California Lawyer: American Apparel

ODD MAN IN

Can a respected immigration lawyer save the tattered reputation - and battered stock price - of American Apparel?

by Matthew Heller

On visits to American Apparel Inc.'s 800,000-square-foot factory in the Los Angeles garment district, the company's founder and CEO, Dov Charney, gets quite a reception. "When he walks through the factory," marvels attorney Peter A. Schey, "all the workers clap. There's a genuine relationship between him and the workers. It's not contrived."

 The majority of the workforce is immigrant and Hispanic, and the employees may have good reason to applaud Charney. He pays them an average of $12 an hour - way above the industry standard for sewing T-shirts and underwear - and he provides health insurance, an on-site health clinic, subsidized meals, and English language classes. Schey has noticed how Charney takes time to talk to employees as he tours the shop floor. "He is approachable by workers who have family problems," he reports. The New York Times recently photographed Charney in a hug with a female factory worker.

Schey, one of the country's most tenacious defenders of immigrant and workers' rights, has also embraced Charney. Since signing on as an advisor in 2008 when the U.S. Immigration and Customs Enforcement (ICE) began an 18-month inspection of American Apparel's workforce, he has become Charney's go-to counsel and media spokesman, an integral component of a legal team that includes in-house counsel Joyce E. Crucillo and blue-chip firms Skadden, Arps, Slate, Meagher & Flom and Mitchell Silberberg & Knupp.

"I believe that American Apparel is led by a person with a very big heart," Schey says.

But Charney, 42, is known for more than progressive employment practices: His name has become something of a byword for sexual harassment in the workplace. In a series of lawsuits, female employees have accused him of everything from roaming his offices dressed in nothing but his underwear to demanding oral sex. Mary Nelson, who worked as an independent contractor in American Apparel's sales department, alleged that he frequently exposed himself to her while wearing briefs (Nelson v. American Apparel Inc., No. BC333028 (L.A. Super. Ct. filed May 4, 2005)).

In a more recent case, Irene Morales, who is suing Charney in New York state court for $250 million, said he held her captive in his Manhattan apartment (Morales v. American Apparel Inc., No. 5018/2011 (Kings Cnty. Sup. Ct. filed March 3, 2011)). "He treats women as sex slaves," says Nelson's attorney, Keith A. Fink of Los Angeles. Morales and two other women also filed a complaint for defamation and invasion of privacy, alleging that Charney posted nude photos of them on fake blogs created in their names after Morales sued him for harassment (Ferguson v. American Apparel Inc., No. BC460331 (L.A. Super. Ct. filed April 26, 2011)). 

On another front, American Apparel faces several shareholder derivative suits and class actions in which investors accuse Charney of securities fraud for failing to disclose "material adverse facts," including his employment of undocumented immigrants. The company's stock, which traded as high as $26 a share in 2007, now languishes around $1.

Although Schey, founder and executive director of the Los Angeles-based Center for Human Rights and Constitutional Law Foundation, is mostly associated with public interest law, he has represented such colorful private clients as the orange-robed Indian mystic Bhagwan Shree Rajneesh. He estimates that his private practice accounts for about 20 percent of his time, and it rewards him handsomely - his hourly rate of $800 to $900 exceeds that of some of L.A.'s top divorce lawyers.

But Schey's alliance with Charney suggests an inexplicable contradiction: a champion of the disenfranchised and downtrodden defending a corporate rogue. "There's obviously controversy" surrounding Charney, Schey says diplomatically. And he and the fashion mogul, he admits, have "a unique and unusual relationship."

"If Dov listens to anybody," Fink says, "he listens to Peter."

When Schey began representing him, Charney was already one of the highest-profile personalities in the fashion industry. In the space of only a decade, he had built American Apparel into the nation's largest clothing manufacturer, making its screen-printer-friendly T-shirts into must-wear items for youngsters, in part through racy advertising campaigns featuring scantily clad models. He expanded into the retail market, opening more than 250 stores. In 2008 he won one of the industry's most coveted awards, Retailer of the Year.

Reporters clamored for interviews - and Charney obliged, sometimes with bizarre results. A Jane magazine profile published in 2004 left little to the imagination. The reporter, Claudine Ko, recounted Charney putting on a "show" of oral sex with a female employee in a hotel suite. "I think sex motivates everything," he remarked. At his apartment in Manhattan, he also performed an act "of what Dov likes to call self pleasure," telling Ko, "Masturbation in front of women is underrated."

CEOs of publicly traded companies don't normally behave this way in front of reporters. But Charney's antics helped create an edgy buzz around American Apparel. "He's kind of a visionary, like a rock star in the fashion industry," observes Schey. "He's a bit of a bad-boy rock star." Portfolio magazine took another tour through Charney's world in 2008, witnessing an incident in which he screamed at employees whom he blamed for defective products. "You have to be a greedy monster in this world," he explained to the reporter. "Like a pig! Like a monster! That insatiable appetite is what drives business. I have the smell for it. I'm a pig! I'm an animal."

Charney also courted controversy by speaking out about immigration. He ran quarter-page ads in newspapers featuring American Apparel employees of Guatemalan origin and proclaiming that the "only realistic" solution for the problem of undocumented immigrants is "some form of legal integration, coupled with a legitimate, forward-thinking immigration policy." The ads asked provocatively, "At what point are we going to recognize that the status quo amounts to an apartheid system?" When Charney's workers marched to downtown Los Angeles to support immigration reform, he joined them.

The immigration issue, Charney told the New York Times, goes to "the core of my soul." His paternal grandparents were European Jews who emigrated to Canada, leaving the horrors of the Holocaust behind them. He is an immigrant himself, having moved from Montreal to South Carolina as a 19-year-old to learn the T-shirt business from textile and garment manufacturers. Asked about his obsession with immigration, he told Portfolio, "It's because I'm a Jew! Birds are free! We want to go somewhere, let's go! I just don't believe in borders, in the end. The Americans who do just don't trust humanity."

As it happens, Charney's outspokenness coincided with a shift in immigration law enforcement. Rather than have agents raid factories and round up undocumented workers - as was the norm during most of the Bush administration - ICE authorities began sending notices to employers with large immigrant workforces announcing I-9 audits of hiring records.

Shortly after American Apparel went public in December 2007, Charney received a notice informing him that he needed to prepare documentation on all 5,600 of his factory workers for review. "ICE tends to target visible, large companies in geographical areas with high immigrant populations," Schey explains. "American Apparel fit those broad criteria." Agents inspected the company's files the following month.

In-house counsel and Mitchell Silberberg handled much of the work for the I-9 audit. But with American Apparel facing a civil complaint and fines if violations were found, Charney felt he needed some additional legal help. For this, he turned to a lawyer who has made the plight of immigrants the cornerstone of an illustrious career.

Like Charney, Schey is an immigrant. His Jewish father and gentile mother fled the Nazis and, after Joseph Kennedy - then ambassador to Great Britain - refused to issue them a U.S. visa, they ended up in South Africa. Schey was born in Durban in 1947, and by his teens he was protesting the country's racial apartheid policies. When he was 15, the family moved to San Francisco, in part for his safety.

As a law student at California Western in San Diego, Schey handled immigration cases at a legal aid clinic. His first court victory was on behalf of a pregnant woman from Mexico who wanted to give birth at the county hospital so that her child would be a U.S. citizen. He passed the bar in 1973, and given his experience growing up in segregated South Africa, practicing civil rights law seemed a natural fit.

As with Charney, immigration is an issue that goes to Schey's core as well. "I feel moved when I encounter people who are suffering in some way that seems unnecessary, that seems to result only from the actions of some bureaucratic official or agency," he has said.

Mark Rosenbaum, chief counsel for the ACLU of Southern California, calls Schey "a pioneer in terms of immigrant rights. He has litigated some of the most important cases in that area. He's one of the all-time greats."

Among other accomplishments, Schey argued Plyler v. Doe (457 U.S. 202 (1982)), in which the U.S. Supreme Court struck down a Texas law denying a public education to undocumented children. He led the fight against Proposition 187, the California ballot measure that would have denied state benefits such as health care and education to undocumented residents (LULAC v. Wilson, 131 F.3d 1297 (9th Cir. 1997)). And after more than 17 years of litigation, he reached a settlement with the government in a case brought by immigrants who were denied legal status because they briefly traveled abroad during the 1987-88 "amnesty" program (Catholic Social Services v. Meese, No. 86-1343 (E.D. Cal. order approving settlement Jan. 23, 2004)).

Now 64, Schey works out of a converted A-frame house in the unfashionable Westlake district of Los Angeles. His office is sparely furnished with a large desk, two computers, a wall-unit air conditioner, and a framed photo of Cesar Chavez. His once wavy hair has grown spiky, but he could still pass for a college professor. Cerebral and reserved, he speaks in sentences that rarely end in exclamation points and often are interrupted by long pauses while he carefully chooses what to say.

Schey's measured diction and temperament appear light years away from the emotional, exclamatory Charney. His practice, over the years, has focused on immigrants and laborers themselves rather than on the employers who hire them. But when Charney told him about the impending I-9 audit at American Apparel, Schey saw an opportunity to bring a different, more nuanced perspective to the company.

The typical response of a "corporate-type law firm," Schey says, "would be pretty much to circle the wagons around the company - and throw the workers under the bus, so to speak." He told Charney he'd work on the I-9 audit if "we bent over backwards to protect the workers." That meant, among other things, providing free and low-cost legal services to help immigrant employees and ensuring that workers had "an adequate and reasonable opportunity" to straighten out discrepancies in their documents. 

During the audit, ICE turned up irregularities in the identity documents that 1,800 workers had presented to American Apparel when they were hired. After months of discussions with immigration officials, the company fired more than 1,500 of them. "I just cry when I think that so many people will be leaving the company," Charney emoted in a September 2009 farewell letter to those he was terminating.

Schey also felt "terrible" about the firings. "I saw people with disabilities lose their jobs, people with families in crisis, with sick family members," he recalls. After he described their plight to Charney, the CEO raised some money for them with a sale of American Apparel clothing in the company parking lot. But many of the fired workers, Schey laments, ended up being "driven into the welcoming arms of sweatshop owners" who "don't even care about [immigration compliance], about health care coverage."

Things could have turned out quite a bit worse for Charney. Last year, clothing retailer Abercrombie & Fitch had to pay a fine of more than $1 million after an I-9 audit uncovered defects in its electronic system for verifying employee eligibility.

Though American Apparel was fined $35,000, Schey stresses that ICE made "no finding that the company had intentionally or negligently hired undocumented immigrants." He says that in an industry such as clothing - "which has effectively been ceded to the immigration population" - even if an employer complies fully with federal employee verification requirements, approximately 20 percent of the workforce will be using unauthorized documents. "It's ... one of the results of a dysfunctional national immigration policy."

All in all, Schey and Charney were pleased with their first collaboration. "It helped us see the value in each other's contributions," the attorney says. Charney suggested that Schey continue advising him in "controversial cases where he wanted a different perspective brought to the table," and Schey now gets a monthly retainer he won't disclose. But he may have wound up with more headaches than he bargained for.

In April 2009 - while the I-9 audit was still in progress - Charney allegedly demanded that Irene Morales, then an 18-year-old employee at an American Apparel store, visit him at his Manhattan apartment. According to the lawsuit Morales filed last March, Charney greeted her "wearing only underpants," dragged her inside the apartment, forced her to perform oral sex on him, and then flung her onto his bed. Over the next several hours, the suit says, he held her "prisoner" in the apartment and forced her to "perform additional sexual acts."

Such sordid allegations might send some companies into a tailspin. At American Apparel, they are almost business-as-usual. Starting with saleswoman Mary Nelson in May 2005, nine female employees have sued Charney and his company for sexual harassment in five separate complaints. None of the cases has gone to trial. Plaintiffs Heather Pithie and Rebecca Brinegar withdrew their claims in 2005, and Nikky Yang, an acknowledged girlfriend of Charney's, dropped hers last year after Charney counter-sued her for fraud (Pithie v. American Apparel Inc., No. BC334169 (L.A. Super. Ct. dismissed Dec. 20, 2005); Yang v. American Apparel Inc., No. BC402837 (L.A. Super. Ct. dismissed Feb. 16, 2010)).

But more than six years into Nelson's litigation, her allegations of a "reign of sexual terror" at American Apparel are still pending. "This emperor literally has no clothes," she memorably said of Charney in a pleading. Amid nationwide publicity, the case was about to go trial in January 2008 when lawyers thrashed out a settlement: Charney would secretly pay Nelson $1.3 million, and she agreed to what an appeals court would later call a "sham" arbitration before retired Judge Daniel Weinstein of San Francisco (Nelson v. American Apparel Inc., 2008 WL 4713262 (Cal. Ct. App. [unpub.])). A press release was prepared to announce Charney's absolution - making no mention of the payment to Nelson. But the convoluted scheme unraveled after plaintiffs counsel Fink did not show up for the scheduled proceeding.

"I personally did not want myself or my firm involved in this sham arbitration," Fink said in a court declaration. American Apparel has said the whole fiasco was his idea.

There is no love lost between American Apparel and Fink. At one point, according to a report in the New York PostThe Keith Fink Files.

"What do you have to do to become the worst attorney in all of LA?" one posting asked. "Just ask Keith Fink." But with Schey involved now, the relationship seems to be a little less hostile. The Nelson case, he says, is "moving towards what I hope will be a fair and just resolution."

The most recent group of sexual-harassment plaintiffs includes Kimbra Lo, a former employee who says Charney assaulted her at his home in the Silver Lake neighborhood of Los Angeles in December 2010 (Lo v. American Apparel Inc., No. BC457920 (L.A. Super. Ct. filed March 23, 2011). As the company's defender, Schey finds himself being spoken of in terms hardly becoming a venerated human rights advocate. Lo's attorney, Eric M. Baum of Simon, Eisenberg & Baum in New York, told the Los Angeles Daily Journal, "Mr. Schey is representing a sexual predator who has committed horrible acts against teenage employees." Baum - who also represents the plaintiffs in Morales and Ferguson - did not respond to a request for an interview.

Schey insists he has "a strong commitment to people who have experienced sexual harassment." He says he advocated a conciliatory approach to one Equal Employment Opportunity Commission case in which an American Apparel worker named Sylvia Hsu said she was harassed by a coworker. "The case started out contentious. It was 'Let's fight this,' " he recalls. "I told Dov, 'I'll take the case if you don't mind me settling.' " The EEOC determined last year that the company had discriminated against Hsu and "women, as a class ... by subjecting them to sexual harassment." Schey says the case is currently in settlement negotiations (Hsu v. American Apparel Inc., Charge No. 480-2006-00418).

After years in the immigration law trenches, Schey has earned his reputation as a compromiser. Asked about the latest harassment suits against Charney, however, Schey pauses, retrieves some Ritz crackers from his office kitchen, and comes back with a response that is less conciliatory than combative.

Charney, he says, munching on his snack, is "a charismatic, single adult male" whose "entire life" is American Apparel. "Once in a while," he continues, "he will develop a relationship with somebody in the company. ... If he ends a relationship, some of these people will be bitter and will try to shake him down. That's what I think is taking place. Each one of these cases is a shakedown." With a grimace, Schey says there are records of emails sent to Charney by plaintiffs in the Morales and Lo cases that "completely destroy" their allegations. "They would pursue him absolutely relentlessly. In a highly sexualized manner, very aggressively."

"If I thought he harassed a woman, I would be the first to call for a reasonable and just resolution," Schey summarizes. "That didn't happen in any of these cases."

Fink calls Schey's comments that the plaintiffs are bitter about being dumped "nonsensical." "Many women have sued the company and complained about Mr. Charney's conduct even though they had no relationship with him," he says, adding that sexual harassment law "prohibits a hostile working environment and protects even those who have not been the subject of a sexual advance."

Indeed, most of Nelson's case involves allegations related to the environment at American Apparel - specifically, Charney's odd executive attire - he allegedly wore a "cock sock," exposing his buttocks and pubic hair, to a meeting with the saleswoman - and his use of epithets such as "slut" and "bitch" to refer to women.

Lo and her coplaintiffs - Alyssa Ferguson, Marissa Wilson, and Tesa Lubans-Dehaven - allege that "numerous people" have complained to American Apparel management about Charney's behavior, but the company has ignored the complaints and "devised a scheme to silence victims of sexual harassment and potential whistleblowers" by requiring even low-level employees to sign binding arbitration and confidentiality agreements as a condition of employment. "They had to do something to protect the company," Fink says.

Charney won a victory in July when a Los Angeles Superior Court judge found that the agreements the Lo plaintiffs signed were enforceable and granted his motion to compel arbitration. A similar motion is pending in New York in Morales.

"It's not a huge difference to Dov Charney whether a case is heard in court or in an arbitration," Schey explains. "But the company has a policy [that] encourages people with a claim to come forward and have the claim adjudicated in a manner that respects their privacy."

Even with arbitration agreements and the best legal advice money can buy, Charney's days at American Apparel may be numbered. High-powered securities lawyers are now after him, alleging that his company "failed to disclose, and made material misrepresentations regarding, their practice of hiring employees who defendants knew, or were deliberately reckless in not knowing, were not eligible to work in the United States." Relying on company press releases, the suit claims the stock price dropped precipitously following the dismissal of the 1,500 "experienced manufacturing employees in the third and fourth quarter of 2009," which reduced labor efficiency and operating income (Andrade v. American Apparel Inc., No. 10-CV-06352 (C.D. Cal. filed Aug. 25, 2010)).

As it spiraled toward bankruptcy earlier this year, American Apparel got a $15 million lifeline from Canadian investors. But the company's board of directors has shown signs of disillusionment with Charney. The CEO's sex-saturated reputation "is a double-edged sword," former board member Keith Miller recently told the New York Times. "As much as it can be tremendously value added, it is equal in erosion."

Schey, though, seems content to stay by Charney's side. "Any time anything takes place that I don't like, my association ends," he says. "I always have the option to bail ... but I've never come close to feeling that way."

Part of the reason may be his and Charney's shared interest in immigration rights, one of the most divisive issues in America. "We share a common vision that what's needed is not massive deportations and more repression but a rather generous legalization program combined with a realistic visa program," he says.

Schey also believes that being the spokesman for American Apparel is a worthwhile experiment. "I'm not sure it's all bad if a corporation wants to have someone speak for it on certain issues and that person is known as a booster of human rights and social justice," he explains. "Maybe more corporations should do that." Among his contributions to the company is a disability rights policy that he claims "will be the industry standard."

Schey says he doesn't get any flak about his high-profile gig from other civil rights activists. "Actually, a lot of people have come to me and said, 'Can you get me a thousand T-shirts?' " he says. "They see some way that American Apparel can be helpful to their cause. That happens once a week."

And working for Dov Charney just may have a certain novelty value. As Fink says, "Peter's just a lawyer. ... It's something he's never done before. I think he enjoys it."

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