 1,700 employees and the "vast majority" of non-management employees who left the company were asked to sign one of a variety of forms of severance agreements.

Although the forms differed somewhat, they contained some form of a provision prohibiting the employee from sharing—with anyone—confidential information concerning BlueLinx that the worker had learned while employed by the company, the SEC said, unless compelled to do so by law or legal process. These confidentiality provisions also required the employee to either obtain written consent from the legal department or provide written notice prior to providing confidential information in the event of legal process and provided no exception to permit the employee to voluntarily provide information to the SEC or other agencies.

Approximately 18 BlueLinx employees signed an agreement containing these confidentiality provisions.

In 2013, the company amended its severance agreements, adding a new provision that stated: "Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with … the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency."

About 160 employees signed agreements with this provision, the SEC said, which operated counter to the purpose of Rule 21F-17 and undermined the intent of Dodd-Frank.

"By including those clauses in its Severance Agreements, BlueLinx raised impediments to participation by its employees in the SEC's whistleblower program," according to the agency's order. "By requiring departing employees to notify the company's Legal Department prior to disclosing any financial or business information to any third parties without expressly exempting the Commission from the scope of this restriction, BlueLinx forced those employees to choose between identifying themselves to the company as whistleblowers or potentially losing their severance pay and benefits. Further, by requiring its departing employees to forgo any monetary recovery in connection with providing information to the Commission, BlueLinx removed the critically important financial incentives that are intended to encourage persons to communicate directly with the Commission staff about possible securities law violations."

The agency ordered BlueLinx to pay a $265,000 fine and terminate use of the challenged provision. The company must also make reasonable efforts to contact the former employees who signed any of the severance agreements, provide them with an Internet link to the SEC order, and provide a statement that BlueLinx does not prohibit them from "providing information to, or communicating with, Commission staff without notice to the Company" or "accepting a whistleblower award from the Commission pursuant to Section 21F of the Exchange Act."

Further, the company will add a new clause to its severance agreements: "Protected Rights. Employee understands that nothing contained in this Agreement limits Employee's ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission ('Government Agencies'). Employee further understands that this Agreement does not limit Employee's ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee's right to receive an award for information provided to any Government Agencies."

The action is the agency's third against an employer based on allegations of Rule 21F-17 violations. In April 2015, the SEC filed and settled a case with a technology and engineering firm that instructed employees not to discuss the workings of an internal investigation without prior authorization by the law department, imposing a $130,000 fine.

Earlier this year, the agency included claims based on Rule 21F-17 in an action against a financial services institution that settled for $415 million, alleging the company failed to include a carveout in the confidentiality provisions of its severance agreements allowing employees to voluntarily give confidential information to government agencies.

To read the order in In the Matter of BlueLinx Holdings Inc., click here.

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