Contract: Company alleges former CEO improperly solicited its employee

Where a company plausibly alleged its former Chief Executive Officer violated confidentiality and non-solicit provisions when he attempted to solicit one of its employees to join a competitor, the CEO’s motion to dismiss was denied.

Background

Empower AI Inc. brings the instant breach of contract suit against Paul A. Dillahay, its former CEO, alleging that he used plaintiff’s confidential information and attempted to solicit one of plaintiff’s employees to join SOS International, plaintiff’s direct competitor, in breach of a Confidentiality Agreement and a Separation Agreement between them. Dillahay has filed a motion to dismiss.

Standard

Under Virginia law, “[t]o survive a motion to dismiss for failure to state a breach of contract claim, the complaint must state sufficient facts showing: ‘(1) a legally enforceable obligation of a defendant to a plaintiff; (2) the defendants’ violation or breach of that obligation; and (3) injury or damage to the plaintiff caused by the breach of the obligation.’”

Enforceable obligation

For a contract to be enforceable, “there must be mutual assent of the contracting parties in terms reasonably certain under the circumstances.” Here, defendant accepted various forms of severance payment – consideration – in exchange for his adherence to the terms of the Separation Agreement, which incorporated the Non-Solicitation and Fiduciary Duty Provisions of the Confidentiality Agreement.

Defendant’s enforceability challenge is focused solely on the Non-Solicitation Provision, arguing that the provision is unreasonably restrictive and against public policy. However, defendant’s facial challenge is premature.

Breach

Defendant argues that plaintiff fails to plausibly allege that he breached the Fiduciary Duty Provision because plaintiff does not specify what kind of Confidential Information was used or disclosed by defendant in the alleged solicitation of the employee. The court disagrees.

The Confidentiality Agreement defines Confidential Information broadly as “any secret, confidential or proprietary information possessed by the Company relating to its businesses” and follows this definition with a list of examples with the qualification that the list is “without limitation.” Among the types of information listed are details of client or consultant contracts, business plans, operational methods and employee compensation information. It is plausible that the alleged confidential information at issue is defendant’s knowledge about the employee role, compensation and performance, which could fall under the categories of details of consultant contracts, business plans, operational methods and employee compensation information.

Next, the Non-Solicitation Provision provides that defendant shall not “provide names or other information about [plaintiff’s employees] to any Person under circumstances which could reasonably be expected to lead to the use of that information for purposes of recruiting, hiring, soliciting, or encouraging any such [employee] to leave the employment or service of [plaintiff].” According to plaintiff, defendant provided the contact information of the employee to SOSi’s CEO and contacted the employee to introduce them to the SOSi employees. SOSi, one of plaintiff’s direct competitors, then sought to recruit the employee. Accepting plaintiff’s allegations as true, the court finds that plaintiff has sufficiently alleged that defendant breach the Non-Solicitation Provision.

Damages

Defendant asserts that plaintiff failed to allege damages because plaintiff did not suffer any actual injury from the alleged solicitation. According to defendant, plaintiff’s claim that defendant’s alleged breach “threatened” its business is speculative because Plaintiff “did not lose out on the JSP Contract, and it still employs Employee A to this day.”

Plaintiff’s theory of damages stems from the language of the Separation Agreement. Plaintiff seeks to recoup the severance payments it made to defendant for his breach of the Non-Solicitation and Fiduciary Duty Provisions, as well as attorney’s fees. Courts recognize that payments made to secure non-compete agreements can constitute damages. Plaintiff has therefore plausibly alleged damages to survive the motion to dismiss stage.

Defendant’s motion to dismiss denied.

Empower AI Inc. v. Dillahay, Case No. 1:24-cv-83, Sept. 30, 2024. EDVA at Alexandria (Alston). VLW 024-3-537. 16 pp.