Why Stormy Daniels May be on the Hook for $1,000,000 – A Look Beyond the Headlines

stormyLast Tuesday, Stormy Daniels, a porn star, sued President Trump seeking to declare her 2016 confidentiality agreement with him unenforceable and void so that she could tell the world about her affair with the President back in 2006. She even offered to return $130,000 she received in exchange for signing the agreement in 2016.

Did the President’s legal team screw up the agreement? Will she win? Can they make her pay $1,000,000 if she decides to talk about the affair? What about the missing notary’s signature? As the headlines keep pouring in, let’s take a closer look at her lawsuit and the agreement she signed.  #SpoilerAlert the headlines may be misleading.

  1. Why did she file a lawsuit to declare the settlement agreement void? Can anyone do that? Filing what’s called a “declaratory judgment” lawsuit is a common tactic when there is a dispute about what the agreement requires the parties to do, or, as here, whether the agreement is valid.  In this case, Ms. Daniels knew that as soon as she started disclosing information covered by the agreement with Mr. Trump, she was likely to be sued in arbitration by the President’s legal team.  By filing the suit first, she was able to control the narrative like labeling the contract a “Hush Agreement” – a term that has now stuck to it – and was able to discuss the information that would have never seen the light of day had she been sued in a confidential arbitration. 
  2. Is the agreement really invalid because Mr. Trump never signed it?  This argument has a superficial appeal; after all, we are all taught that unless the agreement is signed by both parties, there is no agreement. However, the fact that she had accepted a payment of $130,000 in return for signing the agreement makes the lack of Mr. Trump’s signature largely irrelevant.  Generally speaking, if one party performs his or her side of the agreement, the other party must deliver theirs, even if the original party did not actually sign the contract.  So, the lack of signature allowed Ms. Daniels to plausibly challenge the validity of the agreement in court, but it is not a slam-dunk winning argument by any means.
  3. She is ready to return the settlement payment. Will she be free to talk then?  Her offer is really no different from offering to return a TV or a car a buyer had purchased because he/she changed their mind.  Once a party makes an offer and the other party accepts, a contract is formed and both parties must fulfill their respective promises.  A party cannot “undo” a contract because they changed their mind about the deal.  Try “unbuying” a house after signing a contract and see what happens (hint: you won’t be able to barring some unusual circumstances).
  4. She claims the agreement is against public policy, and it seems unfair to force her to keep quiet The enforcement of contracts in our country is based on the basic principle that two consenting adults should be able to enter into whatever contract they want without the government’s interference, i.e. the “freedom of contract.”  Of course, both parties have to be capable of entering into contract, must do so without coercion, and the purpose of the contract cannot be something illegal, i.e. against public policy.  Therefore, an agreement where one party willingly agrees to keep certain information confidential in exchange for payment of money is perfectly allowable under the US law (with some exceptions that do not apply here). So, contrary to Ms. Daniels’ claims, her acceptance of $130,000 for a promise not to disclose certain information about Mr. Trump is not against public policy as it exists currently.
  5. How was the President’s legal team able to “secretly” get an order against Ms. Daniels? It seems unfair and wrong.  Actually, obtaining what’s called an “ex parte” restraining order without notice to the other party to the lawsuit is very common in non-disclosure (and non-compete) disputes and Ms. Daniels’ settlement agreement specifically authorizes this procedure if there is an immediate threat that she may breach it.  The rationale is that if you give someone notice that you are trying to prevent the disclosure of the confidential information, they may hurry up and disclose it before you have a chance to get the court order preventing them from doing so.  Thus, although the President’s legal team obtained the order without allowing Ms. Daniels to present her case or giving her advance notice, there is nothing improper about the procedure they used to do so.
  6. Did the White House really “win” an arbitration against Ms. Daniels? Yes and no. The White House obtained a temporary restraining order from a private arbitrator preventing Ms. Daniels from discussing the information covered by the settlement agreement.  Since the order is temporary it is not a final decision regarding whether the settlement agreement is valid.  However, it is an indication that the emergency arbitrator who granted it believed that the President is likely to win his case against Ms. Daniels, i.e. that the settlement agreement is probably enforceable despite the lack of Mr. Trump’s signature.
  7. Could she be really required to pay $1,000,000 to Mr. Trump for breaching the Settlement Agreement? The settlement agreement says that if Ms. Daniels breaches it by disclosing the information about her alleged affair with Mr. Trump, she will have to pay $1,000,000 for each breach.  This is what’s called a “liquidated damages” clause and it is commonly used in contracts where it is hard to predict the amount of damages that a breach of the agreement can cause.  The amount of liquidated damages cannot be used to penalize the person for breaching the agreement but must approximate the reasonable damages caused by the breach.  If the President’s legal team can provide a reasonable explanation as to why $1,000,000 approximates the damages that the President can suffer from a breach of the settlement agreement, the arbitrator may order Ms. Daniels to pay that sum.
  8. What’s up with the missing notary’s signature? The most recent headlines discuss the fact that although a Texas notary stamped the settlement agreement, she never signed it.  However, while the notary may get in trouble for not following the proper procedure required by her state license,  the lack of her signature does not invalidate the agreement. It is a common misconception in Texas that a contract is not valid until notarized.  In fact, the contract is legal even without a notary’s stamp and signature.  Notaries are simply third-party witnesses whose stamp and signature confirm the identity of the person signing the agreement.  Since Ms. Daniels does not argue that her signature on the settlement agreement was forged, the absence of the notary’s signature is irrelevant. 
  9. What happens if the 60 Minutes Airs? It appears that Ms. Daniels may have already given an interview to Anderson Cooper, which 60 Minutes plans to air very soon. We do not know what she told Mr. Cooper, but if she told him details about her affair with Mr. Trump, she might have already violated her settlement agreement. This means that Mr. Trump’s legal team may seek $1,000,000 payment from her in the arbitration they filed. Luckily for Ms. Daniels, she claims that at least ten people have offered to pay that $1,000,000 on her behalf.  If that is the case, then spilling the beans to Mr. Cooper may not result in any substantive consequences for Ms. Daniels.

BOTTOM LINEIf we ignore the fact that this dispute is between the President of the United States of America and an adult entertainer, the underlying issues surrounding her confidentiality agreement and the related lawsuit are very common in employer-employee lawsuits over breach of non-disclosure agreements.  Arbitration clauses, ex parte orders, liquidated damages provisions and employees arguing that they were unfairly forced to enter into the agreement by their powerful employer – are very typical in these types of lawsuits. 

However, whether a particular non-disclosure agreement is enforceable, fair, etc., depends on the actual language of that agreement.  Therefore, relying on media coverage of legal disputes to figure out whether a particular NDA is valid is like relying on WebMD to diagnose a medical problem.  One might find a lot of generally useful information, but it won’t help determine whether they have a particular condition or problem.

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.

Trump’s Tax Reform Affects Settlements of Sexual Harassment Claims, But Training Remains the Best Answer

sexual harassmentJust days before we rang in 2018, in the wake of the #MeToo movement, the Tax Cuts and Jobs Act became the law, including the special clause titled “Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection with Sexual Harassment or Sexual Abuse.”

Prior to this statute, the law allowed companies to claim tax deductions for settlements of sexual harassment and abuse claims and for attorney’s fees incurred in defense of such claims, even if the settlement agreements were confidential, which they usually were. 

Now, if a settlement agreement prevents a harassment or abuse victim from publicly sharing details about the claim, then the company paying the settlement cannot deduct from taxable income the amount of the settlement or the attorney’s fees incurred in reaching the settlement agreement. 

However, while the title of the section declares a lofty goal, its implementation and the practical effect remain less than clear.  In particularly, the following questions remain:

  1. Where the settlement agreement settles more than just a sexual harassment or sexual abuse claim, can the company still claim the deduction?
  2. Will this law encourage the companies to segregate attorney’s fees between sexual harassment allegations and other types of discrimination or claims alleged by the settling employee?
  3. Will this law incentivize employees to add a sexual harassment/sexual abuse claim to other claims simply to put additional pressure on the company?
  4. Will this law drive the companies to misclassify the types of claims that are being settled or seek a general release of all employment claims (without specific mention of sexual harassment/abuse claim) in order to get the deduction?
  5. Will a general release of all claims against the employer result in its inability to get a deduction because sexual harassment and abuse claims are included in such a release?
  6. Will this law result in more companies attempting to litigate the sexual harassment / sexual abuse claims rather than reach settlement agreements, especially on those claims that are weak and/or not supported by evidence – the so-called “nuisance claims”?

This law goes into effect on January 1, 2018 and will not affect the 2017 taxes.  Until the implications of this statute come into focus, companies should consult with their attorneys regarding whether to include a non-disclosure provision in a settlement agreement if any claim of sexual harassment or sexual abuse was made by the claimant.

While the uncertainty of the answers to the above questions remains, the best course of action for companies is to keep investing into quality anti-discrimination and anti-harassment training so as to avoid the sexual harassment claims in the first place. 

Leiza Dolghih is a partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice Her practice includes commercial, intellectual property and employment litigation.  You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108 or fill out the form below.