First Circuit Finds Company’s Termination of Its CEO Too Clever by Half

Valerie Sullivan began work as etectRX (the Company) as a contractor in 2019.  On August 1, 2020, she entered into a one-year employment agreement with the Company as its CEO.  Her employment agreement provided that the Company had to pay her one-year’s severance benefits if she was terminated without good cause.  However, the Company was permitted to terminate her without an obligation to pay severance by providing written notice of termination sixty days prior to the time for renewal of her one-year contract.

During a May 26, 2021 video call, two members of the Company’s board notified Ms. Sullivan that she was terminated effective immediately, but they asked her to stay on as an at-will employee during the transition.  She agreed to do so, but informed the Company that she would not stay on beyond August 1, 2021.  In July, the Company notified Ms. Sullivan that she was to transfer her duties to a new CEO.  On August 2nd, the Company sent her an e-mail notice that she had “abandoned her role.”  The Company then sent her a letter, reminding her of her one-year non-compete agreement and asserting that the company had not terminated her, given that it had invited her to stay on as an at-will employee.  She sued seeking her severance benefits, alleging breach of her employment agreement and of the duty of good faith and fair dealing.  A trial court dismissed her complaint.

In Sullivan v. etectRX, Inc., the First Circuit reversed.  It rejected Ms. Sullivan’s argument that she was entitled to severance benefits as a result of the non-renewal of her contract.  But it accepted her argument that complaint alleges facts sufficient to entitle her to severance benefits because it plausibly establishes that etectRx terminated her employment without cause during the term of the Agreement.  Accepting the facts as alleged for the purposes of the Company’s dispositive motion, the complaint alleged that the Company “unilaterally and without cause and without prior notice ended Sullivan’s employment under the Agreement and converted her employment status to at will.”  The company thereby effected a termination of the Sullivan’s employment agreement which triggered her entitlement to benefits.  

While the First Circuit upheld dismissal of her claims for breach of the duty of good faith and fair dealing and for violation of the Massachusetts Wage Act, it reversed dismissal.  The Court tipped its hand in noting facts beyond the pleadings.  The Court noted that, while the Company sought to characterize the facts as involving appropriate notice of its intent not the renew the contract, Ms. Sullivan presented a letter from the Company that supports her characterization of those facts.