Woody Allen ended more than a year of legal sparring with American Apparel Inc. Monday when he agreed to a $5 million settlement from the retailer on the morning their dispute over unauthorized billboard advertisements was to go to trial.

This story first appeared in the May 19, 2009 issue of WWD. Subscribe Today.

“It’s of course possible that by going through the trial a jury might have awarded me more money but this is not how I make my living and $5 million is enough to discourage American Apparel or anyone else from trying such a thing again,” Allen said.

The filmmaker filed a $10 million violation of privacy suit against the Los Angeles-based retailer in U.S. District Court in Manhattan in March 2008. During the prior year, the company ran billboards bearing his face in New York and Los Angeles without his permission. The advertisements, which were up less than a week before being taken down at Allen’s behest, depicted him dressed as an Orthodox rabbi in a scene from his 1977 film “Annie Hall.” Hebrew script on the signs, which also ran on the company’s Web site, referred to Allen as the company’s spiritual leader.

Jury selection in the case was to have begun Monday morning. In pretrial filings, Allen’s attorneys said American Apparel did not seek their client’s permission and that he had a long history of turning down endorsements. American Apparel’s lawyers had argued the ads made a social statement and were protected speech, but Judge Thomas Griesa threw out their motion seeking dismissal on First Amendment grounds last week.

Chief executive officer Dov Charney took to the company’s blog Monday, where he wrote more than 1,500 words to explain the billboards and settlement. He said he thought the company had a good case but that its insurance carrier, which controlled the defense, wanted to settle. He added Allen was one of his inspirations.

“Naturally there is some relief of not having to go through a trial, but I also harbor a sense of remorse and sadness for not arguing an important issue regarding the First Amendment, particularly the ability of an individual or corporation to invoke the likeness of a public figure in a satirical and social statement,” he wrote.

Charney has made American Apparel a go-to brand for the hipster set in recent years using a strategy of racy ads and bright basics, all of them produced domestically in Los Angeles. He’s also been the subject of several sexual harassment lawsuits in that time.

In his post, the ceo drew a parallel between those suits and Allen’s own public trials. In 1992, the director was romantically linked to Soon-Yi Previn, 22 years old at the time and the adopted daughter of his longtime girlfriend, Mia Farrow. Allen and Previn married in 1997.

Lawyers for American Apparel had questioned whether Allen’s endorsement was worth the $10 million he sought in light of the ensuing damage to his reputation. Earlier this month, they included the names of both Previn and Farrow on a pretrial disclosure of possible witnesses.

“Threats and press leaks by American Apparel designed to smear me did not work and a scheme to call a long list of witnesses who had absolutely nothing to do with the case was also disallowed by the court,” Allen said. His lawyers said the settlement was the largest reported sum ever paid under the New York Right to Privacy statute.

In January, American Apparel told WWD it maintains a $20 million insurance policy to protect against potential liabilities in the employment suits. It is unclear if the same policy will cover the Allen settlement. The company did not respond to an inquiry on the matter.

Following the close of the stock markets Monday, the company reported a first-quarter loss that exceeded analysts’ estimates by 8 cents and reduced full-year guidance.

The loss in the three months ended March 31 was $9 million, or 13 cents a diluted share, versus a profit of $1.1 million, or 2 cents a share, in the year-ago quarter. Net sales grew 2.4 percent, to $114.3 million from $111.6 million. Analysts surveyed by Yahoo expected a loss of 5 cents on sales of $117.5 million.

Retail sales, which increased 16.5 percent to $78 million offset wholesale sales, which slid 21.9 percent to $28.1 million. Same-store sales declined 7 percent and unfavorable currency shifts weakened the quarterly results, the Los Angeles-based firm said.

The retailer also said its operating expenses for the quarter increased 20.8 percent to $69.3 million, or 60.6 percent of net sales, versus 51.4 percent of sales in last year’s quarter, due to higher payroll, rent and occupancy expense and depreciation related to the greater number of stores in operation, which included the accelerated store rollout in the second half of 2008.

Charney said the worst was behind the company on the wholesale front. “There could be some pent-up [consumer] demand,” he said, adding he saw some new real estate opportunities, including a location in Times Square.

The company reduced its full-year guidance to operating income of $40 million to $50 million on sales of $550 million to $575 million, down from a range of $55 million to $65 million for operating income on sales of $575 million to $600 million.

The company’s shares picked up 7.5 percent during the day Monday, to $5.47, but fell nearly 19 percent in the first 90 minutes of after-hours trading.