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Infinity Capital LLC v. Francis David Corporation

United States District Court, N.D. Ohio

June 3, 2019

INFINITY CAPITAL LLC, et al., Plaintiffs,
FRANCIS DAVID CORPORATION, Defendant. EMS Merchant Choice Total Volume EMS Volume Cap Approx. Choice Volume Below EMS Cap Choice Total Net Profit Months Processing Choice Profit Margin EMS's Damages

          OPINION & ORDER


         This case involves a contract dispute between a credit card processor and its sales agent. Both parties make a number of claims, including contract breach claims.

         Defendant Francis David Corporation, d/b/a Electronic Merchant Services (“EMS”) is a credit card processor and Plaintiffs Infinity Capital LLC and John Paul Golino, d/b/a as Choice (“Choice”) acted as EMS's agent.

         As background, in 2010, Defendant hired Plaintiff to act as an exclusive sales agent for the Defendant's credit card processing services. The Plaintiff, who came to the agency relationship with past success selling credit card processing services, became one of Defendant's most successful sales agents.

         In this industry, processing companies pay their sales agents a percentage of the merchant processed transactions. Under widespread practice, processing companies pay these commissions, also known as residuals, for as long as the merchant continues credit processing with the processing company.

         Defendant mostly used non-exclusive sales agents. In 2015, Plaintiff sought, and Defendant agreed, to change their agency contract to allow Plaintiff to sell for other credit card processing providers. After this 2016 agency contract amendment, Plaintiff continued selling Defendant processing services but also sold other companies' processing services and itself provided some processing services.

         In 2018, Defendant terminated its agency relationship with Plaintiff. This case considers whether the parties' agreement required Defendant to continue paying the residual sales commission for merchants that Plaintiff brought to Defendant. Plaintiff argues it does; Defendant argues the opposite.

         The case also considers whether the 2016 amendment to the parties' agreement allowed Plaintiff to sell its own credit processing services to the customers it brought to Defendant, when the additional services did not reduce Defendant's customers' processing levels. In other words, did the contract allow Plaintiff to sell additional processing capacity to customers that Defendant declined to extend additional capacity to?

         For the foregoing reasons, the Court GRANTS IN PART and DENIES IN PART judgment for Plaintiffs on Count III (breach of contract). It DENIES judgment for Plaintiffs on Counts I (declaratory judgment), II (injunctive relief), IV (breach of good faith and fair dealing), V (accounting and restitution), VI (tortious interference), VII (tortious interference), VIII (tortious interference), and IX (deceptive trade practices). Further, the Court GRANTS judgment for Defendant on Count V (unjust enrichment). It GRANTS IN PART and DENIES IN PART judgment for Defendant on Count III (breach of contract). And it DENIES judgment for Defendant on Counts I (declaratory judgment), II (injunctive relief), and IV (accounting and restitution). Further, the Court GRANTS Plaintiffs' motion for attorney's fees and costs.

         I. Background

         In an increasingly cashless market, merchants depend on credit card processors for payment processing. Those credit card processors typically charge merchants for card processing based on transaction type and volume. In general, established retail merchants pay lower processing fees than internet merchants or merchants who receive more refund demands.

         Because of the nearly limitless number of merchants using credit card processing facilities, processors more often use independent sales agents to obtain merchant processing customers. To compensate the sales agents, processors typically agree to pay the agents a percentage of the merchant's processing volume for as long as the merchant customers use the processor's services-a “residual.”[1] Agents view residuals as a significant asset; a nearly perpetual revenue stream that can be sold or borrowed against.[2]Recognizing Plaintiff Choice's right to receive these residual payments, the parties agreement here provided “EMS is responsible for paying [Choice] the Residual Income attributable to Merchant Processing Services it provides to Merchants that are referred to EMS by [Choice].”

         In this case, Choice principally claims EMS wrongly stopped paying the owed residual stream from merchants Choice secured. For its part, EMS claims that once Choice brought the customer to EMS, Choice could not offer those customers any service, even services that EMS refused to provide. EMS says Choice wrongfully solicited its merchant customers.

         A. The Parties' Relationship & The Amended Agreement

         In 2010, Defendant EMS contracted with Plaintiff Choice to market EMS's services. Under the 2010 Agreement, a Choice sale of EMS services gave Choice a commission right that continued so long as the solicited customer continued EMS services: a residual.[3] The 2010 contract required Choice to exclusively market EMS credit card processing services.

         In 2015, Choice sought to change its business relation with EMS.[4] While still serving as EMS's agent, Choice proposed to also offer its own merchant credit card processing.[5] Further, Choice sought to offer “secondary sourcing” to EMS's merchants. Choice (and EMS) received higher servicing fees from internet merchants but, because these merchants were somewhat riskier, EMS limited the monthly volume t it would process for such merchants. Secondary sourcing would allow Choice to provide its own credit card processing for volume beyond the EMS limits.

         Because credit processing facilities are so crucial for merchants, and because credit processors usually enforce processing limits, merchants often used multiple processors.[6]Multiple processors avoid problems with processor-volume caps and avoid exposure to reliance upon a single processor.[7]

         Choice asked to amend the 2010 agreement. Choice wanted to itself process credit card payments and sought amendments to allow Choice to place customer business with other processors even while continuing customer placement with EMS. EMS already used a large number of non-exclusive sales agents and Choice's proposal for a non-exclusive relationship was not unusual.

         In February 2016 EMS and Choice entered a new agreement (the “Amended Agreement”).[8] With the Amended Agreement, Choice would no longer be an exclusive EMS agent and Choice would also provide its own processing. Under the Amended Agreement, EMS continued compensating Choice through residual payments as long as the customer continued using EMS services.

         Central to this case, the Amended Agreement changed a non-solicitation provision that had been included in the 2010 Agreement. Under the 2010 Agreement, Choice agreed not to

(i) to solicit or attempt to solicit, directly or indirectly, any EMS Merchant for any purpose other than training, support, or other purposes approved in writing by EMS;
(ii) to solicit or attempt to solicit, directly or indirectly, any EMS Merchant to terminate its relationship with EMS.

         The 2016 Agreement changed this and included a provision requiring that Choice not knowingly:

(i) Solicit any EMS Merchants for any purpose other than training and support for EMS Merchant Processing Services [or]
(ii) Solicit or Attempt to Solicit any EMS Merchants to reduce or discontinue their Merchant Processing Services relationship with EMS.[9]

         The Amended Agreement broadly defined “Solicit” as “to make contact with a Merchant or otherwise assist or enable a Merchant in the prohibited activity (even if the Merchant initiated the contact).”[10]

         The Amended Agreement made these changes. First, it required that any disqualifying conduct be knowing conduct. Second, the Amended Agreement stated that only solicitations that reduced or discontinued processing services became prohibited.

         Under the Amended Agreement EMS was generally required to continue making residual payments so long as the merchant customers that Choice brought to EMS continued using EMS services. However, the Amended Agreement included a penalty provision-the loss of the residual-if Choice violated the non-solicitation provision.[11]

         B. Termination & This Case

         As described, the Amended Agreement required EMS pay residual commissions for Choice-secured processing customers who continued using EMS services. Reflecting Choice's rights to the residual payment stream, the Amended Agreement gave Choice the right to sell this residual stream of commission payments. It also required EMS to protect Choice's residual rights if EMS sold its merchants.

         In June 2018, third-party Chesapeake Bank negotiated to purchase 65% of Choice's residual portfolio for approximately $3 million.[12]

         As part of its negotiations with Choice, Chesapeake Bank sought to change the Amended Agreement to better protect Chesapeake's continued right to the residual stream.[13] EMS rejected those changes and the Choice-Chesapeake Bank sale of Choice's residual rights collapsed on August 21, 2018.[14]

         The very next day, EMS accused Choice of breaching the Amended Agreement's non-solicitation provision by providing services to an EMS merchant.[15] Choice responded that it had only provided secondary sourcing to EMS merchants. Choice argued to EMS that the Amended Agreement allowed secondary sourcing for EMS customers so long as it did not reduce EMS's processing volume.[16] On September 14, 2018, EMS terminated the Amended Agreement and stopped making the residual payments.[17]

         Both parties separately sued.[18] Noting the obvious overlap, the Court consolidated the cases.[19]

         Choice, arguing that the Amended Agreement allowed secondary sourcing, brings claims for declaratory judgment, injunctive relief, breach of contract, breach of the implied duty of good faith and fair dealing, restitution, tortious interference, and deceptive trade practices.[20] EMS, arguing the opposite, brings claims for declaratory judgment, injunctive relief, breach of contract, restitution, and unjust enrichment.[21] After a February 2019, bench trial, [22] both sides submitted proposed findings of fact and conclusions of law.[23]

         II. Discussion

         Because this case is here under the Court's diversity jurisdiction, [24] and because the parties' contract says Ohio law governs the contract's interpretation, the Court applies Ohio law.[25]

         The Court takes the parties' claims in turn, determining whether the party with the respective burden proved their claim by a preponderance of the evidence.

         A. The Court Partially Grants and Partially Denies EMS's Breach of Contract Claim

         EMS claims that Choice breached the Amended Agreement by “soliciting” its merchants. Under Ohio law, to win this claim, EMS must show: (i) the existence of a contract, (ii) EMS's qualifying performance, (iii) Choice's breach, and (iv) damages caused by Choice's breach.[26] The parties dispute only whether Choice's solicitations broke the Amended Agreement and harmed EMS.

         1. The Amended Agreement Only Prohibited Business-Reducing Solicitations

         When interpreting a contract, a court's primary responsibility is to give effect to the parties' intent.[27] Here, the Amended Agreement's unclear and likely inconsistent provisions hinders that contract construction effort.

         Again, the Amended Agreement's relevant provisions say that Choice cannot:

(i) “Solicit any EMS Merchants for any purpose other than training and support for EMS Merchant Processing Services [or]
(ii) Solicit or Attempt to Solicit any EMS Merchants to reduce or discontinue their Merchant Processing Services relationship with EMS.”[28]

         And the Amended Agreement defines “Solicit” as “to make contact with a Merchant or otherwise assist or enable a Merchant in the prohibited activity (even if the Merchant initiated the contact).”[29] Subsection (i) appeared in both the 2010 Agreement and the 2016 Amended Agreement. Whereas Subsection (ii) was changed in the later 2016 Amended Agreement. As amended, Subsection (ii) was agreed to years after Subsection (i).

         Confusion stems from the overlap in the two clauses.[30] Subsection (i) arguably prohibits any merchant contact other than training or support. In contrast, Subsection (ii) only forbids customer solicitations seeking to reduce customer purchases from EMS or seeking to terminate the customer's EMS processing. EMS favors the former interpretation, Choice the latter.

         Under Ohio law, a court should attempt to construe a contract to avoid surplusage.[31] Yet, if EMS's argument is accepted, Subsection (i) renders Subsection (ii) completely unnecessary. Subsection (i) would forbid any Choice sales to existing customers while Subsection (ii) allows such sales unless they reduce EMS sales. Given this textual ambiguity, the Court turns to other evidence of the parties' intent.[32]

         The Amended Agreement's drafting history is mixed. In seeking a change to the 2010 Agreement, Choice aimed to assist its customers with alternative processing where EMS caps or policies limited EMS's willingness to cover those customers and end its exclusive EMS agency.

         In the 2016 agreement negotiations, Choice sought explicit language allowing secondary sourcing;[33] EMS did not agree to this inclusion.[34] The bargaining history does not reveal why Choice's proposal was not included. But the Amended Agreement's integration clause makes the drafting history less relevant.[35]

         The parties' course of dealing after the 2016 Amended Agreement execution speaks more clearly about the parties' intent.[36] In March 2016, Choice asked EMS to confirm that it could offer secondary sourcing.[37] After two weeks passed, EMS responded, stating that:

[EMS] think it's clear . . . [Y]ou agreed that you will not (and you will require that your Representatives will not) Solicit or attempt to Solicit any EMS Merchants to reduce or discontinue their Merchant Processing Services relationship with EMS . . . . If you or one of your reps spoke with an EMS merchant about, or assisted/enabled that merchant to reduce its EMS processing volume, or to stop processing with EMS we would have an issue.[38]

         When Choice sought further clarification, EMS responded that Choice could not “poach the customer” or “otherwise dilute the value of [the] customer relationship, ”[39] again focusing only on Subsection (ii). EMS did not respond when asked for a third clarification.

         In April 2016, on two separate occasions, Choice told EMS that it was considering providing secondary sourcing to three specific EMS merchants. EMS never responded. EMS never told Choice that secondary sourcing would violate the Amended Agreement. Later that year, Choice told EMS that it wanted to provide secondary sourcing for a specific EMS merchant.[40] EMS responded that, while the merchant still had room under the volume-cap, “[i]f he insists on diversifying go ahead.”[41]

         Surrounding contract language also indicates that the parties intended to forbid only business-reducing solicitation.[42] At the time of the 2016 Amended Agreement negotiations, EMS knew that Choice used third-party sales agents. Often, these third-party sales agents solicited for Choice but also solicited sales for other credit processors.

         The Amended Agreement required Choice to prohibit its sales agents from soliciting EMS merchants “to reduce or discontinue their Merchant Processing Services relationship with EMS.”[43] This language tracks Subsection (ii) exactly and omits Subsection (i) entirely. If the parties had intended to stop all Choice contact with EMS customers, it makes little sense that EMS would only prohibit Choice's agents from business-reducing-contact. Especially considering that Choice conducted most of its business through agents.

         Contractual ambiguity is construed strictly against the drafter.[44] Not only is the entire Amended Agreement on “copyrighted” EMS letterhead, [45] EMS drafted the non-solicitation provision.

         Equity too demands extending EMS no favors. Choice's repeated attempts at clarification were met with responses ranging from the non-existent, to the unhelpful, to the outright misleading. Contracting parties should work together, not play “gotcha.”

         As described earlier, Subsection (i) was drafted with the 2010 Agreement and at a time when Choice acted as an exclusive agent. Subsection (ii) came with the 2016 contract negotiations and presumptively better reflects the parties' intent after the parties agreed that Choice would no longer be an exclusive agent.

         The Court concludes that Subsection (ii)-not Subsection (i)-reflects the true intention of the parties.

         Separately, while the Court need not resolve it here, Subsection (i) l likely imposes an unreasonable trade restriction. In considering employee trade restrictions, Ohio courts consider, inter alia: (i) whether the employee was the sole customer contract, (ii) whether the employee possesses confidential information or trade secrets, (iii) whether the covenant seeks to stifle the employee's inherent skill and experience, and (iv) whether the employee's skills were developed during the employment.[46]

         Here, EMS did not provide Choice or its principle John Paul Golino with significant confidential information or trade secrets, [47] nor did EMS train Choice or Golino, who had already spent a year in the industry with another company.[48] Nor, did EMS train Choice's sub-agents, through whom Choice did most of its marketing. Choice was not the sole merchant point-of-contact, [49] nor did EMS apparently have much to do with Choice's marketing.[50]

         These efforts to evade the gauntlet of competition is divorced from any legitimate business interest and anathema to the entire American experiment.[51] It was, after all, the protest of competition ...

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