The Stormy Daniels Case: Declaratory Judgments, The Statute of Frauds, Removal and Arbitration Law For The Layperson
Posted on March 19, 2018
Outside of work, a lot of friends have asked me about the lawsuit that pornographic actress Stephanie Clifford, also known as Stormy Daniels, against the President, also, sadly, known as David Dennison. I regret having to write that sentence. Anyway, they’ve asked what I think about the merits and also what I can tell them about the procedural stuff. Here goes.
As has been widely reported, the President’s lawyer Michael Cohen, paid Clifford $130,000 in return for her agreement not to disclose the supposed “romantic” relationship between her and the President. Clifford sued the President in the Los Angeles County Superior Court, seeking a declaration that the agreement was not a valid contract “because, among other things, Mr. Trump never signed the agreements” and never “provide[d] any other valid consideration.” It appears the President has not yet been served with process.
So what might the curious layman want to know about the law here?
- What is a declaratory judgment? When there is a real controversy between, say, the parties to a contract about what the contract means, it’s not generally necessary to arguably breach the contract and wait to be sued in order to get a binding decision about what the contract means. Both California law and federal law permit actions for declaratory judgments. If you win such a lawsuit, what you get is a judgment declaring the parties’ rights, rather than awarding damages. Clifford is asking the California court to declare that there is no contract between her and Trump, which would mean that she has no contractual obligation of confidentiality.
- Does Clifford have a good claim? We’re not really sure yet what the claim is: for present purposes I’ll assume that her argument is that the lack of Trump’s signature means the contract is invalid. I really don’t understand what she means when she says that Trump never provided “valid consideration,” since as I understand the facts she received $130,000. Maybe the claim is that the money came from Trump’s lawyer rather than Trump himself, though it seems pretty clear from news reports that in fact the money was to come from Trump, who perhaps had an obligation to repay Cohen. In any event, let’s just focus on the signature issue and assume that Trump paid Clifford the $130,000 in return for her promise. And while the contract provides that California law or the law of a couple of other states governs, let’s just reason the case through on general principles of common law.
In general, a contract does not have to be in writing, let alone signed. Suppose Clifford had said, “Mr. Trump, I make you the following offer: if you promise to pay me $130,000, then I promise never to tell the world about our ‘romance.'” And suppose that Trump said: “Ms. Clifford, I accept your offer.” That’s a contract. It’s a contract even though the parties only exchanged promises. It’s a contract even though it’s not written down.
The Statute of Frauds, which was part of the law of England at the time of independence and which most (all?) American states have adopted, provides that a contract will not be enforced against a party unless it is in a writing signed by that party if it is: (1) a contract conveying an interest in land, (2) a contract in consideration of marriage (e.g., a prenuptial agreement), (3) a contract that cannot be performed within one year, (4) a contract by the executor of a will to pay the decedent’s debts, (5) a contract for the sale of goods for more than $500, or (6) a contract to pay the debts of another (e.g., to be a surety or a guarantor).
It should be obvious that this contract is not within any of these categories. You might wonder about (3), contracts that cannot be performed within a year. If I promise to pay you money in 2025, that’s a contract that can’t be performed within a year. But if I promise to keep your secret forever, that’s not a contract that can’t be performed within a year. I might die within the year.
“Okay,” you may say, “Trump didn’t have to sign the contract to make it valid. But he had to agree to it in some way, and ordinarily people do that by signing. How do we know that Trump agreed to this contract?” The answer is that he paid Clifford the money, which was his principal obligation under the contract. If I say to you, “If you will pay me $130,000 I promise to keep your secret forever,” and then you pay me the $130,000, then I received the consideration for the contract, and I’m bound by my promise. Sometimes you see a provision in a contract that says something like, “the parties agree that neither will be bound until both have signed,” and sometimes a party will argue that the fact that a contract is memorialized in a complex writing implicitly shows that the parties did not intend to be bound until they signed. But because Clifford got the money, that seems like a weak argument to me in this case.
- Why is the case now in federal court? Trump’s co-defendant, Essential Consultants LLC, filed a notice of removal, which Trump joined. Under federal law, a case can be removed from the state court to the federal court (with certain exceptions) if it could have been brought in the federal court in the first instance. The effect of this rule is to provide that a case that could be heard by a federal court will be heard by a federal court at the option of either side. I am simplifying of course. Clifford could have brought her case in the federal court, because she is (it appears) a citizen of Texas and Trump is a citizen of New York or perhaps the District of Columbia, and the amount in controversy exceeds $75,000. (I’m ignoring the codefendant here). Since she had the option to sue in federal court, Trump has the option to remove the case from the state court to the federal court. Cliffords’s lawyer is talking crazy talk when he claims that the notice of removal is a”bullying tactic from the president and Mr. Cohen.” Removal is routine. It would have been highly unusual in my view if the defendants had not removed this case.
- What is likely to happen next? The next moves in the case are not rocket science. The settlement agreement has an agreement to arbitrate under either the JAMS rules or the ADRS rules. (Now, I have to say, I’m not familiar at all with the ADRS rules, so let’s stick with JAMS). In other words, Clifford and Trump agreed that if they had any disputes, they would resolve them by arbitration rather than in court.
Let’s pause to note that this is not a case where an employer required employees to agree to arbitration of claims of sexual harassment, or a case where the parties settled a claim of sexual harassment and then required arbitration of any further disputes. This isn’t a claim of sexual harassment at all. So whatever you may think about agreements to arbitrate such cases, put those thoughts aside.
Now ordinarily, it’s for a court to decide whether or not a particular dispute is within the scope of an agreement to arbitrate. But if the parties clearly and unmistakably agree that such questions of “arbitrability” should be decided by the arbitrator, then their agreement governs. Parties can make such an agreement by adopting arbitral rules that give the arbitrator the power to decide questions or arbitrability. And the JAMS rules provide:
Jurisdictional and arbitrability disputes, including disputes over the formation, existence, validity, interpretation or scope of the agreement under which Arbitration is sought, and who are proper Parties to the Arbitration, shall be submitted to and ruled on by the Arbitrator.
You may think there is something circular here: since Clifford says there is no contract at all, how can you just assume that there is an agreement to arbitrate at all? Here is a place where the law gets complicated and may vary from circuit to circuit. And there’s another issue lurking: is this agreement to arbitrate governed by the Federal Arbitration Act, or rather by state arbitration law? I’m not going to delve into either of these issues, except to say that in my view, in light of the fact that the defense seems to be just the lack of a signature, rather than a claim that the parties didn’t agree to the terms or that the contract is a forgery or whatever, most likely the question of arbitrability will be for the arbitrator to decide. So I think it’s likely Trump will win the motion to compel arbitration, which means that the dispute will be decided confidentially and in private, as the parties intended, rather than in court.