Employment: Hawaii Supreme Court Refuses to Enforce an Acknowledged Arbitration Clause (Web)

In Douglass v. Pflueger Hawaii Inc., No. 26363, 2006 WL 145746 (Hawaii May 25, 2006)(available at the Opinions link at http://www.courts.state.hi.us), the Hawaii Supreme Court held that an arbitration provision is not a valid and enforceable agreement in a case where the provision fails a test of whether it indicates an unambiguous intent to submit a dispute to arbitration.

In fact, the Court found that an employment handbook’s language “is manifestly unambiguous in its expressed intent” to use arbitration. But the Court said the surrounding circumstances didn’t indicate mutual assent, so the employment clause at issue failed the test, and the Court reversed a trial court order compelling arbitration, and remanded the case for further proceedings.

Plaintiff Adrian D. Douglass began working at Honolulu’s Pflueger Acura as a lot technician in 2001. When he began working, Douglass was only 17, less than four months under Hawaii’s majority age of 18. It was undisputed that an oral employment contract was formed at that time between Pflueger and Douglass.

This dispute arose over Douglass's claim that he was sexually assaulted when a coworker sprayed his buttocks with an air hose.

On Sept. 13, 2001, soon after he began his employment, Douglass attended an employee orientation, where he received Pflueger's employee handbook. The handbook contained an arbitration agreement between Douglass and Pflueger providing that claims arising out of the employment would be settled by binding and final arbitration enforceable by and subject to the Federal Arbitration Act and in accordance with American Arbitration Association rules. Douglass also signed an acknowledgment form, which stated that he received a copy of the handbook and had read and understood the outlined information.

The first issue the Court examines is whether Douglass, as a minor, had an absolute right to disaffirm his employment contract with Pflueger, including the arbitration agreement.

On appeal, Douglass contended that the handbook arbitration provision is not a valid and enforceable contract, since he was a minor child when he signed the acknowledgment form, and didn't have the legal capacity to bind himself as a party to the agreement.

Hawaii, the Court notes, recognizes the common law "infancy doctrine"--that minors’ contracts are voidable. The court looks at whether this general rule is applicable in the employment context. In determining the applicability of the common law rule, Chief Justice Ronald T.Y. Moon analyzes Hawaii's child labor law, HRS § 390-2 (1993 & Supp.2005), which was enacted in 1969, replacing Revised Laws of Hawaii § 88-22 (1955).

The 1969 amendment set out a path for employing 16 to 18 year olds. Chief Justice Moon focuses in the opinion on the law, which provided that the minor’s employer files and records a valid age certificate issued by the state Department of Labor and Industrial Relations. Therefore, 16 year olds and 17 year olds were no longer required to obtain parental consent to work, and the DLIR does not require employer information beyond the employee’s age certificate.

With this backdrop broadening minors’ abilities to work, the Court analyzed that, in enacting the 1969 amendment, the legislature viewed minors older than 15 as being sufficiently close to the majority age as to be capable and competent to contract for employment.

The legislature also provided an additional provision to the 1969 amendment which also protects minors by authorizing the state DLIR to "'suspend, revoke or invalidate’ any certificate of employment or age previously issued if the minor's employment is later found to be detrimental to the minor."

The Court found that the legislative intent behind the infancy doctrine of protecting a minor and his or her “indiscretions and immaturity as well as against the machinations of other people" is preserved in the 1969 amendment.

In the opinion, the Court applies this history to see if the legislative intent is preserved in Douglass's employment context. It concludes that since Douglass is 17, and there is nothing in the record to suggest that the nature or condition of his employment is injurious to his health, safety or well being.

Therefore, public policy dictates that Douglass does not have an absolute right to disaffirm his Pflueger contract. The Court noted that he would be bound to the arbitration provision if it is otherwise valid.

But Pflueger ran aground on Douglass's second contention, that the arbitration provision was not a valid and enforceable agreement.

The Court examines a tripartite test it used, where "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." Brown v. KFC National Management Co., 82 Hawaii 226, 238-240, 921 P.2d 146, 158-160 (Hawaii 1996).

The first Brown requirement--that the contract be in writing--is not in dispute, since the arbitration provision is clearly found in writing in the Employee Handbook.

Therefore, the court focuses on the second prong of the Brown test, under which Douglass argues that he did not assent to the arbitration provision. In determining whether there is an unambiguous intention to submit to arbitration, the court first looks to the language of the arbitration provision. It concludes that it is manifestly unambiguous.

But Douglass argued that he could not have assented to the arbitration agreement, because he could not have known about it, since the provision itself consisted of two paragraphs of text hidden on page 20 of the 60-page handbook. The acknowledgment was located 40 pages away from the arbitration provision, and didn't even mention the provision.

The Court agreed, noting that the arbitration provision was not "boxed off" or otherwise set apart from the other provisions.

Pflueger maintained that since Douglass signed the acknowledgment stating that he had received and understood the employee handbook containing the arbitration provision, he must have assented to the handbook terms.

Although Douglass signed the acknowledgment, it made no mention of the arbitration provision, nor was there anything in the acknowledgment that suggests to the Court that Douglass was entering into an arbitration agreement.

In fact, there was explicit language to the contrary: The acknowledgment form noted that "the provisions contained in the handbook are presented as a matter of information only and do not constitute an employment contract."

The Court also examined whether someone informed Douglass of the arbitration provision. Neither Pflueger nor its human resources administrator, who reviewed the handbook provisions with Douglass at his orientation, specifically called attention to the arbitration clause.

Therefore, since Douglass was not objectively informed of the existence of the arbitration provision, he could not have assented to it. Thus the second Brown requirement was not satisfied.

The Court also quickly determined that the third Brown requirement wasn’t satisfied either, since there was a clause in the acknowledgment form reserving, in Pflueger, the right to change the handbook at any time without advance notice. Therefore, there was no bilateral consideration, since Pflueger is not bound to the handbook terms.

Therefore, the court vacated the First Circuit Court's Dec. 30, 2003, order granting Pflueger's motion to stay action and to compel arbitration.

–John Ousley, CPR Intern