By SUZANNE KAPNER from wsj.com
Messy exit of founder, Dov Charney, gives way to a string of litigation with no sign of easing
American Apparel Inc. was supposed to be focused by now on fixing its battered business. Instead, it is caught up in a firing that won’t go away.
Nearly a year after moving to oust Chief Executive Dov Charney, the maker of T-shirts, tank tops and hoodies continues to fight with its controversial founder on multiple fronts. The wrangling is proving a distraction as the company simultaneously struggles to overcome a tide of red ink and maintain its relevance with fickle young shoppers.
American Apparel’s battle with Mr. Charney has become one of the most protracted efforts by a public company to part ways with its chief executive, several leadership experts said. The fight has produced a thicket of litigation and could escalate. Restrictions in a standstill agreement under which Mr. Charney has agreed not to launch a fight for board seats expire in July.
Mr. Charney has filed an arbitration claim accusing the company of breach of contract and wrongful termination, and has sued American Apparel and its lead director, alleging they defamed him. Two shareholder lawsuits accuse the company of proxy fraud in connection with Mr. Charney’s termination. Another lawsuit filed by Mr. Charney’s lawyer on behalf of former employees that seeks class action status accuses the company of failing to give about 200 workers proper notice before firing them. And more than a dozen labor complaints also filed by Mr. Charney’s lawyer with the U.S. National Labor Relations Board on behalf of employees claim American Apparel, which has pushed for immigration reform and higher wages, has blocked factory workers seeking to unionize. Some of the complaints were dismissed, though Mr. Charney’s lawyer has refiled them.
American Apparel has denied the claims and shot back in mid-May with a lawsuit of its own alleging that Mr. Charney coordinated the various complaints as part of an attempt to ”wrest control of the company away from the board and management and reinstate himself as CEO and a director” in violation of the standstill agreement.
Mr. Charney’s lawyer, Keith Fink, denied that the founder was orchestrating a campaign. But he didn’t waver on his ambitions. ”Does Mr. Charney want to take back the company?” Mr. Fink said. ”You bet.”
The subject of all the wrangling is a troubled company that early on won fans for its hip spin on cotton jersey, its pledge to manufacture in the U.S. and its highly sexualized advertising. American Apparel has accumulated more than $300 million in losses since 2010. Sales fell 4% last year to $609 million, and its stock price is down to 55 cents.
Paula Schneider, who took over as chief executive after Mr. Charney was officially fired, is trying to instill more discipline into what at times have been chaotic operations. She has bolstered the planning and budgeting department to better forecast demand, while clearing out slow-moving inventory and streamlining the number of styles. Still, losses grew to $26 million in the first three months of the year, from a $6 million loss a year earlier, as sales slumped 9%.
Mr. Charney, 46 years old, owns 43% of the company thanks to a deal with hedge fund Standard General that boosted his stake from 27%. But the deal required Mr. Charney to give up voting control of his shares, and he is now suing Standard General, accusing it of collaborating with the board on a ”sham” investigation that led to his removal.
A spokeswoman for Standard General called the suit frivolous.
Mr. Charney played a central role in the company’s rise and fall. He started selling T-shirts from the basement of his parents’ home in Montreal in the late 1980s and founded American Apparel in 1998. His edginess and knack for spotting trends made the brand relevant with young adults. But he also pushed boundaries by frankly discussing his sex life in the workplace and opting for advertising campaigns of spread-eagle models that bordered on soft porn. He found himself at the center of sexual-harassment lawsuits brought by a handful of former employees and the subject of complaints filed with American Apparel’s human-resources department.
American Apparel’s board contends it had little choice but to fire Mr. Charney in December after an internal investigation turned up multiple instances of what the company described as misconduct, including the use of company funds to pay off employees so his alleged misbehavior wouldn’t lead to lawsuits against him, as well as violations of its anti-harassment and anti-discrimination policies.
In its lawsuit, American Apparel accuses Mr. Charney of trespassing on company property, interfering with conference calls, and threatening employees who refused to support his return by taking their photographs and promising to fire them when he is reinstated.
Mr. Fink called the allegations pertaining to Mr. Charney’s conduct a ”joke” and said he never used company funds for personal matters.
Mr. Charney has his supporters, including American Apparel employees who have sent emails to the company asking for his return. A website called Team Dov lists postings from employees who say they want him back. Other employees have attended rallies outside the company’s Los Angeles headquarters organized by the community group Hermandad Mexicana that call for him to regain control.
Eric Ribner, who roomed with Mr. Charney at Tufts University, has filed a lawsuit along with a former American Apparel employee that accuses the company of proxy fraud. ”I would never have voted for the board at the annual meeting had I known they were contemplating Dov’s removal,” Mr. Ribner said.
American Apparel said Mr. Ribner’s claims were meritless.
Mr. Charney’s father, Morris, himself a former employee, says the accusations of sexual harassment are being used to cover up the fact that Standard General and American Apparel’s board stole the company from his son.
”I am so outraged by what has been happening, this lack of recognition of what Dov has succeeded in building,” the elder Mr. Charney said.
-Joann S. Lublin contributed to this article.
Write to Suzanne Kapner at Suzanne.Kapner@wsj.com
PHOTO: PATRICK T. FALLON/BLOOMBERG NEWSÊÊÊ