American Apparel Hides Sexual Harassment and More through Mandatory Arbitration

July 18, 2014
Guest Post

by Arthur Bryant, Chairman, Public Justice

*This piece was originally posted in Public Justice's blog.

An eye-opening piece by Stephen Davidoff Solomon in The New York Times highlights a huge, unappreciated danger of corporations requiring employees to sign mandatory arbitration “agreements” to get or keep their jobs – hiding outrageous misconduct, including sexual harassment. 

Solomon demonstrates that mandatory arbitration isn’t just bad because it bars workers from having their day in court. It also keeps misconduct – including extensive sexual harassment – secret from investors, customers, other workers and the public, so bad behavior and actors can thrive.

Dov Charney, the CEO of American Apparel, was unanimously fired by the company’s Board of Directors late last month. Charney was dramatically over-the-top and openly publicized his sexual focus. In 2004, a female reporter from Jane magazine watched him engage in oral sex and then wrote about it. The article was full of quotes from Mr. Charney like, “Masturbation in front of women is underrated.”

When a series of sexual harassment charges were made, Charney continued with his Board’s full support. After the company’s financial performance decreased, however, and an arbitrator issued a finding of sexual harassment, American Apparel let him go.

Charney got away with it for so long, at least in part, because employees were required to sign agreements to have all disputes handled through arbitration. As a story in the New York Times explains:

Arbitration hearings, unlike trials, are usually closed, and any filings are more likely to be sealed, often enabling defendants to avoid embarrassment and maintain their powerful positions.

“Employers like arbitration so much because it’s a black box — nothing gets out,” said Anne Golden, a New York lawyer who has represented many women in harassment and discrimination cases.

As Solomon explains, American Apparel was especially aggressive in insisting on mandatory arbitration clauses – for employees and models – that (like most such clauses) required everything to be kept secret. There were at least five claims that Charney sexually harassed women and one that he made a woman his “sex slave.”  These cases cracked open the door to the problem because those women sued in court to try to invalidate the mandatory arbitration clauses. But the courts enforced the clauses, so whatever happened in these cases is secret. Almost no one knows how many other employees were harassed, filed claims or were compensated, either. All of this is secret, too.

What we do know is that mandatory arbitration postponed Charney’s day of reckoning for years.

There are lots of reasons why corporations should not be allowed to use mandatory arbitration clauses to eliminate workers’ or consumers’ right to a jury trial or day in court. The arbitrator has the final decision, does not need to know or follow the law, is paid by the company, and knows he or she probably won’t be hired again if the ruling is against the company. There’s almost no right to appeal and the company almost always wins. But secrecy is a big reason why, too, as Solomon explains:

If the suits were known and the details public, investors would have fully realized what a problem this was. After all, investors don’t like risk. American Apparel is a retail operation, and the lawsuits might have pushed retailers to not buy those T-shirts…

Companies in the United States are rushing to force employees into arbitration over all disputes, particularly those as salacious as sexual harassment. Corporate America has been ably aided by the Supreme Court, which has repeatedly upheld the right of companies to enforce arbitration agreements…The American Apparel experience shows the consequences — not just for employees, but the companies themselves and their investors.

It also shows the consequences for our country and system of justice.

What other outrageous conduct is taking place behind companies’ doors? As long as mandatory arbitration clauses can be used and enforced, we may never know.

We must preserve workers’ and consumers’ access to court, where the public’s right to know is preserved.