Can courts dismiss contract disputes before discovery when contract language has multiple reasonable interpretations? Pearce v. Purple Innovation Explained

The Utah Court of Appeals recently reversed a district court’s dismissal of a breach of contract claim in Pearce v. Purple Innovation, providing important guidance on when contract interpretation disputes should survive Rule 12(b)(6) motions to dismiss.

Background and Facts

Terry and Tony Pearce, co-founders of Purple Innovation, entered into employment agreements when Purple was acquired in 2018. These agreements entitled them to lump-sum salary payments if they resigned following a “Change of Control,” defined as “any transaction or series of related transactions to which [Purple] is a party in which in excess of 50% of [Purple’s] voting power is transferred.” After the Pearces sold their shares through multiple transactions from 2019-2020 to increase Purple’s public float, they resigned and requested their lump-sum payments. Purple denied the requests, arguing it was not a “party” to the share sale transactions.

Key Legal Issues

The central issue was whether the contractual language was ambiguous enough to survive a motion to dismiss. The parties offered competing interpretations of key terms including “transaction,” “series of related transactions,” and “party.” Purple argued it was only a party to the specific transactions where shares were actually sold, while the Pearces contended Purple was a party to the informal agreement initiating the sales, the Exchange Agreement facilitating the transactions, and the underwriting agreements.

Court’s Analysis and Holding

The court of appeals applied the standard that contract interpretation becomes a question of fact when contractual language is reasonably capable of more than one interpretation. The court found both parties presented reasonable interpretations: Purple’s narrow view focusing on direct share sale transactions, and the Pearces’ broader interpretation encompassing the interconnected agreements and Purple’s orchestration of the entire transaction series. Since both interpretations were reasonable, the court held that parol evidence should be admitted to determine the parties’ actual intent.

Practice Implications

This decision reinforces that Rule 12(b)(6) dismissal is inappropriate when contract language supports multiple reasonable interpretations. Practitioners defending against such motions should emphasize alternative interpretations supported by the contract’s plain language and context. The ruling also highlights the importance of careful contract drafting—defining key terms like “party” and “related transactions” could have prevented this dispute. For appellate practitioners, the decision demonstrates that standard of review for contract interpretation questions is correctness, with no deference to the trial court’s determination of ambiguity.