On March 26, 2020, Magistrate Judge Robert W. Lehrburger issued an important decision in Chen–Oster v. Goldman, Sachs & Co., No. 10CIV6950ATRWL, 2020 WL 1467182 (S.D.N.Y. Mar. 26, 2020), an employment discrimination class action against Goldman Sachs.

Chen is notable for two reasons. First, it addresses when a defendant in a certified class action waives its right to arbitrate. Second, it provides a comprehensive discussion of a topic the Second Circuit has not addressed: the enforceability of arbitration agreements signed after a class action is filed.

Background

In December 2010, the Chen plaintiffs filed a class action complaint against Goldman Sachs alleging gender discrimination.

Of the 3,322 putative class members, 1,850 signed arbitration agreements after the case was filed. There were actually four different kinds of agreements: severance agreements, promotion agreements, agreements to become private wealth advisors, and equity agreements, which provided for discretionary, equity-based compensation awards.

From early on, Goldman Sachs argued that anyone who signed arbitration agreements belonged in arbitration, not in court.

On March 30, 2018, more than seven years after the case was filed, Judge Analisa Torres granted plaintiffs' motion for class certification. Chen-Oster v. Goldman, Sachs & Co., 325 F.R.D. 55 (S.D.N.Y. 2018). Class members had until Jan. 14, 2019 to exclude themselves, or "opt out" of the class.

On Feb. 5, 2019, Goldman Sachs demanded that class members with arbitration agreements withdraw their claims and file them in arbitration.

Waiver

A defendant that waits too long to compel arbitration risks waiving its right to arbitrate. The obvious question is: how long is too long?

"In the context of class action litigation," Judge Lehrbruger explained, "courts repeatedly have held that the earliest time to move to compel arbitration is after class certification." Though Goldman Sachs moved to compel arbitration ten years into the case, it did not waive its right to arbitrate because it filed its motion three months after the end of the opt-out period. Three months was "as soon as it was practicable and possible" to file the motion.

Judge Lehrburger considered waiver under the Second Circuit's three prong formal test: "(1) the time elapsed from when litigation was commenced until the request for arbitration; (2) the amount of litigation to date, including motion practice and discovery; and (3) proof of prejudice." Louisiana Stadium & Exposition District v. Merrill Lynch, Pierce, Fenner & Smith, 626 F.3d 156, 159 (2d Cir. 2010) (internal quotations and citations omitted). On the facts of Chen, Judge Lehrburger held that each of these factors weighed against waiver.

With respect to the first factor, Judge Lehrburger noted that Goldman Sachs had been raising arbitration since the case began. While formal requests came 10 years into the case, they were hardly a surprise.

Independently of that, it would be a mistake to "simply count[] the years that have passed" since the filing of the complaint. Putative class members only fall within a court's jurisdiction after class certification. Because Goldman Sachs demanded arbitration "expeditiously" following class certification, the first factor weighed against waiver.

The second factor is the amount of litigation prior to the demand for arbitration. It reflects a concern for judicial economy, which "dictates that parties may not burden the courts, only to then jump ship to arbitration when the strategic timing suits their interests."

Once again, Judge Lehrburger emphasized that Goldman Sachs had consistently taken the position that its arbitration agreements should be enforced; it therefore was not merely trying to "jump ship" because of an adverse ruling on class certification. Accordingly, the second factor weighed in favor of waiver as well.

The final factor, prejudice, is the "key to a waiver analysis." Prejudice can take the form of substantive prejudice, which occurs when a party needs to relitigate an issue in arbitration or when a party is subject to discovery that is unavailable in arbitration. Prejudice can also manifest itself as additional cost and delay. Judge Lehrburger held that neither type of prejudice was present. Accordingly, the third factor weighed against arbitration.

Having reviewed the three factors, Judge Lehrburger held that Goldman Sachs had not waived its right to arbitrate.

Enforceability of Arbitration Agreements

Plaintiffs argued that arbitration agreements signed by class members after the complaint was filed should not be enforced. Here, they appealed to Federal Rule of Civil Procedure 23(d), which allows courts to "impose conditions on the representative parties."

While no Second Circuit decision spells out the Rule 23(d) analysis, district courts "have found arbitration clauses and releases voidable when there is a record establishing actual or potential coercion or deception." These courts have considered the "totality of the circumstances," including:

• "the relative vulnerability of the putative class members;
• evidence of actual coercion or conditions conducive to coercion;
• whether the defendant targeted putative class members in a purposeful effort to narrow the class;
• whether the arbitration provision was unilaterally imposed on the putative class; and
• evidence of misleading conduct, language, or omissions, including the extent to which the agreement does or does not mention the existence of the putative class action and related information."

Judge Lehrburger divided his Rule 23(d) analysis into two parts. First, he focused on the separation, promotion, and private wealth advisor agreements. Second, he addressed the equity agreements.

Separation, Promotion, and Private Wealth Advisor Agreements

Judge Lehburger held that Rule 23(d) relief was not warranted for class members who signed separation agreements, promotion agreements, and agreements to become private wealth advisors.

First, the class members who signed these agreements were sophisticated bankers, not vulnerable employees.

Second, there was no evidence of coercion. Unlike many cases where Rule 23(d) orders were granted, Goldman Sachs did not impose arbitration by threatening class members' jobs or otherwise pressuring them. On the contrary, the arbitration provisions were included in agreements that offered material benefits.

Third, the arbitration agreements were not targeted at class members. They were given to male and female employees, not just class members (all of whom were female). Additionally, they could not be understood as a response to Chen. Instead, they were based on agreements that had been used before Chen started.

Fourth, Goldman Sachs did not unilaterally impose arbitration on class members. Individuals who signed the agreements were given valuable consideration in the form of money or a promotion. Accordingly, the first four factors did not support Rule 23(d) relief.

However, the fifth factor, evidence of misleading conduct, did weigh somewhat in favor of Plaintiffs. Goldman Sachs' arbitration agreements were clear, but they did not inform putative class members that by agreeing to arbitrate, they could be giving up their right to litigate in a pending case. At the same time, however, plaintiffs failed to show that any class members actually were misled, which mitigated the impact of the fifth factor in this case.

The fifth factor notwithstanding, the court concluded based on the totality of the circumstances that remedial action under Rule 23(d) was not warranted for the first group of agreements.

Equity Agreements

On the other hand, Judge Lehburger held that Rule 23(d) relief was warranted for class members who signed equity agreements because those agreements were procedurally unconscionable to a degree.

Under the Federal Arbitration Act, arbitration agreements can be invalidated based on generally applicable contract defenses. One such defense is unconscionability.

Unconscionability takes two forms: procedural unconscionability, which implicates contract formation, and substantive unconscionability, which implicates the content of a contract. Both forms of unconscionability are measured on a sliding scale. In New York, arbitration agreements must be both procedurally and substantively unconscionable if they are to be invalidated as unconscionable.

In analyzing procedural unconscionability, Judge Lehrburger noted that Goldman Sachs' equity program was originally contained in a certain agreement that referenced a certain plan. The agreement and the plan contained an arbitration agreement that was limited in scope. Later, Goldman Sachs required an electronic acknowledgment for accepting equity benefits. Employees would not know the acknowledgment contained an arbitration provision unless they scrolled to the end of six frames. Goldman Sachs did not tell explain that the new arbitration provision was much broader than the old arbitration provision for the equity program. This meant the arbitration provision was tainted by a degree of procedural unconscionability. Because there was no substantive unconscionability, Judge Lehrburger refused to invalidate the arbitration provisions on unconscionability grounds.

Still, procedural unconscionability mattered for purposes of Rule 23(d). It led Judge Lehburger to exercise his discretion to permit equity agreement signatories to opt out of arbitration. Judge Lehburger explained that making an opt-out available "avoids outright invaliding the arbitration provisions (as applied to Class Members) and provides individual Class Members with a choice that should have been theirs to make at an earlier time."

Conclusion

Chen offers a generally applicable rule for avoiding waiver in class actions: raise arbitration early and demand arbitration shortly after the opt-out period. Chen also offers a framework for assessing the enforceability of arbitration agreements signed post-complaint. It should be required reading for class action lawyers.

Michael H. Reed is counsel at Yankwitt LLP in White Plains, N.Y., where he practices complex litigation with an emphasis on employment cases.