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...)

First, some factual background:

• 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. 

Comments

[Adam Levitin]

Mark, I think there's a much bigger problem here. The arbitration agreement covers only disputes between Peterson and Dennison (¶ 5.2). Similarly, the clause allowing for ex parte preliminary injunctive relief (¶ 5.1) makes that available only for Dennison. EC doesn't have any rights in either of these clauses. Indeed, EC doesn't seem to have any rights in the whole contract. All EC does is make a $130K payment, but the contract is one of mutual releases between PP (plaintiff?) and DD (defendant?) with EC kicking in money, well, just because.

This makes me think that that the ADR arbitrator clearly exceeded her powers. She issued an arbitral award in a matter in which the party commencing the arbitration did not, by the plain language of the contract, have any right to arbitration, much less to the preliminary relief.

Unless EC can spin out a tale of being a third-party beneficiary of those provisions, I don't see how EC should even be able to get into arbitration (and I'm skeptical about the third-party beneficiary status, given that the contract could readily have given EC those rights directly).

The alternative is for EC to claim that it is an agent or or shares some identity with DD, but that would create much bigger problems for Michael Cohen and Trump in terms of violations of federal campaign finance law.

[Mark Weidemaier]

Adam: Yes, these are also possibilities, among many other reasons to doubt the validity of the settlement agreement and to deny confirmation to the arbitrator's interim award. But that's not the point of the post. Assuming Daniels is a party to an arbitration agreement, which she seems to acknowledge, then most or all of these questions can be delegated to the arbitrator. Had that happened, the arbitrator's resolution of, say, whether EC could initiate the proceeding, would be entitled to deference. (As an analogy, there are cases where courts refer to arbitration disputes over whether non-parties are entitled to invoke the arbitration agreement.) The point of the post is that this arbitration agreement fails to make such a delegation, so all of these questions are for courts to decide. Similarly, if an arbitrator were to resolve questions like these over Daniels's objection or in her absence, that decision would not be entitled to judicial deference.

[Gil Bagnell]

Another interesting thing about the agreement is that it cites PP as having suffered injury to her person. The intent of that would seem to be to escape taxation, since personal injury compensation makes up for damage suffered and so is not income. But also, because of this, it doesn't require reporting. This might have been included for either of these purposes - escaping reporting or taxes - but also it seems likely the recitation is pretty bogus and therefore fraudulent. Taking it at face value, though, there would be a bit of an argument to be made that the $130K was paid to compensate for an injury, meaning that the mutual confidentiality of the settlement becomes a secondary part of the underlying agreement. If that is the case, then if Trump were the one to violate that clause and Daniels tried to enforce it against him, he might well have an out by arguing that he never signed the agreement. If there is no reciprocity, there may be no contract. EC just paid some money to make up for an injury, but no final agreement as to the peripheral terms of the settlement was ever reached and consummated.

[Chuck F. Katz]

"The point of the post is that this arbitration agreement fails to make such a delegation, so all of these questions are for courts to decide."

What's the basis for the above? What arbitration law governs here? Is the ADR case a "state" matter? Does any of the following federal law apply when an arbitration agreement is silent on threshold issues of arbitrability:

... where the "contract is silent on the matter of who primarily is to decide `threshold' questions about arbitration, courts determine the parties' intent with the help of presumptions." BG Group, PLC v. Republic of Argentina, 572 U.S. ___, 134 S.Ct. 1198, 1206, 188 L.Ed.2d 220 (2014). As to procedural preconditions to arbitration such as waiver, the United States Supreme Court has stated:

Courts presume that the parties intend arbitrators, not courts, to decide disputes about the meaning and application of particular procedural preconditions for the use of arbitration. See Howsam [v. Dean Witter Reynolds, Inc., 537 U.S. 79,] 86, 123 S.Ct. 588[, 154 L.Ed.2d 491 (2002)] (courts assume parties `normally expect a forum-based decisionmaker to decide forum-specific procedural gateway matters'.

See use of the above, for example, in this case:
https://scholar.google.com/scholar_case?case=7244674415876938226

[Adam Levitin]

Mark: I've long learned that law is completely counterintuitive in matters of arbitration, but I'm still floored by the idea that an arbitrator can decide that a non-party to an arbitration agreement can still invoke arbitration. That just strikes me as an arbitrator grossly exceeding his powers to the point that it undermines the whole contractual underpinnings of arbitration.

In any case, what do you think about the argument that ADRS rules are incorporated into the contract by reference and that creates the delegation? ADR Services Rule 8 provides that “Unless the issue of arbitrability has been previously determined by the court, the arbitrator shall have the power to rule on his or her own jurisdiction, including any objections with respect to the existence, scope or validity of the arbitration agreement. In addition, the arbitrator shall have the power to determine the existence or validity of a contract of which an arbitration clause forms a part.”

[Mark Weidemaier]

Adam: On incorporation by reference: 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.

On whether the arbitrator exceeds powers: Only if the contract doesn’t delegate such questions to the arbitrator in the first place! I think this is actually a hard question, and arbitration folks might disagree. But here is how I have been thinking about it: Imagine a court decides that there is a written arbitration agreement between Clifford and somebody. Now imagine the agreement expressly says that the arbitrator must resolve challenges to the scope and validity of the arbitration agreement. Whether a 3d party can invoke the clause is such a challenge, it seems to me. Here’s a roughly analogous case, in which the court refuses to consider the argument that a 3d party was not entitled to demand arbitration: https://law.justia.com/cases/federal/appellate-courts/F2/886/469/19384/. (The opinion is flawed, as the court should have first ruled that there was an agreement to arbitrate, not a “prima facie” agreement, but the outcome is that the arbitrator decides whether the 3d party can invoke the clause.) Anyway, if I were a judge I would not find that Clifford’s contract contains an adequate delegation, so all of these questions would remain for the court.

[Chuck F. Katz]

Anybody: If the UAA, the RUAA and the FAA all clearly proscribe that the court, and not the arbitrator, has the jurisdiction to decide the ‘existence, scope and validity of an arbitration agreement,’ then why do all of these respected arbitration organizations have Arbitrator Jurisdiction Rules that effect just the opposite? Are they ignorant of the Arbitration Statutes?

[Mark Weidemaier]

Chuck: While the statutes aren't quite this clear, you are right that they allow for (and sometimes require) judicial resolution of these questions. But for the most part, these are default rules. Almost every dispute concerning the validity and scope of the arbitration clause can be delegated to the arbitrator, if the contract is sufficiently clear about the delegation. The exceptions are disputes about whether an arbitration agreement exists at all (always for the court, whatever the arbitration agreement has to say on the subject) and disputes over the validity of any delegation to the arbitrator. As an example of the latter, if a party argues that the arbitration agreement is invalid because the arbitrator is biased, it should be impossible to delegate that question to arbitration.

tl;dr -- these are mostly default rules, which can be changed by contract.

[Chuck F. Katz]

Thanks, Mark. So, it makes sense for ADR, JAMS, etc. to have these jurisdictional rules because a well written arbitration clause may incorporate them specifically and explicitly by reference in the arbitration language. I've read that AAA added these jurisdictional rules right after the opinion in 'First Options'. The 'First Options' opinion (the basis for ‘clearly and unmistakably’) only interprets the FAA, and no individual state court, in construing its own state’s Arbitration Statute (whether the UAA or the RUAA), is bound by the First Options/FAA Exception. California has not adopted the RUAA. I just don't understand what governs here.

[Mark Weidemaier]

Although these rules derive from the FAA, they preempt contrary state rules and also apply in state court. That's the result of cases like Buckeye and Nitro-Lift, which held preempted state law rules that allowed courts to decide questions that would have been assigned to the arbitrator under the interpretive rules developed by the US Supreme Court.

https://supreme.justia.com/cases/federal/us/546/440/opinion.html

https://supreme.justia.com/cases/federal/us/568/11-1377/