The arbitration of a high-profile sexual harassment lawsuit against fashion mogul Dov Charney was in fact part of an elaborate subterfuge designed to misrepresent that he had won the case, On Point has learned.

An unpublished decision of California's 2nd District Court of Appeal discloses the terms of a confidential settlement agreement that would have allowed Charney, CEO of American Apparel (AMEX: APP), to proclaim an arbitrator had ruled in his favor –- while concealing from the public that he had agreed to settle former employee Mary Nelson's case for $1.3 million.

A press release was prepared to announce Charney's absolution, but the settlement unraveled after an attorney for Nelson did not attend the “sham” arbitration. “I am pleased that we have been able to bring clarity to the role of the First Amendment in the American workplace,” the release quoted Charney as saying.

“[T]he proposed press release is materially misleading -- among other things, no real arbitration of a dispute occurred and plaintiff received $1.3 million in compensation,” the appeals court noted.

Nelson, who worked as an independent contractor in the American Apparel sales department, alleged in her suit that Charney conducted a “reign of sexual terror” at the company, parading around the workplace in his underwear and even showing up for one meeting at his home in a garment described as a “cock sock.”

Amid nationwide publicity, the case was scheduled for jury selection Jan. 23 in Los Angeles Superior Court. But lawyers spent the day thrashing out a settlement in which Charney agreed to pay Nelson $1.3 million by Feb. 7 and she agreed to a “confidential arbitration.”

On Jan. 24, American Apparel attorney Adam Levin announced that the case would be decided by arbitration -- thus avoiding the publicity of a trial -- with both sides to be bound by the decision of the arbitrator or private judge they selected. He said nothing about any settlement.

The “confidential arbitration” was in fact a charade. One of Nelson's attorneys, the 2nd District said, later described it as “a 'fake arbitration' designed to produce a press release calculated to blunt negative media attention.”

According to the settlement agreement, the arbitrator would be chosen only by the defense, would be presented with a stipulated record of facts, and would decide that Nelson “was not subjected to unlawful sexual harassment.” Following the filing of the arbitrator's “decision,” American Apparel would be allowed to issue the press release.

Nelson did not, however, receive her payment by the Feb. 7 deadline. At a hearing that day, American Apparel said plaintiff's counsel Keith A. Fink did not show up for the “arbitration” before a retired judge in San Francisco and, as a result, the judge was unable to rule, leaving the case officially unsettled.

Since then, the two sides have been litigating 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. In its opinion, the 2nd District ordered that dispute into arbitration -– this time, presumably, a real one.

The irony here is that Charney could have kept things forever under wraps if he had simply agreed to a routine confidential settlement. By making an extraordinary attempt to manipulate the media, he has ended up getting the very publicity he sought to avoid.

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

By Matthew Heller
10/28/08