Bay Street Advisors v. Kevin P. Mahoney

Background

After Kevin P. Mahoney left Bay Street Advisors, LLC (BSA) to work for Christoph Zeiss Partners, BSA sued him alleging violations of the Defend Trade Secrets Act, breaches of his employment and nondisclosure agreements, and breach of fiduciary duty. Mahoney denied those allegations and asserted counterclaims concerning a Resignation Transition Plan and Agreement that governed his offboarding.

The agreement provided that Mahoney would help finish 18 client engagements in process, called “Live Searches,” in exchange for 40% of fees from successfully closed searches. Mahoney alleged that BSA paid him only 20% for three searches and deducted, or threatened to deduct, a 2.5% research fee. BSA maintained that it could reduce the commissions because Mahoney handed off substantial work to BSA employee John Gregory and could deduct the research fee because Mahoney was acting as an independent contractor.

BSA moved under Federal Rule of Civil Procedure 12(b)(6) to dismiss Mahoney’s unjust-enrichment and quantum-meruit claim. These are alternative, quasi-contract theories that may seek payment when an express contract does not clearly govern the disputed subject. BSA also moved under Rule 12(f) to strike portions of Mahoney’s counterclaims as irrelevant, improper, or scandalous.

Motion to Dismiss the Quasi-Contract Claim

The court denied BSA’s motion to dismiss. It held that Mahoney had adequately pleaded his quasi-contract claim in the alternative, even though he acknowledged that the Transition Agreement was valid and enforceable. Under the court’s analysis, an alternative quasi-contract claim may proceed when the parties dispute whether the written agreement covers the particular subject of the payment dispute.

The court found that the Transition Agreement did not clearly address whether Mahoney was entitled to his full 40% commission if he worked with BSA employees or handed off work to them. The agreement also did not expressly provide for a reduced payment in that situation. The court further found that the agreement did not clearly define Mahoney as an independent contractor or authorize a 2.5% research-fee deduction.

The court considered a commission provision in Mahoney’s 2009 Employment Agreement but concluded that it did not resolve the dispute. That provision applied to people employed by BSA when a commission became due, and the parties did not dispute that Mahoney was no longer a BSA employee when the alleged underpayment occurred. The court therefore concluded that the scope of the Transition Agreement and the parties’ payment rights could not be resolved at the pleading stage. It denied BSA’s motion to dismiss the quasi-contract claim.

Motion to Strike

The court also denied BSA’s motion to strike in its entirety. A motion to strike seeks removal of material from a pleading, and the court explained that such motions are generally disfavored. The moving party must show that no supporting evidence could be admissible, that the allegations have no bearing on the issues, and that allowing them to remain would prejudice the moving party.

The challenged allegations concerned alleged financial mismanagement by BSA’s managing partner, alleged misuse of Paycheck Protection Program funds, alleged wage-and-hour violations involving support staff, Mahoney’s unsuccessful efforts to obtain an equity stake, the reasons Mahoney and members of his working group left BSA, and alleged motives for BSA’s lawsuit and payment decisions.

The court found that the allegations supplied background and could bear on the parties’ claims and counterclaims. In particular, the allegations could provide context for why Mahoney and his working group left BSA, Mahoney’s defense to BSA’s trade-secret allegations concerning his use of personal devices, and the parties’ dispute over the Transition Agreement. The court recognized that some allegations had criminal overtones or were unfavorable to BSA and its managing partner, but concluded that their potential prejudice did not overcome their relevance and the demanding standard for striking material.

Disposition

Judge Ronnie Abrams denied BSA’s motion to dismiss Mahoney’s quasi-contract claim and denied BSA’s motion to strike in its entirety. The Clerk of Court was directed to terminate the pending motion at Docket No. 23. The opinion did not decide the ultimate merits of the parties’ underlying claims or Mahoney’s entitlement to the disputed payments.