Reaching Settlement, Faking Arbitration (Nov. 4).

Picking up on a case reported on blogs last week, today's Wall Street Journal looks at an amazing ploy by retailer American Apparel to fake an arbitration.

The ADR tale comes from a case decided early last week in a California state appellate court in Los Angeles, Nelson v. American Apparel Inc., No. B205937 (Oct. 28, 2008)(available at OnPointNews).

The story starts with widely reported allegations about retailing legend Dov Charney, who heads American Apparel, a trendy chain that claims more than 10,000 employees in more than 230 retail stores in 19 countries. Charney, who has been accused of serial sexual harrassment, has been forced to settle with former employees, as well as arbitrate.

According to the California Second Appellate District, Division Five opinion, Charney and American Apparel entered into a settlement a day before trial with former employee Mary Nelson under which Nelson would get $1.3 million in return for agreeing to a staged arbitration where the outcome was predetermined.

The scripted arbitration decision would provide a categorical win for Charney and American Apparel, with no incidents of sexual harassment found. The settlement included press release language that declared the arbitration victory for the company, stating, among other things, "The [a]rbitrator ruled that the marketing materials, sexual speech and much of the conduct about which Nelson complained are protected under the First Amendment’s guarantee of free speech and could not form the basis for any claim."

The press release was the key for Charney and his company, allowing a public vindication, despite a seven-figure payment behind closed doors.

The scheme hasn't completely backfired, despite the fact that the planned arbitration session crumbled when the arbitrator and the plaintiffs' representatives bailed.

Charney and his firm, as today's WSJ notes, won in front of the appellate panel, which reversed a trial court and granted the defense's request to compel arbitration in the case--even though the appeals court noted in the opinion that it would have had reservations about enforcing the settlement because of "considerations of illegality, injustice, and fraud which would affect [its] powers as a court of equity to enforce the 'arbitration.'"

The Journal article appears on cover page B1 of the Marketplace section and is available via subscription here; a different account is available at the Journal's Law Blog here.

Here's what happened:  The appeals court, in a unanimous published decision written by Presiding Justice Paul Turner, wrote that it wasn't touching the fake abitration. It was merely enforcing two sections of the settlement agreement that invoked arbitration--one for disputes over confidentiality breaches, and another that specifically sent settlement agreement enforcement issues to arbitration.

The appellate court's view was that the defense request to compel arbitration was a straightforward Buckeye request, and ruled that the issues under the settlement section were to be decided by the arbitrator. Buckeye Check Cashing, Inc. v. Cardegna (2006) 546 U.S. 440, 446-449.

The panel emphasizes that arbitrator and former California state judge Daniel Weinstein, of JAMS' San Francisco office, refused to participate in the fake arbitration. "If this appeal involved a petition to compel the resumption of the 'arbitration' before Retired Judge Weinstein or any other provision of paragraph 7"--the settlement agreement section providing the specifics of the phony arbitration--"the issue would be different."

The plaintiffs' attorney, Keith A. Fink, who heads his own firm with offices in Los Angeles and San Francisco, also declined to appear at the arbitration hearing, telling the court that after the settlement agreement was signed, "it was my understanding and the parties[’] intent that with respect to the sham arbitration, neither the arbitrator, nor Defendants required anything else of me, my firm or Ms. Nelson."

The panel also writes that Paragraph 7 is severable from the rest of the settlement agreement.

The story emerged last week when OnPointNews published the opinion. IP ADR Blog contributor Victoria Pynchon last week contributed fellow blogger Mike Young's version of the events to the Overlawyered blog, here.

--Russ Bleemer, Editor, Alternatives