Can KP Force Ellen Pao into Arbitration? Not Necessarily; Here’s Why

Since surfacing in May, Kleiner Perkins partner Ellen Pao’s explosive lawsuit against the storied venture capital firm —  in which she claims she was serially harassed, discriminated against, and retaliated against over a five-year period — has had much of Silicon Valley wondering what will come of her allegations.

As of last week, it seemed we might never find out. It was then that Kleiner filed what one San Francisco-based employment lawyer described to me as among the most surprising legal answers he’s ever seen, because it quotes copiously from Pao’s annual reviews. (“It’s very unusual to include that level of detail cited from a performance evaluation,” he said.)

Kleiner also filed a motion to compel arbitration, a maneuver designed to move the case off its path toward a courtroom and onto the desk of an adjudicator, whose verdict would be legally binding and completely confidential. As the basis for this motion, Kleiner noted that Pao agreed to numerous arbitration provisions in several written contracts that state: “Any controversy or claim arising out of or relating to” the agreements “shall be settled by arbitration.”

A judge will decide on Kleiner’s motion next month, but the language appeared pretty damning for Pao, a Harvard-trained attorney. “The wording of an arbitration clause is critical and ‘relating to’ opens up the scope of an agreement considerably,” says the San Francisco attorney, who asked not to be named.

Still, legal experts believe her attorneys may have uncovered a hole in Kleiner’s motion: the arbitration agreements that Pao signed relate to the firm’s agreements with limited partners, not an employment agreement with the firm. In fact, a source close to Kleiner confirms that no separate employment agreement exists.

Why does it matter? Because Pao is suing the firm, not the managing entities of Kleiner’s venture capital funds that are referenced in the LP agreements. (A venture firm decides how to invest funds, each of which is a separate entity called a managing LLC and each of which is controlled by “managing members,” who can vary from one LLC to the next.)

Although Kleiner declined to comment for this story, Kleiner’s attorney, Lynn Hermle, has gone to great pains in a 15-page, court-filed memo to argue that “the decisions [Pao] attacks were not made by her employer KPCB but instead by those who controlled various managing entities in which she had an interest” and should thus be settled by arbitration. She elaborates further, writing that “Pao’s relationships with the entities responsible for the decisions she challenges are governed by contracts with broadly drafted arbitration clauses” and that “Pao’s claims…relate to matters covered by those agreements” in numerous ways, including the allocation of profits, decisions regarding promotions, and differences in the number of investments different partners are allowed to make.

Says the source close to Kleiner: “The language in the LLC contracts is very broad and Pao’s claims regarding carry and promotions are governed by these agreements.”

But the San Francisco attorney I talked with says, “It looks to me like the agreements Pao signed are between herself and the funds and not herself and Kleiner. She isn’t suing the funds, though, so it’s not clear to me that Kleiner has the ability to invoke that clause.”

“Normally,” adds a second Bay Area employment attorney who also asked not to be identified, “when an employer wants an arbitration agreement to encompass all possible claims, including a worker’s right to be free from gender discrimination or retaliation, that agreement is part of the basic employment agreement that the worker is required to sign as a condition of employment.”

On the other hand, LLC agreements are typically written to address disputes affecting deal valuation, profit allocations, or proper methods of accounting. So “if there is an arbitration clause in a deal agreement or some VC fund agreement, it’s not likely to be construed by a court as encompassing the employee’s fundamental, statutory right to be free from gender discrimination,” says this attorney.

What if the attorneys are wrong, and Kleiner can invoke the clause? Turns out its efforts to move the fight into arbitration may face other, separate obstacles, including the fact that increasingly, arbitration agreements are not airtight.

John West, an attorney who works alongside famed attorney Gloria Allred at Allred Maroko Goldberg in Los Angeles, says his firm has been able to invalidate a number of arbitration agreements. “Some agreements contain ‘unconscionable’ provisions, and depending on the extent [of them], the whole agreement can be set aside,” he explains.

Meanwhile, a corporate attorney with a prominent Silicon Valley firm (who yes, asked not to be named), tells me: “All a plaintiff has to say is that ‘I was under duress when I was forced to sign [an arbitration agreement],’ or ‘a copy wasn’t provided to me,’ and the [Equal Employment Opportunity Commission] will bend over backwards [to help] him or her. It’s hard to disprove a lot of this stuff later.”

In California, in particular, this person adds, “There have been recent rulings that you can’t force arbitrations, enforce statute of limitations, or reduce employee’s rights. And I think we’ll see even more limitations going forward.”