Legal News

The Story Behind American Apparel?s Sham Arbitration

By Dan Slater

I want to be something bigger and better. . . . I don’t know when the market is going to realize that the superficial doesn’t create value over the long-term. The Enron guys were all CEOs of the year and then, a few years later, they were carting them off to jail. What would they prefer? Would they prefer some authenticity? — American Apparel CEO Dov Charney speaking to the WSJ’s Nicholas Casey

Dov Charney, the CEO of American Apparel, is widely acknowledged as a retail genius, an immigration reformer and a workplace liability. Now, according to recent court decision, his company is making novel uses of arbitration.

To wit, the opening graf of a story in today’s WSJ:

Hip clothing retailer American Apparel Inc. earlier this year agreed to pay a former female employee $1.3 million to settle a sexual-harassment claim involving its chief executive. But there was a catch: She had to keep the settlement’s existence a secret, and instead participate in an arbitration proceeding, with a preordained outcome that would allow Chief Executive Dov Charney to publicly declare victory.

Last January, reports the WSJ, Charney and American Apparel were facing trial in a suit filed by Mary Nelson, a sales manager who claimed Charney made sexual advances and inappropriate comments to her prior to firing her from the job. The company denied the allegations. The day before the trial was to begin, according to court documents, the parties struck a deal in which American Apparel agreed to pay Ms. Nelson $1.3 million, without admitting liability.

However, according to the agreement, which was quoted in a recent appeals court opinion, the parties agreed to conduct an arbitration before a retired judge selected by American Apparel. The arbitrator would decide the case solely on one precedent case that American Apparel presumably saw as favorable, and it would result in a decision stating, among other things, that Charney “never sexualized, propositioned or made any sexual advances of any nature whatsoever towards Mary Nelson.”

American Apparel would then be able to issue a press release stating that the arbitrator’s decision “puts an end to the sexual harassment claims against Charney and the company” and declaring that the ruling brings “clarity to the role of the First Amendment in the American workplace.”

Though Nelson’s attorney, Keith A. Fink, agreed to the arbitration’s unusual terms, he and Nelson later refused to attend the meetings, according to background given in the appeals court finding. The arbitration was aborted and the $1.3 million was never paid, American Apparel says. American Apparel claims the scheme was Fink’s idea in the first place.

American Apparel went to the California appeals court to force the plaintiff to sit down to a new arbitration to determine whether her absence from the first arbitration breached the initial agreement. In a ruling dated Oct. 28, a three-judge panel of California’s Second Appellate District in Los Angeles said the alleged breach of the settlement should be reviewed by a third party. The court took issue with what it described as the “potential illegality of the ‘arbitration’ clause . . . with its goal of issuing a press release for the purpose of misleading journalists and the public.”

The court went on to say that “the proposed press release is materially misleading — among other things, no real arbitration of a dispute occurred and [the] plaintiff received $1.3 million in compensation.”

In an interview, American Apparel confirmed the terms of the settlement but took issue with the court’s implication that the arbitration was potentially illegal. Company General Counsel Joyce Crucillo said in an interview that the plaintiff’s lawyer had contacted the company on the eve of trial “practically begging me to settle this case and not proceed to trial.” Fink declined to comment.

Full post as published by Law Blog - WSJ.com on November 04, 2008 (boomark / email).