Non-Disclosure, Rescission, Agency, and Third Party Beneficiary Law in the News
By Anthony P. Fritz, Attorney at Law
President Donald J. Trump’s alleged tryst with an adult film star has become sensationalized tabloid media fodder across America. Regardless of its political implications or entertainment value, the Clifford v. Trump litigation raises several interesting legal issues concerning contract interpretation and enforcement.
Media reports state that in 2006 Mr. Trump had an extramarital affair with a woman named Stephanie Clifford, who goes by the stage name “Stormy Daniels”. It has been reported that shortly before the 2016 presidential election, Mr. Trump learned that Ms. Daniels was about to go public with details of their alleged carnal dalliance, and his attorney took certain steps to prevent that from happening.
On October 28, 2016 Ms. Clifford, under the pseudonym “Peggy Peterson”, signed a document titled “Confidential Settlement Agreement and Mutual Release; Assignment of Copyright and Non-Disparagement Agreement”. The other parties referenced in the agreement were “Essential Consultants, LLC”, a newly formed Delaware limited liability company, and “David Dennison”, a pseudonym for the soon-to-be-elected President of the United States.
The Confidential Settlement Agreement provides that, in exchange for $130,000, Ms. Clifford/Peterson shall assign and deliver to Trump/Dennison all “physical and intellectual property rights” pertaining to her relationship with Trump, including photographs, negatives, letters, films, tapes, CD-Roms, DVD-Roms, magnetic data and electronic data. She further agreed to not disparage Mr. Trump in any way, shape or form, directly or indirectly, and to not disclose to any person any information pertaining to her intimate encounters with Mr. Trump. The settlement agreement provides that Ms. Clifford will be obligated to pay Trump all money and other consideration she derives from her disclosure of any confidential information, and she will owe Trump $1 million for each separate violation of the agreement.
Michael Cohen, Donald Trump’s longtime personal attorney, negotiated the settlement agreement and he signed it on behalf of Essential Consultants, LLC. Donald Trump did not sign the settlement agreement, and no signature appears on Mr. Dennison/Trump’s signature line in the agreement.
Ms. Clifford received her $130,000 on October 27, 2016, and Donald Trump was elected President shortly thereafter. That should have been the end of the story, except that in January 2018, rumors about the alleged affair and efforts to keep it secret began to surface in various media reports. Michael Cohen came forward, publicly stating that he used funds from his home equity line of credit to pay Ms. Clifford the $130,000 and he was never “directly or indirectly” reimbursed for the expenditure, and his payment to Clifford had nothing to do with Trump’s election campaign.
In February 2018 Mr. Cohen obtained an ex parte restraining order to prevent Ms. Clifford from going public with her story. Clifford responded by scheduling an interview with 60 Minutes. Her attorney, Michael Avenatti, publicly offered to return the $130,000 Ms. Clifford received when she signed the agreement. There is nothing to suggest that the offer was accepted.
On March 6 Stephanie Clifford and her attorney filed a complaint for declaratory relief with the Los Angeles Superior Court naming Donald Trump and Essential Consultants, LLC as defendants. Clifford’s complaint in Stephanie Clifford v. Donald J. Trump et al, LA Superior Court Case No. BC696568 alleges that the so-called “Hush Agreement” is “null, void and of no consequence” because it was never signed by Mr. Trump, Trump had no knowledge of the agreement and he did not pay any consideration for it, thus Mr. Trump “never assented to the duties, obligations, and conditions” therein. Ms. Clifford’s complaint further claims that Mr. Cohen’s public disclosures about the settlement agreement violated its confidentiality provisions thereby nullifying it, and the agreement itself is unconscionable, illegal and violates public policy.
On March 16 Mr. Trump joined Essential Consultants’ petition to remove the Clifford v. Trump lawsuit from L.A. Superior Court to the U.S. District Court, Central District of California. The removal petition states that Essential Consultants intends to seek private arbitration of the dispute and that Ms. Clifford owes President Trump $20 million based on 20 separate violations of the settlement agreement she allegedly committed as of March 16.
The controversy has spurred much public debate among various legal experts. We offer our analysis of certain legal issues presented in the Clifford v. Trump lawsuit under California law.
Non-Disclosure Provisions are often included in settlement agreements, particularly in highly contested litigation. There is nothing intrinsically nefarious or sinister about a non-disclosure agreement. Disagreements between parties to a business transaction often lead to highly contentious and acrimonious litigation. Most lawsuits settle before trial, with one party agreeing to pay money to the other in order to resolve the dispute. A settlement agreement often includes non-disclosure provisions to prevent the recipient of settlement funds from harming the paying party’s reputation by proclaiming their victory to the world through the internet and social media.
A party may cancel and rescind a contract where his or her consent to the contract was given by mistake, or obtained through duress, menace, fraud, or undue influence, where the consideration for the contract fails due to the fault of the other party, where the contract is unlawful or if the public interest will be prejudiced by permitting the contract to stand. Rescission extinguishes the contract, terminates further liability on the agreement, and restores the parties to their former positions. To effect a rescission, a party must restore or offer to restore everything of value he or she received under the contract. Ms. Clifford’s attorney offered to return the $130,000 she received under the settlement agreement to support her claim for rescission of the agreement.
There does not appear to be a basis for Ms. Clifford to rescind the settlement agreement based on mistake, duress, menace, fraud, or undue influence based on the information that is presently publicly available. It is questionable whether the settlement agreement can be rescinded based on Mr. Cohen’s public communications about the agreement. Clifford’s best argument may be that the settlement agreement, and its confidentiality provisions, should be rescinded because disclosure of the details of her alleged intimate relationship with the President is in the public interest.
Ms. Clifford’s complaint alleges that Donald Trump is not entitled to enforce the settlement agreement because he never signed it and he did not know about the agreement when it was negotiated and signed by his attorney in October 2016. However, Trump may be considered a party to the settlement agreement according to agency principles under California law.
Michael Cohen was Donald Trump’s attorney representing Trump as his agent in negotiating and signing the settlement agreement. An agent represents a principal in dealings with third persons. Such representation is called “agency”. An agent can bind his principal to a contractual agreement when acting within the scope of his or her agency relationship. An agency is either actual or ostensible. An agency is “actual” when the agent is really employed by the principal. An agency is “ostensible” when the principal intentionally, or by want of ordinary care, causes a third person to believe another to be his agent who is not really employed by him. An agency may be created, and an authority may be conferred, by a precedent authorization or a subsequent ratification. An attorney is an agent of his client, and the attorney-client relationship is governed by the rules applicable to the relationship of principal and agent in general.
Both principal and agent are deemed to have notice of whatever either have notice of and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.  An attorney practicing law in California or New York is ethically required to advise his or her client of a settlement offer or a settlement agreement affecting the client’s rights and duties. Under agency principles, Michael Cohen’s knowledge of the settlement agreement may be imputed to Trump, regardless of whether Mr. Trump had actual knowledge of the settlement agreement and its terms when it was signed.
Ratification is the voluntary election by a person to adopt in some manner as his own an act which was purportedly done on his behalf by another person, the effect of which, as to some or all persons, is to treat the act as if originally authorized by him. Ratification may be inferred from a purported principal’s conduct which demonstrates an intent to adopt an act as its own, including acceptance of benefits. A voluntary acceptance of the benefit of a transaction is equivalent to a consent to all the obligations arising from it, so far as the facts are known, or ought to be known, to the person accepting. Trump ratified the settlement agreement by accepting its benefits and seeking to enforce it.
Donald Trump is bound by and he benefitted from Michael Cohen acts and agreements while acting within the scope of his authority as Trump’s agent and attorney. Under California agency principles, Trump would very likely be entitled to enforce the settlement agreement even though he did not sign it, and even if he did not know about the agreement when it was negotiated and signed by Mr. Cohen in October 2016.
Third Party Beneficiary
Donald Trump may also be entitled to enforce the settlement agreement as a third party beneficiary under California law. The Confidential Settlement Agreement states that it is entered by and between “EC LLC and/or DAVID DENNISON (DD), on the one part, and PEGGY PETERSON (PP), on the other part…” The “and/or” in the Agreement is significant. Donald Trump may not actually be a party to the settlement agreement, but he should have the right to enforce its terms as a third party beneficiary of the agreement.
A person who is not a party to a contract may be entitled to damages for breach of contract if he or she can prove that the parties to the contract intended for that person to benefit from the contract. A third party may qualify as a beneﬁciary under a contract where the contracting parties intended to beneﬁt that individual and the intent appears from the terms of the agreement. The intent to make Trump a beneficiary of the settlement agreement is apparent from its terms. Therefore, the absence of Trump’s signature on or knowledge of the settlement agreement would not likely be an impediment to his right to enforce it under California law.
Stephanie Clifford’s arguments for rescission of the Confidential Settlement Agreement appear to be on shaky legal ground if the dispute is decided according to California legal principles. She undoubtedly stands to make a great deal more than $130,000 by sharing her tales of adulterous intimacy with the world, but Ms. Clifford is very much at risk of having to pay all of the proceeds, and possibly much more, to her former inamorato. Donald Trump is no stranger to legal controversy, and he and his attorneys have good reasons to seek private arbitration of the dispute rather than a high profile legal battle before a potentially hostile Los Angeles jury.
1 Civil Code § 1689(b)
2 Civil Code § 1691
3 Civil Code § 2295
4 Civil Code § 2298
5 Civil Code § 2299
6 Civil Code § 2300
7 Civil Code § 2307
8 Moving Picture, etc., Union v. Glasgow Theaters, Inc., (1970) 6 Cal.App.3d 395, 403.
9 Civil Code § 2332
10 Clifford’s complaint points out that Mr. Cohen would have violated his ethical duties as Donald Trump’s attorney if he did not tell Trump about the settlement agreement when he negotiated and signed it.