Arbitration Blues: Stormy Daniels v. Donald Trump

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by Gregg Bertram, M.A., J.D., LL.M.

The dispute between porn star Stormy Daniels and Donald Trump continues to dominate the news cycle.  Ironically, the nondisclosure agreement (NDA) purportedly entered into between them was designed to avoid any publicity about their alleged affair that happened more than ten years ago.  Among other things, the NDA contains a one-sided arbitration clause (NDA Sec.5.2) and Daniels is waging a determined battle to have the NDA, including its arbitration provision, declared invalid.  Daniels’ attorney, Michael Avenatti, filed a Complaint in Los Angeles County Superior Court (cause No. BC 696568) seeking that relief.  Mr. Trump’s attorneys have recently removed the case to U.S. District Court, at least for the time being.  A public trial rather than private arbitration would be a more favorable forum for Daniels, especially if the trial were to be a jury trial for the reasons below.

Arbitration has been the subject of much criticism from the legal profession in recent years.  Commercial arbitration is private and binding with no opportunity for appeal.  Courts have also been historically reluctant to set aside arbitration awards except under rare and egregious circumstances.  Further, arbitration has often been criticized for being as expensive and as inefficient as the civil trial process.  Last, the true impartiality of some arbitrators has been questioned in cases where one party is a frequent user of the arbitrator or arbitration service provider.  None of the above critiques is reassuring to individuals who seldom litigate.  Here, Donald Trump is a notorious serial litigator.

Ms. Daniels’ Complaint seeks to have the NDA held invalid primarily because Donald Trump never signed it.  His attorney, Michael Cohen, signed the NDA only on behalf of a limited liability Delaware corporation (“Essential Consultants, LLC”) that was formed only to facilitate execution of the NDA.  Additionally, Trump also failed to sign the side letter that was an exhibit to the NDA and which purported to reveal the true identities behind the aliases used in the NDA.  These omissions may or may not be sufficient to invalidate the NDA.  Ms. Daniels’ acceptance of $130,00.00 for her silence is no doubt an obstacle for her cause.

The arbitration clause in this NDA is especially one-sided in Trump’s favor.  It grants very broad jurisdictional authority to the arbitrator and allows Trump to select the arbitration forum as well as the arbitration’s procedural rules.  The arbitrator may grant injunctive relief to stop any pre-arbitration hearing disclosure of information identified in the NDA, an action that the arbitrator has already taken.  Ominously, the arbitrator is also authorized to enforce the draconian liquidated damages provision of NDA Sec.5.1.2 that specifies a $one-million-dollar penalty for each NDA violation. The arbitrator must also award attorney’s fees and costs to the prevailing party. These expenses alone are likely to run into hundreds of thousands of dollars.  The above so strongly favors Mr. Trump that one wonders what Ms. Daniels’ initial attorney was thinking.

In addition, in this arbitration, a single person, the arbitrator, would decide every issue of fact and law all behind closed doors.  There would be no jury or public scrutiny of the arbitrator’s conduct of the arbitration proceeding.  Although Trump was not President of the United States when the conduct triggering the NDA allegedly occurred, he is President now.  The actual and perceived power of his status is likely to affect the arbitrator’s decisions whether consciously or unconsciously.  None of the above can possibly be of advantage to Ms. Daniels.

At present, it would seem that the next procedural decision will be made by a U.S. District Judge in California.  This court should decide whether the case will proceed in arbitration, or, instead, in a public trial.  It is also likely that whichever party is the loser of this issue will appeal to the 9th Circuit Court of Appeals.  Of course, the already massive publicity surrounding this imbroglio will likely continue. To whom will this benefit most? Certainly not Trump.

As a collateral matter, the perception of arbitration as a fair dispute resolution process has already been further tarnished by this mess.  There is nothing remotely even-handed about this NDA arbitration clause.  If this tawdry dispute is ultimately arbitrated, there will likely be no transcript of the arbitration hearing or other record and the reasons for the arbitrator’s final award may never be explained.  Ms. Daniels may rue the day she signed away her procedural rights for so little consideration.


Recent Research Sources:

Trump’s Lawyers Claim Stormy Daniels Violated Confidentiality Agreement at Least 20 Times

By Jim Rutenberg and Maggie Haberman New York Times Mar 16 2018

Stormy Daniels Case Should Be Resolved Privately, Trump’s Lawyers Say

By Maggie Astor and Jim Rutenberg New York Times   Apr 2 2018

Trump moves to force Stormy Daniels Suit into arbitration

By Josh Gerstein Politico Apr 2 2018

Judge Denies Stormy Daniels’ bid to expedite case against Trump over confidential agreement

by Mark Berman and Frances Stead Sellers Washington Post Mar 29 2018

Porn Star Stormy Daniels Sues Trump over ‘Hush Agreement’

By Edvard Pettersson  Bloomberg Politics   Mar 7, 2018

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