Non-Disclosure Agreements and the Art of the Deal

Ten days before the 2016 presidential election, “Peggy Peterson (PP)” entered into a non-disclosure agreement with “EC, LLC and/or David Dennison (DD).” The deal was simple. She got $130,000, and he got her silence in the form of a promise not to disclose any “Confidential Information” about “Dennison,” including the fact that such information even exists.

The contract takes up fifteen pages, single-spaced, plus a two-page “side letter agreement” which, according to the contract, includes the parties’ real names. That letter identifies Ms. Peterson as “Stephanie Gregory Clifford a.k.a. Stormy Daniels.” The signed document may provide Mr. Dennison’s real name, but the copy I have seen, which is attached to a complaint filed by Ms. Clifford in California federal court, has a solid black rectangle in place of the name. As you might expect, the black block is the same length as the name “Donald Trump.”

The transaction was heavily lawyered. The signature page includes approvals “as to form” signed by lawyers Keith M. Davidson (“for PP”) and Michael D. Cohen (for “Essential Consultants, LLC.). Between those signature lines is a place reserved for “Attorney for DD,” but that signature line is blank, though we now know it was Mr. Cohen. And, just to make everything look official, Ms. Clifford’s signature on both documents is notarized by a Texas notary public named Erica Jackson.

The agreement calls for arbitration of any disputes, which would not be public. But Ms. Clifford is suing “Donald J. Trump a.k.a. David Dennison” in California federal court to have the agreement, including the arbitration clause, declared void. She recently added Michael Cohen to the case, claiming that his recent public statement that “Just because something isn’t true doesn’t mean that it can’t cause you harm or damage” is effectively calling her a liar.

What about her claim that the “Hush Agreement,” as her federal complaint calls it, is null and void? Can she win that argument and thereby avoid both arbitration and confidentiality?

The answer may lie in the rule of “general applicability.” As an example of this principle, a state law prohibiting the use of certain banned substances applies to members of a group such as followers of the Native American Church, who believe that consuming peyote is a sacred part of their religious service. The law wasn’t passed to target members of that particular religion, so they remain subject to the law without offending the constitutional freedom of religion.

Another example is a reporter’s promise that if a source will provide information, the person’s name will not be disclosed. In Cohen v. Cowles Media, the press broke such a promise – known as “burning” the source – and published the name on the theory that the public had a right to know that the person telling tales on a political candidate was working on behalf of her opponent.

The source sued the newspaper for breach of contract. “A deal’s a deal,” said the Supreme Court in 1991, meaning that contract law is “generally applicable.” Justice Souter dissented on the grounds that the general applicability doctrine should not dictate the outcome where freedom of the press is concerned.

The rule has its limits. You can’t enforce a law that bans consensual sexual activity between consenting adults of the same sex, even if it is “generally applicable” to both sexes, as the Supreme Court decided in 2003, or an illegal agreement, such as hiring someone to commit a crime, or one signed under duress.

But confidentiality agreements in general are perfectly legal. We make them all the time, not only for business reasons, to protect trade secrets for example, but for personal ones as well. They serve a useful purpose, allowing parties to settle disputes without airing their dirty laundry in public.

“PP” and “DD,” both adults represented by counsel, made a deal. She promised to remain silent, and he (or maybe his lawyer) paid her $130,000. DD, who is actually “DT,” then became President, and she now wants out of the deal.

It doesn’t matter why she has had a change of heart, whether to protect her reputation, perform a public service, or make money. And it doesn’t matter why he wants to keep her quiet. When it comes to enforcing contracts, motives are beside the point.

Yet, there are some peculiarities here. One is that she signed it and he didn’t. Another is that the document includes a so-called “liquidated damages” clause, which would require Ms. Clifford to pay $1 million for “each violation.” That clause looks so extreme as to be punitive and unenforceable.

The weirdest part of the story may be that according to Cohen, he funded the settlement using his own money, and Trump says he knew nothing about the deal. If that is true, it is unusual (to say the least) and may land Cohen in trouble under professional ethical rules and election law.

If the court lets Ms. Clifford out of her agreement, whether from antipathy to Mr. Trump or salacious curiosity, would that damage the sanctity of a contract? “Hard cases make bad law,” according to an old legal maxim, meaning that courts should not base their decisions on sentimental feelings. I don’t think a decision in favor of Ms. Clifford would make bad law. How can Mr. Trump hold her to a deal that he says he never made?

The more I think about this case, the more I think Ms. Clifford should win.

2018-04-09T10:37:52+00:00By |