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Gabriel v. Island Pacific Academy, Inc.

Supreme Court of Hawaii

June 13, 2017

LAURA GABRIEL, Plaintiff/Appellant-Cross-Appellee,
v.
ISLAND PACIFIC ACADEMY, INC., a domestic nonprofit corporation; JOHN DOES; JANE DOES; DOE CORPORATIONS; DOE PARTNERSHIPS; DOE UNINCORPORATED ORGANIZATIONS; AND DOE GOVERNMENTAL AGENCIES, Defendants/Appellees-Cross-Appellants.

         APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT (CAAP-15-0000912; CIV. NO. 15-5-0852-05)

          Joseph T. Rosenbaum for plaintiff/appellant- cross-appellee

          Jeffrey S. Harris for defendant/appellee- cross-appellant

          RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.

          OPINION

          McKENNA, J.

         I. Introduction

         At issue in this case is whether it is unconscionable to require an employee to pay half the estimated arbitration costs up front in order to access the arbitral forum. We hold that, under the circumstances of this case, such a requirement is unconscionable and unenforceable. We further hold that, in this case, striking this requirement in the arbitration provision provides an insufficient remedy; rather, the entire arbitration provision must be invalidated.

         II. Background A. Facts

         Laura Gabriel ("Gabriel") taught physical education at Island Pacific Academy ("IPA") from 2006 through 2014. Gabriel and IPA contracted for her employment annually. In December 2013, one of her 8th grade male students dropped his water bottle, and water hit Gabriel. She remarked, "Why are you guys always getting me wet?" which prompted three of her male students to snicker that the boys in the class were always getting Gabriel wet. Gabriel surmised that she was the butt of a sexual joke and reported the incident as sexual harassment to IPA administration. The Secondary Principal, Kip Cummings, told Gabriel that she would no longer be teaching the class containing those male students. Ms. Cummings also expressed her concern over parent complaints about Gabriel's class. Ms. Cummings said she could not trust Gabriel and would not support her when parents complain.

         Three months after this incident, in March 2014, IPA issued Gabriel an employment agreement for the 2014-2015 school year and requested her signature on it by April 2014. The employment agreement contained the following arbitration provision:

L. Arbitration. The parties desire that any dispute concerning the Agreement be handled out of court. Accordingly, they agree that any such dispute shall, as the parties' sole and exclusive remedy, be submitted to an arbitrator licensed to practice law in the State of Hawaii and selected in accordance with the standard procedures of Dispute Prevention Hawaii [sic]. The arbitrator will not be entitled to add to or subtract from its terms. Should either party start any legal action or administrative proceeding against the other with respect to any claim related to this Agreement, or pursue any method of resolution of a dispute other than mutual agreement of the parties or arbitration, then all damages, costs, expenses and attorneys' fees incurred by the other party as a result shall be the responsibility of the one bringing the suit or starting the proceeding.[1]

         The employment agreement also provided that "[t]he parties agree that this contract shall be interpreted in accordance with the laws of the state of Hawaii. . . ." Gabriel timely signed and submitted the employment contract. Gabriel alleged that the Headmaster informed her that her employment contract was not going to be honored because Ms. Cummings did not want to work with her. Gabriel's last day with IPA was in June 2014.

         In October 2014, Gabriel filed her charge of discrimination with the Hawai'i Civil Rights Commission ("HCRC"), to be filed with the United States Equal Employment Opportunity Commission, alleging retaliation. The HCRC issued Gabriel a right to sue letter in February 2015.

         B. Gabriel's First Amended Complaint

         In May 2015, Gabriel filed her First Amended Complaint with the Circuit Court of the First Circuit.[2] She alleged that IPA refused to hire her for the 2014-2015 school year in retaliation for her sexual harassment complaint, in violation of HRS § 378-2(2) (2015), and that IPA's actions resulted in intentional infliction of emotional distress ("IIED"). She sought back pay, front pay, and all employee benefits that she would have enjoyed, as well as general and punitive damages for IIED.

         C. IPA's Motion to Compel Arbitration

         IPA filed a Motion to Compel Arbitration. IPA, through counsel, averred that Gabriel was terminated due to a reduction in force because of insufficient enrollment, not due to discriminatory retaliation. IPA pointed out that subsection H(e)[3] of the employment agreement provided for termination due to business conditions. Should the employee be terminated for that reason, IPA noted that subsection H of the employment agreement provided for the continuation of the arbitration obligation. IPA asked the circuit court to stay the proceedings pending arbitration. IPA also sought an award of its attorney's fees and costs for bringing the motion to compel arbitration, pursuant to the employment agreement's arbitration provision. IPA also contended that an award of attorney's fees and costs could also be made pursuant to the circuit court's inherent power, arguing that any opposition to IPA's motion would be frivolous.

         Gabriel opposed IPA's motion to compel arbitration. She argued that she and IPA had not entered into the 2014-2015 employment agreement (IPA had not signed the agreement) and no consideration was given under the agreement; therefore, IPA was foreclosed from attempting to enforce the agreement's arbitration provision. Assuming there was a valid agreement to arbitrate, Gabriel argued that her civil rights claim was beyond its scope. Furthermore, she argued, the arbitration agreement was unenforceable because it was included in an employment agreement that constituted a contract of adhesion, offered to Gabriel on a "take-it-or-leave-it" basis. Gabriel also argued that the arbitration provision was unconscionable because it required her to pay for the arbitration costs in a civil rights matter. Lastly, Gabriel opposed IPA's request for attorney's fees and costs under the arbitration provision, arguing that the provision was unenforceable. Gabriel also opposed an award of fees and costs under the circuit court's inherent power, arguing that her opposition to the motion to compel arbitration was not frivolous.

         The circuit court held a hearing on IPA's motion to compel arbitration. Although the arbitration provision states that the parties shall submit disputes concerning the employment agreement "to an arbitrator licensed to practice law in the State of Hawaii and selected in accordance with the standard procedures of Dispute Prevention Hawaii [sic]" (emphasis added), the parties and the court assumed that Dispute Prevention and Resolution, Inc. ("DPR") would be the arbitral body. The circuit court directed the parties to enter DPR's standard procedures into the record. The circuit court also asked the parties to submit supplemental briefing addressing whether the arbitration provision was unconscionable because DPR's standard procedures required the parties to split arbitration fees.

         D. Supplemental Briefing

         DPR's standard procedures were entered into the record. In her supplemental brief, Gabriel quoted the following material from DPR's rules to show that she would have to pay for half of the cost of arbitration, and would be required to pay and submit half of the deposit for the fees of the arbitrator prior to the arbitration:

I. DPR FEES & COSTS
Any out-of-pocket expenses incurred by the DPR appointed neutral (e.g., air fare, lodging, meals) in conjunction with a DPR proceeding are to be borne equally by the parties and shall be paid to the appointed neutral from funds deposited by the parties with DPR for that purpose. . . . .
II. ADVANCE DEPOSITS & REFUNDS
DPR policy requires that each party submit advance deposits toward the anticipated fees and expenses of the DPR appointed neutral on an equal or pro rata basis. DPR may require the parties to submit additional deposits during the pendency of the arbitration proceeding based on the expected duration of the matter. DPR and the DPR appointed neutral reserve the right to suspend their services for non-payment by any party. In the event of inadequate or non-payment of requested deposits by a party, DPR may request that the other party(s) involved in the proceeding submit additional deposits to assure that an adequate sum is available to compensate the DPR neutral. . . . .

         Gabriel's supplemental brief was accompanied by a declaration in which she averred that she was without a full-time job, having financial difficulty, and unable to pay for the costs of arbitration.[4] Gabriel also cited out-of-jurisdiction cases for the proposition that courts have found arbitration agreements unconscionable where the putative grievant is made to pay for arbitration costs in a civil rights matter.

         In its supplemental brief, IPA first argued that the arbitration agreement did not require cost-splitting and was, in fact, silent on the issue of fees and costs; all the arbitration agreement required was selection of a neutral arbitrator "in accordance with the standard procedures of Dispute Prevention Hawaii [sic]." IPA pointed out that the final payment of fees and costs is determined by the arbitrator according to HRS § 658A-21(d) (2016).[5] Consequently, IPA argued, Gabriel's claim that she will incur costs in arbitration that will prevent her from vindicating her rights is "completely speculative" and an insufficient basis for refusing to compel arbitration under Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79 (2000).

         IPA then argued that, if the circuit court was persuaded that the cost of arbitration would be prohibitively expensive for Gabriel, it should sever any arguably unconscionable provision or interpret the parties' agreement to require arbitration under conditions that the Court believes are necessary to allow Gabriel the ability to vindicate her rights. IPA considered the possibility that Gabriel might have to pay half of the arbitration deposit to be the only arguably unconscionable aspect of the agreement. The 2014-2015 employment agreement did contain a severability clause that states, "Should any provision of this contract be invalidated by a court of law with proper jurisdiction, the remaining provisions shall remain in full force and effect."

         E. The Parties' Arbitration Cost Estimates

         The circuit court then ordered the parties to submit an estimate of arbitration costs from DPR for this case. Gabriel's counsel estimated that it would take three and one half days to put on Gabriel's case, and IPA's counsel estimated that it would take half a day to put on its case. At Gabriel's counsel's request, DPR Case Manager Kelly Bryant estimated that it would cost $20, 418.84 for a four-day arbitration. Bryant informed Gabriel's counsel that each party would need to remit a $10, 200.00 deposit to DPR. After previously telling Gabriel's counsel that the defense portion of the arbitration would take half a day, IPA's counsel estimated that the entire arbitration would take half a day. At IPA's counsel's request, Bryant estimated that the total cost would be $2, 748.69 and that she would ask each party for a deposit of $1, 375.00.

         F. The Circuit Court's Order Granting IPA's Motion to Compel Arbitration

         The circuit court granted IPA's motion to compel arbitration, on the condition that IPA pay all of the arbitrator's fees in connection with the resolution of Gabriel's claims. The circuit court first concluded that the parties entered into a valid employment contract when Gabriel returned the signed 2014-2015 employment Agreement. The circuit court concluded that IPA terminated the 2014-2015 employment Agreement according to its terms, for business reasons. The circuit court concluded that the arbitration agreement was broad enough to encompass Gabriel's claim that IPA refused to renew her employment for the 2014-2015 academic year due to discriminatory retaliation against her. The circuit court found that the arbitration agreement was supported by consideration, as both parties mutually agreed to arbitrate and forgo the right to litigate in court. Even though Gabriel was not hired for the 2014-2015 school year, the circuit court found that she was bound by the 2014-2015 employment agreement's terms, analogizing Gabriel's case to failure-to-hire cases. The circuit court also concluded that the absence of an IPA agent's signature on the 2014-2015 employment agreement was not a basis for avoiding arbitration, where the agreement manifests the employer's intent to be bound by the arbitration provision.

         The circuit court, however, concluded that the arbitration agreement was unconscionable as applied, because it effectively requires Gabriel to pay for arbitration costs to adjudicate her statutory civil rights claim in an arbitral forum, and that she would not have to bear such costs by bringing her action in a judicial forum. The circuit court concluded that the arbitration clause was procedurally unconscionable as a contract of adhesion because it was the result of coercive bargaining between parties of unequal bargaining strength. The circuit court reasoned that the employment agreement was drafted and proffered by IPA, the stronger of the contracting parties; the employment agreement was offered to Gabriel on a take-it-or-leave-it basis; Gabriel was given only a few weeks to review and sign the 2014-2015 employment agreement, which contained the arbitration provision; the employment agreement required Gabriel to certify that she sought employment only with IPA; and Gabriel was given no opportunity to modify the terms of the employment agreement. The circuit court also concluded that the arbitration clause was substantively unconscionable because it unfairly limits the obligations of and unfairly advantages IPA, the stronger party, by compelling Gabriel, the weaker party, to split the arbitration costs. The circuit court supported its conclusion with a citation to Cole v. Burns Int'l Sec. Servs., 105 F.3d 1465 (D.C. Cir. 1997).

         Although the circuit court noted that the arbitration agreement did not contain an express provision regarding payment or sharing of arbitration fees and costs, it noted that the arbitration agreement required the parties to arbitrate through DPR. The circuit court deemed Gabriel's $20, 418.84 arbitration estimate to be reasonable, and noted that Gabriel would have to pay roughly half of this amount as a deposit. The circuit court found it unconscionable that Gabriel would have to pay a $10, 200.00 deposit to even access the arbitral forum; it concluded that enforcing such a payment would preclude Gabriel from vindicating her statutory rights in the arbitral forum. The circuit court noted that Gabriel would have to pay a filing fee of only $515.00 to have her case heard in circuit court, making the $10, 200.00 arbitration cost prohibitive and exorbitant.

         Nevertheless, the circuit court concluded that the arbitration clause could still be enforced by requiring IPA to pay for all arbitration fees and costs to resolve ...


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