The U.S. Court of Appeals for the First Circuit has reversed a District Court decision dismissing a CEO’s claim for unpaid severance, finding that the CEO adequately plead that she was terminated without cause.

United States Court of Appeals

SUMMARY: (court decision – opens in PDF)

“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. …

“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. …

“… 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. …

“… 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 atwill. Such a transition would be a termination by etectRx of Sullivan’s employment without cause or notice entitling her to severance. …

“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. …

“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.”