Ellen Pao v. Kleiner Perkins wrap-up

The jury has returned and Kleiner Perkins is not guilty of sex discrimination.

How is it possible to lose a lawsuit like this in one of the most plaintiff-friendly jurisdictions in the world? As noted in my previous postings (first; second), it was hard to explain why the partners of Kleiner Perkins wanted to make themselves poorer by promoting an unqualified man in favor of a qualified woman. Discrimination of any kind might make sense for a manager at a government agency. His or her salary won’t change if less qualified or productive people are hired to fill jobs. His or her customers cannot be wooed away by a more efficient competitor. But almost anyone should be able to understand that for a VC partnership, indulging in discrimination will personally cost the partners. In addition, Pao had the “bad fact” of the affair with the married co-worker, a circumstance that most people can understand might lead to on-the-job problems.

Why did people think that this case was strong? My theory is that American journalists and pundits, nearly all of whom have no technical education or experience with industry that depends on engineering, simply wanted to write about gender discrimination. Here’s an example from Forbes: “Cracking The Boys Club: Jenny Lee On What It Means To Be The Top Woman In Venture Capital” (March 25, 2015). Forbes talks about VC being a “boys club” (headline) and implies that the U.S. VC world is not “open to female venture capitalists”. These statements are directly contradicted by the woman who is supposedly the subject of the piece. The interviewee, who actually some experience with venture capital and engineering, says that VC “is capitalism at its ultimate. To do well you have to understand this point. No one is going to be nice to you because of your age, or where you come from or your gender. The VC industry is about survival of the fittest, and that’s the same mindset we give to our entrepreneurs.” When pressed as to why there are few female VCs she points out that less than 10 percent of her engineering class at Cornell were female.

Plainly Ms. Pao would be close to $200 million richer today if the jury had been 12 journalists from the New York Times and other publications that reported on the case as though the guilt of Kleiner Perkins had been established prior to trial. Denied a place in the jury box, what are these folks writing now? That this lawsuit was somehow useful in “starting a conversation.” None of the articles about how great this is for the nation mention the fact that it had to cost Kleiner Perkins at least $10 million in legal fees and distraction/time. That would have been enough to fully fund 100 women to get engineering bachelor’s degrees and join the STEM workforce that Barack Obama and the New York Times editorial board say is a good place for people other than themselves (previous posting). Which advances the cause of women in engineering more, 100 women with engineering degrees or a conversation that starts “So the flight attendant on the $65 million Gulfstream was pouring Champagne for me but I couldn’t enjoy it because some douchebag on the far end of the cabin was talking about the Playboy Mansion…”?

The story that did not seem to capture the media’s or the public’s attention was “Just how much litigation can one couple generate here in the U.S.?” According to this this summary article and this WSJ piece, Pao and her husband, Buddy Fletcher, have put lawyers to work on at least the following matters:

  • should Buddy Fletcher’s race discrimination case against Kidder Peabody be heard in court or in arbitration?
  • how much cash should Buddy Fletcher get from Kidder Peabody as a result of having been black?
  • how much investor cash did Buddy Fletcher steal from his hedge fund?
  • did fellow co-op owners at The Dakota refuse to approve his acquisition of an apartment because they thought that he was black or thought that he would soon have no money? (2011 lawsuit)
  • should Buddy Fletcher be fined or imprisoned by the government? (taxpayer-funded Justice Department and SEC investigations)
  • should some of Buddy Fletcher’s, uh, “buddies” (affiliated companies/shells/etc.) have to repay various investors, including some state pension funds?
  • how annoying do your fellow passengers on a private jet have to be before you can say that you would rather have flown JetBlue?
  • if you sue your partners do they still have to greet you enthusiastically every morning when you show up to the office? (the retaliation claim of the lawsuit, which I am surprised that Pao did not prevail on)

The New York Post says that the overdue fees in just one of Fletcher’s cases are $2.7 million. Let’s assume that the Dakota case is the simplest, $1 million in total fees. Let’s assume the Kidder Peabody case ran up fees on both sides slightly larger than the ultimate payout to Fletcher: another $2 million. The hedge fund debacle, including what the taxpayers are incurring, maybe $20 million in fees? Then count both sides of the Pao case against Kleiner at $15 million? That’s a total of roughly $40 million in legal fees…. for the cases we actually have heard about. How much litigation is that if you go to a country with a more streamlined legal system? We just finished interviewing a Germany divorce litigator. She told us that fees in a custody lawsuit come from a table published by the court. Each side’s attorney can charge 773.50 euro. That’s $842 per side or $1684 in total to decide a case. So Pao and Fletcher have personally generated as much work for attorneys as 23,753 German couples who fight over custody. Germany has a divorce rate of about 2/1000 and a population of 80 million. That works out to 160,000 divorces per year. If we assume that half of those involve minor children and that a third of the couples with children actually fight over custody. Thus Pao and Fletcher have generated more work for attorneys than the entire divorcing-with-children population of Germany, a country in which it is impossible to get divorced without lawyers and courts (i.e., they don’t have an administrative process as might be used by Danes or Swedes).

[You might ask why it is reasonable to assume that only a third of divorcing German couples with children would have a custody fight. First, the potential cash profit from obtaining custody of a child in Germany is limited to about $6000/year (compare to $72,000/year for the top of the Utah guidelines, for example, or the unlimited amounts available in California, Wisconsin, etc.). The government doesn’t hold out the same financial incentives to fight as most U.S. states. Second, the outcome is pretty easy to predict. The attorney that we interviewed said that she, after practicing for 12 years, has never been involved in a contested custody case in which the father prevailed. Very likely the percentage is smaller, in which case Pao and Fletcher have driven enough legal fees to pay for all of the custody lawsuits in Germany plus a lot more!]

Note that the couple managed to run up all of these legal bills without ever (1) investing money productively for investors, (2) delivering a service to consumers, or (3) designing or engineering a product.

What do readers think? What will be the long-term effect, if any, of this lawsuit? And what happens to Ellen Pao now? Does she (a) pull a Judy Faulkner by starting her own company and getting crazy rich by doing a better job than competitors? (okay, and also getting the federal government to force customers to buy the product; sometimes it is fun to ask “Imagine how much richer and more successful Faulkner would have been if she had been a white man.”), (b) become a reality TV celebrity like Kim Kardashian?, or (c) something else?

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13 Comments

  1. Izzie L.

    March 28, 2015 @ 11:38 pm

    1

    > What will be the long-term effect, if any, of this lawsuit?

    Places like Kleiner will spend more time on HR functions (creating personnel policy manuals – Kleiner couldn’t even find theirs) and less time finding the next Google.

    Part of this will include building a dossier on every female/minority employee – scratch that – that would be discriminatory if discovered. They will build a dossier on EVERY employee. Then when it comes time to can said employee, they will have ample reason for doing so in their files.

    The tech sector was one of the last remaining vital sectors in the US. Now it will be a little bit more like the DMV.

  2. George

    March 29, 2015 @ 2:56 am

    2

    Back to business as usual. Just hire a couple of more HR workers and send them to seminars on lawsuit avoidance. And put something in the employee manual against being a homewrecker.

  3. Dan

    March 29, 2015 @ 11:07 am

    3

    The amazing parts to me are:

    1) Pao lost even though the judge was so biased in her favor. She was allowed to grandstand about motives but they were forbidden from discussion her possible motives (the bankruptcy/debt).

    2) That the media just reprinted her side of the story and that a majority of articles ignored that whole side

    3) How much this has destroyed Kleiner’s reputation even though they were the best large firm at promoting women and funding women entrepreneurs. I’ve had at least a dozen non-tech people ask me about them.

  4. bjk

    March 29, 2015 @ 11:14 am

    4

    It was funny how Pao saw working at a portfolio company as the equivalent of career suicide. Wouldn’t funning a portfolio company (or at least working as an exec) be a necessary step towards becoming a VC? Is there really a career path from being an admin to John Doerr to attending pitch meetings and selecting investments? Maybe that’s a legitimate career path (I wouldn’t know), but it sounds kind of boring.

  5. WiT

    March 29, 2015 @ 11:44 am

    5

    1. I would love to see a women only tech firm financed by all the #WomenInTech people. Create something that Men are not doing like Women’s health for example.
    Now that tech is going to be marketed as fashion, women have distinct advantage.

    2. The society that makes fun of science and math as nerdy is all of sudden produce nerd girls and reward them. most of the ph.d candidates are foreigner who can pay in dollars to even come to this country.
    Surely will also tell the ten year olds that Tech firms kick out Engineers before they hit 40 so plan on a second career if your stock options don’t pan out.
    and if you have bad health habits and get overworked like 80 hours a week, good luck after 40 because you won’t be seeing 50.

  6. Mitchell Z

    March 29, 2015 @ 12:23 pm

    6

    A classic of “proves too much.”
    By Greenspun’s logic, there can scarcely ever be instances of gender or racial discrimination — why would those with the power to hire or promote ever prefer to hire a less qualified white heterosexual male (say), rather than a more qualified woman, person of color, etc.? It will always be the case that the more qualified other will generate more profits, make things run better etc. So we must start with a very powerful presumption that no one has ever been discriminated against in employment decisions. The decision makers all operate on the basis of this definition of rationality, and are rational men (sic).
    Sigh.

  7. Joe Clark

    March 29, 2015 @ 12:45 pm

    7

    The euro symbol exists, even in the galaxy populated by computer programmers not using Macintosh. “773.50 euro” is, first of all, “euros,” but actually €773.50.

  8. Izzie L.

    March 29, 2015 @ 1:14 pm

    8

    Yes the € symbol exists, but how do you get to it on an American keyboard? I can’t be bothered to memorize windows alt-codes. I hope they did not invest in molding the symbol into EU keyboards because it probably won’t be around for that much longer. Did you not understand what Philip meant when he typed “euro”? Does this count as a microagression against Euro-peans?

    Maybe Philip DOESN’T prove too much but rather it’s the laws that prove too little. According to the law we are supposed to assume that big, rapacious capitalist organizations which in other contexts we are told care only for money and are willing to poison the Earth, endanger the safety of their customers and do whatever it takes to make it, suddenly in another context care NOTHING for money and are ruled only by prejudice. If an organization (say the NBA or the NFL – oops, no, strike that, say Kleiner Perkins) does not hire and promote employees in their exact proportion in the general population, that has nothing to do with the distribution of talent in the population and everything to do with racism and sexism.

    I had the feeling that most of the reporters had their stories pre-written – “A Glorious Victory Against Sexism in the Workplace”. When Pao lost, they had to change their lede paragraph but then spun it as “this is a victory for women anyway” and so they were able to use the rest of their story intact. Winning would SURELY have prove that SV and VCs are rife with sexism, but losing proves nothing. We see this spin over and over again. Jackie’s “gang rape” proved that fraternities are evil but Jackie’s FALSE report of rape says nothing about the prevalence of false rape reports, but meanwhile fraternities are STILL evil anyway even though this one particular case did not pan out.

  9. Jerry

    March 29, 2015 @ 2:57 pm

    9

    This BuzzFeed article (trigger warning, hyperlink goes to BuzzFeed)
    http://www.buzzfeed.com/ellencushing/the-real-revolution-of-the-ellen-pao-trial#.lreXBwPnY tells the real dynamic:

    “The Real Revolution Of The Ellen Pao Trial

    Regardless of who prevails in the case, it may prove to be a milestone event: the moment at which Silicon Valley’s **female press corps** came together.”

    The vast majority of the reporters on this article are young women, who have undoubtedly taken many gender studies classes alongside their journalism classes and who, along with most your reporters in the Internet era have tossed out neutral, objective, balanced skeptical reporting in the name of virality, assumptive activist (tumblr/twitter) journalism in which the ends justify the means.

    In this case the story from these former English Lit majors is that all tech, all society is evil and patriarchal and that women can do anything so long as the men ain’t holding them down.

    Why it’s a classic damsel in distress trope! (Thanks Feminist Frequency).

    OTOH, am I surprised that people given too much money and too much power act like assholes and justify it all that their success was 99% due to their own talent and none of it was based on luck? (And that goes for VCs and their young start up founders too.) So while I understand the argument that rational and smart people would not discriminate widely (or broadly in the case of Pao) against highly talented individuals, I do think the story is more complicated than that.

    (I usually get all the weirdo symbols by googling “foo unicode” and then cutting and pasting the symbols for foo that show up.)

  10. Sarah

    March 29, 2015 @ 7:14 pm

    10

    Under discrimination law, if any employer discriminates, the employee’s motivations for filing a lawsuit are not legally relevant. In the case of VCs, can’t we presume that capitalism motivates all parties? And, finally, can you recall a time when a man’s wife was considered relevant? What does her husband have to do with whether KP discriminated against Pao?

  11. philg

    March 29, 2015 @ 7:43 pm

    11

    Mitchell: Being skeptical about Kleiner Perkins, a partnership, doesn’t say anything about whether we should be skeptical regarding discrimination at the vast majority of American employers. A private corporation is typically subject to the http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem in which the decision-making managers are not the owners. With government or government-related jobs (such as government contractors, Medicare/Medicaid-funded health care industry, etc.), which is approaching 50 percent of the economy, you have the additional factor of a lack of competition.

    Sarah: I think you’re right about a plaintiff’s motivations not mattering. The New York Times painted Ellen Pao as a disinterested heroine championing the rights of all women. Some folks in the industry thought that her attempt to squeeze $176 million out of Kleiner was primarily motivated by a desire to have an additional $176 million in her checking account. The judge excluded evidence regarding this and also regarding her husband’s colorful career as a litigant and Ponzi scheme operator. But Kleiner’s motivations did matter in this case, especially for the $160 million in punitive damages. Just look at the jury instructions in http://recode.net/2015/03/27/the-pao-v-kleiner-perkins-verdict-is-in/ ; the very first question is “Was Ms. Pao’s gender a substantial motivating reason for Kleiner Perkins’ not promoting Ms. Pao to senior partner?”

    A divorce litigator pointed out that Ellen Pao could have done a lot better if she had spent one night having sex with Kleiner partner John Doerr, listed by Forbes as having a fortune of $3.4 billion. Assume that a California family court would have imputed 7 percent per year in income to those assets. That’s $238 million per year in income for calculating child support or roughly $20 million per month. The official California child support calculator shows that Ms. Pao would have collecting a tax-free $1.05 million per month in child support. That’s $227 million over 18 years. If she could have persuaded Mr. Doerr to have sex with her in Wisconsin, Massachusetts, or New Hampshire she could have done even better (at least double). One would think that a graduate of Harvard Business School and Harvard Law School would have been more alert to this profit-maximizing option.

  12. RobF

    March 30, 2015 @ 1:37 pm

    12

    Pao and her husband seem like a supremely mockable pair, so by all means mock away. Still, I’m with Mitchell in believing that the implication that it’s impossible for self-interested owners to discriminate is too much. Maybe in 2015 high-tech venture capital is a perfect meritocracy. I don’t know. But I think even recent history offers a deep well of education in the ways that societies will ignore perfect income-maximizing strategies in favor of the comforts of in-group tribalism, and I don’t see how your principal/agent reference makes that go away.
    In 1900, there were hardly any lawyers, scientists, physicians, or professional athletes who were women or minorities. By 2000, there were many. The difference is not due to members of those groups suddenly changing their bad attitudes and working to develop some competency. The difference is that we slowly and steadily implemented policies and new social norms designed to purge these economic systems of their race, gender and religious biases. We can argue that today maybe some of these policies are creating more problems than they solve, but we should remember the history that produced these policies.

    Here is one of the law firms that represented Buddy Fletcher:

    http://en.wikipedia.org/wiki/Skadden,_Arps,_Slate,_Meagher_%26_Flom

    Can we assume that from its founding in 1949 until 1981 (first female partner), a laissez faire combination of market forces and self-interest guaranteed every aspiring female at the firm she would rise or fall purely on the merits of her personal competency?

  13. philg

    March 30, 2015 @ 2:03 pm

    13

    RobF: I didn’t mean to suggest that anything is a perfect meritocracy in the sense that VC partners would make good decisions regarding where to invest and whom to hire/promote. After all, on average VCs underperform the S&P 500. I meant only that the VCs are trying their best to make profit-maximizing decisions, which therefore necessarily means that considerations of gender must be secondary (as noted by the Chinese female VC, Jenny Lee, in the Forbes article cited above).

    On the other hand you raise a good point about Skadden Arps! We could probably infer from the fact that no woman made partner until 1981 that there was discrimination happening at least through 1967 (since it would take about 14 years to get through college, law school, and the associate phase). That was 48 years ago, however. Is it reasonable to assume that conditions for women in education and at work are the same as they were 48 years ago? Harvard University, a common feeder for Skadden Arps, merged the undergraduate admissions process for men and women only in 1977 (Radcliffe students could start using the Harvard College library in 1967, though). If Kleiner Perkins had no female partners it would seem reasonable to infer that not much had changed in 48 years, at least not in venture capital. But KP did have female partners. Ellen Pao was complaining that she wasn’t one of them (just as I complain that I was not selected by KP to become a senior partner despite the brilliance that I demonstrated during a meeting in their offices).

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