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Will Ms. Daniels Really Have to Pay Millions in Damages?

Posted March 30, 2018

By Jonathan A. Karon

According to news reports, the President’s lawyer, Michael Cohen, claims he is entitled to a payment of one million dollars for each time that adult film actress Stormy Daniels violates a non-disclosure agreement, by discussing her alleged past relationship with the President. Putting aside whether the President actually had a relationship with Ms. Daniels, would a Court really order her to pay millions of dollars in damages for discussing her claimed relationship with President Trump?

I think the answer is no. Provisions requiring payment of a specific sum of money in the event of breach of a contract are called “liquidated damages” provisions. They are intended for circumstances where calculation of the actual damages which would be suffered is difficult and the parties decide to agree on a specific amount. As the Massachusetts Supreme Judicial Court explained in the leading case of A-Z Servicecenter, Inc. v. Segall, 334 Mass. 672 (1956) courts will enforce liquidated damages clauses only if they “represent a reasonable estimate of the actual damages.” But “where the actual damages are easily ascertainable and the stipulated sum is unreasonably and grossly disproportionate to the real damages from a breach” the Court will only award the actual damages.

The key is that the amount of damages in the contract can’t be an unreasonably disproportionate “penalty” designed to coerce compliance. These principles are well accepted throughout the country, including in both California, where Ms. Daniels has filed suit and in the President’s home state of New York. As the Supreme Court of California explained in Ridgely v. Topa Thrift and Loan Association, 17 Cal.4th 970 (1998), “the characteristic feature of a penalty is its lack of proportional relation to the damages which may actually flow from failure to perform under a contract.”

So how does this apply to Ms. Daniels? It would seem that one million dollars per disclosure is grossly disproportionate to any harm that might be suffered by the President and certainly bears no relationship to any harm that might be suffered by Mr. Cohen who claims to have paid Ms. Daniels $130,000 out of his own funds. Usually, in a case like this, refund of the $130,000 paid would seem to be a more reasonable measure of the damages sustained. Refund of monies paid is a much more typical penalty for breach of confidentiality agreements. It is hard to see how Mr. Cohen has suffered any additional harm from Ms. Daniel’s allegations.

What about the President? Obviously these types of allegations would be damaging to anyone’s reputation, but were they really likely to cause one million dollars worth of harm to him? The question is particularly intriguing because he maintains that Ms. Daniel’s allegations are false. Moreover, once the initial disclosure has been made it’s hard to see how each additional disclosure would result in an additional harm worth one million dollars.

Frankly it seems that the damages provision is simply intended to scare Ms. Daniels into silence. Unfortunately for the President and Mr. Cohen that is exactly what the law does not allow. As aptly explained by the New York Court of Appeals, “A clause which provides for an amount plainly disproportionate to real damage is not intended to provide fair compensation but to secure performance by the compulsion of the very disproportion. A promisor would be compelled, out of fear of economic devastation, to continue performance …to permit parties in their unbridled discretion to utilize penalties as damages would lead to the most terrible oppression in pecuniary dealings.” Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 41 N.Y.2d 420 (1977).

Now, I haven’t had the opportunity to read the complete non-disclosure agreement. But I’d be shocked if Ms. Daniels was ever ordered to pay the President’s lawyer millions of dollars in damages. In my view the damages provision has much more value as a threat then as an enforceable contract.

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