Every day there is news involving President Donald Trump and Stephanie Clifford, an adult film actress also known as Stormy Daniels. Many reports concern the legal aspects of the unfolding Trump–Clifford conflict, including the role of arbitration. This article sorts through the relevant materials and contentions to assess the next steps in the process, and who gets to decide what they are.
1. The Legal Setting.
Essential Consultants, LLC (EC) is a party to an October 2016 settlement agreement between David Dennison (DD), reportedly Mr. Trump, and Peggy Peterson (PP), the pseudonym used for Ms. Clifford. These initials are used in the agreement, which is dated October 28, 2016, ten days before the presidential election that year. The agreement, which authorizes payment by EC of $130,000 to PP, followed several days of media notoriety given to a tape recording and accounts by more than a dozen women describing sexual misconduct by Mr. Trump. EC, through attorney Michael Cohen, is listed as the contact for DD.
Among other terms, the settlement agreement requires confidentiality by PP as to private information about DD, including business, familial, and sexual conduct. In one portion of the agreement, PP promises to return any documents, photographs, or electronic data involving DD. A redacted side letter to the agreement provides the true identities of DD and of PP.
On February 27, 2018, a retired judge in Los Angeles, presently serving as an arbitrator with a private dispute resolution service, issued a temporary restraining order to enforce the confidentiality and non-disclosure terms of the 2016 agreement. EC, not DD, is listed as the party seeking the order. As permitted under the settlement agreement, the restraining order was issued ex parte; that is, without notice to or participation by PP in the process.
A week later, on March 6, 2018, Ms. Clifford filed a court complaint in Los Angeles seeking declaratory relief. The complaint was filed by Michael Avenatti, a California attorney who did not represent Ms. Clifford for the October 2016 agreement. The complaint seeks to invalidate the settlement agreement, alleging that a contract was never formed because Mr. Trump did not sign the agreement. The complaint also maintains that the agreement is unconscionable, the result of intimidation, and against public policy.
The court filing refers to the settlement document as a “hush agreement.” The complaint not only alleges that Ms. Clifford had a past intimate relationship with Mr. Trump over a several-month period in 2006–07, it also describes pre-election pressure by Mr. Cohen to force Ms. Clifford to enter into the agreement. Additionally, the complaint contends that Mr. Cohen, by responding to news accounts of the $130,000 payment, breached the terms of the settlement, thereby excusing any further confidentiality obligation for Ms. Clifford. Mr. Cohen has described the payment as coming from his personal funds, without reimbursement by the Trump Organization or campaign.
Efforts to silence Ms. Clifford, according to the complaint, include the February 27 restraining order that resulted from a “bogus” and “defective” arbitration proceeding secured without advance notice or due process. The complaint states that it is unbelievable, and a violation of ethics rules governing attorneys, to accept that Mr. Cohen acted on his own without the approval of Mr. Trump, his client, or the Trump companies, for whom Mr. Cohen has worked. Based on the facts recited in the complaint, and the claim that there was never a valid settlement agreement, Ms. Clifford contends that any arbitration order “is of no consequence or effect.”
Recent press accounts have revealed that an arbitration demand that was filed on February 22 provided the basis for the restraining order. The attorney signing the demand works for the Trump Organization in southern California. Other press reports indicate that a court hearing on the complaint has been set for July 12. But wait.
The latest curve ball thrown into the mix was a notice filed by EC on March 16 to remove the state court lawsuit to federal district court in Los Angeles. Mr. Trump, as a named party in the state lawsuit, was required to provide his consent in order for the action to be removed. This does not mean, yet, that Mr. Trump admits to being Mr. Dennison, but that acknowledgment might not be far off. The removal notice promises that a motion to compel arbitration will soon follow.
Public statements from the White House, other than by Mr. Trump, deny that Mr. Trump had an intimate relationship with Ms. Clifford, or that Mr. Trump knew of the settlement agreement or the payment of $130,000. Mr. Cohen has stated that the funds used for the payment were his own, and that neither the Trump Organization nor Mr. Trump were involved. The California attorney filing the initial arbitration demand on February 22 reportedly was assisting Mr. Cohen (and EC) as a personal matter, and was not serving as an attorney for Mr. Trump or his business.
The truthfulness of these statements will be determined either in proceedings with Ms. Clifford in state or federal court, or, possibly, if there is government action challenging the payout as an unlawful campaign contribution intended to benefit Mr. Trump, with possible gift or income tax liability as well.
2. What Happens Next On the Legal Front?
As a threshold matter, Ms. Clifford could seek to have her lawsuit remanded from federal to state court. Federal removal was based on diversity between the parties to permit federal court authority under the Federal Arbitration Act. The removal notice states that there also is a sufficient amount in controversy to justify federal court jurisdiction, citing the $130,000 settlement payment as well as the potential for $20 million or more as liquidated damages payable by Ms. Clifford for violating the agreement. It is not yet known whether Ms. Clifford will challenge removal. She may decide that federal court is just where she wants to be.
If the parties steam ahead without a skirmish over remand, what happens next to resolve a conflict between the arbitration procedure initiated by EC through Mr. Cohen and the complaint for declaratory relief on behalf of Ms. Clifford?
As a first step in answering this question, basic principles of arbitration law are relevant. In arbitration cases dating back decades arising from collective bargaining agreements, and followed in later commercial arbitration disputes, the Supreme Court has favored enforcement of a promise to arbitrate, and established a presumption that arbitration should be ordered.
A deal is a deal, after all, and, in this setting, there is no dispute that Ms. Clifford signed the settlement agreement, which shows that she knew about the arbitration provision. Moreover, Ms. Clifford had an attorney representing her to negotiate the terms of the agreement. Nevertheless, it also is well-established law that a court can compel arbitration only if the parties consented to arbitrate; that is, an order to arbitrate follows when there is an enforceable agreement, with doubts resolved in favor of arbitration. However, for a dispute over the initial question of whether a contract exists, the Supreme Court has stated that formation is an issue for the courts to decide.
This is precisely the dispute framed by Ms. Clifford’s complaint. As alleged in the lawsuit, there is good reason to doubt that an enforceable agreement binding on Ms. Clifford has been created, given that California law requires consent by parties for a contract to be effective.
In several particulars, the settlement agreement requires personal approval, which DD did not provide. Examples of the commitments spelled out in the agreement include individual representations and warranties exchanged by DD and PP, and the release and waiver of known and unknown claims, including claims preserved by California Civil Code Section 1542, a statute designed to guard against fraudulent agreements.
Other doubts about consent arise from the signature lines for DD and PP that are designed to show acceptance of the agreement and of the side letter stating the true names of the individuals, Ms. Clifford as PP and, reportedly, Mr. Trump as DD. Ms. Clifford signed, but DD did not.
Certainly, a corporate agent can act on behalf of an individual, but it is a stretch to read such authority for EC in this case, especially in the absence of any acknowledgment by Ms. Clifford that relieves DD of the obligation to show his consent to the agreement. Evidence of personal agreement is an important factor under California law governing settlement agreements that release claims and end a case.
Mr. Cohen or other counsel for DD may argue that a decision about the validity of the settlement agreement and its enforcement is a decision to be made by an arbitrator, not a court, whether state or federal. In making this argument, counsel can point to Supreme Court cases stating that parties can agree to delegate to an arbitrator an initial “gateway” decision on arbitrability, the word used when there is an objection that arbitration does not apply.
But, under this precedent, such a delegation must be shown in “clear and unmistakable” language. The distinction drawn in these cases builds upon an older Supreme Court decision describing the role of an arbitrator in deciding a challenge to a contract as a whole, leaving for a court a determination about an arbitration provision alone.
In the Trump–Clifford situation, if a court finds there is a proper delegation in the settlement agreement, any dispute over the agreement, including its arbitration provision, could be moved to arbitration. Will such a finding be made?
On this issue, a problem for EC (and DD) is that there is no express delegation clause stating that an arbitrator, not a court, is to make arbitrability decisions. Indeed, not only is the contract silent on this issue, but there is uncertainty about this outcome that is evident in the phrasing of the arbitration provision. The arbitration clause states that DD, not PP, can determine the law and the location to govern an arbitration, selecting either California, Nevada, or Arizona. This uncertainty, it can be argued, undermines any claim of a clear delegation to an arbitrator since the law governing basic contract issues varies from state to state.
Nor is it likely that EC (or DD) can rely on the rules of the dispute resolution provider to shift preliminary decision making to an arbitrator. One reading of the rules provides authority for an arbitrator to rule on jurisdictional claims, but this does not clearly express a waiver of initial judicial review over the question of whether a contract exists. Moreover, there is no evidence that Ms. Clifford was aware of the provider’s rules or otherwise agreed to a grant of sweeping jurisdictional authority when the arbitration provision is itself silent on the issue.
Putting aside a reading of the text of the settlement agreement, perhaps EC (and DD) will argue that an arbitration proceeding has already started in California, thus answering the question of whether arbitration is appropriate. Does this action block an objection by Ms. Clifford to arbitration? Not likely. Ms. Clifford was not given notice of the proceeding, nor later involved in it, and there is no other evidence showing that she waived objections to arbitration.
Under the circumstances just outlined, the answer to the delegation issue, and whether judicial review is required, probably will favor Ms. Clifford under appellate precedent in California. Ms. Clifford can also cite a decision by the US Court of Appeals for the Ninth Circuit, the court that oversees federal court proceedings in California, to support having the issue of contract formation decided by a judge, not an arbitrator.
These analyses aside, predicting legal outcomes is not a science, and decisions about compelling arbitration are often made on the basis of papers submitted to a court, not following a trial on disputed facts. But what if such a trial takes place?
Here, EC, DD, and Mr. Trump may have miscalculated in removing the case to federal court. Under Section 4 of the Federal Arbitration Act, a jury trial can be requested by Ms. Clifford to decide whether a contract exists with an enforceable arbitration provision. Presumably, civil discovery procedures will be used before a trial, including depositions of Mr. Trump, Ms. Clifford, and others.
Still, EC (Mr. Cohen) may seek an order from a court confirming the restraining order issued in February as a means of preserving the status quo, at least until further proceedings are completed, either by a court or an arbitrator, to determine whether the case should be in arbitration at all.
The first problem encountered by such a proposal is that there is a shadow over the restraining order, quite aside from whether the no-notice order violated California law. Since the arbitrator signing the order relied on language in the settlement agreement authorizing a no-notice proceeding, the issue of whether such language supersedes statutory rights could be decided while the status quo is preserved.
More troubling, and perhaps fatal to enforcement of the restraining order, is that it was secured by a party—EC—that is not authorized to invoke the provisions governing injunctive relief or arbitration. The settlement agreement states that it is to be used to resolve disputes between DD and PP. EC is not mentioned, yet EC was the party that sought the restraining order.
Beyond these concerns, there are other questions about the validity of the settlement that might lead a court (or, eventually, an arbitrator) to reject the agreement. Ms. Clifford also alleged that the agreement is unconscionable; that is, so one-sided and unfair as to require that the contract be set aside or that the offending terms be severed.
Under California law, which applies based on the arbitration filing in California and absent a showing that DD decided different law should govern, courts have considered two types of unconscionability, procedural and substantive. Courts give consideration to each type before rejecting an agreement to arbitrate or severing the application of an improper provision. Courts also recognize that the strength of each argument may vary.
Procedural arbitrability usually refers to how an agreement was made, perhaps by stealth, surprise, small print, or the exercise of overwhelming authority. On this point, Ms. Clifford has a difficult argument since she was represented by an attorney and cannot convincingly claim that she didn’t know what she was signing.
Regarding substantive unconscionability, Ms. Clifford has stronger arguments. The arbitration provision favors DD by affording him, and only him, the choice of law and location. Other provisions in the dispute resolution section of the agreement also are one-sided, exclusively favoring DD, including access to injunctive relief without notice to the opposing party and liquidated damages of $1.0 million for each violation of the agreement. Each of these provisions can be viewed as violating California law.
To preserve basic due process, injunctive relief without notice is prohibited, except in very limited circumstances under California Code of Civil Procedure Section 527(c), particularly when free speech issues are affected. A separate statute, Code of Civil Procedure Section 1281.8, states that Section 527 applies in arbitration. There is no indication that either statute was the subject of an express waiver by Ms. Clifford.
The liquidated damages provision also will be cited to support an unconscionability argument. Such damages are disfavored under California Civil Code Section 1671 when the amount is so high that it can be viewed as a penalty, and not as an approximation of actual, potential damages.
On the prospect of liquidated damages, we should recall that Mr. Trump was elected as the US president even though there was public awareness of his past extra-marital relationships and of his taped admission of predatory actions toward woman. Is it reasonable that further disclosures of an affair with Ms. Clifford will justify a $1.0 million damage award for each violation?
No doubt other issues will arise as the Trump–Clifford legal conflict moves forward. For now, the basic elements of any battle over arbitration are in sharper focus.