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Confidentiality Aspects of Arbitration Clauses Used by American Apparel to Hide Problems

Friday, July, 25, 2014

While arbitration has been heralded as a faster, cheaper, and fairer way to settle conflicts outside of the overburdened courtroom, the recent dismissal of American Apparel CEO Dov Charney has brought into question the rampant misuse of arbitration clauses to cover up problems from both regulators and investors.


Charney, recently ousted from his company over accusations of sexual harassment, apparently used the confidentiality aspects of arbitration clauses in employee contracts to keep investors in the dark about increasing problems in the company stemming from his own behavior.  The company required all employees to agree to arbitration to settle all disputes, including (unusually) charges of sexual harassment.  The entire arbitration, including the final decision, was covered under the confidentiality clause, and employees were also barred contractually from saying anything negative about the company or Mr. Charney.  The end result is that the public, including investors, were unaware of the extent of Mr. Charney’s behavior.


With companies rushing to push employees into binding arbitration clauses with the full support of the Supreme Court, the danger is now seen in the confidentiality aspects of the clauses.  With no fear of bad publicity, companies may be encouraged to allow behavior on the part of its officers and executives that in the past would never be tolerate – and investors run the risk of financing companies that are rotting from the inside because all evidence of problems are swept under the rug of a confidential arbitration proceeding.