Populus Media, Inc. v. Erb

Background

Populus Media, Inc. brought a diversity action against Jeffery Erb, one of its founders and a former employee. The amended complaint asserted state-law claims for breach of contract, breach of fiduciary duties, fraud, and violations of New York’s faithless-servant doctrine.

According to the allegations accepted as true for purposes of the motion, Erb entered into a stock agreement, a confidentiality and assignment agreement, and an employment agreement with Populus. The confidentiality agreement required him to devote full-time efforts to Populus’s business and to report conflicts of interest or the appearance of conflicts. The employment agreement incorporated that confidentiality agreement.

Populus alleged that Erb continued working for McCann Health after beginning his full-time work for Populus, publicly presented himself as McCann Health’s president, and had limited availability for Populus. Populus also alleged that Erb misrepresented the qualifications of an independent contractor whom he recommended hiring, that he had a romantic relationship with the contractor, and that he used company work time and materials to send her sexual and pornographic material.

Populus further alleged that Erb traveled to France with the contractor for what was supposed to be a remote promotional interview, failed to prepare adequately, and altered an invoice to make the interview appear remote. Populus alleged that the failed marketing efforts and other expenditures caused it to lose at least $45,000, and that it paid Erb at least $230,000 in salary without receiving the promised services. Populus terminated Erb for cause on December 16, 2022. It later alleged that Erb had an undisclosed interest in Digital Health Networks and signed a $25,000 license on Populus’s behalf that provided little or no value to the company.

Rule 12(b)(6) Standard

Erb moved to dismiss all claims under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally plausible claim. At this stage, the court accepted the complaint’s factual allegations as true, but did not accept bare legal conclusions. The court considered the complaint, attached exhibits, and documents incorporated into the complaint.

Breach of Contract

The court denied the motion to dismiss the breach-of-contract claim. Populus plausibly alleged that Erb breached the employment agreement and the incorporated confidentiality agreement by continuing to work for McCann Health, failing to devote his full-time efforts to Populus, and failing to report an apparent conflict of interest.

The court rejected Erb’s argument that the agreements limited Populus to specified termination-related remedies. The court concluded that those provisions described Populus’s obligations when terminating Erb for cause, rather than establishing exclusive remedies for breaches of the agreements. The confidentiality agreement also referred to other available remedies in addition to specific performance and injunctive relief. Populus plausibly alleged damages resulting from the claimed breaches, including salary paid for work not performed and costs from failed marketing efforts.

Fraud

The court denied the motion to dismiss the fraud claim. Populus adequately alleged that Erb falsely represented that he had resigned from McCann Health and that Populus relied on that representation by continuing to employ and pay him. Populus also adequately alleged that Erb intentionally misrepresented the qualifications of the contractor he recommended, causing Populus to hire and pay her.

The court held that the allegations satisfied Federal Rule of Civil Procedure 9(b), which requires fraud to be pleaded with particularity. The complaint identified the alleged fraudulent statements, their speaker, when and in what circumstances they were made, and why Populus considered them fraudulent.

Fiduciary Duties and Faithless Servant Claim

The court held that Delaware law governed Populus’s fiduciary-duty claim because Populus was incorporated in Delaware. Under Delaware law, corporate officers owe duties of loyalty, good faith, care, competence, and diligence. The court found that Populus plausibly alleged breaches of those duties through Erb’s continued work for McCann Health, alleged misrepresentations, hiring of an allegedly unqualified contractor with whom he had a personal relationship, use of company resources, inadequate preparation for the promotional interview, and alleged alteration of invoices.

The court treated the factual allegations supporting Populus’s faithless-servant claim as supporting its fiduciary-duty claim because the two claims relied on the same alleged conduct. However, the court dismissed Claim Two to the extent Populus intended to assert a separate claim under New York’s faithless-servant doctrine. The court did not dismiss Claim Four, the breach-of-fiduciary-duties claim.

Disposition

Judge Mary Kay Vyskocil granted in part and denied in part Erb’s motion to dismiss. The court dismissed Populus’s faithless-servant claim only to the extent it was asserted as a separate claim. The court held that Populus’s breach-of-contract claim (Claim One), fraud claim (Claim Three), and breach-of-fiduciary-duties claim (Claim Four) adequately stated claims.