Nelson v. American Apparel, Inc.

Mary Nelson (plaintiff) filed an action against American Apparel, Inc. (defendant) and its CEO and vice president for wrongfully terminating her employment, as well as for alleged violations of labor law and defamation. Nelson and American Apparel entered into a settlement agreement under which American Apparel agreed to pay Nelson $1.3 million. In exchange, Nelson not only agreed to dismiss the lawsuit, but she also agreed that an arbitrator selected by and paid for by American Apparel would enter a sham award in American Apparel’s favor based on a stipulated record. American Apparel would also be entitled to issue a press release to the media announcing the favorable outcome of the sham arbitration. The settlement agreement also contained a confidentiality clause and a separate arbitration clause for disputes arising under the settlement agreement. Thereafter, Nelson’s attorney refused to show up and participate in the sham arbitration, which American Apparel alleged was a breach of the settlement agreement. American Apparel also claimed that there had been a breach of the confidentiality provisions of the settlement agreement. American Apparel petitioned the court to compel Nelson to arbitrate the dispute over whether she (and her attorney) had breached the settlement agreement. Nelson’s attorney argued that nothing in the settlement agreement required his participation in the sham arbitration, that Nelson had executed a dismissal as required by the settlement agreement, and that American Apparel had still failed to pay the $1.3 million in settlement funds. The lower court denied the motion to compel arbitration, and American Apparel appealed.