Gabriel v. Island Pacific Academy, Inc.

*** FOR PUBLICATION IN WEST’S HAWAII REPORTS AND PACIFIC REPORTER ***
Electronically Filed
Supreme Court
SCAP-15-0000912
13-JUN-2017
08:00 AM
IN THE SUPREME COURT OF THE STATE OF HAWAII
---oOo---
________________________________________________________________
LAURA GABRIEL, Plaintiff/Appellant-Cross-Appellee,
vs.
ISLAND PACIFIC ACADEMY, INC., a domestic nonprofit corporation;
JOHN DOES 1-10; JANE DOES 1-10; DOE CORPORATIONS 1-10;
DOE PARTNERSHIPS 1-10; DOE UNINCORPORATED ORGANIZATIONS 1-10;
AND DOE GOVERNMENTAL AGENCIES 1-10,
Defendants/Appellees-Cross-Appellants.
________________________________________________________________
SCAP-15-0000912
APPEAL FROM THE CIRCUIT COURT OF THE FIRST CIRCUIT
(CAAP-15-0000912; CIV. NO. 15-5-0852-05)
JUNE 13, 2017
RECKTENWALD, C.J., NAKAYAMA, McKENNA, POLLACK, AND WILSON, JJ.
OPINION OF THE COURT BY 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
2
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.
1
The 2013-2014 employment agreement between Gabriel and IPA contained an
identical agreement to arbitrate.
3
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
2
The Honorable Karen T. Nakasone presided.
3
Subsection H(e) of the employment agreement is titled “Termination Due
to Business Conditions.” It states, “As necessary as determined by the
school due to business conditions, including, but not limited to,
insufficient enrollment, unsuitability of facilities, change in curriculum,
or elimination of position, all is determined in the School’s sole
discretion.”
4
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
5
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
6
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 §
4
Elsewhere in the record, there is evidence that IPA paid Gabriel
$35,000 the first year she taught (2006-2007); $36,400 the following year
(2007-2008); and would have paid Gabriel $45,000 for the 2014-2015 school
year.
7
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
5
HRS § 658A-21(d) states, “An arbitrator’s expenses and fees, together
with other expenses, shall be paid as provided in the award.”
8
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
9
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
10
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,
11
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 Gabriel’s
claims, as the Cole court had done.
Lastly, the circuit court denied IPA’s request for an award
of fees and costs in connection with its motion to compel
arbitration.
G. Gabriel’s Appeal and IPA’s Cross-Appeal
Gabriel timely appealed from the order granting IPA’s
motion to compel arbitration. Gabriel raises the following
points of error on appeal:
1. The Circuit Court, through its Order, erred in
concluding that as a matter of law that Plaintiff’s claims
against Defendant are subject to, and require, mandatory
arbitration pursuant to the non-honored Employment
Agreement and the applicable Hawaii law.
. . . .
2. The Circuit Court, through its Order, after finding the
Arbitration Clause . . . was unconscionable, erred in
ordering an erroneous modification of the Arbitration
Clause of the Employment Agreement.
IPA cross-appealed from the order. IPA raises the following
points of error on appeal:
1. The Circuit Court erred in holding the arbitration
agreement is substantively unconscionable, and therefore
ordering IPA to pay for all fees and costs of arbitration,
because “[t]he arbitration clause in the instant case would
make Plaintiff pay for half the cost of the DPR
arbitration. Arbitration would prohibitively and
exorbitantly cost Plaintiff $10,200.00.”
. . . .
2. The Circuit Court erred in denying IPA fees and costs
for the necessity of bringing its motion to compel.
12
This court accepted transfer of this appeal from the ICA.
III. Standard of Review
“A petition to compel arbitration is reviewed de novo.”
Siopes v. Kaiser Found. Health Plan, Inc., 130 Hawaii 437, 446,
312 P.3d 869, 878 (2013). “The standard is the same as that
which would be applicable to a motion for summary judgment, and
the trial court’s decision is reviewed ‘using the same standard
employed by the trial court and based upon the same evidentiary
materials as were before [it] in determination of the motion.’”
Brown v. KFC Nat’l Mgmt. Co., 82 Hawaii 226, 231, 921 P.2d 146,
151 (1996) (brackets in original; citations omitted).
IV. Discussion
A. This court has jurisdiction over this appeal.
Before this appeal was transferred to this court from the
ICA, IPA moved to dismiss Gabriel’s appeal for lack of appellate
jurisdiction. IPA argued that federal substantive law of
arbitrability precludes an appeal from an order compelling
arbitration. The ICA issued an order denying IPA’s motion, as
well as an order denying IPA’s motion for reconsideration of
that order. In its Answering Brief to Gabriel’s Opening Brief,
however, IPA persists in arguing that appellate jurisdiction is
lacking because the Federal Arbitration Act, or “FAA,” applies
to the parties’ agreement to arbitrate and preempts Hawaii’s
13
procedural rule permitting appeal of an order compelling
arbitration and staying judicial proceedings. We disagree.
It is true that the FAA states that “an appeal may not be
taken from an interlocutory order . . . compelling arbitration
under section 206 of [the FAA].” 9 U.S.C. § 16(b)(3) (West,
Westlaw through P.L. 114-327 (also including P.L. 114-329 and
115-1 to 115-8. Title 26 current through 115-18)). According
to the United States Court of Appeals for the Ninth Circuit, it
is now “well established that § 16(b) bars appeals of
interlocutory orders compelling arbitration and staying judicial
proceedings.” Johnson v. Consumerinfo.com, Inc., 745 F.3d 1019,
1021 (9th Cir. 2014). In the case before us, the circuit court
compelled arbitration and stayed the judicial proceedings
pending arbitration. Had this order been issued by a federal
district court, it is clear that it would not be appealable.
See, e.g., MediVas, LLC v. Marubeni Corp., 741 F.3d 4, 7 (9th
Cir. 2014) (“[A]n order compelling arbitration may be appealed
if the district court dismisses all the underlying claims, but
may not be appealed if the court stays the action pending
arbitration.”) (citations omitted).
This order, however, was issued in our state circuit court.
Under Hawaii law, a circuit court order compelling arbitration
and staying proceedings is an appealable final order over which
our appellate courts have jurisdiction. See Association of
14
Owners of Kukui Plaza v. Swinerton & Walberg Co., 68 Haw. 98,
107, 705 P.2d 28, 35 (1985) (holding that “orders granting stays
and compelling arbitration are appealable” under HRS § 641-
1(a)); County of Hawaii v. UNIDEV, LLC, 129 Hawaii 378, 392, 301
P.3d 588, 602 (2013) (“[A]fter Hawaii’s adoption of HRS § 658A-
28, orders compelling arbitration remain appealable under
Hawaii’s final judgment statute, HRS § 641-1.”)) (citation
omitted).
IPA argues that the Hawaii rule allowing appeals of orders
staying proceedings and compelling arbitration is preempted
because it conflicts with the FAA rules regarding appeals. IPA
asserts that by delaying arbitration proceedings, the Hawaii
rule contradicts and obstructs the overarching purpose of the
FAA to ensure the enforcement of arbitration agreements
according to their terms so as to facilitate streamlined
proceedings.
Alternatively, while IPA acknowledges that the parties’
employment agreement contains a choice-of-law provision calling
for the application of Hawaii law, IPA argues that the parties
have not agreed to apply Hawaii’s procedural rule simply by
having a choice of law provision that selects Hawaii law. We
disagree and conclude that the FAA does not preempt Hawaii’s
procedural rule, and applying Hawaii’s procedural rule will be
15
consistent with the parties’ expectations under the arbitration
agreement.
The FAA does not automatically preempt “different rules
than those set forth in the Act itself.” Volt Info. Scis., Inc.
v. Board of Trs. of the Leland Stanford Junior Univ., 489 U.S.
468, 479 (1989). The FAA’s purpose is “simply [to] require[]
courts to enforce privately negotiated agreements to arbitrate,
like other contracts, in accordance with their terms.” 489 U.S.
at 478. Under the FAA, parties may “agree[] to abide by state
rules of arbitration, [and] enforcing those rules according to
the terms of the agreement is fully consistent with the goals of
the FAA. . . .” 489 U.S. at 479. The FAA does not preempt
those state rules that may delay arbitration “where the Act
would otherwise permit it to go forward.” Id. The Volt court
emphasized that no federal policy exists for “favoring
arbitration under a certain set of procedural rules. . . .” 489
U.S. at 476. A state procedural rule governing arbitration,
applied “in accordance with the terms of the arbitration
agreement itself,” does not “undermine the goals and policies of
the FAA.” 489 U.S. at 477-78. So long as the state procedural
rule does not “stand as an obstacle to the accomplishment and
execution of the full purposes and objectives of Congress” in
enacting the FAA, it does not conflict with the FAA, and the FAA
will not preempt it. 489 U.S. at 477 (citation omitted).
16
For those jurisdictions that have examined whether the
FAA’s appeal provisions preempt state appeal provisions (where
those state appeal provisions are based on the Uniform
Arbitration Act, as Hawaii’s arbitration appeal provisions are),
a majority rule has emerged: the FAA’s appeal provisions do not
preempt state appeal provisions because (1) state appeal
provisions are procedural rather than substantive; (2)
procedural provisions should not be preempted unless they stand
as an obstacle to the full purposes and objectives of the FAA;
and (3) the state procedural rules do not impede the FAA’s
objective of ensuring the enforceability of arbitration
agreements in private contracts. Morgan Keegan & Co., Inc. v.
Smythe, 401 S.W.3d 595, 606 (Tenn. 2013) (collecting cases
following the majority rule). More specifically, some of these
jurisdictions have held that an order compelling arbitration is
immediately appealable under state procedural rules. See, e.g.,
Kremer v. Rural Cmty. Ins. Co., 788 N.W.2d 538 (Neb. 2010);
Wells v. Chevy Chase Bank, F.S.B., 768 A.2d 620 (Md. 2001);
Simmons v. Deutsche Fin. Servs. Corp., 532 S.E.2d 436 (Ga.
2000).
Therefore, this court will enforce the parties’ choice-of-
law provision and apply Hawaii’s procedural rules to this
matter. This court has jurisdiction to entertain this appeal.
17
B. The circuit court correctly concluded that the parties
entered into a valid arbitration agreement, and that
Gabriel’s retaliation claim was within the scope of
the arbitration agreement.
Under Brown, a court faced with a motion to compel
arbitration must first address whether an arbitration agreement
exists between the parties. Brown, 82 Hawaii at 238, 921 P.2d
at 158 (citation omitted). In order to be valid and
enforceable, “an arbitration agreement must have the following
three elements: (1) it must be in writing; (2) it must be
unambiguous as to the intent to submit disputes or controversies
to arbitration; and (3) there must be bilateral consideration.”
Douglass v. Pflueger Hawaii, Inc., 110 Hawaii 520, 531, 135 P.3d
129, 140 (2006) (citation omitted).
On appeal, Gabriel argues that the parties did not enter
into the 2014-2015 employment agreement, and, therefore, did not
enter into the arbitration agreement found within it. Gabriel
argues that, as she was not hired for the 2014-2015 academic
year, no consideration supported the 2014-2015 contract or the
arbitration provision within it. She again points out that IPA
did not sign the 2014-2015 employment agreement.
IPA’s position is that the parties entered into a valid
arbitration agreement. IPA argues that Gabriel accepted IPA’s
offer of employment when she signed and returned the 2014-2015
employment agreement, unmodified. In so doing, she entered into
18
the arbitration agreement, which was contained in the employment
agreement. Concerning Gabriel’s argument that no consideration
existed to support the 2014-2015 employment agreement and the
arbitration agreement within it, IPA counter-argues that
consideration supported the arbitration agreement because both
Gabriel and IPA agreed to forgo their rights to litigate in
court, citing Brown, 82 Hawaii at 239-40, 921 P.2d at 159-60;
and Douglass, 110 Hawaii at 534-35, 135 P.3d at 143-44.
For the reasons stated by IPA, we conclude that Gabriel and
IPA entered into an arbitration agreement. The arbitration
agreement (1) was in writing; (2) unambiguously bound the
parties to “handle[] out of court” “any dispute concerning this
Agreement” through submission of the dispute to an arbitrator;
and was supported by bilateral consideration, as both parties
“would forego [sic] their respective rights to a judicial forum”
and accept the binding arbitration process.” Brown, 82 Hawaii
at 239-40, 921 P.2d at 159-60. Additionally, it did not matter
that an agent from IPA did not sign the employment agreement.
This case is similar to Brown, where this court enforced an
arbitration agreement found in an employment application signed
by the prospective employee but not by the employer. See Brown,
82 Hawaii at 229, 921 P.2d at 149. When Gabriel signed and
returned the 2014-2015 employment agreement, she accepted IPA’s
19
offer for employment, and all of the terms that came with it,
including an agreement to arbitrate.
We note that the entire employment agreement is relatively
short at four pages long. It is written in plain English with
no fine print or cross-references to other documents. The
arbitration agreement is located on the same page as Gabriel’s
signature. Thus, this case is unlike other cases in which
questions arise as to an employee’s intent to be bound to an
arbitration provision that is physically separate from an
employment contract. See, e.g., Brown, 82 Hawaii at 245, 921
P.2d at 165 (holding that an arbitration agreement contained in
an employment application applied to a discrimination claim
arising out of a later executed oral contract for employment);
Douglass, 110 Hawaii at 534, 135 P.3d at 143 (holding that
mutual assent to arbitrate was lacking, where the employment
contract did not contain the arbitration agreement, and the
employee merely signed an acknowledgement of having read a
separate employee handbook, which did contain the arbitration
agreement). In this case, by contrast, the plain language of
the arbitration agreement demonstrates the parties’ mutual
assent to arbitrate. In short, a valid and enforceable
arbitration agreement exists between the parties.
A court faced with a motion to compel arbitration must next
decide whether “the subject matter of the dispute is arbitrable
20
under the agreement.” Brown, 82 Hawaii at 238, 921 P.2d at 158
(citation omitted). Gabriel argues that the arbitration
agreement governs matters covered in the employment agreement,
but not civil rights claims under HRS § 378-2(2). IPA counter-
argues that Hawaii courts have long recognized the strong public
policy supporting Hawaii’s arbitration statutes, and that any
doubts concerning the scope of arbitrable issues should be
resolved in favor of arbitration, citing Lee v. Heftel, 81
Hawaii 1, 4, 911 P.2d 721, 724 (1996).
We conclude that Gabriel’s discriminatory retaliation claim
was within the scope of the arbitration agreement, because the
arbitration agreement required her to “handle[] out of court”
“any dispute concerning this Agreement” by submitting the
dispute to an arbitrator. At the federal and state level, there
exists a strong policy in favor of arbitration, such that any
doubt concerning whether a dispute is covered by an arbitration
agreement should be resolved in favor of arbitrability. See
Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24 (1983) (“The Arbitration Act establishes that, as a matter of
federal law, any doubts concerning the scope of arbitrable
issues should be resolved in favor of arbitration, whether the
problem at hand is the construction of the contract language
itself or an allegation of waiver, delay, or a like defense to
21
arbitrability.”) (footnote omitted); Lee, 81 Hawaii at 4, 911
P.2d at 724 (“[T]he proclaimed public policy [supporting
Hawaii’s arbitration statutes] is to encourage arbitration as a
means of settling differences and thereby avoiding litigation.
[A]ny doubts concerning the scope of arbitrable issues should be
resolved in favor of arbitration[.]”) (citations omitted).
IPA also correctly observes that arbitration agreements
should be interpreted broadly in favor of finding arbitrability,
where the arbitration agreement is worded similarly to the
instant one regarding “any dispute concerning this Agreement.”
Indeed, in UNIDEV, we examined an arbitration agreement that
stated that “[a]ny dispute arising under the terms of this
Agreement . . . shall[, if the matter cannot be resolved by
other preliminary means] submit the matter to arbitration. . .
.” 129 Hawaii at 381, 301 P.3d at 591 (emphasis added). We
held that an arbitration agreement worded this way “constitutes
a ‘general’ arbitration clause” whose scope should be
interpreted broadly. 129 Hawaii at 395-96, 301 P.3d at 605-06.
In short, Gabriel’s retaliation claim falls within the scope of
the arbitration agreement.
Lastly, Gabriel argues that a discriminatory retaliation
claim is not expressly referenced in the employment agreement,
and, therefore, falls beyond the scope of the arbitration
22
agreement. We disagree and note that the arbitration agreement
covered termination due to alleged retaliatory discrimination,
because the employment agreement implicitly included within it
Hawaii’s laws concerning discrimination in employment. A
contract is presumed to include all applicable statutes and
settled law relating to its subject matter. Section 363 of 17A
Am.Jur.2d Contracts (2016) states
Contracting parties are presumed to contract in reference
to the existing law, and to have in mind all the existing
laws relating to the contract, or to the subject matter
thereof. All existing applicable or relevant statutes, and
settled law of the land at the time a contract is made
become a part of it and must be read into it just as if an
express provision to that effect were inserted therein,
except where the contract discloses a contrary intention.
By virtue of this rule, the laws which exist at the time
and place of making a contract and at the place where it is
to be performed, affecting its validity, construction,
operation, performance, enforcement, and discharge, enter
into and form a part of it as if they were expressly
referred to or incorporated into its terms.
This court favorably cited to and applied this general rule in
City and Cty. of Honolulu v. Kam, 48 Haw. 349, 402 P.2d 683
(1965), and Quedding v. Arisumi Bros., 66 Haw. 335, 661 P.2d 706
(1983) (per curiam). In both Kam and Quedding, this court held
that the “general rule [is] that the existing law is part of a
contract where there is no stipulation to the contrary.” Kam, 48
Haw. at 355, 402 P.2d at 687; Quedding, 66 Haw. at 338, 661 P.2d
at 709. Therefore, the arbitration agreement’s scope included
Gabriel’s retaliatory discrimination claim.
23
In short, the parties entered into a valid employment
agreement containing an arbitration agreement, and the
arbitration agreement covered Gabriel’s claims.
C. The arbitration agreement’s cost-splitting requirement is
unconscionable and, therefore, unenforceable.
On appeal, Gabriel argues that the arbitration agreement is
unenforceable because it is procedurally and substantively
unconscionable. She contends the 2014-2015 employment agreement
that contained the arbitration agreement was procedurally
unconscionable because it was a contract of adhesion, offered to
her on a take-it-or-leave-it basis, and she was only given a few
weeks to review and sign it. Gabriel maintains that she had no
opportunity to negotiate the terms of the 2014-2015 employment
agreement, that she was not told she was agreeing to arbitrate
civil rights claims, and that the arbitration agreement was not
made conspicuous within the employment agreement. Gabriel
argues that the arbitration agreement was also substantively
unconscionable because it unfairly advantaged IPA by limiting
her access to the courts and costing her a significant amount of
money to arbitrate her claims.
Under Hawaii law, an arbitration agreement is generally
“valid, enforceable, and irrevocable except upon a ground that
exists at law or in equity for the revocation of a contract.”
HRS § 658A-6(a) (2016). One of those grounds is
24
unconscionability. See Lewis v. Lewis, 69 Haw. 497, 500, 748
P.2d 1362, 1366 (1988). Unconscionability encompasses two
principles: one-sidedness (substantive unconscionability) and
unfair surprise (procedural unconscionability). Balogh v.
Balogh, 134 Hawaii 29, 41, 332 P.3d 631, 643 (2014). The Balogh
court noted, “Generally, a determination of unconscionability
requires a showing that the contract was both procedurally and
substantively unconscionable when made,” but an impermissibly
one-sided contract can be unconscionable and unenforceable
without a showing of unfair surprise. Id. (citing Adler v. Fred
Lind Manor, 103 P.3d 773, 782 (Wash. 2004) (en banc) (brackets
and ellipsis omitted).
We have applied the doctrine of unconscionability in
multiple contractual contexts, not just in the arbitration
context. See, e.g., Balogh, 134 Hawaii 29, 332 P.3d 631
(memorandum of understanding regarding property division in
divorce); Thompson v. AIG Hawaii Ins. Co., 111 Hawaii 413, 142
P.3d 277 (2006) (personal injury settlement agreement); Lewis,
69 Haw. 497, 748 P.2d 1362 (premarital agreements); Earl M.
Jorgensen Co., v. Mark Constr., 56 Haw. 466, 540 P.2d 978 (1975)
(contract for sale of goods). Therefore, application of the
unconscionability doctrine in this case places the arbitration
agreement “on equal footing with all other contracts,” DIRECTV,
25
Inc. v. Imburgia, 136 S. Ct. 463, 465 (2015), and does not
“single[]out arbitration agreements for disfavored treatment. .
. .” Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct.
1421, 1425 (2017).
Gabriel urges us to follow cases from the United States
Court of Appeals for the Ninth Circuit that hold that an
arbitration agreement’s cost-splitting requirement is, standing
alone, so substantively unconscionable as to render the entire
arbitration agreement unenforceable. The Ninth Circuit has
examined, under California law, a similar requirement that an
employee split arbitration fees with her employer. Circuit City
Stores, Inc. v. Adams, 279 F.3d 889, 894 (9th Cir. 2002). The
Ninth Circuit held, “This fee allocation scheme alone would
render an arbitration agreement unenforceable.” Id. (footnote
and citation omitted). The Ninth Circuit ultimately invalidated
the entire arbitration agreement because additional provisions
provided further justification for finding the arbitration
agreement unconscionable and, therefore, unenforceable. Id. at
896.
In Ferguson v. Countrywide Credit Industries, Inc., 298
F.3d 778, 785 n.7 (9th Cir. 2002), the Ninth Circuit favorably
cited Adams’ holding, noting that a cost-splitting requirement
between employer and employee posed a “significant deterrent
effect . . . on employees who are required to arbitrate their
26
civil rights claims.” The Ferguson court elaborated that “the
significant up-front costs associated with bringing a claim in
an arbitral forum may prevent individuals with meritorious
claims from even pursuing these claims in the first place.” Id.
at n.8. Similarly, in Ingle v. Circuit City Stores, Inc., 328
F.3d 1165, 1178 (9th Cir. 2003), the Ninth Circuit again
favorably cited Adams and added that an arbitration agreement
calling for an employee to share arbitration costs with an
employer was “harsh and unfair to employees seeking to arbitrate
legal claims,” and is, therefore, substantively unconscionable.
We do not go so far as to adopt a holding that a cost-
splitting requirement in arbitration is per se unconscionable
and, therefore, unenforceable. Rather, whether cost-splitting
in arbitration is unconscionable depends on the facts of each
case. Under the circumstances of this case, the cost-splitting
provision is substantively unconscionable because it would be
prohibitively expensive for Gabriel to pursue her claims in the
arbitral forum.
During the course of her employment with IPA, Gabriel’s
salary ranged from $35,000 to $45,000. As part of this
litigation, she filed a declaration stating that she was without
a full-time job, having financial difficulty, and unable to pay
for the costs of arbitration. Gabriel also submitted evidence
from DPR that it would cost $20,418.84 for a four-day
27
arbitration, and that she would need to remit a $10,200.00
deposit to DPR. It is 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.6 Therefore, we hold that the cost-
splitting requirement alone is unconscionable as impermissibly
one-sided, in favor of IPA. Balogh, 134 Hawaii at 41, 332 P.3d
at 643. This conclusion renders it unnecessary for this court
to pass on the issue of procedural unconscionability. We note,
however, that IPA did not challenge the circuit court’s finding
that the manner7 by which Gabriel agreed to the cost-splitting
requirement was procedurally unconscionable. Therefore, we
accept that finding, which provides an additional basis for
rendering the cost-splitting requirement unenforceable as
unconscionable.
Despite ample evidence in the record that Gabriel will not
be financially able to arbitrate her claims, IPA argues that
6
We would similarly conclude that it would be unconscionable to require
such cost-splitting in, for example, the mediation context. As such, our
unconscionability analysis does not single out arbitration agreements for
disfavored treatment. See Kindred Nursing Ctrs. Ltd. P’ship, 137 S. Ct. at
1425.
7
As stated earlier, the circuit court concluded that the arbitration
agreement 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 noted that the arbitration agreement
was drafted and proffered by IPA, the stronger of the contracting parties;
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 agreement; 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.
28
Gabriel did not carry her burden of proving the likelihood that
she would incur prohibitively expensive arbitration costs under
Green Tree, 531 U.S. 79. In Green Tree, an employee asserted
that she would be unable to vindicate her statutory rights
(there, her rights under the federal Truth in Lending Act and
the federal Equal Credit Opportunity Act) if she were compelled
to arbitrate her claims, because there was a risk she would have
to pay potentially substantial costs in arbitration. 531 U.S.
at 83, 89. The United States Supreme Court disagreed, noting
that the employee had utterly failed to substantiate her
assertion. 531 U.S. at 90 n.6.
The United States Supreme Court observed that the record
“does not show that [the employee] will bear such [large
arbitration] costs if she goes to arbitration. Indeed, it
contains hardly any information on the matter.” 531 U.S. at 90
(footnote omitted). All the employee submitted to the district
court, in a motion for reconsideration, was an “assert[ion] that
‘[a]rbitration costs are high’ and that she did not have the
resources to arbitrate.” 531 U.S. at 90 n.6. The employee
provided no estimates of the cost of arbitration and, instead,
“assumed” the American Arbitration Association, or AAA, would
conduct the arbitration, noting (without evidentiary support)
that the AAA charged a $500 filing fee for claims under $10,000.
29
Id. The employee also submitted an article stating that
arbitration costs are, on average, $700 per day. Id.
The Court concluded that the employee “plainly failed to
make any factual showing that the American Arbitration
Association would conduct the arbitration, or that, if it did,
she would be charged the filing fee or arbitrator’s fee that she
identified.” Id. The Court stated, “The ‘risk’ that [the
employee] will be saddled with prohibitive costs is too
speculative to justify the invalidation of an arbitration
agreement.” 531 U.S. at 91. The Court went on to hold that,
“where . . . a party seeks to invalidate an arbitration
agreement on the ground that arbitration would be prohibitively
expensive, that party bears the burden of showing the likelihood
of incurring such costs.” 531 U.S. at 92.
IPA argues that, like the employee in Green Tree, Gabriel
failed to carry her burden of proving that arbitration would be
so prohibitively expensive for her that it would prevent her
from vindicating her statutory rights (in this case, statutory
rights under HRS Chapter 378, which prohibits discrimination in
employment). Green Tree, however, involved the vindication of
federal statutory rights in the arbitral forum. 531 U.S. at 89-
91. It is an open question, however, as to whether Green Tree
applies in cases where claimants challenge arbitration as a
forum for vindicating state statutory rights. See, e.g.,
30
Kaltwasser v. AT&T Mobility, 812 F. Supp. 2d 1042, 1048 (N.D.
Cal. 2011) (“[I]t is not clear that Green Tree’s solicitude for
the vindication of rights applies to rights arising under state
law, which are the only rights that [the claimant] seeks to
vindicate here.”); and James v. McDonald’s Corp., 417 F.3d 672,
679 (7th Cir. 2005) (“It remains unclear whether the rationale
of Green Tree applies to situations that do not involve the
assertion of federal statutory rights.”).
Green Tree itself thrice referenced the vindication of
“federal statutory claims” in reaching its holding. Green Tree,
531 U.S. at 89-90 (emphasis added). The majority of federal
circuits ruling on the issue have concluded that Green Tree does
not apply where a claimant seeks to vindicate only state
statutory claims, as Gabriel seeks in this case. See, e.g.,
Stutler v. T.K. Constructors, Inc., 448 F.3d 343, 346 (6th Cir.
2006) (“Green Tree . . . [is] limited by [its] plain language to
the question of whether an arbitration clause is enforceable
where federal statutorily protected rights are affected. In
this case, no federally protected interest is at stake.”)
(emphasis added); Pro Tech Indus., Inc. v. URS Corp., 377 F.3d
868, 873 (8th Cir. 2004) (noting that Green Tree addresses
arbitration of federal statutory claims, not unconscionability
of an arbitration agreement under state law); Coneff v. AT&T
Corp., 673 F.3d 1155, 1158 n.2 (9th Cir. 2012) (“Green Tree . .
31
. [is] limited to federal statutory rights.”) (emphasis added);
but see Kristian v. Comcast Corp., 446 F.3d 25, 29 (1st Cir.
2006) (finding “provisions of . . . arbitration agreements . . .
invalid because they prevent the vindication of statutory rights
under state and federal law”); and Booker v. Robert Half Int’l,
Inc., 413 F.3d 77, 79-81 (D.C. Cir. 2005) (applying Green Tree
to District of Columbia statutory rights without analysis into
whether Green Tree applied only to federal statutory rights).
Assuming arguendo that Green Tree does apply, Gabriel has
sufficiently carried her burden of proof: exhibits and
declarations in the record show that arbitration was estimated
to cost $20,418.84, that Gabriel would have to remit a
$10,200.00 deposit to DPR to arbitrate her claim, that Gabriel
made $45,000 annually during the last academic year she worked
for IPA, and that Gabriel was without a full-time job, having
financial difficulty, and unable to pay for the costs of
arbitration. Unlike the plaintiff in Green Tree, who could only
speculate as to the high costs of arbitration, Gabriel has shown
precisely what the costs were estimated to be and that such
costs were prohibitively expensive for her. Therefore, we
disagree with IPA’s assertion that Gabriel presented “nothing
but speculation she would incur any arbitration costs.”
32
D. The circuit court erred in compelling arbitration and
ordering IPA to pay for all arbitration costs.
The circuit court found the cost-splitting requirement
unconscionable but nonetheless compelled arbitration and ordered
IPA to pay all of the arbitration costs. On appeal, Gabriel
argues that the circuit court should have denied IPA’s motion to
compel or invalidated the entire arbitration provision. On
cross-appeal, IPA argues that the circuit court was correct in
compelling arbitration, but it should have severed the cost-
splitting requirement pursuant to the severability clause in the
parties’ employment agreement instead of conditioning
arbitration upon IPA’s payment of all arbitration costs.
Gabriel points out, and IPA agrees, that the parties had no
intention to allow for the rewriting of the arbitration clause
to have IPA pay for the arbitration cost.
We agree that the circuit court improperly modified the
parties’ arbitration agreement when it attempted to reform the
parties’ agreement by ordering IPA to pay all arbitration costs.
We note that the parties’ employment agreement allows
modification of the agreement only “in writing, signed by both
the Educator and the Head of School and/or his designee, and
entitled ‘Modification of Contract.’” As Gabriel argues,
neither party sought to modify the arbitration agreement to
direct IPA to pay arbitration costs. The court’s order
33
compelling arbitration and directing IPA to pay costs is a
result neither party intended, and amounts to a reformation of
the arbitration agreement without a firm basis in our precedent
to do so. Ordinarily, reformation of a contract is a remedy in
the following circumstances:
Reformation is appropriate, when an agreement has been
made, or a transaction has been entered into or determined
upon, as intended by all the parties interested, but in
reducing such transaction to writing, either through the
mistake of both parties, or through the mistake of the
plaintiff accompanied by the fraudulent knowledge and
procurement of the defendant, the written instrument fails
to express the real agreement or transaction.
Kuamu v. Iaukea, 9 Haw. 612, 614 (quoting Pomeroy’s Eq. Jur.
vol. 2, Sec. 870, p. 344); see also State v. Kahua Ranch, Ltd.,
47 Haw. 28, 33, 384 P.2d 581, 585 (1963) (holding that
reformation is appropriate where the contract contains a “mutual
mistake [that] does not reflect the true intention of the
parties. . . .”); Lee v. Aiu, 85 Hawaii 19, 31, 936 P.2d 655,
667 (1997) (noting that reformation of a deed is appropriate to
reflect the true intent of the parties, where such intent was
incorrectly expressed through mutual mistake or the fraud of the
defendant). These circumstances are not present in this case;
therefore, the circuit court improperly reformed the arbitration
agreement by requiring IPA to pay all arbitration costs.
Further, the circuit court justified its decision to order
IPA to pay all arbitration costs by relying on Cole, 105 F.3d
1465, a case that is distinguishable from the instant case. In
34
Cole, the United States Court of Appeals for the D.C. Circuit
affirmed the district court’s order compelling arbitration of an
employee’s Title VII claim. 105 F.3d at 1488. Like the instant
arbitration agreement, the arbitration agreement at issue in
Cole contained no express provision on the payment of fees;
rather, it incorporated by reference the AAA’s rules. 105 F.3d
at 1485. Unlike the instant case, where DPR’s rules require
cost-splitting, the AAA’s rules were silent on the issue of
payment of fees and made no provision for reduced or waived fees
in case of financial hardship. 105 F.3d at 1469, 1484, 1485.
The D.C. Circuit upheld the arbitration agreement but construed
the silences within it against the drafter (the employer) in
requiring the employer to pay all of the costs of arbitration,
as follows:
In our view, an employee can never be required, as a
condition of employment, to pay an arbitrator’s
compensation in order to secure the resolution of statutory
claims under Title VII (any more than an employee can be
made to pay a judge’s salary). If there is any risk that
an arbitration agreement can be construed to require this
result, this would surely deter the bringing of arbitration
and constitute a de facto forfeiture of the employee’s
statutory rights. The only way that an arbitration
agreement of the sort at issue here can be lawful is if the
employer assumes responsibility for the payment of the
arbitrator’s compensation.
105 F.3d at 1468 (footnote omitted). Thus, Cole stands for the
proposition that, where no provision is made for the payment of
arbitration costs, and where arbitration of a Title VII claim is
compelled in the employment context, an employer can be ordered
35
to bear all arbitration costs.8 Cole appears to be an outlier in
judicially creating a condition that an employer pay for
arbitration costs; other courts address unconscionable
arbitration cost provisions by severing offending provisions or
invalidating the arbitration agreement altogether. See, e.g.,
Adams, 279 F.3d 889; Ingle, 328 F.3d 1165; Ferguson, 298 F.3d
778 (all applying California contract law).
E. The circuit court erred in declining to invalidate the
entire arbitration provision.
The appropriate course for the circuit court was to examine
the arbitration agreement as a whole to determine whether parts
of it could be severed, or whether the entire arbitration
agreement should be invalidated. Under our case law, in the
context of illegal contracts, a partially invalidated agreement
may nevertheless be upheld if the invalid provisions are
severable from the valid provisions. See, e.g., Beneficial
Hawaii, Inc. v. Kida, 96 Hawaii 289, 311, 30 P.3d 895, 917
(2001) (“Thus, the general rule is that severance of an illegal
provision of a contract is warranted and the lawful portion of
the agreement is enforceable when the illegal provision is not
central to the parties’ agreement and the illegal provision does
8
Green Tree has called into question Cole’s continuing viability. In
Shatteen v. Omni Hotels Mgmt. Corp., 113 F. Supp. 3d 176, 182 n.3 (D.C.D.C.
2015), the D.C. District Court doubted whether Cole remained good law,
noting, “Cole’s holding is, in any event, on shaky ground in light of the
Supreme Court’s subsequent decision in Green Tree Financial, which eschews
any per se ban on fee shifting in the arbitral context.”
36
not involve serious moral turpitude, unless such a result is
prohibited by statute.”); Ai v. Frank Huff Agency, Ltd., 61 Haw.
607, 607 P.2d 1304 (1980), overruled on other grounds by
Robert’s Haw. Sch. Bus, Inc. v. Laupahoehoe Trans. Co., 91
Hawaii 224, 982 P.2d 853 (1999) (“It is well settled under
ordinary contract law, however, that a partially illegal
contract may be upheld if the illegal portion is severable from
the part which is legal.”) (citations omitted).
Similarly, in the context of unconscionable contracts, the
Restatement (Second) of Contracts § 208 (1981) states, “If a
contract or term thereof is unconscionable at the time the
contract is made a court may refuse to enforce the contract, or
may enforce the remainder of the contract without the
unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable result.”
Comment g to the Restatement elaborates, “Where a term rather
than the whole contract is unconscionable, the appropriate
remedy is ordinarily to deny effect to the unconscionable term.”
Other jurisdictions following the Restatement, however,
have articulated circumstances under which invalidation of an
entire arbitration provision, not just severance of an
unconscionable term, is necessary, where no part of the
arbitration provision can be spared and given effect. For
example, in New Mexico, where an unconscionable provision in an
37
arbitration agreement is “central” to the means by which the
parties would arbitrate their claims, severance of the
unconscionable provision is not possible, and the entire
arbitration agreement must be invalidated. See Felts v. CLK
Mgmt., Inc., 254 P.3d 124, 139 (N.M. 2011). In Felts, the New
Mexico Supreme Court invalidated an entire arbitration agreement
due to a substantively unconscionable class action ban that was
central to the parties’ agreement to arbitrate. 254 P.3d at
140.
Even more similar to this case, the Washington Supreme
Court held, “Severance is the usual remedy for substantively
unconscionable terms, but where such terms ‘pervade’ an
arbitration agreement, [the Washington courts] refuse to sever
those provisions and declare the entire agreement void.” Gandee
v. LDL Freedom Enters., Inc., 293 P.3d 1197, 1199-1200 (Wash.
2013) (citation omitted). In Gandee, the Washington Supreme
Court invalidated an entire arbitration agreement due to
pervasive substantively unconscionable terms, thereby affirming
the denial of a motion to compel arbitration. 293 P.3d at 1203.
In this case, substantively unconscionable terms pervade
the arbitration agreement. Therefore, no part of the
arbitration agreement can be spared and given effect. Again,
the entire provision states
L. Arbitration. The parties desire that any dispute
concerning the Agreement be handled out of court.
38
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.
The employment agreement contains a severability provision,
which 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.”
Although the circuit court did not review each provision in the
arbitration agreement for its enforceability, “this court may
nonetheless [do so] because unconscionability is a question of
law, reviewable de novo.” Balogh, 134 Hawaii at 42-43, 332 P.3d
at 644-45.
We note that the second sentence in the arbitration
provision incorporates, by reference, DPR’s cost-splitting
rules. The circuit court implicitly found this provision
unconscionable, and we agree. The third sentence states, “The
arbitrator will not be entitled to add or subtract from its
terms.” With the second sentence invalidated, there remains no
grammatical referent for the “its” in the third sentence, which
39
appears to refer back to the procedures mentioned in the second
sentence. Therefore, the third sentence must be stricken.
We also note that the last sentence in the arbitration
agreement (the fee-shifting provision) is obviously unfair.9 The
fee-shifting provision requires the party challenging
arbitration to pay the other party’s attorney’s fees and costs,
solely for challenging the arbitration provision in court, and
even if the challenge is meritorious and/or successful. Under
this provision, because Gabriel initiated these proceedings, she
would have to pay for all of the “damages, costs, expenses, and
attorney’s fees” incurred by IPA thus far, simply for
challenging the arbitration provision in court, and even though
9
We note that, at oral argument, IPA’s counsel represented that the
substance of the fee-shifting provision in the arbitration agreement “was not
presented below. It was not presented in the briefing [before the Hawaii
Supreme Court],” and that it was “presented for the first time at oral
argument” by this court.
http://www.courts.state.hi.us/supreme_court_oa_scap-15-912 at 34:14-27.
IPA’s counsel went on to represent that he “ha[d]n’t even read the clause,”
because “it wasn’t presented at the circuit court and it wasn’t presented in
briefing before [the Hawaii Supreme Court].”
http://www.courts.state.hi.us/supreme_court_oa_scap-15-912 at 52:17-28.
IPA’s counsel misstates the record. The fee-shifting provision in the
arbitration clause appeared in IPA’s briefing before the circuit court and
before this court. In briefing before the circuit court, IPA argued, “The
Court should award Defendant’s attorneys’ fees in bringing this motion
because the parties agreed to that as part of the arbitration agreement,” and
quoted the final sentence of the arbitration agreement. In briefing before
this court, IPA referred specifically to the fee-shifting provision in the
point of error regarding the circuit court’s denial of an award of fees, as
follows: “Because of the parties’ agreement to the party opposing
arbitration paying the fees of the party required to compel it, and because
of the frivolousness of Gabriel’s arguments in opposition to complying with
her agreement to arbitrate, the Court should order her to pay the reasonable
attorneys’ fees incurred by IPA to enforce the parties’ agreement to
arbitrate Gabriel’s claims.” Therefore, the substance of the fee-shifting
provision in the arbitration agreement was not raised by this court for the
first time at oral argument, and it has been raised throughout these
proceedings by IPA itself.
40
she won this appeal. This provision is plainly substantively
unconscionable and must be stricken as well. What remains in
the arbitration agreement is just the first sentence, which
states only, “The parties desire that any dispute concerning the
Agreement be handled out of court.” Arbitration is not
mentioned in this sentence. Therefore, the remaining sentence
does not clearly evidence the parties’ desire to arbitrate their
claims. It cannot serve as a basis for compelling arbitration.
In effect, no part of the arbitration agreement remains.
Consequently, the circuit court erred in compelling arbitration
in this case.
F. The circuit court did not abuse its discretion in denying
IPA’s request for attorney’s fees and costs.
This court invalidated the entire arbitration agreement;
therefore, the fee-shifting provision within the arbitration
agreement cannot serve as the basis for an award of attorney’s
fees and costs to IPA. Further, as Gabriel’s opposition to
IPA’s motion to compel was not frivolous, as it legitimately
challenged an unconscionable arbitration agreement, an award of
attorney’s fees and costs was not warranted under the circuit
court’s inherent power. Therefore, the circuit court did not
abuse its discretion in denying IPA’s request for attorney’s
fees and costs.
41
V. Conclusion
We conclude that (1) this court has jurisdiction over this
appeal; (2) the circuit court correctly concluded that the
parties entered into a valid arbitration agreement; (3) the
cost-splitting requirement in the arbitration agreement is
unconscionable; (4) however, the circuit court improperly
reformed the arbitration agreement to require IPA to pay all
arbitration costs instead of invalidating the entire arbitration
agreement; and (5) the circuit court did not abuse its
discretion in denying IPA’s request for attorney’s fees and
costs. Consequently, we vacate the circuit court’s order
compelling arbitration and remand this case to the circuit court
for further proceedings.
Joseph T. Rosenbaum /s/ Mark E. Recktenwald
for plaintiff/appellant-
cross-appellee /s/ Paula A. Nakayama
Jeffrey S. Harris /s/ Sabrina S. McKenna
for defendant/appellee-
cross-appellant /s/ Richard W. Pollack
/s/ Michael D. Wilson
42