Fashion mogul Dov Charney has denied responsibility for a “sham” arbitration of a sexual harassment lawsuit, saying it was the idea of a plaintiff's attorney who admitted his client had no case.

As On Point reported earlier this week, a confidential settlement agreement between Charney's American Apparel (AMEX: APP) company and former employee Mary Nelson would have allowed him to proclaim an arbitrator had ruled in his favor –- while concealing from the public that he had agreed to settle the case for $1.3 million.

The settlement averted a trial that was scheduled to begin Jan. 24, 2008. According to an unpublished appeals court opinion, it unraveled after Keith A. Fink, lead counsel for Nelson, did not attend the phony arbitration Feb. 1 before a retired judge in San Francisco.

American Apparel gave its version of events today in a statement e-mailed to On Point, describing negotiations which began the night before trial when Fink contacted defense counsel and “admitted that Ms. Nelson’s claim of sexual harassment was 'bogus,' but that neither he nor his client could walk away after incurring several millions of dollars in legal fees.”

Since American Apparel “refused to settle the case without a public admission from Ms. Nelson that her accusations were completely untrue,” the plaintiff's attorney

devised a settlement agreement whereby his client would agree to certain stipulations amounting to a confession that her charges of sexual harassment were bogus, and that she had never been subject to any harassment or a hostile work environment. This confession would then be presented in an arbitration proceeding, and following American Apparel prevailing in arbitration, the company would issue a press release announcing the resolution of the matter.

The company “viewed the proposed settlement from the plaintiff, which would effectively exonerate the company of the erroneous allegations, as a preferable outcome to additional months of litigating the matter in court ...”

Fink and co-counsel Sarah E. Hernandez did not respond to requests for comment. But American Apparel's account leaves some things unexplained, among them:

• The arbitrator's stipulated decision falls short of a “confession” by Nelson that her claims were false, saying only that they did not meet the legal test for sexual harassment under California law.

• American Apparel says it agreed to "pay a fraction of the legal fees that had been incurred by Ms. Nelson to date." But the settlement agreement states that the $1.3 million was for "alleged emotional distress damages."

• If it was Fink who devised the sham arbitration, why would he then not show up for the hearing in San Francisco? He said in a court declaration that "I personally did not want myself or my firm involved in this sham arbitration.”

• American Apparel says Fink pleaded with its lawyers on Jan. 23 not to go to trial. If so, why would Hernandez say at a Feb. 7 court hearing, “I have no problem commencing trial immediately if we do not receive [the $1.3 million] payment ...”?

• The appeals court noted that "Much of plaintiff’s [appellate] brief is dedicated to arguing the improper nature of the 'arbitration'” -- an argument of unadulterated chutzpah if, indeed, the arbitration was Fink's idea.

In its opinion, the California 2nd District Court of Appeal ordered the parties into an arbitration to decide whether Nelson breached her obligation under the settlement to participate in the arbitration and violated confidentiality by objecting to the agreement being filed under seal.

If American Apparel prevails in that arbitration, Charney could -- believe it or not -- make a claim for damages against Nelson. Indeed, the company said in its statement that Nelson's alleged violations have done “irreparable harm” to its reputation in the fashion marketplace.

For a graphic showing those involved in the "arbitration," click here.

By Matthew Heller
10/30/08