The Irony of that Kleiner Perkins Lawsuit: UPDATED

Last week, Silicon Valley learned that Partner Ellen Pao of Kleiner Perkins Caufield & Byers is suing the firm, alleging that she endured years of gender discrimination and claiming that when she complained, she faced retaliation in the form of reduced pay and stifled career advancement.

Managing Partner John Doerr responded to Pao’s allegation in a note published about an hour ago. Doerr stated that it’s “not easy to stand by as false allegations are asserted against the firm, especially because legal constraints prevent us from responding fully at this time.” He also wrote that Kleiner has “taken great care to treat this situation seriously, swiftly, and with integrity” and in the end, “facts – not unfounded claims – will determine the outcome of the suit filed against us.” (Doerr’s response can be read in its entirety here.)

Here’s one of the most ironic things about this whole situation, though: Had Pao been promoted at some point to general partner, it’s likely that she wouldn’t be able to sue Kleiner for sexual harassment and discrimination.

“Partners [of varying types of organizations] sue each other all the time over breach of fiduciary duties,” explains Robert Hillman, a law professor at the U.C. Davis School of Law. “But [Pao’s] claim for sexual harassment is directly addressed by Title VII [of the Civil Rights Act of 1964]. And to bring a sexual harassment claim under federal law or state law, you have to be an employee. It would be impossible as a partner.”

In fact, says Hillman, “If you’re truly a partner and someone has been hitting on you, partner to partner, I’m a little stumped” as to what can be done about it, he says. “A creative lawyer could package it in some way, but you’d have to jump through many more hoops to do anything about it.”

The reality is that federal law has long offered many more protections to employees than it does to proprietors. And one 2003 Supreme Court ruling — Clackamas Gastroenterology Associates, P.C. v. Wells – all but ensured that certain federal employment statutes (including around age discrimination) protect employees and not partners.

Of course, one problem that arises in many discrimination cases is determining who is an employee and who isn’t, titles be damned.

In the Clackamas case, the Supreme Court said it had been persuaded by six factors identified by the Equal Employment Opportunity Commission as relevant in distinguishing an employee from a proprietor, including whether an organization can “hire or fire” the individual or “set the rules and regulations of the individual’s work,” whether the “individual reports to someone higher in the organization,” to what extent an individual is “able to influence an organization,” and “whether the individual shares in the profits, losses, and liabilities of the organization.”

Based on some of those criteria, it isn’t beyond imagination that a venture firm might argue its junior partners are owners. (Hillman says law firms have been fighting over the difference “for 25 years.”) After all, every investment professional scouts out deals on behalf of the venture firm where he or she works, an act that could be construed as influencing the organization. More, like their senior peers, junior partners also typically invest in their own firm’s funds as individual LPs, as a ways of putting some of their “skin in the game.”

Hillman says “there are no real guidelines” in a case like that of Pao but says a court would be looking at whether a so-called partner “makes decisions about expansion, for example, or around the firm’s financing, or who will be hired.” It’s the “major decisions” that a court would be weighing to decide who is an owner and who isn’t.

The good news for Kleiner – and other venture firms – is that most of these cases get settled before they hit a courtroom.

“None of this stuff goes to trial,” says one former Silicon Valley attorney who worked at a well-known firm and asked not to be named. “A case like [KP’s] doesn’t happen all the time, but certainly disputes between GPs do.” And “even though we’d construct all our GP agreements in a way to try to minimize what the partners could do to each other, you could never make them air tight. There are a lot of creative plaintiffs’ lawyers who can come up with any number of ways to sue a partnership.”

The bad news for Kleiner – and the broader industry, potentially — is that either way, Pao’s lawsuit is likely to attract greater scrutiny by outsiders.

Says Hillman: “Sexual harassment activates all kinds of alerts and sirens in courts and at regulatory agencies like the EEOC, which has brought a number of cases against law and accounting firms. And the EEOC likes to find new targets.”

Kleiner Perkins “shouldn’t feel too smug if the EEOC starts snooping around,” he adds.

Update: A source close to the Kleiner case says that the “claims being brought by Ellen are discrimination and retaliation claims not sexual harassment,” even while allegations of sexual harassment are made throughout the lawsuit’s filing, including on pages 4 and 5. Adds this person, the “fact that Ellen did not bring sexual harassment charges are because the time limitation to file such a claim had expired and nothing to do with whether she was a partner or employee.” (A claimant has one year from the harassment incident to file a claim.)

Image credit: Photo of law books courtesy of ShutterStock

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