Another One Bites the Dust: Another Blow to Employment Arbitration Clauses in Hawai`i

In Gabriel v. Island Pacific Academy, Inc., the Hawai‘i Supreme Court recently refused to enforce an arbitration clause in an employment agreement, where the chosen arbitrator’s standard operating procedures would have required the employee to pay half the arbitration costs up front in order to arbitrate any dispute. The Court held that the clause was substantively unconscionable and, therefore, unenforceable where the associated arbitration costs were so prohibitively expensive as to deter the employee from bringing a claim. The Court further held the proper remedy was to strike the entire arbitration agreement, not reformation, because the parties’ agreement to arbitrate was pervaded by the unconscionable terms.

The employment agreement between Gabriel and Island Pacific Academy (“IPA”) contained the following arbitration clause:

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.

Although the clause only provided that the parties submit any disputes to an arbitrator “in accordance with the standard procedures of Dispute Prevention Hawaii,” the circuit court found that Dispute Prevention and Resolution Hawaii, Inc. (“DPR”) was in fact the arbitral body. The circuit court demanded DPR’s standard operating procedures be submitted, after Gabriel argued that DPR would require her to pay half of the cost of arbitration and half of the deposit for the arbitrator’s fees upfront.

DPR’s standard operating procedures stated:

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.

Pursuant to DPR’s standard operating procedures, the Court agreed that Gabriel would have had to pay half of the arbitration costs upfront. The Court then found that Gabriel would have been deterred from accessing the arbitral body because she was unable to pay the costs. Gabriel had submitted a personal declaration and supporting exhibits showing:

  • While at IPA, her salary was $45,000 annually;
  • She was without a full-time job, having financial difficulty, and unable to pay for the costs of arbitration; and
  • DPR would have charged $20,318.74 for a four-day arbitration, and that she would need to remit a $10,200.00 deposit.

However, the Court clarified that an arbitration agreement requiring employee cost-splitting is not unconscionable, per se; it is a fact-dependent inquiry, turning on whether the costs of submitting to arbitration would deter the employee bringing a claim. Here, the Court estimated that Gabriel’s arbitration costs would have been somewhere between 1/4 to 2/3 of her contracted, annual salary, and this was a deterrent.

The takeaways: draft an employment arbitration clause carefully (such as using boilerplate language selectively, avoiding clauses a court may consider burdensome on an employee) and seek a Hawai`i employment lawyer’s legal advice or review.

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Scott Prange is an Associate Attorney at Alston Hunt Floyd & Ing in the Employment and Government Contracts Practice Group.  He can be reached at sprange@ahfi.com