Pacelli v. Augustus Intelligence, Inc.

• Decision Date: 11 May 2020
• Docket Number: 20-cv-1011 (LJL)
• Parties: Marco PACELLI and Ed Crump, Plaintiffs, v. AUGUSTUS INTELLIGENCE, INC., Defendant.
• Court: U.S. District Court — Southern District of New York

459 F.Supp.3d 597

Marco PACELLI and Ed Crump, Plaintiffs,

v.AUGUSTUS INTELLIGENCE, INC., Defendant.

20-cv-1011 (LJL)

United States District Court, S.D. New York.

Signed May 11, 2020

Connie N. Bertram, Polsinelli PC, Washington, DC, Gabriel Levinson, Darnell Stybel Stanislaus, Polsinelli PC, New York, NY, for Plaintiffs.

Lewis Avery Bartell, Law Office of Lewis A. Bartell, Garden City, NY, Michael Steven Gordon, George Alexander Stamboulidis, Lauren Rebecca Weinberg, Baker & Hostetler LLP, New York, NY, for Defendant.

OPINION AND ORDER

LEWIS J. LIMAN, United States District Judge:

This is a fraudulent inducement and breach-of-contract case. Defendant Augustus Intelligence, Inc. ("Augustus") moves to compel Plaintiffs Marco Pacelli and Ed Crump ("Plaintiffs") to arbitration and to stay the litigation. For the following reasons, the motion is granted.

BACKGROUND

1. Factual Background

Augustus is a technology company specializing in artificial intelligence. (Dkt. No. 24 ¶ 1; Dkt. No. 5–7 at 2.) Its principal place of business is New York. (Dkt. No. 24 ¶ 8.) Plaintiffs are former employees of Augustus. Marco Pacelli is a Florida citizen and Ed Crump is a California citizen. (Id. ¶¶ 6–7.)

Pacelli alleges that he was fraudulently induced to sign both an independent contractor agreement and later an employment agreement with Augustus. According to the Amended Complaint (Dkt. No. 24 (hereinafter, the "Complaint")), Pacelli learned about Augustus in December 2018. (Id. ¶ 20.) In January 2019, Pacelli met with the Augustus co-founders who "pitched him on the company's supposedly rich funding and cutting edge technology." (Id. ) In February 2019, Pacelli accepted an independent contractor position with Augustus. (Id. ¶¶ 20–22.) Pacelli allegedly planned to terminate his relationship with Augustus at the end of the contractor period, but the Augustus co-founders changed his mind with "glowing representations about Augustus Intelligence's funding and the status of its technology." (Id. ¶ 27.) He signed an employment agreement on July 13, 2019 that elevated him to the position of Chief Commercial Officer. (Id. ¶ 28; Dkt. No. 5–2 (the "Pacelli Agreement").)

The Pacelli Agreement promised a signing bonus, sales commissions, and stock options. (Dkt. No. 24 ¶¶ 29–31; Dkt. No. 5–2.) It "anticipate[d] that [Pacelli would] initially work from home and ultimately from the Florida office to be established" but stated that Pacelli would "need, especially at the beginning of [the] engagement, to report regularly to the office in New York, NY." (Dkt. No. 5–2 at 3.) Additionally, the Pacelli Agreement prohibited Pacelli from being "directly or indirectly engaged or interested in any capacity in any other business, trade or occupation whatsoever so long as [he was] employed" by Augustus (without Augustus's prior written consent). (Id. at 4.) Finally, the Pacelli Agreement contained an arbitration provision, which will be discussed in further detail below. (Id. , Exhibit C.)

Ed Crump also complains that he was fraudulently induced to work for Augustus. He first met with the executive team at Augustus in the spring of 2019. (Dkt. No. 24 ¶ 24.) According to the Complaint, the team made various representations to him too about the status of the technology and the company's funding. (Id. ¶¶ 24, 175.) Like Pacelli, Crump started at Augustus as an independent contractor. (Id. ¶¶ 25–26.) According to the Complaint, Augustus promised Crump that he would receive stock options at the end of the contractor period. (Id. ¶ 25.)

On September 10, 2019, Crump signed an employment agreement. (Id. ¶ 39; Dkt. No. 5–3 ("Crump Agreement").) His title was Head of Product. (Id. ) Like the Pacelli Agreement, the Crump Agreement contained various promises and obligations. Crump was promised stock options and a signing bonus. (Dkt. No. 5–3.) He was prohibited (without Augustus's prior written consent) from being "directly or indirectly engaged or interested in any capacity in any other business, trade or occupation whatsoever so long as [he was] employed by" Augustus. (Id. ) But the Crump Agreement differed from the Pacelli Agreement in certain respects. For example, the Crump Agreement stated that Augustus "agree[d] and acknowledge[d]" that Crump would "from time to time, engage as an Advisor for other companies so long as th[o]se engagements [did] not compete or present a conflict of interest to Augustus." (Id. ) The Crump Agreement also stated that Crump's "primary office" would "be the Company's offices in New York, NY." (Id. ) Like the Pacelli Agreement, however, the Crump Agreement contained an arbitration provision. (Dkt. No. 5–3, Exhibit C.) Indeed, the provisions are almost identical. (Compare Dkt. No. 5–2, Exhibit C; Dkt. No. 5–3, Exhibit C (both referenced hereinafter as the "Arbitration Provision").¹

An important event happened between Pacelli's execution of the Pacelli Agreement (on July 13, 2019) and Crump's execution of the Crump Agreement (on September 20, 2019). On July 17, 2019, Pacelli and Crump incorporated an LLC called Quantum Intelligence ("QI") along with two other individuals. (Dkt. No. 24 ¶ 32.) The Complaint insists that "QI was not competitive with Augustus Intelligence"; while Augustus was "develop[ing] proprietary artificial intelligence product[s] to sell to customers," QI was "providing financial, operational, technical and data monetization advice to start-ups." (Id. ¶ 37.) On July 19, 2019 (six days after Pacelli signed the Pacelli Agreement), one of the individuals who co-founded QI—but not Pacelli or Crump—met with Augustus executives, proposed that Augustus could undertake QI's business model under a different name, and "disclosed that QI had been formed[.]" (Id. ¶ 38.) Augustus passed on the business opportunity. (Id. ) According to the Complaint, Pacelli and Crump both disclosed their QI involvement to Augustus—Crump in September 2019 and Pacelli in November 2019—and Augustus executives did not object. (Id. ¶¶ 42, 54, 57.)

As Plaintiffs tell this story, their employment relationships with Augustus were fraught from the start. Soon after they began working as full-time Augustus employees, they discovered that many of the representations that had been made to them were untrue. (Id. ¶ 43.) "In fact," the Complaint summarizes, "the company did not have [its stated] funding, did not have a product, and did not have substantial customers or revenues." (Id. ¶ 46.)

Crump and Pacelli assert that, throughout the fall of 2019, Augustus decided to "freeze [them] out" and "marginaliz[e]" them. (Id. ¶¶ 49, 53.) The motivation, Plaintiffs contend, was financial. As the end of the year approached, Augustus's debts loomed—including several substantial bonus and commission payments to Plaintiffs. (Id. ¶ 56–57.) Augustus's revenue stream stalled. (Id. ¶ 55.) Ultimately, according to the Complaint, Augustus concocted "baseless allegations about QI" as a pretext for terminating Pacelli and Crump, thereby avoiding the obligation to make bonus and commission payments. (Id. ¶ 57.)

On December 10, 2019, Augustus executives informed Pacelli and Crump that Augustus was terminating them for cause, based on their involvements with QI. (Id. ¶ 59.) According to the Complaint, over the following days, Augustus executives made various defamatory statements about Plaintiffs to employees, contractors, and third parties. (Id. ¶ 62.) Those statements included that Pacelli and Crump "were ‘criminals,’ had stolen money, customers, and intellectual property, could not be trusted, ... were ‘enemies,’ " and had "lied." (Id. ¶¶ 62, 65.) Augustus also allegedly insisted that Plaintiffs return their signing bonuses. (Id. ¶ 63.) When Crump demanded that Augustus pay him part of his due bonus, Augustus allegedly "produced a doctored employment agreement to Crump's counsel." (Id. ¶ 67.)

2. Procedural Background

On January 14, 2020, Augustus filed a lawsuit against Pacelli and Crump in the Supreme Court of New York, New York County. (Dkt. No. 11–1.) Augustus's complaint alleged breaches of the Crump and Pacelli Agreements, breaches of the duty of loyalty, misappropriation of proprietary information, and related claims. (Id. ) Pacelli and Crump removed that lawsuit to federal court. (Dkt. No. 24 ¶ 68.) The next day, counsel for Pacelli and Crump sent counsel for Augustus a three-page letter "request[ing]" that Augustus "dismiss [the] pending lawsuit in favor of an arbitration proceeding, as required by the binding arbitration provisions in Mr. Crump and Mr. Pacelli's employment agreements." (Dkt. No. 5–4.) The letter characterized the Arbitration Provision as "the paradigm of a broad [arbitration] clause" and insisted that it "encompasse[d] not only claims for breach of the employment agreements, but also any claims that ‘touch[ed] upon matters covered by the agreement.’ " (Id. (quoting Collins v. Aikman Products Co. v. Building Systems, Inc. , 58 F.3d 16, 20 (2d Cir. 1995) ; Mehler v. Terminix Intl. Co. L.P. , 205 F.3d 44, 50 (2d. Cir. 2000) ); see id. (further characterizing the Arbitration Provision as "indisputably broad")). "Each claim in [Augustus's] Complaint is within the scope of these arbitration agreements," the letter stated. (Id. ) The letter then summarized all eighteen of Augustus's claims and explained why each one should be compelled to arbitration. (Id. ) In closing, the letter asserted:

Pursuant to Rule 11(c)(2), we request that [Augustus] withdraw its Complaint within the next 21 days. Should [Augustus] fail to do so, Messrs. Crump and Pacelli reserve the right to seek sanctions, including all attorneys’ fees incurred in filing and prosecuting a motion to compel arbitration.

(Id. ) In compliance with that directive, Augustus filed a notice of voluntary dismissal without prejudice pursuant to Federal Rule of Civil Procedure 41(a)(1)(A)(i) on February 5, 2020 (the twenty-first day after the letter was sent). (Dkt. No. 5–5; Dkt. No. 11 ¶ 12.)² Simultaneously, Augustus...