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?