Chances are you've never met an executive quite like Charney. The muttonchops-wearing entrepreneur has built American Apparel into a $250 million-a-year rising star of the rag trade, selling T-shirts, swimsuits, and underwear, all made at his downtown Los Angeles plant. Since November, 2003, when American Apparel opened its first store, 53 retail outlets in five countries have opened. Charney claims to have stores, such as one in Manhattan's Soho, that produce $1,800 a square foot in sales, seven times the apparel industry average. He talks of building a $1 billion-a-year business in a few years, with 1,000 locations. He even wants to open stores in Hong Kong, exporting -- of all things -- American-made T-shirts to China.GLOWING PROFILES
But the freewheeling culture that Charney has cultivated at American Apparel is being put to the test. Charney is a self-described "hustler," who as a teen used to hawk T-shirts on the streets of his native Montreal. But now, he and his 4,500 employees are bumping up against the constrictions of the modern workplace. In a world in which the CEO of Boeing Co. (BA
) was forced to step down over an affair with an underling, Charney has made himself an easy target. In May, he was sued by three women -- all former American Apparel employees -- who claim they were sexually harassed by him at work. He denies that he has harassed anyone. He attributes the lawsuits to disgruntled former employees. In addition, he denies that he has ever pressured employees into a sexual relationship.
Under Charney's watchful eyes, American Apparel has become the epitome of hipster cool, with its slim-fitting, logo-free clothes; a savvy, sexy ad campaign; and a pro-labor philosophy. Charney promotes his business as "sweatshop-free," and to back that up he pays his mostly Latino factory workers nearly twice the minimum wage, throwing in health insurance, subsidized lunches, and paid time off to take English classes on the premises. Such jobs -- let alone ones with perks -- are rare in the U.S. apparel industry, where 97% of the goods are imported. As a result, Charney has been the subject of positive profiles in such places as Time, The New Yorker, and CNN.
Charney has tried to incorporate some of that pro-labor message into the retail experience. Typically located in edgy neighborhoods such as Los Angeles' Los Feliz or Chicago's Wicker Park, his sparsely furnished stores feature concrete floors and stacks of American Apparel's reasonably priced merchandise, such as $15 fitted T-shirts and $45 hooded sweatshirts. In the windows you'll often find a TV, replaying one of Charney's many appearances in which he talks about manufacturing in the good, old U.S. of A. "I have the highest-paid apparel workers in the world," he boasts.
You'll also see the blatantly sexual side of American Apparel. The stores' white walls are dotted with product shots. Like the company's signature advertisements, these are grainy, seemingly candid photos of young people in various states of undress. In case shoppers miss the message that American Apparel's clothes are sexy, Charney sometimes pins up pages from 1970s Penthouse magazines.
To hear Charney explain it, he's connecting with an emerging youth movement, an underground network of urban hipsters from Brooklyn to Berlin. They surf the Internet for gossip and fashion trends and race to get copies of gritty lifestyle magazines named Vice and Purple. These twentysomething consumers don't mind being marketed to as long as the images look real, unvarnished, and match their own casual attitudes toward sex. Charney, in a characteristically grandiose flourish, likens his young customers to the free-spirits of the 1960s. "Turn off the sound on Eyes on the Prize," he says of the award-winning documentary on the civil rights era, "and it looks like a fashion show."SALTY LANGUAGE
It's in the company's racy ads -- which run mostly in alternative newspapers such as New York's The Village Voice and LA Weekly -- that the line between work and recreational sex at American Apparel begins to blur. Charney takes many of the photos himself, often using company employees as models as well as people he finds on the street. "Meet Melissa," reads one print ad, which pictures a comely brunette in a shower and a see-through shirt. "She won an unofficial wet T-shirt contest held at the American Apparel apartment in Montreal." (The company maintains a string of apartments in the U.S. and Canada to save money on hotel rooms.)
In his marketing, Charney has been adept at weaving his libertarian sexual attitude with his progressive labor practices. But it's another matter to make that attitude a bedrock principle of the workplace. In their sexual harassment suits, two of the women accuse Charney of exposing himself to them. One claims he invited her to masturbate with him and that he ran business meetings at his Los Angeles home wearing close to nothing. Another says he asked her to hire young women with whom he could have sex, Asians preferred. All describe him using foul language in their presence, much of it demeaning to women. Says Keith A. Fink, an attorney for one of the women suing: "The work environment there makes Animal House look like choir practice."
Charney says all three women did substandard work and gave no indication before they left that they had felt harassed. Charney says he never engaged in any of the acts of which he is accused. As for his language, he says that's par for the course in the fashion biz. "When I'm working with creative people I use the language of the street," he says. "It can get pretty salty."
The suits follow a bizarre article last year in the women's magazine Jane. Charney was described as engaging in oral sex with a female employee and masturbating in front of the reporter. Charney doesn't deny taking part in any of the activities described in the article. He says he befriended the writer over the course of the two months it took her to research the piece. "I've never done anything sexual that wasn't consensual," Charney says. The reporter, Claudine Ko, confirmed his take on events to BusinessWeek.
Employment attorneys say Charney's language alone could get him into trouble. "You can't force women to be subject to certain conduct on the theory that this is a coarse working environment," says Washington, D.C. employment attorney Bruce A. Fredrickson. As for Charney's admitted "love affairs" with employees, San Francisco attorney Phil Horowitz, chair of the California Employment Lawyers Assn., says: "Any chief executive who's thinking of having sex with subordinates ought to have his head examined."
Since the U.S. Supreme Court concluded in 1986 that a hostile work environment was a violation of an employee's civil rights, sexual harassment cases have become a fact of life in American business. According to the U.S. Equal Employment Opportunity Commission, unwelcome sexual advances, requests for sexual favors, and verbal or physical conduct of a sexual nature can constitute harassment if it's severe or pervasive. It's not illegal for a boss to pursue relationships with underlings, so long as the relationships are welcome. If there's a pattern of promotions or other opportunities granted to employees who engaged in sex with a manager, the employer may be liable for sex discrimination claims from other workers.LATE BEERS
Charney has always been unconventional. He demonstrated his entrepreneurial leanings early. Recognizing that Canada's insular distribution system kept the price of goods such as cassette tapes and T-shirts much higher than in the U.S., Charney built an import-export business as a teen. While attending prep school at Choate Rosemary Hall in Wallingford, Conn., Charney says, he was bringing goods worth $1 million a year into Canada.
Charney dropped out of Tufts University in his senior year and moved to Columbia, S.C., to start a T-shirt company in 1989. As imported goods flooded the market, Charney saw the price of T-shirts plummet and waves of his suppliers shut down. In 1996, he put his own business into bankruptcy. Two years later he reemerged in Los Angeles, creating a new version of American Apparel with a partner, Sam Lim.
The company began as a manufacturer of T-shirts for designers, rock bands, and corporate customers. Charney's specialty: tightly knit T-shirts that held silkscreen designs well and fit better than the boxy ones prevalent at the time. Promising a high-quality product in the latest styles and a fast turnaround, Charney was able to charge more for his goods -- around $4 wholesale per T-shirt, as much as four times the cost of one from China. Charney's customers saw that American Apparel shirts sold better than the cheaper varieties and increased orders. The higher prices translated into higher revenues, which Charney plowed back into the business.
As the company has grown, Charney has tried to maintain an "environment of freedom," in which, for example, art department employees working late can drink alcohol, and anyone can walk into the boss's office at any time. BusinessWeek spoke to a number of current and former American Apparel employees who say the culture actually motivates them to work long hours. Tacee Webb, a 32-year-old mother of two who opens new stores on the West Coast for American Apparel, says she has heard Charney curse, scream, and make comments about employees' appearances, but never to the point of it being offensive. "I've seen a lot of things go on at other businesses, and it's all weird and hushed," she says. "Dov is just out in the open." Adds Clara Reis, Charney's personal assistant for two years, who left American Apparel for another job earlier this year: "Some people might misunderstand the way he is about sexuality. He just considers sex a natural thing. He won't put any limits on it."
But BusinessWeek spoke with seven former workers who say they were offended by what they called a highly sexual atmosphere at American Apparel. They told stories of senior managers who pursued sexual relationships with less senior colleagues and rewarded their favorites with promotions, company cars, and apartments. "It was a company built on lechery," says a former stock person. "I thought it was a male contemporary perspective on feminism, but it turns out to be just a gimmick," says another ex-employee. And another: "I made sure to stay away from the store when I knew [Charney] was coming into town. It's not one person -- he's aiming for all women."
Others say it's not surprising that more women haven't spoken out. "When you see the women that work there, you see they all have the same look," says apparel industry veteran Tony Augustine, 58, who left a senior sales job at American Apparel last November after a year and a half. "They're pretty, but they lack direction, and along comes their guru. He puts them in jobs, and they don't have to work very hard and they are getting paid more than they would anywhere else."
Clearly, Charney is a creative entrepreneur who has successfully fought off global competition and the fickleness of the fashion trade. On the one hand, Charney feels caught in a culture war, a struggle between the old ways of doing business and the new: "I should tone down? So I don't get in trouble? It's fascism. You're asking me to succumb to tyranny." But later he sounds sincere when he says, "I've made mistakes. There are bumps in the road to what I'm doing." As he takes American Apparel to the next level, his biggest opponent could be himself. By Christopher Palmeri in Los Angeles