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Can American Apparel CEO Dov Charney be 'cured?'

Dan Eaton, partner at Seltzer Caplan McMahon Vitek and professor at San Diego State University

The American Apparel board ousted Dov Charney as its chairman but it can't fire him  as president and CEO until after a 30-day "cure" period, according to terms of his contract. 

That gives him a chance to "cure" the alleged misconduct. If, at the end of that period, he cannot prove to the satisfaction of the board that he has cured the problems that led the company to take this action, then he's fired.

Dov Charney
Keith Bedford | Bloomberg | Getty Images

Charney has been the target of several different sexual-harassment lawsuits, including one employee who accused him of keeping her as a teenage sex slave.

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The board moved to dismiss him now because a board-hired investigator found that Charney had learned that a subordinate planned to publish on the Internet nude photos of a woman who had sued Charney for sexual misconduct but did nothing to stop it, the New York Times reported.  The board's decision to oust Charney also was based on his use of company resources for personal purposes, including paying for flights for his parents and using company apartments when he wasn't doing official company business, according to the report.

If the board succeeds in establishing that it had cause to fire Charney, the company will be excused from paying him millions of dollars in severance to which he otherwise would be entitled were he dismissed without cause under his agreement, according to a report in the Wall Street Journal. That's the way termination clauses in the employment agreements of high-level employees typically work.  

In such clauses, "cause" typically is defined to include a list of specific misdeeds and a catch-all provision providing "cause" to terminate for unsatisfactory performance as judged by the board.  In the absence of a provision defining what constitutes cause, an employment agreement for a specified period of time governed by California law, where American Apparel is based, may be terminated for "any willful breach of duty by the employee in the course of his employment, or in case of his habitual neglect of his duty or continued incapacity to perform it." 

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The core question is whether any such misconduct is really curable by Mr. Charney.  The board apparently doesn't think so.  The company's statement said that the board "expected" the termination to be effective once the required 30-day period expires.  In a June 19 letter written to counsel for American Apparel, Charney's lawyer Patricia Glaser said "the Company has actively denied Mr. Charney any ability to address any performance issues by delivery its termination as a fait accompli. "  Well, that's something on which the two sides seem to agree. 

But how exactly would Charney "cure" the alleged misconduct of which he is accused?  If true, the misuse of company funds and the failure to block the posting of nude photos involve past misdeeds that undermine trust and confidence.  There's no known cure for that.  

Moreover, a cure requires, at minimum, the recognition that something is wrong and a proposed way to heal it.  Based on his attorney's letter and the accounts of insiders who have spoken to the press anonymously, Charney's strategy appears to insist that he did nothing wrong, either because the actions were common practice (personal use of apartments), approved by other company officials (posting of the photos), long known by the board, or resulted in no harm to American Apparel.  

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That strategy is less designed to cure, or fix, the problems the board has with what the board says Charney did than it is designed to show the board why those problems do not warrant Charney's termination at all.  In other words, the cure that Charney is seeking is not the cure of a wrong that he has done to the company, but a wrong the company's board has done to him.  Charney's lawyer was clear about that in seeking an immediate meeting with the board to negotiate Charney's reinstatement and negotiate the restoration, that is to say healing, of Charney's business reputation.   

It is hard to see any satisfying outcome resulting from a process in which the doctor and the patient cannot decide which is which. 

Don't expect this to be over in 30 days.

Commentary by Dan Eaton, a partner with the San Diego law firm of Seltzer Caplan McMahon Vitek where his practice focuses on defending and advising employers.  He also is a professor at the San Diego State University College of Business Administration where he teaches classes in business ethics and employment law. Follow him on Twitter @DanEatonlaw.

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