Sullivan v. etectRx, Inc. ( 2023 )

United States Court of Appeals
For the First Circuit
No. 22-1488
VALERIE SULLIVAN,
Plaintiff, Appellant,
v.
ETECTRX, INC., a Delaware Corporation; JEFFREY P. SPAFFORD;
EDWARD H. HENSLEY; RICHARD J. KRUZYNSKI; ETRX HOLDINGS, INC.,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Indira Talwani, U.S. District Judge]
Before
Kayatta, Gelpí, and Montecalvo,
Circuit Judges.
David J. Shlansky, with whom Colin R. Hagan and Shlansky Law
Group, LLP were on brief, for appellant.
Aaron M. Katz for appellees.
May 11, 2023
KAYATTA, Circuit Judge. Valerie Sullivan worked for
etectRx, Inc. ("etectRx"), a digital health company, as its CEO
from August 2020 until August 2021. Her one-year, automatically
renewable employment agreement required etectRx to pay her twelve
months of salary as severance benefits in the event her "employment
[wa]s terminated by the Company" without cause or if Sullivan
terminated her employment for good reason. After etectRx decided
that it no longer wished to continue its relationship with Sullivan
as defined in the employment agreement and she subsequently left
the company, etectRx refused to pay severance benefits. The
company argued that it merely exercised its right not to renew the
employment agreement and thus did not terminate Sullivan's
employment. The district court accepted this argument in granting
etectRx's motion to dismiss for failure to state a claim, and
Sullivan timely appealed.
We agree that a mere non-renewal of the employment
agreement by etectRx would not have entitled Sullivan to severance
benefits. But we also find that Sullivan's complaint adequately
alleges that etectRx obligated itself to pay severance benefits by
ending her employment under the agreement without cause before the
end of the one-year term. Our reasoning follows.
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I.
"[W]e assume that the facts alleged in the complaint,
plus reasonable inferences drawn from those facts, are true."
Kaufman v. CVS Caremark Corp., 836 F.3d 88, 90 (1st Cir. 2016).
Sullivan began working for etectRx, a digital health
company, as a contractor in August 2019. A year later, she began
employment as etectRx's CEO, pursuant to a negotiated employment
agreement (the "Agreement") dated August 1, 2020. The Agreement
was effective for an "Initial Term" of one year and would be
"automatically extended for an additional 12-month period
commencing at the end of the Initial Term, and successively
thereafter for additional 12-month periods . . . , unless either
party gives written notice to the other party that such party does
not desire to extend the term of this Agreement." Such notice of
non-renewal "must be given at least sixty (60) days prior to the
end of the Initial Term or the applicable Additional Term."
In addition to allowing non-renewal by sixty days'
written notice, the Agreement stated that "either Executive or the
Company may terminate Executive's employment with the Company for
any reason, at any time, upon not less than thirty (30) days' prior
notice." Any such termination by etectRx (except for cause, death,
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or disability) would trigger an obligation to pay severance under
section 6 of the Agreement, which stated as follows:
6. Effect of Termination.
(a) Effect of Termination by Company without Cause
or by Executive for Good Reason If Executive's
employment is terminated by the Company for any
reason other than [for cause, death, or disability]
or by Executive for Good Reason, Executive shall be
entitled to receive (i) Executive's monthly Base
Salary for twelve (12) months (the "Severance
Benefit"); and (ii) those amounts earned and unpaid
under Sections 3(a) and 3(b) through the date of
termination together with any accrued vacation.
The Agreement also provided that, "[u]pon the expiration
of this Agreement or termination of Executive's employment with
the Company for Cause, neither party shall have any further
obligation or liability under this Agreement to the other party,
except as set forth in Sections 4, 6, 7, 8, 9, 10, 11 and 16 of
this Agreement. The date of expiration of the Employment Term
shall be referred to as the 'Termination Date.'"
Finally, the Agreement included a non-compete covenant
barring Sullivan from competing with etectRx "[d]uring the
Employment Term and for a period of twelve (12) months following
the termination of Executive's employment for any reason (the 'Non-
Compete Period')."
According to Sullivan's complaint, two etectRx board
members held a video call with her on May 26, 2021, during which
they informed her that her employment with the company was
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terminated with immediate effect. They also asked that she remain
as an "at-will" employee through August 1, 2021, the last day of
the Initial Term. The next day, one of those board members sent
a letter to Sullivan to "serve[] as written notice by etectRx of
its decision not to continue the term of the Agreement beyond the
Initial Term" while also asking Sullivan to "remain employed as an
at-will employee for continued support during this period."
Sullivan informed etectRx that she would work through
the remainder of the Initial Term but refused to continue her
employment on an at-will basis beyond that point. In July, etectRx
instructed her to transfer her responsibilities to a new executive.
She otherwise continued to perform her duties through August 1,
2021. On August 2, 2021, etectRx sent an email to Sullivan in
which it asserted that Sullivan had abandoned her role. The
following day, etectRx sent Sullivan a letter reminding her of the
Agreement's restrictive covenants, including the one-year non-
compete provision. In this letter, etectRx also maintained that
it had not terminated Sullivan's employment "with the expiration
of the Agreement" because it had asked her to remain employed on
at at-will basis.
In due course, Sullivan brought suit against etectRx and
three named board members (Jeffrey Spafford, Edward Hensley, and
Richard Kruzynski), claiming that etectRx violated the terms of
the Agreement and the implied covenant of good faith and fair
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dealing, and that etectRx and the three board members violated the
Massachusetts Wage Act by failing to provide the severance benefits
she was owed. EtectRx filed a motion to dismiss for failure to
state a claim, which the district court granted. Sullivan timely
appealed.
II.
We review the district court's order granting a motion
to dismiss for failure to state a claim de novo. Germanowski v.
Harris, 854 F.3d 68, 71 (1st Cir. 2017). To that end, "we ask
whether the well-pleaded factual allegations, viewed in the light
most favorable to the plaintiff, . . . 'plausibly narrate a claim
for relief.'" Id. (quoting Schatz v. Republican State Leadership
Comm., 669 F.3d 50, 55 (1st Cir. 2012)).
Sullivan's opening brief on appeal raises three
arguments. First, that the terms of the Agreement require the
payment of severance benefits if the employer opts not to renew
the Agreement. Second, that the complaint alleges facts plausibly
establishing that etectRx terminated her employment without cause
during the term of the Agreement, and therefore that etectRx owes
severance benefits even if such benefits are not due merely because
of non-renewal. And third, that should she prevail on either of
the first two arguments, her complaint also alleges facts entitling
her to additional remedies under the Massachusetts Wage Act. We
address each argument in turn.
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A.
The parties agree that Delaware law governs the
interpretation of the Agreement. They further agree that the
pivotal issue is whether the Agreement entitles Sullivan to
severance benefits, based on the facts alleged in the complaint,
as supplemented by reference to the Agreement itself. Sullivan's
first argument turns on interpretation of the language of the
contract, which is a question of law. See Vinton v. Grayson,
189 A.3d 695, 699 (Del. Super. Ct. 2018) ("In Delaware, the
interpretation of a contract is a question of law suitable for
determination on a motion to dismiss." (quoting Markow v. Synageva
Biopharma Corp, C.A. No. N15C-06-152, 2016 WL 1613419, at *4
(Del. Super. Ct. Mar. 3, 2016)(unpublished))). Dismissal is
warranted only if the "defendants' interpretation is the only
reasonable construction as a matter of law." Id. at 700 (quoting
L&L Broad., LLC v. Triad Broad. Co., C.A. No. N13C-10-028,
2014 WL 1724769, at *3 (Del. Super. Ct. Apr. 8, 2014)). Whether
a contract is susceptible to more than one of several possible
interpretations is a question of law. Allied Cap. Corp. v. GC-
Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006). "A
contract is not rendered ambiguous simply because the parties do
not agree upon its proper construction. Rather, a contract is
ambiguous only when the provisions in controversy are reasonably
or fairly susceptible of different interpretations or may have two
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or more different meanings." Lorillard Tobacco Co. v. Am. Legacy
Found., 903 A.2d 728, 739 (Del. 2006) (quoting Rhone-Poulenc Basic
Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1196 (Del.
1992)).
In dismissing the complaint, the district court held
that the Agreement could not be construed as granting severance
benefits in the event that the Agreement simply expired upon either
party's exercise of its right of non-renewal. In brief, reasoned
the district court, non-renewal of the Agreement did not trigger
an obligation to pay benefits due only in the event that Sullivan's
"employment [wa]s terminated by the Company" without cause.
In so ruling, the district court relied on our prior
decision in Mason v. Telefunken Semiconductors America, LLC,
797 F.3d 33 (1st Cir. 2015). Like the district court, we see no
good reason to reach a different result than we reached in Mason.
Mason's observation that "'[n]on-renewal' and 'termination' are
distinct terms having different meanings," id. at 42, applies a
fortiori here, with the Agreement expressly referring on the one
hand to "expiration of this Agreement" and, on the other hand, to
"termination of Executive's employment." The very clause that
created a conditional right to severance benefits on its face
applied only "[i]f Executive's employment [wa]s terminated by the
Company" without cause. As in Mason, the Agreement also
established separate notice requirements for non-renewal
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(sixty days) and for termination of Sullivan's employment without
cause (thirty days). This would make little sense if a non-renewal
left the parties in the same position as if the Agreement was
terminated without cause. Id. at 43. And the sixty-day notice
requirement for non-renewal would be entirely superfluous if
etectRx could instead simply terminate Sullivan's employment
thirty days from the renewal date, with the same result.
Sullivan rests her contrary reading on a sentence in
section 2 of the Agreement stating that "[u]pon the expiration of
this Agreement or termination of Executive's employment with the
Company for Cause, neither party shall have any further obligation
or liability under this Agreement . . . , except as set forth in
Sections 4, 6, 7, 8, 9, 10, 11 and 16 . . . ." She points out
that section 6(a) is the paragraph that creates a right to
severance benefits. And, she says, because those benefits do not
apply when the company terminates the Executive's employment for
cause, that provision's "survival" must mean that it applies
"[u]pon the expiration of this Agreement." Otherwise, she reasons,
there would be no reason to include section 6 among those
provisions that survive.
Sullivan's argument fails because there is a clear
explanation for why severance obligation must survive the
expiration of the Agreement, even if a mere expiration does not
trigger the severance benefits. The severance obligation could be
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triggered prior to the expiration date (by, for example, a
termination without cause), in which case the section 2 survival
clause ensures that etectRx will pay severance for a full twelve
months -- including those months following the expiration date.
Said differently, the survival of section 6 ensures that an
already-triggered obligation to pay severance does not disappear
upon the expiration date. In short, the reference to section 6 is
not surplusage under the district court's reading of the Agreement
because the reference has meaning and effect even if a non-renewal
does not trigger severance.
Finally, Sullivan points again to section 2, noting that
it defines the date of expiration of the "Employment Term" to be
the "Termination Date." But the question is not whether there was
a termination of her employment -- both parties agree that,
ultimately, there was. The question is whether there was a
termination of Sullivan's employment "by the Company" under
section 6 that would trigger severance benefits. As previously
noted, this section does not use the defined term "Termination
Date," and conditions severance benefits on termination of
employment by the Company without cause or by the Executive for
Good Reason, not on the expiration of the Agreement.
It is true that, literally, Sullivan's status as an
under-contract employee obviously ended if and when the Agreement
was not renewed. But that hardly means that a non-renewal rendered
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Sullivan's "employment . . . terminated by the Company" without
cause. In any event, Mason's holding that non-renewal of an
employment agreement is different from termination of employment,
plus the Agreement's differential treatment of termination of
employment as contrasted with non-renewal, leaves no room for a
holding in Sullivan's favor. Therefore, we affirm the district
court's rejection of Sullivan's claim that etectRx owes severance
benefits even if it merely opted not to renew the Agreement.
B.
Sullivan's alternative argument fares better. She
contends that her complaint adequately alleges that etectRx
actually terminated her employment, without cause, before the
contract ran its twelve-month course and thus incurred an
obligation to pay severance benefits under the Agreement. We agree
with Sullivan on this point.
EtectRx does not dispute that it sought to transition
Sullivan from employment under the terms of the Agreement to
employment as an at-will employee. Because etectRx made clear
that a change from under-contract to at-will employment would not
impact Sullivan's compensation or benefits, we can comfortably
deduce that the principal difference between employment under the
Agreement and employment at-will would relate to termination. As
is most relevant, under the Agreement, etectRx had to give Sullivan
thirty days' notice to terminate her without cause and also pay
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severance. Conversely, as an at-will employee, she could be fired
without cause, notice, or severance.
EtectRx contends that it attempted to effect that
transition by not renewing the Agreement and thus triggering its
expiration on August 1. And as we have just now said, letting the
Agreement expire by its own terms would not have resulted in
etectRx owing severance benefits to Sullivan. Sullivan, though,
alleges that etectRx effected that transition in May by telling
her that her employment under the Agreement was terminated with
immediate effect and declaring her an at-will employee, thus ending
her employment under the Agreement and replacing it with a similar
but materially different arrangement. Effectively, etectRx ended
the Agreement and unilaterally changed the terms of Sullivan's
employment to at-will, leaving her title, duties, and pay identical
but stripping the parties of the Agreement's bargained-for
protections, including the severance provision.
Because we are reviewing the dismissal of the case under
Federal Rule of Civil Procedure 12(b)(6), we must accept as true
Sullivan's description of the video call on May 26, and we must
construe the May 27 letter in a light fairly favorable to Sullivan.
In short, we must assume that in May, etectRx unilaterally and
without cause and without prior notice ended Sullivan's employment
under the Agreement and converted her employment status to at-
will. Such a transition would be a termination by etectRx of
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Sullivan's employment without cause or notice entitling her to
severance. And this is so even though her transition did not
result in actual unemployment before August 1. Cf. Id. at 39–41
(holding that a change in employer due to a corporate restructuring
may work a "termination" that triggers severance); see id. at 39(noting that "unemployment is not a prerequisite to the right to
separation pay"; instead, that right "may, and frequently does,
exist where there is no interruption whatever in the continuity of
employment" (quoting Chapin v. Fairchild Camera & Instrument
Corp., 107 Cal. Rptr. 111, 115 (Cal. Ct. App. 1973))). If etectRx
could unilaterally convert Sullivan's under-contract employment to
at-will prior to the expiration of the contract term, and
simultaneously claim not to have terminated her employment for
severance purposes, that would strip Sullivan of the contracted-
for severance benefits and leave her with no recourse if etectRx
decided to fire her the next day, in the middle of the original
contract term. The language of the Agreement here does not provide
etectRx with that power.
Notably, etectRx does not claim to read the Agreement
otherwise. That is to say, it does not claim that it had the power
to convert Sullivan to an at-will employee without cause during
the term of the Agreement without effectively terminating her
employment under the Agreement. Instead, etectRx disputes
Sullivan's characterization of its actions and contends that in
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the May 27 letter, the company was simply providing the requisite
notice of its intent not to renew the employment contract and
offering Sullivan the opportunity to continue on as an at-will
employee following the expiration of the initial term of employment
on August 1, 2021.
There is much common sense supporting etectRx's
assertion that in May it was only giving notice of non-renewal
while inviting Sullivan to stay on at-will after August 1. It is
difficult to see why it would have done what Sullivan claims given
that it wanted her to work through at least the end of her initial
term. And its May letter was captioned "Notice of Non-Renewal of
the Employment Agreement with etectRx, Inc." On the other hand,
etectRx offers no explanation for why it would have told Sullivan,
as she alleges it did orally on May 26 and then again in its May 27
letter, that she was converted to at-will for the remainder of her
initial term. Indeed, conspicuously absent from etectRx's
argument is any mention of the May 26 conversation. Sullivan's
argument is bolstered by the language etectRx used in its letter,
apparently drafted by counsel, which asked that she "remain
employed as an at-will employee for continued support during this
period." The prior sentence refers to the period "up to and
including the Termination Date," so the antecedent for "this
period" would seem to be the remainder of the initial term. Thus,
it is plausible that etectRx immediately and unilaterally, even if
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foolishly, ended Sullivan's under-contract employment without
cause and converted her to at-will status in May, triggering an
obligation to pay severance benefits.
In any event, the case is at the pleading stage, so our
charge is not to weigh competing versions of what happened.
Rather, our task is to determine only whether Sullivan has a
plausible claim if her allegations are true. And given that she
alleges point blank that she was told her employment under the
Agreement was terminated "presently" and "with immediate effect,"
that etectRx requested that she nonetheless remain employed "at-
will" for the remainder of her initial term, and that she was
instructed to transfer her responsibilities to a new executive in
July, she has alleged that etectRx terminated her without cause
and without notice, triggering the severance obligation. She has
plausibly stated a claim for entitlement to severance benefits.
III.
Sullivan also appeals the district court's dismissal of
her claim that etectRx breached the implied covenant of good faith
and fair dealing by attempting to recharacterize her termination
as a non-renewal to avoid paying severance benefits. Under
Delaware law, "to state a claim for breach of the implied covenant,
[Plaintiff] 'must allege a specific implied contractual
obligation, a breach of that obligation by the defendant, and
resulting damage to the plaintiff.'" Kuroda v. SPJS Holdings,
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L.L.C., 971 A.2d 872, 888 (Del. Ch. 2009) (quoting Cantor
Fitzgerald, L.P., v. Cantor, No. C.A. 16297-NC, 1998 WL 842316, at
*1 (Del. Ch. Nov. 10, 1998)(unpublished)). When a valid contract
between the parties expressly governs the dispute, a plaintiff
cannot obtain relief through a claim for breach of the implied
covenant of good faith and fair dealing. See id. at 889 & n.45
(explaining that the plaintiff could not sustain a breach of the
implied covenant of good faith and fair dealing claim when he
acknowledged that express terms of the contract at issue
"govern[ed] his right to receive the payments he seeks."). As
best we can tell from Sullivan's under-developed argument, she
contends that etectRx attempted to mischaracterize its without-
cause termination of her employment to avoid paying severance
benefits. This is coterminous with her breach of contract claim.
To the extent that Sullivan argues that her breach of the implied
covenant of good faith and fair dealing claim is distinct from her
breach of contract claim, she does so for the first time in her
reply brief. And, even then, she does not identify "a specific
implied contractual obligation" that she contends etectRx
breached, nor does she explain why this claim is actionable despite
the express contract terms governing the severance benefits at
issue here. To that end, Sullivan has failed to state a claim for
breach of the implied covenant of good faith and fair dealing.
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IV.
Because the district court determined that etectRx did
not owe severance benefits to Sullivan, it dismissed her
Massachusetts Wage Act claim predicated on her being owed those
benefits. As we disagree, at least insofar as the motion to
dismiss goes, we address Sullivan's Wage Act claim.
"[T]he Wage Act requires the payment of wages on a weekly
or biweekly basis. The act provides that 'any employee leaving
his [or her] employment shall be paid in full on the following
regular pay day,' and that 'any employee discharged from . . .
employment shall be paid in full on the day of his [or her]
discharge . . . the wages or salary earned by him [or her].'" Mui
v. Mass. Port Auth., 89 N.E.3d 460, 462 (Mass. 2018) (quoting Mass.
Gen. Laws ch. 149, § 148). Sullivan's claim can succeed only if
she demonstrates that the severance benefits at issue are "wages"
as that term is used in the Wage Act.1
As etectRx notes, the Massachusetts Appeals Court has
held that severance benefits are not "wages" for purposes of the
Wage Act. Prozinski v. Ne. Real Est. Servs., 797 N.E.2d 415, 419–
21 (Mass. App. Ct. 2003). And "federal courts . . . must follow
1 The Wage Act does not define the term "wages," but
Massachusetts courts have construed the term to mean amounts
"definitively determined and . . . due and payable to the
employee." Mui, 89 N.E.3d at 712 (quoting Mass. Gen. Laws ch. 149,
§ 148).
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the decisions of intermediate state courts in the absence of
convincing evidence that the highest court of the state would
decide differently." Stoner v. N.Y. Life Ins. Co., 311 U.S. 464,
467 (1940).
Sullivan cannot make this showing. Indeed, the
Massachusetts Supreme Judicial Court has thrice cited Prozinski
with approval for its holding that the Wage Act does not cover
severance pay. See Calixto v. Coughlin, 113 N.E.3d 329, 334 n.9
(Mass. 2018); Mui, 89 N.E.3d at 462; Weems v. Citigroup, Inc., 900
N.E.2d 89, 92 (Mass. 2009).
Moreover, in Mui, the Massachusetts Supreme Judicial
Court held that the Wage Act did not encompass a percentage of
accrued sick time that the employer gave to departing employees
who worked for the employer for at least two years and were not
terminated for cause. 89 N.E.3d at 463–64. The court noted that
"[t]he only contingent compensation2 recognized expressly in the
act is commissions," and that "[w]e have not broadly construed the
term 'wages' for the purposes of the act to encompass any other
type of contingent compensation." Id. at 463. Therefore, because
the sick pay was "only available to departing Massport employees
2 In this context, compensation is contingent if it is
payable only upon the occurrence of a particular triggering event
(in contrast to an amount earned by the performance of work). See
Prozinski, 797 N.E.2d at 420 (reasoning that severance benefits
are contingent upon the event of severance and are thus distinct
from earned wages).
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meeting certain criteria," that sick pay did not constitute "wages"
for purposes of the Wage Act. Id. at 463–64.
Here, like the sick pay in Mui, the severance benefits
are contingent on the departing employee meeting certain criteria,
namely that the "Executive's employment is terminated by the
Company for any reason other than [for cause, death, or disability]
or by Executive for Good Reason."
Nonetheless, Sullivan contends that her circumstance is
distinguishable. She argues that, unlike the employees in Mui,
Calixto, Prozinski, and Weems, she earned her severance by
complying with post-termination obligations, including her non-
competition obligations and her agreement to "cooperate and
provide assistance to Company in transitioning the work of
Executive; ensure a smooth transition; and in answering questions
and completing tasks as requested by Company as necessary following
termination of employment" (as required by the general release she
must sign to obtain severance). But Sullivan's receipt of
severance benefits was not wholly dependent on completion of her
non-compete obligations. Instead, the severance benefits were
contingent on her termination by etectRx not being for cause,
death, or disability, and then on Sullivan signing a release and
waiver of claims. So we see no basis for holding that her severance
benefits, if due, were the type of contingent compensation that
Massachusetts classifies as a wage for purposes of the Wage Act.
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These post-termination obligations do not distinguish Sullivan's
claims from Mui because, regardless of whether Sullivan must
perform post-termination obligations to obtain her severance, that
severance is still contingent on meeting certain criteria at the
time of the departure.
Thus, we affirm dismissal of Sullivan's Massachusetts
Wage Act claim on the alternative grounds that her severance
benefits are not covered by the Wage Act.3
V.
For the foregoing reasons, we reverse the dismissal of
Sullivan's breach of contract claim against etectRx and affirm the
district court's dismissal of all other claims against etectRx and
Jeffrey P. Spafford, Edward H. Hensley, and Richard J. Kruzynski.
The parties shall bear their own costs.
3 Sullivan also argues that payment of the severance benefits
was necessary for etectRx to comply with Massachusetts's "garden
leave" statute, Mass. Gen. Laws ch. 149, § 24L, which requires
that non-competition agreements be supported by payments of fifty
percent of the employee's salary "or other mutually-agreed upon
consideration between the employer and the employee, provided that
such consideration is specified in the noncompetition agreement."
§ 24L(b)(vii). This assertion is irrelevant to whether severance
is a "wage" for purposes of the Wage Act. At best, it is an
argument that the non-competition provision is unenforceable;
however, because etectRx released Sullivan from the non-
competition obligation in January 2022, this argument is moot.
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