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American Apparel Gets a T.R.O. Against Ex-CEO Dov Charney

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By Casey C. Sullivan, Esq. on June 05, 2015 1:55 PM

It's been a bad breakup between American Apparel and its founder and ex-CEO, Dov Charney. Once Charney's bad-boy image had helped sell a brand that used "porny ads" to sell plain tees and spandex pants and rapidly expand across the U.S. After years of scandal, sexual harassment suits, and declining sales, Dov was finally kicked to the curb last December. But just like the creepy ex who won't leave you alone, Dov is refusing to take the break up in stride.

That has lead the company to take out a restraining order against Charney. What can GC's learn from this messy corporate implosion?

Who Ever Let it Get This Bad?

First lesson: stop problems before they start. When Charney, a Canadian, founded American Apparel in 1998, he first trumpeted it as a "made in America" alternative to sweatshop clothes. As the brand took off, the store's image grew more risque and Dov was frequently featured as a wild man in everything from Vice magazine to The Economist.

It wasn't just the CEO's image that was over the top; his behavior matched. With apparently no corporate counsel or even basic H.R. in sight, Dov allegedly worked in his underwear, sexually harassed reporters, slept with many of his employees and allegedly strangled others. His persona became part of the brand's selling power, but no one ever drew a line between public image and office behavior. Even after the company's IPO revealed that it had "inadequate expertise in ... generally accepted accounting principles," not much was done to institute responsible corporate governance.

The Founder Who Won't Go Away

Lesson two: don't let a million dollar company become a one-man show. It wasn't until the stock began to thoroughly tank that Charney was finally ousted. But for someone whose persona had so deeply integrated with the company's image, it wasn't easy for Dov to let go -- and he might not.

Which leads us to lesson three: don't ignore your problems. After firing Dov, the company was generally silent. But Charney certainly was not. Not only is Charney suing American Apparel for $40 million for breach of contract, he's fighting the board to regain control of the company. That's where the restraining order comes in.

According to the restraining order, Dov gathered more than 300 employees for a secret meeting, asking them to reinstate him as CEO. That's a violation of Charney's standstill agreement, the company claims, which limits his ability to campaign against the board and speak to the press. Whether he will stick to the terms of the order remains to be seen.

So, as you watch American Apparel downward spiral continue, remember -- some firm action from the GC early on and much of this could have been avoided.

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