The Complicity of Sexual Harassment Under Corporate Law

by: Oscar Campos

This Country is currently undergoing a major cultural shift on how we handle allegations of sexual assault.  Celebrities, once believed to be untouchable, are now becoming exposed for their sexual misconduct.[1]  But to be sure, it is not only Hollywood where sexual abuse has occurred.  It can happen anywhere to anyone at any time, especially in corporate America.[2]

According to an ABC News poll, “three in ten [women] have put up with unwanted advances from male co-workers and a quarter have endured them from men who had influence over their work situation.”[3]  And while many allegations of sexual assault in the workplace may be shocking today,[4] our court-system is not new to details of sexual harassment. What is disturbing is how some courts have dealt with such allegations, specifically in the corporate context.[5] One recent and harrowing example of this corporate complicity is in the case of In re American Apparel, Inc.[6]

American Apparel is a shareholder lawsuit brought against American Apparel’s board of directors as well as the founder and former CEO of the company, Dov Charney.[7]  The lawsuit claimed that Mr. Charney acted with gross sexual misconduct towards a significant number of American Apparel employees while he was CEO.[8]  Yet at the heart of this lawsuit is the shareholders’s claim that the Board of Directors failed to act in the best interest of the company—breaching their fiduciary duty—when they aided Mr. Charney’s sexual exploits within the company.[9]  The Board, instead of addressing the conduct of Mr. Charney and preventing further assaults on American Apparel employees, allegedly facilitated the CEO and directly contributed to the beast.[10]

The board of directors eventually fired Charney as CEO in June 2014—capping over ten years of sexual misconduct allegations within American Apparel—but the shareholders believed that the board’s actions were too little too late.[11]  In all, the shareholders listed eight instances “of serious misconduct by” the CEO before he was finally terminated.[12]  Moreover, the court noted that many other “details of Charney’s misconduct are not known because American Apparel employees are required to submit sexual misconduct claims to closed arbitration proceedings rather than open court or jury trials.  American Apparel’s employment contracts also limited an employee’s ability to talk to the media or disparage the Company.”[13]

Nevertheless, the allegations in the shareholders’ complaint plainly establishes that the American Apparel directors allowed their CEO to get away with astonishing misconduct.  The first instance was in 2004, when “Charney exhibited ‘improper and shocking conduct’ during an interview with Claudine Cho for Jane magazine, when he masturbated a number of times and received oral sex from an employee in front of her.”[14] Indeed, you can read the entire interview for yourself here:

In another instance by Mary Nelson, who was a former sales manager at American Apparel, claimed that Charney sexually harassed her in 2005. The Board of Directors, instead of addressing their CEO’s behavior in a remedial fashion, attempted to conceal Nelson’s claim with a “sham arbitration” in order to keep the court filings confidential.[15]  In 2006, “former American Apparel employee Sylvia Hsu filed a discrimination claim with the Equal Employment Opportunity Commission, which determined that “reasonable cause exists to believe [American Apparel] discriminated against Ms. Hsu and women, as a class, on the basis of their female gender, by subjecting them to sexual harassment.”[16] In 2008, “Jeneleen Floyd brought suit against Charney alleging hostile sexual behavior in the workplace.”[17] In 2011, four former employees alleged sexual harassment against Charney.[18] Also in 2011, Irene Morales sued the American Apparel CEO with an eyebrow-raising claim that Charney “made her his ‘sex slave.”’[19]

While this is not an exhaustive list of the misconduct detailed in American Apparel, it is clear that the board stood by Charney despite numerous employees claiming to be victims of sexual abuse.  And one would think that the American Apparel board failed to act in the best judgement of the company by allowing Charney to continue his reign of terror.

Yet the district court was not moved. Instead, the court did not believe the Board’s actions—which allowed Charney to skirt serious punishment for his devious acts on American Apparel employees—did not breach their fiduciary duty to shareholders.[20]  The board apparently did not breach its fiduciary duties by concealing the extent of the CEO’s problems from investors.[21]  Sadly, the court’s decision seems to agree with the board of directors argument that they faced a “complicated and sensitive” issue from the mounting allegations against their CEO, which they handled in good faith.[22]  Apparently, the court approved the directors actions in sweeping the sexual misconduct allegations under the rug, silencing the victims by forcing them to arbitrate their claims, and allowing Charney to retain his position as American Apparel’s CEO as if he did nothing wrong.[23]

Hopefully in 2018 we have reached an age where CEOs, boards of directors, and, significantly, judges, realize that facilitating powerful predators in their sexual exploits at the workplace is not in the best interest of a company. At least in the corporate context, people in power must take responsibility—and hopefully takes steps to prevent—actors like Charney. Because the way society is evolving today, it is unacceptable for powerful people to roam about a company and sexually harass its employees, especially for the amount of years and victims described in the American Apparel case.  Anything less should be a breach of their fiduciary duty to the company, its shareholders, and the public at large.  And maybe next time when a case like American Apparel reaches the courtroom, the judge will hold the CEO and board members accountable, instead of letting them off the hook.


[1] Dan Corey, Since Weinstein, here’s a growing list of men accused of sexual misconduct, NBC News, (January 10, 2018),

[2] Gary Langer, Unwanted sexual advances not just a Hollywood, Weinstein story, poll finds, ABC News, (October 17, 2017),

[3] Id.

[4] See, e.g., Maeve McDermott, Matt Lauer firing reactions: Former colleagues are ‘in shock’, USA Today, (November 29, 2017) /story/life/people/2017/11/29/


[5] See White v. Panic, 783 A.2d 543 (Del. 2001).

[6] In re Am. Apparel, Inc. 2014 Derivative S’holder Litig., CV1405230MWFJEMX, 2015 WL 12724070 (C.D. Cal. Apr. 28, 2015), aff’d sub nom. In re Am. Apparel, Inc., 2014 Derivative S’holder Litig., 696 Fed. Appx. 848 (9th Cir. 2017).

[7] Id. at 1.

[8] Id. at 2.

[9] Id. at 1.

[10] Id. at 1-2.

[11] Id. at 2.

[12] Id.

[13] Id.

[14] Id.

[15] Id. at 2-3.

[16] Id. at 3.

[17] Id.

[18] Id.

[19] Id.

[20] Id. at 16.

[21] Id. at 18.

[22] Id. at 16.

[23] Id. at 18-19.

Leave a Reply

Your email address will not be published. Required fields are marked *