Stormy Daniels, Donald Trump, and the Role of Arbitration in Ensuring Silence
[Edited to correct names; too many aliases involved in this one]
For readers who haven't been following along: Stephanie Clifford, aka Stormy Daniels, is an adult film star who allegedly had a sexual relationship with Donald Trump in the mid-2000s. She recently sued Trump and other defendants, seeking to invalidate a settlement agreement in which she was paid to keep silent about the details of the alleged relationship. Here is her complaint, which includes the settlement agreement as an exhibit. And here is some coverage of background details.
The settlement agreement includes an arbitration clause, which should prompt some reflection about the use of arbitration to silence victims of sexual assault (a topic that has attracted attention in the wake of revelations about Harvey Weinstein). On the other hand, people are often too quick to blame arbitration for unrelated problems, so I hope this (long-ish) post can offer a bit of clarity. The short version: Whoever drafted the agreement between Clifford and "David Dennison" gets an A for cynicism, but would have to beg for a C in my arbitration class. (I’m guessing the draftsperson would fail professional responsibility...)
- The settlement agreement uses pseudonyms, Peggy Peterson and David Dennison. In exchange for a payment of $130,000, “Peterson” agrees among other things not to disclose confidential information about Dennison, their “alleged sexual conduct,” and other matters. She also agrees to arbitrate “any and all claims or controversies” arising between her and Dennison. The agreement designates two potential institutions to administer the arbitration: JAMS and Action Dispute Resolution Services.
- Peterson (i.e., Clifford) signed the contract (through her lawyer), but Dennison did not. Instead, the contract was signed by Michael Cohen (a lawyer for Trump), on behalf of an entity named Essential Consultants, which allegedly was formed to hide the source of the hush money. There is a blank for Dennison’s signature, but it is empty.
- The settlement agreement requires all parties to keep the alleged relationship confidential. Formally, this has nothing to do with the arbitration agreement. Parties to an arbitration agreement do not have confidentiality obligations (unlike the arbitrator and any administering institution, which do). The arbitration hearing will be private; unlike a court hearing, members of the public cannot attend. But the parties can tell whatever they want to whomever they want, unless they have separately agreed to maintain confidentiality. Thus, Clifford's confidentiality obligations, if she has any, stem from the non-disclosure provisions of the agreement, not from the arbitration clause.
- In the event of a breach of the non-disclosure provisions, the agreement allows either party to obtain an injunction forbidding further disclosure without notice (!!) to the party alleged to have made the disclosure.
- It has been reported that Cohen recently obtained such an injunction from an arbitrator in a proceeding administered by ADRS. And in fact, here is a copy of what appears to be the arbitrator’s interim award. (I must say, this is not exactly a high water mark in the history of arbitration…)
Clifford’s complaint alleges that, because Donald Trump did not sign the agreement, she has no contract with him. She also alleges that any contract is unconscionable and/or void as against public policy. Some of these arguments target the confidentiality provisions. There are indeed potent arguments against enforcement of non-disclosure agreements in such cases. However, there is a problem with these arguments (from Clifford’s perspective). If Donald Trump is entitled to invoke the benefits of the arbitration clause, then the arguments must be resolved by the arbitrator (in a private hearing). Put differently, Clifford needs to do more than come up with legally sound arguments against enforcement of the contract and its non-disclosure provisions. If she wants to put pressure on Trump, she needs to come up with legally sound arguments that don’t have to be resolved in arbitration.
From “Dennison’s” perspective, by contrast, a well-drafted arbitration agreement will send as much of the dispute as possible to arbitration. There, Dennison can count on a private hearing. And if the arbitrator rules that the non-disclosure portions of the agreement are enforceable, courts will probably enforce that ruling. Here, then, is the link between arbitration and confidentiality. Although arbitration itself imposes no confidentiality obligations, it can help parties who value confidentiality maintain it, at least if they expect arbitrators to enforce non-disclosure agreements.
It’s here that Dennison’s lawyers may have dropped the ball. Courts always decide whether an arbitration agreement exists. Thus, the court hearing Clifford’s lawsuit against Trump should not refer it to arbitration before deciding, at minimum, whether Clifford is a party to an arbitration agreement. Unfortunately for her, that seems to be a pretty easy call. She is clearly a party to an arbitration agreement; it is just that the identity of the other party or parties is unclear.
But here’s where things get complicated. Even if not a party to the agreement, Donald Trump can invoke the benefits of the arbitration clause if the parties intended to let him do so. Based on my quick read, this seems an entirely plausible interpretation (assuming Trump is David Dennison). But Trump hardly wants to litigate his entitlement to invoke the arbitration clause in public court proceedings. In his ideal world, this issue, too, would be resolved in arbitration. So, too, would disputes over the validity of the arbitration agreement itself—for instance, disputes over whether the arbitration agreement is part of an invalid scheme to circumvent public policy, and disputes over whether the arbitration agreement imposes impermissibly high costs on Clifford (as it arguably does).
Arbitration law allows parties to refer such questions to arbitration. Put differently: if Clifford is a party to an arbitration agreement (as she surely is), then that agreement, if properly drafted, can force her to arbitrate virtually every other issue in dispute. To accomplish this, however, the agreement must provide “clear and unmistakable evidence” of the intent to arbitrate issues that would normally be assigned to a judge. A good way to do that is to include language providing that the arbitrator will have exclusive authority to resolve “any disputes over the validity, scope, or enforceability of this arbitration clause.” But you won’t find language like this anywhere in the settlement agreement. At best, “Dennison” can point to language in the rules of the designated arbitration institutions (like Rule 11 of the JAMS Comprehensive Arbitration Rules [edit: and Rule 8 of the ADR Services rules). But there are good arguments against treating such language as “clear and unmistakable” evidence of the intent to arbitrate challenges to the validity or scope of the arbitration agreement itself. For one thing, these institutional rules are intended to permit, but not necessarily to require, arbitration of such issues. For another, in such a complicated contract—seemingly created largely for the purpose of obfuscation—it’s not clear that incorporation by reference satisfies the “clear and unmistakable” standard.
Bottom line: Ethics aside, this is a sloppily drafted arbitration clause. The court should decide whether Clifford is party to an arbitration agreement. The court should decide whether Trump is entitled to the benefits of that agreement. And the court should decide whether that agreement is enforceable or is an invalid scheme to circumvent public policy--for instance, by obscuring the fact that a party to (or beneficiary of) the agreement is now President of the United States.