Dov Charney, the founder of American Apparel, is nearly as famous for the sexual accusations against him as for the retailer's sexually provocative ads.

Female employees have filed three sexual harassment lawsuits against Charney. The last active suit was settled earlier this year, but details about it had not been disclosed until a California appellate court released a decision this week.

The decision, however,  also describes a bizarre piece of theater concocted as part of the settlement proposal. In exchange for paying the former employee $1.3 million, she and her lawyers agreed to a sham "arbitration." A retired judge picked by American Apparel would agree to stipulated facts and make a finding in the company's favor.

A panel of Court of Appeal for the State of California was asked to rule on a real arbitration process since the settlement has since fallen apart. But in doing so, the panel pointed to the sham arbitration process outlined in the proposed settlement.

"There would be considerations of illegality, injustice, and fraud which would affect our powers as a court of equity to enforce the 'arbitration' contemplated" by the settlement, if it were before the court, the panel said.

Yet while calling the move "just stupid," Stephen Gillers, an ethics professor at New York University School of Law,  said he found no real ethical problems with the ginning up of a sham arbitration to issue a press release.

"The lawyers had no duty to insure that the public got the facts or that the issues were resolved based on a real trial before a real tribunal with real evidence. Arbitration is private and contractual and if the parties were prepared to agree to fool the rest of the world, that's their business even if foolish. People have a right to be fools so long as they break no law."

The sexual harassment lawsuit was brought by Mary Nelson, a sales representative. In a profile of Charney in the November issue of Condé Nast Portfolio, Claire Hoffman described Nelson's allegations. Charney wore a skimpy thong that barely covered his genitals, according to Nelson's lawsuit.

"During Nelson's initial job interview, which was held at Charney's home, she says he referred to female employees as 'sluts.'" Charney told Hoffman that Nelson "was a bad employee who swore compulsively and hustled him, often referring to him as "donkey cock." His lawyers portrayed Nelson as a bad sales rep.

The appellate decision lays out the sham arbitration of the settlement. It stipulated that the arbitrator would absolve Charney of the sexual harassment claims based solely on his consideration of a California case, Lyle v. Warner Brothers Television Productions.

In that case, the California Supreme Court in 2006 reversed a lower court's finding that a writer's assistant on the television show Friends did not come up with enough evidence for a "hostile work environment claim" by contending that the writer used sexually explicit language during the writing of the show.

The arbitrator, under the settlement agreement, would cite specifically the concurring opinion by Justice Ming Chin of the California Appeals Court, who wrote, "This case has very little to do with sexual harassment and very much to do with core First Amendment free-speech rights."

Charney, to be sure, is all for the First Amendment. So much so that the settlement would have included this press release to be issued: "The arbitrator ruled that the marketing materials, sexual speech and much of the conduct about which Nelson complained are protected under the First Amendment's guarantee of free speech and would not form the basis for any claim."

Asked for comment, a spokesman for Charney, Ryan Holiday, said: "American Apparel is very pleased that the Court of Appeal of the State of California has upheld our appeal to compel to arbitration the plaintiff's breach of the settlement agreement and the plaintiff's breach of the confidentiality provisions of the settlement agreement, relating to the case of Mary Nelson v. American Apparel et al."

Holiday's statement goes on to claim that Nelson's lawyer contacted the company's lawyers in January "to plead them not to go to trial." Nelson's lawyer, he said, "admitted that Ms. Nelson's claim of sexual harassment was "bogus," but that neither he nor his client could walk away after incurring several millions of dollars in legal fees."

Lawyers for Nelson did not return calls for comment.

In its decision, the appellate court ruled that Nelson must submit to binding arbitration on the settlement blowup. That would be real arbitration, of course.