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Debbie Does Damages: the Stormy Daniels Contract Clusterf*ck

posted by Adam Levitin

There's been a lot of poorly informed reporting about the Stormy Daniels contract litigation, including in some quite reputable publications, but by reporters who just aren't well versed in legal issues.  For example, I've seen repeated reference to an "arbitration judge" (no such creature exists!) or to a "restraining order" (there's no enforceable order around as far as I can tell.  So what I'm going to do in this blog post, as a public service and by virtue of some tangential connection to our blog's focus, dealing with arbitration agreement (to satisfy Sergeant-at-Blog Lawless), I want to clarify some things about the Stormy Daniels contract litigation and engage in a wee bit of informed speculation based on tantalizing clues in the contract.  As a preliminary matter, though, I apologize for the clickbait title.  

Let's start with the facts as we know them.

(1) There is a purported contract among three parties:  Peggy Peterson, David Dennison, and Essential Consultants, LLC (EC). The contract says that these aren't the parties' real names, but that their real names are revealed in a side agreement.  

(2) Peggy Peterson is really Stormy Daniels (the nom-de-porn of Stephanie Clifford).  EC is a shell company created by Michael Cohen, Donald Trump's lawyer and fixer.  And David Dennison is allegedly Donald J. Trump. 

(3) The contract says is a settlement agreement in which Peterson (PP) and Dennison (DD) engage in a mutual release of litigation claims and Essential Consultants kicks in $130k to Peterson.  In other words, PP is supposed to give DD a litigation release in exchange for a litigation release from DD and $130k from Essential Consultants.

(4) The contract provides that disputes between PP and DD are to be resolved in confidential arbitration. 

(5) The contract provides that DD may obtain a preliminary restraining order against PP to prevent her from breaching her obligations of confidentiality under the releases.  

(6) The contract provides for DD having the option of either actual damages or stipulated damages of $1 million if PP breaches.

(7) The only public copy of the contract is signed by PP and EC, but not by DD. The signatures are notarized, indicating the date on which they were signed.  

(8) Stormy Daniels was paid $130K by EC.  The ultimate source of the funds for EC LLC remains unclear.

(9) EC commenced an ex parte arbitration action to obtain a preliminary restraining order against PP. An arbitrator granted the request, but there does not appear to be any court order confirming the award.

(10) Stormy Daniels brought suit in California state court seeking a declaratory judgment that the contract was void as unconscionable/against public policy and unenforceable because it lacks a signature from David Dennison.

So what are we to make of this mess?  

First, it's important to note that this is not the classic bilateral contract situation:  there are three, not two contractual parties.  The contract does refer to Dennison and Essential Consultants "on the one part" and Peterson "on the other," but Dennison and Essential are very clearly not the same party, and the contract does not specify anything about their relationship.  

Second, the choice of names here is amusing, but I don't think it's coincidental. Why on earth would someone use the names Peggy Peterson and David Dennison?  I think it is law-school-note shorthand for Plaintiff (PP) and Defendant (DD). If I'm right, I'm guessing that this is not the only contract that Michael Cohen (the principal of Essential Consultants and Donald Trump's lawyer) has written with Peggy and Dennison. Indeed I'd wager that Stormy Daniels isn't the only "Peggy Peterson" out there, particularly as some the terms of this contract don't seem to have any relation to the claims (as far as we know them) that Stormy Daniels might have about Trump, such as claims about "unacknowledged children". There's a tantalizing hint here that there might be another Trump settlement agreement regarding paternity claims.  

Is the contract enforceable? 

Certain contracts are subject to states' Statutes of Frauds, which are requirements that there be a writing that indicates a contract that is signed by the parties. I'm pretty sure the Statute of Frauds applies here both because of the dollar amount of the contract and because it cannot be performed in a year as it involves a permanent obligation of confidentiality. There's no statutory exception for partial performance, but in at least some other contexts California courts have found a partial performance exception to the statute of frauds. So maybe Stormy can't win on a Statute of Frauds argument, but she can still argue that there was no agreement ever formed because of the lack of a signature by DD.  

It's axiomatic that parties have to assent to a contract.  The signature goes to the question of whether there is any indication of assent to the contract by DD. One way to express assent would be a signature, but it's absence is not inherently fatal.  Another way of showing assent would be performance.  Has DD taken any actions that indicate performance?  It's not clear. There's no way to tell if litigation claims have been released by DD because all that means is that DD wouldn't bring litigation--but that's also consistent with retaining the claims and choosing not to act on them. But DD might have taken receipt of pictures, text messages, etc. under the contract. The acceptance of a benefit might be enough to indicate acceptance. And then there are estoppel type arguments that DD/EC could raise against PP.  The facts aren't clear, but I think Stormy has at least a plausible case that there is no enforceable contract with DD. (This assumes that there isn't another copy of the contract signed by DD, but if so, there's a question of when it was signed...)

What about the argument that Michael Cohen was Trump's agent and was signing for him.  Cohen could have signed for Trump as his agent, but there's no indication that he did. The signature is for EC LLC, not for DD.  Cohen can sign in multiple capacities, of course, but he didn't.  EC LLC could be signing for Trump, but if so it creates a serious campaign finance law violation problem as it would mean that the $130K payment was a payment on behalf of Trump (which of course it was). Given the political benefit to Trump of keeping Stormy quiet (and the timing of the agreement, on the eve of the election), this would readily be seen as a campaign contribution, and if so it would have been above legal contribution limits (violation by Cohen), and it would be undisclosed, another violation (by Trump). EC LLC/DD are kind of precluded from raising this argument, then, without creating more problems for themselves with the campaign finance laws. 

Note, btw, that even if there's no contract, it doesn't mean that Stormy gets to keep the $130k.  She should be returning the $130K and EC/DD would return any items they took from her. 

There's also Stormy's void-as-against-public policy argument. I'm not going to opine on that--everything gets weird when dealing with the public's interest in the Presidency. 

What about the arbitration proceeding? 

EC LLC brought an arbitration proceeding against PP to get a preliminary restraining order.  As a starting matter, let's be clear about terminology. Arbitration is before an arbitrator, not a judge. That's just a private party delegated to resolve a dispute.  Even if the arbitrator happens to be a retired judge (as was the case here), it's still an arbitrator, not a judge. And that means that the arbitrator has no power herself to enforce any arbitration award.  If you win an arbitration award, you still have to go to court to get the court to enforce the order, and that creates an opportunity for the losing party in the arbitration to challenge the award.  The grounds for challenging arbitration awards are pretty limited and narrow--a simple mistake of law or fact by the arbitrator isn't going to do it--but if the arbitrator lacked authority to arbitrate in the first place, it's a different matter.  

As far as I can tell, there has been no attempt to enforce the arbitration award of the preliminary restraining order.  In other words, EC (Michael Cohen) got an ex parte award from an arbitrator, but no court order to enforce it.  My search for dockets on Bloomberg Law involving "Peggy Peterson" or "EC LLC" didn't turn up any actions to enforce the award. And frankly, I'm not surprised. I don't think this award is enforceable because the arbitrator had no authority to even hear the matter, much less grant the relief she granted. The arbitration provision governs only disputes between PP and DD, not disputes involving EC, and the preliminary relief provision is only for DD, not for EC. EC has as much standing to seek preliminary injunctive relief via arbitration as Sasquatch. 

Wait, you might say, isn't EC LLC a third-party beneficiary of the arbitration rights? Nuh-uh. EC is a named party to the contract, so it gets the benefits spelled out in the contract and nothing more; a third-party beneficiary is, by definition, not a party to the contract. 

Ok, but isn't EC LLC really just the same thing as David Dennison/Donald J. Trump?  Isn't it an agent/alter ego/creature of Trump?  Well, yeah, of course it is, but just as above, Michael Cohen/EC LLC can't run with that argument because it sets up some pretty serious campaign finance law violations, the sort of thing that cost John Edwards his law license and which carry real criminal penalties. 

In other words, what's happened is that Michael Cohen made some threats but hasn't attempted to follow through by seeking to confirm the arbitrator's award, probably because it's not likely to be confirmable and also because it isn't likely to do any good at this point.   

fwiw, if Stormy wants to challenge the arbitration clause, she needs to do so specifically, rather than challenging the entire contract or else the contract should go to the arbitrator to decide on enforceability, although, as Mark Weidemaier notes, the contract lacks a provision specifying that the arbitrator makes that decision. I believe that even in its absence under Buckeye Check Cashing that the arbitrator still makes that decision, but it's possible that Buckeye Check Cashing assumed the existence of such a delegation clause. 

What comes next? 

So where we're left is the question of whether Donald Trump et al. will even respond to Stormy Daniels complaint in her lawsuit or will take a default judgment.  My money is on the default judgment.  Trump's likely to lose if he litigates, and doesn't really have any upside to winning. He can't put the genie back in the bottle at this point. (What more does she have to reveal?  She's already said that they had boring sex one time, that's it.  Some have speculated, based on the agreement, that there are pictures, but I think that's just boilerplate or holdovers from other Trump settlements.  If Stormy had nude pictures of Trump, she'd have been paid a helluva lot more than $130k for them.)  The more he fights, the more attention Stormy gets. I'm not sure what Trump's end-game is here, but at this point it seems that trying to enforce the contract is kind of beside the point.  Stormy's going to tell her tale, and Trump's best move is to hope that we're all so inured to scandal that it's a yawn. 

 

Comments

Dragging this post a bit closer to home: if Stormy goes BK, can any of her obligations made under prior arbitration agreements be discharged? If so, what types?

I've gotten some great comments from folks who are too polite to post:

(1) What kind of notary will notarize pseudonymous signatures?

(2) Maybe Trump has a ratification argument against Daniels? I tend to see it more as estoppel, but the basic idea is that if she took the $$$, she can't complain. I think that's right, but she took the $$$ from EC. It's not clear that DD actually gave up anything. If so, I think that PP can walk, but I will say that her case would be better if she were offering to return the $130K (and demanding back her photos, texts, etc.)

(3) The invocation of the ARDS and JAMS process would incorporate their rules into the contract, and that would address any possible questions about whether the arbitrator could determine arbitrability under Buckeye absent a challenge to the delegation. That's a neat observation, although I wonder if it undermines contract integration generally, which might be an undesirable side effect.

(4) The arbitrator didn't issue an "award" but an "order", and only "awards" are subject to confirmation/vacatur under the FAA (and possibly CA law?). That sounds right to me, but what possible force does an arbitrator's order have if not confirmed by a court? The arbitrator can't enforce orders via contempt or by sending out the marshal to seize assets. The only sort of order I think an arbitrator can enforce is a procedural order about the arbitration and that's by virtue of what the arbitrator will ultimately be willing to hear or consider.

The agreement contains the very standard provision permitting it to be executed in counterparts. So it would hardly be surprising if a DD-signed counterpart existed somewhere (or did, and they lost it...).

Notice also that certain provisions (4.3(b)) seem to assume that "PP" is plural, and weep at the resulting vision of hot Trump threesome action that must have happened with some iteration of PPs at some point.

On the incorporation by reference question, I'm re-posting the relevant part of my response to Adam's comment on my prior post. Bottom line, despite some unfavorable precedent, Clifford has a decent argument here.

The question is whether incorporation of institutional rules delegates to the arbitrator questions that would ordinarily be reserved for a court. The problem for Clifford is that there are a bunch of cases holding that incorporation by reference is sufficiently “clear and unmistakable.” But I think she wins anyway. First, I don’t know of any cases involving the ADRS rules. Those rules seem quite clear that the arbitrator *may* decide such questions if the parties submit them (the arbitrator “shall have the power”). However, the rules seem equally clear that the parties need not submit them. Compare JAMS rule 11, which says that disputes of this nature “shall be submitted to and ruled on” in arbitration. The arbitration agreement lets the claimant pick their preferred rule set (and in fact Essential Consultants picked ADRS). If one accepts my reading of the ADRS rules, this means that the contract gives Clifford, as plaintiff, an option not to delegate questions of "arbitrability" to the arbitrator. On that understanding--which I think follows fairly straightforwardly from the language of the rules--she can't be required to arbitrate such questions.

For what it's worth, the ALI’s project for a new Restatement of the U.S. Law of International Commercial Arbitration also takes the view that institutional arbitration rules allow but usually do not require arbitrators to rule on questions of "arbitrability." Conceivably this position may influence courts, and I see no reason to distinguish between domestic and international arbitration on this question. And of course the Restatement's understanding makes extra sense given the language of the ADRS rules.

Finally, there is some support for the notion that incorporation by reference may only work in commercial contracts between sophisticated parties. (There's a recent 4th Circuit case, for instance.) The Clifford contract isn't exactly a contract of adhesion, but its entire point seems to be to obfuscate the terms of and parties to the deal. Long story short: I think she has a decent argument against incorporation by reference.

Incorporation by reference of JAMS arbitration rules clearly and unmistakably showed the parties' intent to delegate arbitrability issues to an arbitrator (Greenspan v. LADT, LLC (2010) 185 Cal.App.4th 1413, 1442.)

If the Dems and the media took the same amount of persistance in reporting on the damage the banks have done to American homeowners and pensioners under Clinton, Bush & Obama - the public would be aghast. Over 50 millions homes have been foreclosed, short saled, or are in the courts. At 2.5 persons per household - that's 125 MILLION Americans damaged and/or destroyed. This has been the largest disaster (man-made or natural) in the modern world. Not to mention the $5 TRILLION pension deficit gradually attacking American workers...


Here is an interesting, very recent case on the issue of delegation of arbitrability determinations to the arbitrator, incorporation of arb org rules, and party-sophistication as a factor. The Fitbit case (cited therein) also addresses the consideration issue, but the latter case involved on-line contract formation of the click-wrap genre.

Smith v. Kellogg Company, Dist. Court, D. Nevada 2018
https://scholar.google.com/scholar_case?case=17223381081395533568&hl=en&as_sdt=6,44

Excerpt:

B. Motion to Compel Arbitration (ECF No. 55)
In deciding whether to grant a motion to compel arbitration, I must determine (1) whether there is a valid agreement to arbitrate, and (2) whether the agreement covers the dispute. Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015). The gateway question of arbitrability is generally an issue for judicial determination unless "the parties clearly and unmistakably provide otherwise." AT&T Techs., Inc. v. Commc'n Workers of Am., 475 U.S. 643, 649 (1986). Even if the parties have clearly and unmistakably delegated the arbitrability decision, this delegation may be unenforceable if the delegation itself is unconscionable. Brennan, 796 F.3d at 1132.

i. The Parties Clearly and Unmistakably Delegated Arbitrability
The Continued Employment/Incentive Agreement includes the following language: "Employee and Kellogg . . . agree that any controversy, claim or dispute between the parties, directly or indirectly, concerning . . . Employee's employment with Kellogg . . . will only be resolved in individual arbitration before JAMS (Judicial Arbitration Mediation Services) subject to JAMS' Streamlined Arbitration Rules and Procedures . . . ." ECF No. 55-1 at 26. Kellogg argues that the incorporation of JAMS rules delegated the arbitrability decision to the arbitrator. Smith responds that this delegation was not clear and unmistakable to him because he is not a sophisticated party.

In Brennan, the Ninth Circuit addressed the incorporation of the rules of the American Arbitration Association (AAA) into an arbitration agreement. Those rules, like the JAMS rules, provide that the arbitrator has the power to determine the validity of the arbitration agreement. See id. at 1130; ECF No. 85-1 at 13 (JAMS rule 8 stating "[j]urisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought . . . shall be submitted to and ruled on by the Arbitrator"). The court in Brennan held that an incorporation of the AAA rules "constitutes clear and unmistakable evidence that contracting parties agreed to arbitrate arbitrability." Brennan, 796 F.3d at 1130; see also Esquer v. Educ. Mgmt. Corp., No. 17-cv-01240-BAS-AGS, 2017 WL 5194635, at *3-4 (S.D. Cal. Nov. 9, 2017) (applying Brennan analysis to agreement incorporating JAMS rules).

Smith argues that such an incorporation is insufficient when one of the contracting parties is unsophisticated. In Brennan, the court limited its holding to the facts of that case—which included two sophisticated parties—but stated that the holding did not require that the contracting parties be sophisticated or that the contract be commercial. Id. at 1130. The court noted that "the vast majority of the circuits that hold that incorporation of the AAA rules constitutes clear and unmistakable evidence of the parties' intent do so without explicitly limiting that holding to sophisticated parties . . . ." Id. at 1131.

Following Brennan, courts in this circuit are split about whether the sophistication of the parties matters in the determination of whether a delegation by incorporation is clear and unmistakable. See Esquer, 2017 WL 5194635, at *4 (comparing cases finding Brennan is limited to sophisticated parties and those finding a clear delegation without regard to the parties' sophistication). The recent trend is to apply Brennan to the incorporation of arbitration rules regardless of party sophistication. See id.; McLellan v. Fitbit, Inc., No. 3:16-cv-00036-JD, 2017 WL 4551484, at *3 (N.D. Cal. Oct. 11, 2017); Diaz. v. Intuit, Inc., No. 5:15-cv-01778-EJD, 2017 WL 4355075, at *3 (N.D. Cal. Sept. 29, 2017); Seaman v. Private Placement Capital Notes II, LLC, No. 16-cv-00578-BAS-DHB, 2017 WL 1166336, at *4 (S.D. Cal. Mar. 29, 2017); Cordas v. Uber Techs., Inc., 228 F. Supp. 3d 985, 992 (N.D. Cal. 2017). But see Ingalls v. Spotify USA, Inc., No. C 16-03533 WHA, 2016 WL 6679561, at *3-4 (N.D. Cal. Nov. 14, 2016) (noting the trend in the circuit as of late 2016 was to find incorporation "insufficient to establish delegation in consumer contracts involving at least one unsophisticated party" and holding a delegation by incorporation was not clear and unmistakable when the parties included "ordinary consumers who could not be expected to appreciate the significance of incorporation"). In its most recent case, the Ninth Circuit again found it unnecessary to "decide whether the Brennan rule applies when one or more party is unsophisticated." Galilea, LLC v. AGCS Marine Ins. Co., 879 F.3d 1052, 1062 (9th Cir. 2018).

The court in Brennan stated its holding "should not be interpreted to require that the contracting parties be sophisticated" to conclude that incorporation of arbitrator rules "constitutes clear and unmistakable evidence of the parties' intent" to delegate the arbitrability decision. 796 F.3d at 1130. Given this language, and the fact that the majority of circuits do not limit their holdings finding clear and unmistakable intent by incorporation to sophisticated parties, I agree with the finding in Esquer that "Brennan does not compel a court to inquire into a party's sophistication to find clear and unmistakable intent." 2017 WL 5194635, at *4. In this case, the requisite intent to delegate is present in the Continued Employment/Incentive Agreement in the incorporation of the JAMS rules, which delegate the determination of arbitrability to the arbitrator.

ii. The Delegation Provision is Not Unconscionable
Although the Federal Arbitration Act (FAA) governs the substantive law of arbitrability, federal courts apply state law to determine the "validity, revocability, and enforceability of contracts generally," including whether the arbitration clause is unconscionable. Perry v. Thomas, 482 U.S. 482, 492 n.9 (1987). Here, the Continued Employment/Incentive Agreement includes a Michigan choice of law provision. ECF No. 55-1 at 26. The parties do not dispute that Michigan law applies.

Under Michigan law, "for a contract or contract provision to be considered unconscionable, both procedural and substantive unconscionability must be present." Clark v. DaimlerChrysler Corp., 706 N.W.2d 471, 474 (Mich. Ct. App. 2005). "Procedural unconscionability exists where the weaker party had no realistic alternative to acceptance of the term," and substantive unconscionability exists where the inequity of the challenged term "is so extreme as to shock the conscience." Id. at 474-75. Challenges to the enforceability of a delegation provision must be directed to that provision specifically rather than the arbitration agreement as a whole. See Brennan, 796 F.3d at 1133; Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 70 (2010).

Smith argues that the delegation provision is procedurally unconscionable because he is an unsophisticated party who would be unlikely to understand the importance of the incorporation of the JAMS rules, a copy of which were not provided to him. He argues that the delegation is also substantively unconscionable because the arbitration provision as a whole would violate Morris v. Ernst & Young LLP, 834 F.3d 975 (9th Cir. 2016) and the delegation provision would violate the public policy behind the FLSA. Kellogg responds that Smith has not shown procedural unconscionability, as the Ninth Circuit has rejected his argument about incorporation by reference. Kellogg further contends that the delegation provision does not run afoul of Morris because it does not prohibit workers from litigating claims collectively.

Given the power and sophistication imbalance between Smith and Kellogg, Smith has shown some degree of procedural unconscionability. Kellogg's argument about incorporation by reference is based on Poublon v. C.H. Robinson Company, 846 F.3d 1251 (9th Cir. 2017), in which the court made an unconscionability determination under California law, so it is not controlling. However, Smith has not shown that he lacked a meaningful choice in accepting the delegation term. The agreement included a "Knowing and Voluntary Action" provision in which Smith acknowledged he was advised to consult with an attorney and was given at least twenty-one days to consider the agreement before signing. ECF No. 55-1 at 27. There is also a "Revocation of Agreement" provision in which Smith acknowledged he had a period of seven days in which to revoke the agreement. Id. Smith has pointed to no other evidence than his lack of sophistication as evidence of procedural unconscionability.

Furthermore, Smith has not shown that the delegation provision shocks the conscience. Such delegation provisions have been routinely upheld. See, e.g., Esquer, 2017 WL 5194635, at *8; Ortiz v. Volt Mgmt. Corp., No. 16-cv-07096-YGR, 2017 WL 1957072, at *4 (N.D. Cal. May 11, 2017). Smith's argument that the delegation provision violates the policies behind the National Labor Standards Act and the FLSA is essentially an argument that the arbitration provision as a whole is unconscionable, rather than the delegation provision specifically.

I find that Smith has raised a slight inference of procedural unconscionability but has not made a showing of substantive unconscionability as to the delegation provision. Therefore, the delegation provision is enforceable and I grant the motion to compel arbitration.

CONTRACT FORMATION AND AGREEMENT TO ARBITRATE BASED ON TERMS-OF-SERVICE CLICKWRAP AGREEMENT

McLellan v. Fitbit, Inc., No. 3:16-cv-00036-JD, 2017 U.S. Dist. LEXIS 168370, at *4 (N.D. Cal. Oct. 11, 2017) (while plaintiffs properly note that contract formation issues are for the Court to decide, neither of plaintiffs' formation challenges disrupts their agreement to arbitrate. The record shows that plaintiffs manifested their objective assent to the ToS by checking the "I agree" box, and for that agreement they received adequate consideration. The order compelling arbitration remains in full force and effect.)


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