Allen, who sued the company for using an image of him from "Manhattan," in which he was dressed up as a rabbi, without his permission on one or two of their billboards, won 5 million dollars in the out-of-court settlement.
Initially, the firm had planned to bring up his personal life in its defence, reports The BBC.
Speaking outside Manhattan federal court, where the case had been due to take place, the famous director said 5 million dollars were "enough to discourage American Apparel or anyone else from ever trying such a thing again".
He said: "I sued American Apparel because they calculatingly took my name, likeness and image and used them publicly to promote their business.
"Testimony revealed that American Apparel believed that fear of publicity would keep me from ever taking action."
Meanwhile, American Apparel founder, Dov Charney, told reporters the case was about "the dignity of ideas".
"I am not sorry for expressing myself," he said.
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