An arbitration agreement that required a former Oahu private school teacher to pay half the estimated arbitration costs upfront (about $10,000 for the employee’s share) rendered the arbitration agreement unenforceable, the Hawai‘i Supreme Court recently ruled. Employers that have or are considering arbitration agreements will want to consider the lessons from this decision.
Teacher Contract Contains an Arbitration Clause
According to the Hawai‘i Supreme Court’s decision, Laura Gabriel (“Gabriel”) was a physical education teacher at Island Pacific Academy (“IPA”) from 2006 to 2014. The school would contract with Gabriel for employment on an annual basis. The employment agreement contained an arbitration provision that required the parties to submit any disputes to arbitration at Dispute Prevention and Resolution, Inc. (“DPR”) in accordance with DPR procedures. The agreement also said that if either party initiated legal action instead of arbitrating as required by the agreement, that party would be required to pay the other party’s attorneys’ fees and other expenses. The agreement did not say anything about the costs of arbitration. However, DPR’s rules provide that parties are to equally split the costs of arbitration and that the parties were required to submit advance deposits toward the anticipated fees and expenses of the arbitrator.
Teacher Complains About Student Comment
In December 2013, an 8th grade male student dropped his water bottle, resulting in water hitting Gabriel. She told the student, “Why are you guys always getting me wet?” The comment prompted three male students “to snicker that the boys in the class were always getting Gabriel wet.” Gabriel assumed the comment was a sexual joke and reported the incident as sexual harassment to the IPA administration.
Gabriel Signed a New Contract, But Wasn’t Hired
In March 2014, IPA gave Gabriel an employment agreement for the upcoming 2014-2015 school year and asked Gabriel to sign it by April. Gabriel timely signed and returned the employment agreement, which included the arbitration provision.
IPA later told Gabriel it would not need her for the upcoming school year. Gabriel says she was told her contract would not be honored because the principal did not want to work with her. On the other hand, IPA said Gabriel had been terminated due to a reduction in force resulting from low enrollment at the school.
Gabriel Complains of Retaliation
Gabriel filed a charge of discrimination with the Hawaii Civil Rights Commission and the Equal Employment Opportunity Commission. In her charge, Gabriel alleged that IPA did not hire her for the 2014-2015 school year in retaliation for her complaint to the IPA administration about sexual harassment by her male students. Gabriel then filed a lawsuit in Hawai‘i state court claiming retaliation and intentional infliction of emotional distress.
IPA Seeks to Compel Arbitration
In response to Gabriel’s lawsuit, IPA asked the court to compel Gabriel to arbitrate her claims as provided in the employment agreement for the 2014-2015 school year. IPA also asked the court to order Gabriel to pay the attorneys’ fees incurred by IPA in having to compel arbitration.
Gabriel argued that she should not be compelled to arbitrate because: (1) IPA had never signed the employment agreement for the 2014-2015 school year; (2) Gabriel’s retaliation claim was not covered by the agreement; and (3) the arbitration provision was unenforceable because it was offered on a “take-it-or-leave-it” basis and was unfair because it required Gabriel to pay half of the costs of arbitration.
The court asked the parties to submit an estimate of the costs for arbitration from DPR. Based on an estimated four-day arbitration, DPR reported that the costs would be approximately $20,000 and that each party would need to remit a deposit of approximately $10,000 to DPR.
The court granted IPA’s request to compel arbitration, but only on the condition that IPA pay all of the arbitrator’s fees. The judge concluded it would be unconscionable to require Gabriel to pay $10,000 to initiate arbitration (particularly when it costs only $515 to initiate a lawsuit in court), but that the arbitration provision could be made fair by requiring IPA to pay all the fees. The judge also denied IPA’s request to be awarded its fees and costs incurred in compelling Gabriel to arbitrate. Both Gabriel and IPA appealed the judge’s decision to the Hawai‘i Supreme Court.
Valid Arbitration Existed
Taking Gabriel’s arguments about why she should not be compelled to arbitrate in turn, the Hawai‘i Supreme Court first rejected Gabriel’s argument that there was no valid agreement to arbitrate because IPA had never signed the 2014-2015 employment agreement. Although Gabriel was not hired for the 2014-2015 school year and IPA did not sign the employment agreement, the court ruled that the parties had an entered into an arbitration agreement. The court explained that all three elements necessary for a valid arbitration agreement existed because the agreement (1) was in writing; (2) unambiguously bound the parties to handle disputes out of court through arbitration; and (3) was supported by “bilateral consideration,” meaning that both sides were giving something up (the right to litigate in court). The court ruled that “it did not matter that an agent from IPA did not sign the employment agreement” because once Gabriel signed and returned the agreement, she accepted IPA’s offer for employment and all of the terms that came with it, including the agreement to arbitrate disputes.
Retaliation Claim Covered by the Agreement
The Hawai‘i Supreme Court also rejected Gabriel’s argument that her claim for retaliation was not covered by the arbitration agreement. The court explained that retaliation was covered because the arbitration agreement required Gabriel to handle any dispute concerning the agreement out of court. The court noted the “strong policy in favor of arbitration,” and the requirement that any doubt about whether a dispute was covered be resolved in favor of arbitration. Thus, the fact that the arbitration provision did not specifically reference retaliation claims did not mean such claims were not covered.
Cost-Splitting Was Unfair
The Hawai‘i Supreme Court agreed with Gabriel that requiring her to pay approximately $10,000 to initiate arbitration was “unconscionable.” The court expressly stated that it was not ruling that a cost-splitting requirement in an arbitration agreement would be unfair in all cases. Rather, the court said consideration needed to be given to the specific circumstances of the case.
The court noted that during her employment with IPA, Gabriel earned between $35,000 to $45,000 annually. In connection with her objection to arbitration, Gabriel submitted a declaration stating that she did not have a full-time job and was having financial difficulty such that she could not pay the costs for arbitration. The court also took note of the $20,000 estimated cost for arbitration, half of which Gabriel would be expected to pay up front to DPR. Based on those circumstances, the court ruled it would be “unconscionable to require a terminated school teacher to pay, up-front, a deposit amounting to one-quarter to one-third of her former annual salary in order to access the arbitral forum.”
Unfairness Can’t Be Fixed
Having concluded the requirement to split arbitration costs was unfair, the question was whether it was appropriate for the judge to have ordered IPA to pay all of the costs or if the unfairness meant the entire arbitration provision was invalid. The court ruled it was improper for the judge to have modified the agreement by ordering IPA to pay all of the arbitration costs. The court reasoned that the employment agreement provided that it could be modified only in a document signed by both parties and that the circumstances here did not present a valid basis for the court to reform the parties’ agreement. The court also concluded that because of the way the arbitration provision was drafted, it was not possible to simply sever the unfair portion and enforce the remainder of the agreement to arbitrate.
The court also concluded that the portion of the arbitration provision that required a party that initiates litigation to pay the other side’s attorneys’ fees and costs solely for challenging the arbitration provision in court, regardless of whether the initiating party’s challenge was successful, was “obviously unfair.”
As a result, the court ruled that Gabriel could not be compelled to arbitrate and IPA was not entitled to recover its attorneys’ fees because Gabriel filed suit instead of arbitrating.
Gabriel v. Island Pacific Academy, Inc., SCAP-15-912 (Haw. June 13, 2017)
While it is possible for IPA to seek review of the Hawai‘i Supreme Court’s decision by the U.S. Supreme Court, there is no guarantee that IPA will seek such review or that it would be successful in overturning the Hawai‘i Supreme Court’s decision. Accordingly, it is a good time for employers using arbitration agreements to review their terms with experienced employment counsel, keeping in mind the Hawai‘i Supreme Court’s recent pronouncements on which types of provisions are unfair. Although the court said a cost-splitting provision is not unfair per se, such a provision is likely to be challenged by attorneys for employees seeking to avoid arbitration. Thus, careful consideration should be given to arbitration agreements that contain cost-splitting provisions or that refer to an arbitral forum that requires the parties to share the costs of arbitration.
Amanda M. Jones is a partner in Cades Schutte’s Litigation Department. She is currently the editor of Hawai‘i Employment Law Letter, where this article first appeared. In that role, she is also a member of Employers Counsel Network.