Court Slams ‘Deceptive’ Arbitration Deal Involving American Apparel CEO

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Court Slams ‘Deceptive’ Arbitration Deal Involving American Apparel CEO
Wednesday November 5, 3:02 am ET
Mike McKee, The Recorder

 

Legal blogs were buzzing Tuesday about a California appellate ruling involving a sham arbitration between controversial clothier Dov Charney and a woman who sued him for sexual harassment.Los Angeles’ 2nd District Court of Appeal revealed in an unpublished ruling Oct. 28 that attorneys for Charney, CEO of American Apparel Inc., a public company known for its racy ads, had conspired with lawyers for former sales manager Mary Nelson. Both sides had agreed, the ruling says, to enter into an arbitration whose outcome was preordained to favor Charney, and agreed to a press release stating that Charney “never sexualized, propositioned or made any sexual advances of any nature whatsoever toward Mary Nelson.” Nelson, in turn, would get $1.3 million if she kept the settlement secret, according to the ruling.

The 2nd District, in an opinion authored by Justice Paul Turner, said that settlement — which never went through — would have raised “considerations of illegality, injustice and fraud.” The court also held that the purpose of the proposed press release “was to mislead journalists and the public.”

The attempted under-the-table agreement raised some questions about whether JAMS Inc. arbitrator Daniel Weinstein — a retired San Francisco Superior Court judge and co-founder of the 20-year-old JAMS — had gone along with the ruse.

But the appeal court exonerated Weinstein in Nelson v. American Apparel Inc., B205937, saying he had “refused to consummate” what the court called a “deceptive procedure.” And on Tuesday, JAMS Executive Vice President and general counsel John “Jay” Welsh fiercely defended Weinstein in a prepared statement.

“Judge Weinstein never conducted an arbitration as outlined in the parties’ settlement agreement,” Welsh wrote. “[He] did not conduct a hearing and did not issue an award. … Judge Weinstein and JAMS would never cooperate in a known subterfuge of the arbitration process.”

Weinstein did not return a call Tuesday afternoon; a JAMS spokeswoman said he would not be commenting.

The 2nd District’s ruling points out that the settlement agreement was signed on Jan. 23 by Nelson’s lawyer, Keith Fink of L.A.’s Keith A. Fink & Associates, and by American Apparel’s attorney, Adam Levin, a partner at the Los Angeles firm Mitchell Silberberg & Knupp.

Neither Fink nor Levin returned calls from The Recorder late Tuesday. But American Apparel General Counsel Joyce Crucillo told The Wall Street Journal in a story that ran Tuesday that Fink had contacted the company on the eve of trial “practically begging” to settle and proposing an arbitration in which Nelson would be given money to “defray legal costs” in exchange for a confession that would clear Charney’s name.

Crucillo told the Journal that the company changed its mind.

But that doesn’t quite jibe with the findings of the appellate court, which unsealed documents that had been sealed in arbitration and before L.A. County Superior Court Judge John Shook. According to the 2nd District, Fink backed out and refused to participate in the arbitration with its preordained settlement facts on Feb. 1 in San Francisco.

The court quoted Fink as saying he “did not want myself or my firm involved in this sham arbitration.”

Charney’s lawyers subsequently accused Nelson of breaching their agreement to arbitrate, and sought to compel her to arbitrate over that issue.

Shook later refused to compel arbitration and the issue went to the 2nd District.

The appellate court, while obviously disturbed by the original arrangement, ordered the case back to JAMS to decide whether Nelson had generally agreed to traditional arbitration.

“There is a public policy in favor of arbitration under federal and state law,” Justice Turner wrote. “Any doubts as to whether an arbitration clause applies to a particular dispute should be resolved in favor of ordering the parties to arbitrate.”

He — along with Justices Orville Armstrong and Sandy Kriegler — held, however, that their position would have been entirely different if American Apparel had been trying to resurrect sham arbitration under the improper agreement.

“Then there would be considerations of illegality, injustice and fraud,” the court held, “which would affect our powers as a court of equity to enforce the ‘arbitration.’”

Ethics attorney Diane Karpman, the principal of L.A.’s Karpman & Associates, said that while the sham arbitration pushed the limits, it probably wouldn’t lead to State Bar discipline charges.

“Clients have a right to settle on just about any terms,” she said. “Sometimes you have a plaintiff client, in for example a class action, who a defendant will ‘pick off’ and settle with on very favorable terms to that one client.”

“It’s permitted,” Karpman added, “because clients are allocated the authority of when to settle. It’s their decision, not the lawyers.’”

State Bar prosecutors wouldn’t comment on the case.

 

 

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~ by ebragg on November 6, 2008.