Oh my God. Oh my God. Ohmigod ohmigod OMG.
Now what?
This Michael Cohen thing.
You’re going to have to be way more specific.
He’s trying to take the Fifth! He wants the Stormy Daniels lawsuit stopped so he can take the Fifth!
Well. Sort of.
Isn’t that huge?
Yes and no.
That’s not helpful. You’re not being helpful.
Imagine my guilt. What is it that you want to know about? What part of the Stormy Daniels lawsuit don’t you understand?
Just a tiny bit of it. Just a bit. Some. Part of it. Just part . . . all of it. I don’t understand any of it. I don’t know what’s going on, I just nod when people talk about it.
Okay. Let’s start from the beginning.
So. Stormy Daniels, whose real name is Stephanie Clifford, claims she had a relationship with Donald Trump in 2006 and 2007. She claims that when the infamous “grab them by the pussy” Access Hollywood tape became public, she wanted to tell her story to the media. Once she started shopping her story, she says that Trump — through Michael Cohen — approached her and negotiated a non-disclosure agreement — $130,000 for her silence. The parties to the agreement were “Essential Consultants LLC”, a company formed just before the 2016 election, Mr. Trump (referred to as “David Dennison,”) and Ms. Clifford (referred to as “Peggy Peterson.”
Is . . . is it normal to have a nondisclosure agreement with aliases and a party that’s a new company that you just started?
No. No it is not.
Anyway, Ms. Clifford got a $130,000 payment under the agreement. When the existence of the agreement became public in February 2018, Mr. Cohen began making statements about it and about Ms. Clifford, and sought to enforce the provisions of the agreement (including the gag order on Ms. Clifford and the penalty provision) in a secret arbitration proceeding.
Ms. Clifford, through her current attorney Michael Avenatti, filed a lawsuit in Los Angeles County Superior Court asking the court to hold that the agreement is not enforceable, so that (1) she can talk freely and (2) she won’t be penalized for talking. You can read that here. Clifford sued Donald Trump “aka David Dennison” and Essential Consultants, the company Mr. Cohen created.
Then, in what they thought was a shrewd move but was not, Essential Consultants removed the case to federal court.
Removed it! Wow. Removal, with the removing and stuff. Exciting. I understand.
. . .
I don’t know what that means.
OK. Federal courts, broadly speaking, can hear two types of cases. One type is a case that alleges a violation of a federal statute. The other is a case under what’s called “diversity jurisdiction.” The idea, historically, is that state courts might not treat someone from another state fairly, so if a case involves disputes from people from different states, you can “remove” it to federal court, and litigate it there. Put simply, if someone sues you in state court, you can remove it — that is, transfer it — to federal court if there is “complete diversity” — if no plaintiff is from the same state as any defendant. Also, the amount at issue has to be high enough.
So here, Essential Consultants (supported by Trump) moved the case from California state court to United States District Court for the Central District of California, because Clifford is from Texas, Trump lives in DC, and Essential Consultants is a Delaware company. The notice of removal is here.
Was that a good idea?
No it was not. Conventional wisdom is that federal courts are better for the defense and more likely to enforce arbitration agreements. However, federal judges move faster and abide by deadlines and rules more closely, and are substantially less tolerant of bullshit than state judges. If substantial portions of your defense are premised on bullshit and delay, don’t remove to federal court.
So. What’s the issue in federal court?
Well, the main issue is whether the nondisclosure agreement — and especially the part that requires disputes to be arbitrated in private — are enforceable. If they are enforceable, then Trump (and, I suppose, “Essential Consultants”) could conceivably get a gag order against Clifford and get massive damages against her for breaching the confidentiality agreement, and could do so through a private arbitration proceeding instead of in public.
But wait a minute. Stormy Daniels already told her story in public. It’s been all over the media. All this litigation does is draw more attention to it and, potentially, make Trump or Cohen answer questions about the hush money. How does it make sense for Trump and Cohen to try to enforce the nondisclosure now that the cat’s out of the bag?
It’s a very foolish move.
Unless, of course, Trump and Cohen are worried that failing to pursue Clifford will signal to others than other nondisclosure agreements will not be enforced.
But really, even then.
Okay. So even Ms. Clifford says that she signed this agreement and got the $130,000, right? So how can she say that she’s not bound by the nondisclosure agreement and the arbitration clause?
You can read her arguments in her amended complaint in federal court.
She has three main arguments. First, she says that there was never an enforceable contract. Her argument is this: Trump never signed the contract. Now, normally, that wouldn’t be a good argument — Clifford signed it, and she accepted the money, which is enough to enforce it against her. But here the contract has some ill-considered boilerplate language that it’s only effective once everyone signs it. Don’t put that in your contracts if you’re not going to get everyone to sign them.
Second, she says that the contract is unconscionable. Very rarely, a court will refuse to enforce a contract if its terms are too shocking and one-sided. Clifford claims that the million-dollar penalty and other terms, all one-sided, and that there’s no penalty if Trump or Cohen breach (by, for instance, Cohen’s rant to the media).
Third, she argues that the contract is void because it’s against public policy. Courts refuse to enforce certain contracts that contradict strong public policy — as one example, you can’t contract to conceal a crime from the police, and can’t contract to kill someone. Here, Clifford argues that the contract is against public policy because it’s meant to evade federal campaign contribution limits (in the sense that the $130,000 to silence Clifford represents an undisclosed and excessive contribution to Trump’s campaign) and because it suppresses speech about a candidate for President.
Clifford argues that because the whole contract is void, the arbitration clause is void.
These are, at least, plausible arguments.
Is that all?
No, in her amended complaint, Clifford threw in a defamation claim against Cohen, on the theory that he justified paying her hush money by saying “Just because something isn’t true doesn’t mean it can’t cause you harm or damage.” Clifford claims that’s defamatory because it states that she’s lying.
I think that’s an unusually weak defamation claim — the statement is hyperbole in the context of trash-talking about litigation, and isn’t even definite, and therefore isn’t a provable statement of fact. Cohen has filed an anti-SLAPP motion against that claim, which I think he might win if the case ever moves forward.
Wait a minute. If there’s an agreement saying all disputes are arbitrated, who decides the dispute over whether the agreement is valid?
You spotted the loophole! People trying to enforce arbitration agreements always argue that the arbitrator should decide whether they are enforceable. People trying to break them always argue that a judge should decide first. The law in the area is something of a mess, but it’s often the case that the arbitrator decides.
There’s a significant exception, and Clifford is trying to take advantage of it. The Federal Arbitration Act generally controls arbitration agreements in federal court. Under that Act, if a party disputes that the arbitration agreement was formed at all (as Clifford does here), the federal court can hold a mini-trial on that issue alone. Essential Consultants has asked the federal court to send the whole thing — including the attacks on the validity of the agreement — to arbitration. But Clifford has asked the Court first to hold a mini-trial on whether the contract was ever formed at all, and — crucially — to allow limited discovery into that point through depositions of Cohen and President Trump.
That’s where it was when the shit hit the fan.
The search of Michael Cohen’s office?
The search of Michael Cohen’s office, which was huge.
This immediately created grave dilemma for Michael Cohen. On the one hand, the litigation in California would require him to testify — in arbitration if not in the deposition Clifford requested — and would require him to otherwise commit himself to facts. But based on that search, the FBI is clearly investigating him based on the hush-money agreement with Clifford. It’s likely that the government’s theory is that Cohen engaged in transactions that broke campaign finance laws by paying the $130,000 to protect Trump’s campaign, and perhaps committed other violations arising from that core violation. It would be absolutely reckless for him to start talking about the circumstances; the only good advice is to lawyer up and shut up.
Incredibly — and uniquely, in the course of the Trump people’s behavior in the last year — Cohen has done something smart. Well, sort of. He’s decided to preserve his option to shut up. He’s asked the federal court to stay the case — freeze it without activity — because it implicates his Fifth Amendment rights in the criminal investigation.
He can take the Fifth in a civil case? I thought that was for criminal cases.
You can take the Fifth anywhere. The difference is the consequence. If you take the Fifth in a criminal proceeding in which you are the defendant, it can’t be held against you. The prosecutor can’t even mention it to the jury. But in a civil case, taking the Fifth — that is, asserting your Fifth Amendment right to remain silent — can have serious negative consequences. If you’re the plaintiff in a civil case and take the Fifth, the case can be dismissed. If you’re a defendant, there can be all sorts of other bad consequences. The jury can be told to consider that you took the Fifth. The Court can prohibit you from introducing any evidence on the issues on which you took the Fifth, so that you can’t effectively contradict the Plaintiff’s evidence. You can be left unable to prove essential parts of your defense. It’s pretty disastrous and it’s very hard to defend a civil case while taking the Fifth.
So, when faced with a criminal investigation, both plaintiffs and defendants often ask the civil court to stay — freeze — the civil case while the criminal investigation or prosecution is going on.
And do courts to that?
Sometimes they do, sometimes they don’t. The Court is supposed to use a five-part test to decide whether to stay the case. The factors are (1) the plaintiff’s interest in moving forward and the harm to plaintiff if there is a delay, (2) the burden on the defendant if the case moves forward, (3) the convenience of the court, (4) the interests of third parties, and (5) the interests of the public.
How do you think it will go?
I think Clifford has the better argument by far.
Her opposition brief is very strong. She points out that Cohen has already run his mouth extensively about the hush money transaction in the media, so his interest in shutting up can’t be that strong. She points out that Cohen himself initiated an arbitration proceeding to try to shut Clifford up. She points out that Cohen filed a declaration in this civil case about the formation of the contract even after the FBI’s search warrant, and gave a statement about the matter the day after the search.
Moreover, Clifford points out that Cohen’s motion is extremely vague — it amounts to saying “look, the FBI is investigating the same general subject.” He doesn’t explain what specific subjects of testimony (including, for instance, the source of funds or his communications with Trump) that could incriminate him. Finally, she points out that the case is of national interest and has attracted huge public attention, weighing against a stay.
Cohen’s failure to commit that he will take the Fifth doesn’t help either. Perhaps because taking the Fifth is so widely perceived as a sign of guilt (which, of course, it is not), Cohen’s not ready to say definitely that he will take the Fifth to any questions about the transaction — he’s sticking with the wishy-washy argument that his rights are “implicated.” That’s compounded by the fact that his lawyers, asked about him taking the Fifth, publicly denied that he had decided to do so, and suggested that doing so was premature. In other words, they undercut their own stay request.
Wow. That’s . . . wow.
I KNOW, RIGHT? I think you only get one smart move per quarter out of Cohen. Contemplating taking the Fifth was his. Now it’s all downhill until July or so.
So where does this leave us?
Judge Otero, who is hearing this, is a very no-nonsense judge who likes things to be orderly. I expect a thorough written opinion from him on the stay promptly — within days, I suspect. The best thing Cohen has going for him is that he’s only asking for a 90-day stay. Judge Otero may look at this daily-escalating national legal catastrophe and decide that shutting down the civil case for a few months to see how things work out is not a bad idea. Or he may just say Cohen hasn’t carried his burden of showing he need a stay.
What happens then?
It depends on the ruling. If Judge Otero grants the stay, then Cohen will have mitigated the harm from this very foolish litigation for the time being, allowing him to focus on his troubles in New York. If Judge Otero denies the stay, next he’ll have to rule on whether Clifford gets to take limited discovery and get a mini-trial to determine whether the contract was ever formed and therefore whether the case should go to arbitration. If Judge Otero allows that, then Cohen will have to decide whether actually to take the Fifth when confronted with questions. Buckle up.
Will you update this post when Judge Otero decides?
If I feel like it.
Copyright 2017 by the named Popehat author.
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