By Marjorie Johnson, J.D.
The court rejected plaintiffs’ contention that Goldman’s inclusion of the arbitration provisions and releases in employment and compensation agreements was coercive and misleading.
In a decade-old class action accusing Goldman Sachs of systemic gender discrimination, over 1,000 putative class members who signed arbitration agreements as part of separation, promotion, or compensation agreements will have to arbitrate their individual claims. However, others who may have been misled into agreeing to arbitrate over six years after the litigation commenced as part of their equity award agreements will be given the chance to opt-out. In an 88-page opinion granting in part the parties’ cross-motions, a federal magistrate judge in New York rejected the plaintiffs’ contention that Goldman waived its right to compel arbitration and ruled that the arbitration clauses contained in all four categories of the arbitration agreements were enforceable. The plaintiffs also failed to convince the court that the arbitration provisions in all 1,220 agreements that were entered into by class members after this action was filed should be voided pursuant to the court’s duty to manage communications with putative class members under Rule 23(d) (Chen-Oster v Goldman, Sachs & Co., March 26, 2020, Lehrburger, R.).
In this class action, the plaintiffs alleged that Goldman engaged in disparate-impact and disparate-treatment sex discrimination by implementing certain processes in a discriminatory manner that allowed it to favor men over women with respect to evaluation, compensation, and promotion. On March 30, 2018, the court certified a class of female associates and VPs employed in certain revenue-generating divisions and ordered a two-phase trial.
Cross-motions. At issue was Goldman’s motion to stay the claims of over 1,800 (56 percent) of the more than 3,300 class members, excluding them from the class, and compelling them to individually arbitrate their claims. In opposition, the plaintiffs argued that Goldman waived its right to compel arbitration and that the arbitration clauses in the equity compensation agreements were unconscionable and therefore unenforceable. The plaintiffs also filed a Rule 23(d) cross-motion seeking a judicial order voiding the arbitration clauses (and releases in severance agreements) contained in agreements executed after the filing of this lawsuit on September 15, 2010.
Four types of arbitration agreements. The broad arbitration clauses at issue were contained in four types of agreements—separation, promotion, private wealth advisor (PWA), and equity award—none of which were solely offered to, or accepted by, class members. In 769 separation agreements, class members agreed to arbitrate employment-related disputes and release claims in exchange for lump-sum severance payments and other valuable benefits. In 200 agreements, class members agreed to arbitration in exchange for increased compensation and promotion to certain managing director positions. In 187 agreements, those who served as PWAs agreed to arbitrate in exchange for significant career and compensation benefits.
Beginning six years after the litigation commenced, 694 class members agreed to a broad arbitration clause while receiving discretionary equity-based compensation awards as part of equity award (EA) agreements. Though the EA agreements contained only limited arbitration clauses that did not encompass employment-related disputes broadly, Goldman introduced a new layer of the electronic acceptance process in 2016, in which it required employees to submit a “Signature Card” acknowledging their acceptance of the terms associated with both the Signature Card—which included the broad arbitration clause—and those of the EA agreement and stock inventive plan.
To view the full terms of the Signature Card, an employee had to scroll through six frames of fine print to see the sweeping arbitration provision in the last frame. Moreover, nothing alerted employees to the fact that the Signature Card’s arbitration provision was broader than those of the EA agreement and the stock incentive plan.
No waiver. The court first rejected the plaintiffs’ argument that Goldman waived its right to compel arbitration because it waited too long to assert it. Though the lawsuit was 10 years old, “simply counting the years” did not end the court’s analysis “given the unusual and circuitous path of this complex litigation.” Significantly, Goldman stated its intention to compel arbitration since it filed its first responsive pleading in 2010, reiterated that intention repeatedly over the years, and moved to compel as soon as practicable following class certification.
While the amount of litigation that had taken place was significant, context was key. In particular, the company could not compel arbitration until class certification and the members of the class were determined, and it did not “hide the ball” with respect to its intent. Indeed, it had successfully advanced an interlocutory appeal in the Second Circuit, winning reversal of the district court’s denial of its motion to compel arbitration against a former named plaintiff. Moreover, because it sought to compel arbitration of only about half of the class members’ claims, the dispute would proceed in litigation with more than 1,000 remaining plaintiffs, and there was no showing of prejudice.
First three types enforceable. Turning to the merits, the court first found that the arbitration provisions contained in the separation, promotion, and PWA agreements were enforceable and encompassed the claims in this suit. All the agreements were in writing and signed and accepted by “sophisticated” class members, and it was undisputed that the consideration exchanged was substantial. Indeed, the plaintiffs did not challenge the contractual validity of these agreements.
EA agreements procedurally unconscionable. However, the broad arbitration provision contained within the EA agreement’s Signature Card was somewhat procedurally unconscionable due to the lack of clarity in the way in which Goldman implemented and presented it. While some factors weighed in Goldman’s favor—including that the plaintiffs were sophisticated and didn’t point to any “high-pressured tactics” to coerce signatures—the record demonstrated that the Signature Card’s broad arbitration provision was tainted by procedural unconscionability. In particular, the court considered the limited scope of arbitration in the EA agreement and stock incentive plan documents, Goldman’s “burying” the broader provision in the Signature Card, its failure to alert employees to the change of scope, and the resulting potential for confusion.
Not substantively unconscionable. The Signature Card’s broad arbitration provision was nevertheless enforceable because it was not substantively unconscionable, the court held, rejecting the plaintiffs’ contention that Goldman intentionally changed the arbitration language six years into litigation to provide it with an “unfair advantage” in the lawsuit and any resulting individual arbitration. The mere existence of the decade-long class action lawsuit did “not bar Goldman from altering its business practices, arbitration policies, or form agreements” and there was no evidence that the broader language on the Signature Card was designed to target putative class members. To the contrary, it asked all eligible employees of both genders to execute identical form contracts, resulting in the receipt of the agreements by about one-third of its global workforce. Moreover, it did not introduce the new Signature Card process until six years after this case had been filed as a class action.
Agreements not voidable. The plaintiffs also failed to convince the court to void the arbitration provisions in all 1,220 agreements that were entered into by class members after this action was filed, pursuant to the court’s duty to manage communications with putative class members under Rule 23(d). Basically, their complaint was that Goldman’s inclusion of the arbitration provisions and releases in various employment and compensation agreements was coercive because of the employee-employer relationship and misleading because Goldman did not identify the existence of this action or contact information for class counsel.
Totality of circumstances analysis. The court noted that the interplay between Rule 23(d) and a defendant’s entry into arbitration agreements or releases with putative class members has been addressed in a number of cases, primarily outside the Second Circuit, but no controlling precedent dictated the outcome here. After an exhaustive review, the court concluded that the relevant cases together showed that courts are primarily concerned with whether arbitration agreements with the putative class members resulted from coercion or deception. To make this determination, the totality of circumstances should be considered, including: “(1) the relative vulnerability of the putative class members; (2) evidence of actual coercion or conditions conducive to coercion; (3) whether the defendant targeted putative class members in a purposeful effort to narrow the class; (4) whether the arbitration provision was unilaterally imposed on the putative class; and (5) 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.”
Relief not warranted as to separation, promotion, PWA agreements. Considering all of the circumstances, the court found that no Rule 23(d) relief was warranted as to the separation, promotion and PWA agreements since they were not actually or potentially coercive, deceptive, or otherwise abusive. There was no evidence that Goldman engaged in pressure tactics and under the circumstances, the employment relationship alone was not enough to demonstrate sufficient potential for coercion. Indeed, the record showed that the plaintiffs, who were well-educated and experienced professionals, “received substantial rewards through promotion, compensation or severance pay, and entered into agreements based on standard forms that Goldman had been using long before the lawsuit was filed and which were extended to both men and women.”
Failure to disclose class action not enough. The plaintiffs argued that Goldman’s failure to disclose the existence of this action and provide putative class members with “an opportunity to consult with Class Counsel to make an informed choice as to whether to waive their participation in this case” rendered the agreements misleading. The court agreed after a thoughtful analysis that omission of any reference to the pending class action was “of some concern,” and that the “better practice would have been for Goldman to include that information in conjunction with agreements proposed to putative class members.” However, standing alone and considering the other factors, that fact did not warrant voiding or taking other remedial action with respect to those agreements.
But opt-out notice warranted for EA agreements. The EA agreements also were not obtained through coercive means. However, they were procured in a “confusing and potentially misleading fashion” that, while not rising to the level of unconscionability, was sufficient to merit the court’s discretionary relief under Rule 23(d). The court concluded that the most appropriate remedy was to provide a notice to relevant class members that would give them the opportunity to opt out of arbitration and remain in the class litigation.
This remedy avoided “outright invaliding” the arbitration provisions as applied to class members, and provided individual class members with a choice “that should have been theirs to make at an earlier time.” And “preemptively concluding” that all relevant class members would prefer class action litigation to individual arbitration was “presumptive and broader than necessary.” On the other hand, merely warning Goldman to modify its Signature Card procedures in the future would be meaningless as the class had already been certified.
The court limited the relevant class members to whom notice should be sent, however, since there were some who may have executed an EA agreement following introduction of the Signature Card process, while also having entered into one of the separation, promotion. or PWA agreements. Those individuals should not be provided with opt-out notice because they had separately agreed to arbitrate their claims in this action through an agreement that did not pose a problem under Rule 23(d).
Rejected statutory argument. Finally, the court rejected Goldman’s argument that the Rules Enabling Act barred it from voiding the arbitration provisions since the Act commands that a procedural rule cannot trump a substantive congressional statute like the FAA. There was no such conflict here since the court was exercising its supervisory authority over class actions and ordering a “narrowly tailored remedy that does not void any arbitration provision.”
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