The sham arbitration of a sexual harassment lawsuit against fashion mogul Dov Charney could have put prospective employees of his American Apparel (AMEX:APP) company “in harm's way,” the plaintiff's attorney said in a court document.

Keith A. Fink represents a former American Apparel employee, Mary Nelson, who alleged that Charney conducted a “reign of sexual terror” at the company. As part of a settlement agreement, she agreed on the eve of trial in January 2008 to allow Charney to issue a press release proclaiming an arbitrator had ruled in his favor –- while concealing from the public that he had agreed to pay her $1.3 million.

The agreement unraveled after Fink did not show up for the arbitration hearing before a retired judge in San Francisco. In October, an appeals court ordered the parties into an arbitration to decide whether Nelson breached her obligation under the settlement to participate in the arbitration.

According to American Apparel, it was Fink who devised the sham arbitration in the first place after admitting that his client's sexual harassment claim was “bogus.” The press release would have stated that Charney's conduct was protected under the First Amendment.

But in a petition for Supreme Court review of the appeals court's decision, Fink argued that the arbitration was illegal and “harmful to the public.”

“Any press coverage reporting a false arbitral victory by Defendants based on the First  Amendment,” he said,

would serve to discourage other potential American Apparel victims of sexual harassment from seeking redress. Further, prospective American Apparel employees, after hearing or reading the media's account regarding Plaintiff's allegations and lawsuit, are likely to place themselves in harm's way if they conclude that American Apparel is a working environment devoid of sexual harassment.

The rhetoric did not sway the Supreme Court, which last month denied review. Now if American Apparel shows Nelson breached the agreement, Charney could make a claim for damages against her –- and he appears impatient for a day of reckoning.

“Appellants have now waited more than ten months to arbitrate the disputes” arising from the agreement, he said in his answer to the petition for review.

Fink has testified in a court declaration that he did not appear before Retired Judge Daniel Weinstein because “I personally did not want myself or my firm involved in this sham arbitration.” The Supreme Court petition said the entire settlement agreement was invalid because of the illegality of the clause which “concerned, among other things, Defendants' issuance of a press release for the purpose of misleading journalists and the public ...”

“Instead of invalidating the entire agreement, as required under California law, the Court of Appeal severed [the clause] from the remainder of the settlement agreement,” it said. “Yet severing an illegal section of a contract which permeates the entire contract with illegality is not permitted under California law.”

Charney responded: “[U]nder California law, it is for the arbitrator to decide any outstanding issues about the validity of the parties' contract.”