Please disregard this post if you are tired of the arbitration fight being waged between Trump and Stormy Daniels. But if you are interested, I have received several questions the past few days about the obligation to arbitrate if a crime is involved. In a nutshell, it is possible – but not entirely clear – that the federal court addressing the enforceability of the Trump/Daniels arbitration clause may have to address whether the hush agreement amounted to a criminal violation of federal campaign law.
The Supreme Court case most directly on point is the 2006 decision in Buckeye Check Cashing v. Cardegna. The Buckeye case involved the enforceability of an arbitration clause within a check cashing agreement, and these check cashing transactions involved usurious interest rates allegedly violating Florida criminal statutes. Did the criminal, unlawful nature of these agreements negate the arbitration clause found within these agreements? The Supreme Court held that the arbitrator should decide the validity of the contract containing the arbitration clause. In other words, the criminal violation may infect the overall agreement, but such an attack on the overall agreement does not automatically impact the arbitration clause within the agreement.
The Buckeye case ultimately traces its lineage back to the 1967 Supreme Court opinion in Prima Paint, where the Court similarly held that an allegation of fraud regarding the overall contract does not impact the validity of the arbitration clause within the contract. Thus, the arbitrator resolves whether the alleged fraud invalidated the overall contract.
How are these decisions possible? How can a court support an arbitration clause within a larger contract that is arguably in violation of criminal laws or the result of fraud? These results in Buckeye and Prima Paint are a well-established fiction of arbitration law, and this fiction makes the arbitration clause in effect a stand-alone, separable agreement. Unless one can specifically challenge the making of the arbitration agreement – as opposed to the overall agreement, an arbitrator generally determines the validity of the overall agreement containing the arbitration clause. Thus, in Buckeye, the arbitrator would rule on whether the alleged criminal violations invalidated the check cashing contracts. I’m troubled by a private arbitrator ruling on issues of criminal law. (I’m not questioning the competency or integrity of arbitrators; they can be just as conscientious and competent as a judge. Arbitrators can even be more skilled than a judge or have more expertise in certain areas, which is one of the benefits of arbitration. I believe an arbitrator could be just as competent to rule on a matter of criminal law than a judge.) However, as a matter of policy, I would prefer matters of criminal law to be resolved in public proceedings, with full, robust procedural protections, with the public getting the benefit of the decisions or results in the case implicating criminal law, so that the public is aware of what counts as a criminal violation, and also so that the public hearing will have a punitive or deterrent effect.
I struggle when I read the Buckeye opinion and realize its implications regarding criminal law. I believe lower courts are similarly troubled by the Buckeye holding, and thus, you will see lower court opinions distinguishing Buckeye and using the criminal nature of an agreement or transaction to negate an arbitration clause within the agreement or transaction. These decisions are in tension with Buckeye; I’ll see from time-to-time lower court judges finding creative ways to avoid Supreme Court precedent on arbitration law. The Supreme Court only hears about 80-100 cases of their choosing per year (I believe the Justices could hear many more cases if they really wanted to, and they should, but that’s another story for another day). As a practical matter, the Supreme Court won’t accept review of every case, and so you can find lower courts avoiding Supreme Court precedent in clever ways.
In Janvey v. Alguire, 847 F.3d 231 (5th Cir. 2017), a concurring opinion from the federal court of appeals found that “arbitration agreements may be rejected when they are instruments of a criminal enterprise.” The arbitration agreements at issue in Janvey were used in furtherance of an alleged Ponzi scheme. Similarly, one could argue that there is no obligation to arbitrate in the Trump-Daniels situation because the stringent hush agreement and arbitration clause were allegedly used in furtherance of a criminal violation of federal campaign law. Similarly, in Macon County Greyhound Park, Inc. v. Hoffman, 226 So.3d 152 (Ala. 2016), the Supreme Court of Alabama struck down an arbitration clause because the arbitration clause was found within a gambling contract that violated criminal law. The court in Hoffman raised a series of interesting hypotheticals (an arbitration clause within a contract to distribute cocaine or within a murder-for-hire contract). Would the US Supreme Court apply the Buckeye holding to these more extreme examples?
In sum, despite the Buckeye holding, there is some authority for a court to strike down the obligation to arbitrate if the arbitration clause was part of a larger criminal scheme, and so the federal judge in this case may be asked to rule on the criminal nature of the hush payment. The firing of Comey and McCabe and related concerns about obstruction of justice already raise the possibility of a scandal that rivals Watergate. Similarly, this arbitration battle could rise to the same level and produce legal fights about the criminal nature of the hush payment. The judge who will hear the expected motion to compel arbitration from Team Trump will face multiple, intricate issues of arbitration law, as I noted in my previous posts, and it would be very easy for the judge to avoid all this arbitration mess by simply compelling arbitration and having the arbitrator rule on everything, including the obligation to arbitrate and whether the hush agreement is valid.
Trump’s arbitration agreement reminds me of similar legal issues surrounding marijuana tribunals. Marijuana arbitration tribunals have developed to deal with disputes that may arise with the sale and distribution of marijuana, because of the legalization of marijuana in several states. (Check out the Cannibis Dispute Resolution Institute here.) However, under federal law, the possession, buying, or selling of marijuana is still a crime. Whether an agreement to arbitrate a marijuana dispute is valid, due to the criminal nature of the transaction under federal law, raises the same question involved in the Trump case and cases like Janvey (Ponzi scheme) and Hoffman (gambling) mentioned above.