American Apparel Files Lawsuit Against Charney for Alleged Breach of ‘Standstill Agreement’

The fight between American Apparel and its founder, Dov Charney, continued with a lawsuit the manufacturer filed on May 15 in the Delaware Court Of Chancery against the ousted chief executive officer, alleging Charney violated a “standstill agreement” he had with American Apparel.

According to the suit, American Apparel is charging that Charney “refuses to abide by the obligations to which he agreed in a July 9, 2014, nomination, standstill and support agreement entered into by him, the company and hedge fund Standard General L.P.

One of the provisions of the Standstill Agreement prohibits Charney from “instigating, encouraging, joining, acting in concert with or assisting any third party in seeking to remove directors of the company,” according to the suit.

Recently, several shareholder complaints have been filed against the company charging violation of federal securities law and breach of fiduciary duties. In a suit filed on April 21, former employees and shareholders Jan Hubner and Eric Ribner said proxy statements sent last April to re-elect American Apparel board members were deceptive because their statements to voters said they supported keeping Charney in his job when in fact they were plotting his ouster.

Charney was suspended by the board after the company’s annual shareholder meeting in New York on June 18. Charney then entered into an agreement with Standard General. Following an internal investigation, Charney was terminated from his job on Dec. 16.

A class-action lawsuit filed on April 21 by shareholder and former American Apparel employee Eliana Gil Rodriguez calls for another board-member vote at a special stockholders’ meeting, stating that the election of the last board members was illegally obtained and invalid. Rodriguez’s suit further states that there was a “poison pill” amended to American Apparel’s bylaws that removed stockholders’ ability to call a special meeting and nominate new directors of the board.

According to an 8-K form filed on May 18 with the U.S. Securities and Exchange Commission, former American Apparel employee and shareholder Jeffrey Kolb notified the company that at the upcoming 2015 annual meeting he would be nominating two board-member candidates, Adrien Kowalewski and Gene Montesano. Kowalewski is a former American Apparel employee who had held several positions at the company, including chief financial officer and director. Montesano is co-founder and former owner of Lucky Brand Dungarees. (Montesano had been previously proposed as a director by American Apparel lender Lion Capital, under its investment agreement, but his name was later withdrawn.) Kolb also proposed the company adopt a resolution to repeal any changes and provisions to the company bylaws not in effect in the bylaws as of Dec. 22, 2014.

According to American Apparel’s latest suit, these actions have been filed by friends of Charney. The company describes these as part of a “legal campaign” launched by Charney, who also filed his own defamation suits against American Apparel and Standard General. Further, the suit charges, Charney’s attorney Keith A. Fink has filed several unfair labor practice charges against the company with the National Labor Relations Board and “relentlessly continues to solicit current and former employees to file additional charges against the company.”

Fink, a principal partner with Fink & Steinberg in Los Angeles, initially filed 12 labor complaints with the NLRB, although six have been dismissed.

Fink disputed American Apparel’s suggestion that Charney is behind the other shareholder lawsuits, calling the notion “patronizing to the other shareholders.”

“The real question is did the company commit proxy fraud?” he said.

He also took issue with the charge that Charney is behind the employment actions filed by Fink on behalf of other former American Apparel employees.

“The many upper-level management people I represent are proceeding against the company not because of Mr. Charney,” he said. “Rather, these long-term employees are proceeding with litigation because current management retaliated against them immediately after filing complaints of harassment, discrimination and unfair employment practices. (Some firings happened within two days of a complaint. Some were a few weeks after).”

Fink said the complaints filed with the NLRB also have nothing to do with Charney, adding that he filed 13 new complaints on May 21.

Charney’s efforts are described by American Apparel in the lawsuit as a “scorched-earth campaign that exceeds all bounds of propriety,” charging that he “trespassed on company property, interfered with company conference calls and criticized company employees for the manner in which they handled these calls, demanded employees handle the day-to-day operations of the company in accordance with his instructions, called employees on the telephone demanding company information such as sales reports, and threatened employees who refuse to support his return by taking their photographs and promising to fire them when he returns to power.”

The suit further states that Charney has “sabotaged” the company’s relationship with suppliers, has interfered with potential financing sources, and “flagrantly and repeatedly made a number of disparaging comments about the company to the press” in violation of the standstill agreement. Moreover, the suit says Charney has participated in employee meetings, “rallying them to circulate flyers touting the fact that ‘Dov is fighting in the courts to regain control of the company.’”

According to the suit, he standstill agreement precludes Charney from serving as a board member, seeking removal of a board member or proposing a nominee for the board—or enlisting anyone else to do so—until after the 2015 annual meeting.

Fink disagreed, saying the standstill agreement does not prevent Charney from returning to the company as CEO.

“Does Mr. Charney want to take back the company? You bet! Does he expect to take back the company? You bet!” he said. “The standstill agreement doesn’t prevent his desire or efforts to take back the company. It does not prevent his return to the company.”

One section of the agreement states, “The parties acknowledge and agree that if for any reason any of the provisions of this agreement are not performed in accordance with their specific terms or are otherwise breached, immediate and irreparable harm or injury would be caused for which money damages would not be an adequate remedy. Accordingly, each party agrees that in addition to other remedies the other party shall be entitled to at law or equity, the other party shall be entitled to seek an injunction or injunctions to prevent breaches of this agreement and to enforce specifically the terms and provisions of this agreement exclusively in the court of chancery or other federal or state courts of the state of Delaware.”

American Apparel is requesting injunctive relief “prohibiting Mr. Charney from continuing to breach or further breaching the terms of the standstill agreement” as well as “further relief as the court deems just and proper,” such as attorneys’ fees.

Fink dismissed the suit as a “weak public-relations move” to divert attention from Charney’s defamation lawsuits, the arbitration proceeding against American Apparel for breach of Charney’s employment contract, “and additional legal actions the company knows are coming down the pike.”

The attorney said he expects the company’s lawsuit to be dismissed quickly.

“Delaware, like many states, has an anti-SLAPP statute designed to dispose of lawsuits like this,” he said.