By Anne Muenchinger

A New York  Southern District matter accusing President Donald Trump, his company and his family of endorsing an allegedly fraudulent sales scheme is moving forward as litigation after the defendants tried to move the case to arbitration.

U.S. District Judge Lorna G. Scholfield refused the Trump Corp.’s motion to compel arbitration of the claims. Jane Doe, et al. v. Trump Corp., et al., 18 Civ. 9936 (LGS) (S.D.N.Y. April 8) (available at https://bit.ly/2wXWZLh).

The order is the latest development in a claim originally filed in October 2018, against Trump Corp., the president, and his three older children for racketeering and conspiracy to racketeer in violation of federal law, and six state law claims relating to unfair or untrue business practices.

The amended complaint alleged that the Trumps promoted Concord, N.C.’s ACN Opportunity LLC, a non-party to the action.  ACN is a multi-level marketing company which contracts with independent business owners, or “IBOs,” who then sell ACN’s products and services to the wider public. The ACN videophone tanked, and the plaintiffs allege they lost hundreds of thousands of dollars.

The company was endorsed and promoted by Trump Corp. through multiple media advertising channels, including during episodes of the television program Celebrity Apprentice, hosted by Donald Trump and featuring his children Ivanka Trump and Donald Trump Jr.

The anonymous plaintiff, along with other similarly placed complainants, signed up to become IBOs, citing the defendants’ endorsement as a crucial in deciding to contract with ACN.

Their action, brought individually and on behalf of a putative class, alleges that the defendants made false statements in the promotional material that concealed that the Trumps were paid for their promotion, rather than because they believed that ACN “offered a reasonable probability of commercial success.”

The defendants filed a motion to dismiss following a February 2019 amended complaint, which was granted on the racketeering and conspiracy to racketeer claims.  But state law claims of dissemination of untrue and misleading public statements, unfair competition, unfair and deceptive trade practices, deceptive practices, as well as fraud and negligent misrepresentations were permitted to proceed, with the court retaining jurisdiction under the Class Action Fairness Act, 28 U.S.C. § 1332(d).

The Trumps notified the court on July 19, 2019, of their intention to compel arbitration, eight months into litigation. Their motion is based on the contract signed between ACN and each IBO, which includes a clause mandating the resolution of all disputes via binding arbitration under the American Arbitration Association commercial arbitration rules.

In her denial order earlier this month, Judge Scholfield not only firmly rejects the motion, but issued a scathing rebuke of the Trumps’ behavior which she denounces as “substantively prejudicial towards Plaintiffs and seeks to use the [Federal Arbitration Act] as a vehicle to manipulate the rules of procedure to the Defendants’ benefit and Plaintiffs’ harm.” Jane Doe, et al. v. Trump Corp., et al., 18 Civ. 9936 (LGS) at 15.

Scholfield added, “Such tactics undermine a fundamental purpose of the FAA to support the economical resolution of claims.” Id.

The defendants argued that the contractual obligations arising out of ACN’s contract with each IBO equally apply to them under a theory of equitable estoppel, or agency, so the claims must be submitted to arbitration.

The central question for the court to resolve was whether the plaintiffs had in fact agreed to arbitrate any disputes with the defendants under either of the two cited doctrines, since the Trumps were not a party to the plaintiffs-ACN contracts. Additionally, in the event that an agreement was established, the court examined whether the defendants had waived their right to mandatory arbitration of the claims.

On the theory of equitable estoppel, Judge Scholfield wrote that a signatory to an arbitration clause may be compelled to arbitrate a dispute against a non-signatory “where (1) ‘the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed,’ and (2) there is ‘a relationship among the parties of a nature that justifies a conclusion that the party which agreed to arbitrate with another entity should be estopped from denying an obligation to arbitrate a similar dispute’ with the non-signatory.” Id. at 6 (citations omitted).

Because the claim is based upon misleading and unfair statements which allegedly induced the plaintiffs to enter the agreement, Scholfield ruled that the claims are sufficiently intertwined with the agreement.

But the opinion holds that the relationship prong needed to find equitable estoppel is not fulfilled in this case, rejecting the defendants’ proposition that the plaintiffs were aware of the defendants’ paid relationship with ACN.

Rather, the opinion states that the “business relationship was expressly hidden,” and applies Second Circuit precedent denying estoppel to “a defendant aligned with the signatories to allegedly accomplish wrongful business practices”. Id. at 9.

Similarly, the Trump’s failure to disclose their relationship with ACN was central in the court’s reasoning with regard to the agency claim. That basis of the claim was also denied, as arbitration agreements may only apply to non-signatory agents where such agents are disclosed. Id. at 12.

On the waiver, the court examined the time elapsed from the commencement of litigation to the request for arbitration, the amount of litigation to date, and the proof of prejudice. All of these elements, the court explains, lean in favor of the plaintiffs in this case.

The opinion found probative that Trump Corp. notified the court of its intention to arbitrate eight months after the outset of litigation, and after full adjudication of a motion to dismiss; a motion to proceed pseudo-anonymously; multiple motions to seal, and several discovery disputes.

Prejudice is established, the Scholfield explained, where “the defendant seeks to benefit from information obtained through judicial proceedings that would be unavailable in arbitration,” and where the defendants want to “use arbitration as a means of aborting a suit that did not proceed as planned in the District Court.” Id. at 15 (internal citations omitted).

So the case will continue before the Southern District of New York.

Only a day after the order, Bloomberg reported that in a teleconference hearing, Judge Schofield ordered Hollywood studio Metro-Goldwyn-Mayer, current owner of the Celebrity Apprentice, to release hundreds of hours of unaired footage from the two episodes in which ACN principals were featured. See Erik Larson, “MGM Told to Hand Over Trump’s ‘Apprentice’ Tapes in Scam Suit,” Bloomberg (April 9) (available at https://bloom.bg/3cFNz6q).

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Muenchinger is a CPR Institute Spring 2020 intern, and an LLM student at the Benjamin N. Cardozo School of Law at Yeshiva University in New York City.