Prepaid Ventures, Ltd. v. Compton
| Decision Date | 21 December 2022 |
| Docket Number | 18-CV-2102 (DLI) |
| Parties | PREPAID VENTURES, LTD., et al., Plaintiffs, v. PAUL COMPTON, et al., Defendants. |
| Court | U.S. District Court — Eastern District of New York |
REPORT AND RECOMMENDATION
On April 9, 2018, plaintiffs PPV Merchant Solutions, LLC (d/b/a CapX Payments) (“CapX”), PPV Holdings, LLC (“PPV Holdings”), and Prepaid Ventures, Ltd. (“Prepaid Ventures”) (collectively “plaintiffs”) commenced this action against defendants Christopher Benson, Paul Compton, Pablo Garcia and ProfitSTAT, LLC (“ProfitSTAT”) (collectively “defendants”), alleging claims for breach of contract (First and Second Counts), breach of fiduciary duty (Third Count), fraudulent concealment by fiduciary (Fourth Count), constructive fraud in contract (Fifth Count) contract performance interfered with by outsider (Sixth Count), intentional interference with prospective economic advantage (Seventh Count), promissory estoppel (Eighth Count), unjust enrichment (Ninth Count), unfair competition (Tenth Count), and contributory trademark infringement (Thirteenth Count).[1]Currently pending before this Court, on a referral from the Honorable Dora L. Irizarry (the District Judge to whom this case is assigned), is plaintiffs' motion for default judgment. See Order (July 29, 2022). For the reasons that follow, this Court respectfully recommends that plaintiffs' motion be granted in part and denied in part as to liability; that plaintiffs' request for lost profits be denied as unduly speculative; and that the request of CapX for damages in the amounts paid to defendants be denied without prejudice, with leave to submit documentation supporting such payments, along with a supplemental declaration quantifying prejudgment interest on the same.
As its principal business, plaintiff Prepaid Ventures offers several brands of prepaid debit cards that various distribution channels and retail merchant locations market to customers so as to generate income from fees on transactions occurring on the card accounts. Compl. ¶ 15. In late 2016, Prepaid Ventures and PPV Holdings commenced a new line of business in merchant processing, which they operate through a wholly owned subsidiary, CapX. See id. ¶ 16. In furtherance of this new line of business, CapX entered into a Business Services Agreement with defendant ProfitSTAT, on December 10, 2016 (the “Business Services Agreement”). See id. ¶ 17. Compton and Garcia, who are alleged to be owners of ProfitSTAT, see id. ¶ 7, and are specifically identified as “Principals” of ProfitSTAT in the Business Services Agreement, see id. ¶ 18, made certain representations to induce CapX to enter into the Business Services Agreement, including the following: that they had many large independent sales organizations (“ISOs”) and merchant relationships that could quickly be brought in to build the business; and that “they had access” to “discount for cash” technology that could be used to apply a discount at checkout for customers paying cash, see id. ¶ 21. Compton and Garcia were expected to provide CapX with “discount for cash” technology and to build a sales team to sell a wide range of products and services and to attract merchants for CapX services. See id. ¶ 23.
The Business Services Agreement provided that ProfitSTAT, and its named principals Compton and Garcia:
will not, directly or indirectly or through an affiliate: (a) provide any services similar to [defined] Services to anyone other than [CapX] without [CapX's] prior written consent, including but not limited to placing or seeking to place, or permitting or causing any third party to place or seek to place, prospective merchants with anyone other than [CapX], unless [CapX] elects, in its sole discretion, not to pursue a relationship with a prospective merchant introduced to [CapX] by [ProfitSTAT].
Id. ¶ 26; see Business Services Agreement ¶ 5, DE #87-8 at ECF p. 3. In addition, the Business Services Agreement provided that during the term of that agreement, and for a period of 18 months thereafter, ProfitSTAT, Compton and Garcia would not:
solicit the business of any client or customer of [CapX], or of any person or entity known by [ProfitSTAT, Compton or Garcia] to have been contacted by [CapX] as a prospective client or customer of [CapX] within the twelve (12) month period immediately prior to the termination of this Agreement, either for itself or on behalf of a third party that competes with [CapX][.]
Compl. ¶ 27; see Business Services Agreement ¶ 9, DE #87-8 at ECF p. 5. In exchange for the services to be provided pursuant to the Business Services Agreement, CapX agreed to pay ProfitSTAT a monthly fee and to reimburse the expenses of ProfitSTAT and its principals. See Compl. ¶ 29; see Business Services Agreement ¶ 2, DE #87-8 at ECF p. 2.
On February 20, 2017, CapX entered into a Consulting Agreement with defendant Christopher Benson, who was introduced to CapX by Compton and Garcia. See Compl. ¶¶ 31-32. The Consulting Agreement, whereby Benson became an ISO and sales recruiter for CapX, provided that CapX would pay Benson monthly in exchange for bringing merchants and ISOs to CapX and training new ISOs brought to CapX. See id. ¶¶ 32-33. The Consulting Agreement also provided that Benson would not work for a competing business without prior notice to and approval by CapX. See id. ¶ 34; see also Consulting Agreement ¶ 12, DE #87-9 at ECF p. 4.
Plaintiffs allege that in violation of the Business Services Agreement and Consulting Agreement (collectively, the “Agreements”), Compton, Garcia and Benson worked independently with merchants that were being referred to CapX, as well as with others who were not referred to CapX, without CapX's knowledge or consent. See Compl. ¶¶ 37, 79. Plaintiffs additionally allege that Compton, Garcia and Benson improperly “engag[ed] in efforts to divert [merchants] and their business away from CapX for their own benefit.” Id. ¶ 38. For example, before the parties entered into the Business Services Agreement, Compton and Garcia told CapX that they had an “in” with high-end potential clients, such as the Dallas Cowboys, Party City, Hard Rock International, Arnold Palmer Golf, Cash Money Records and Wynn Resorts. See id. ¶ 40. Despite CapX's expenditure of significant time and resources supporting efforts to enter into agreements with those potential clients, CapX “never entered into an agreement” with any of them. See id. ¶¶ 41-42. Regarding the Dallas Cowboys, Compton and Garcia were separately pursuing opportunities with them, to the exclusion of CapX, to provide the exact services previously offered to the Dallas Cowboys by CapX. See id. ¶ 43. Indeed, Compton and Garcia created an entity called StarCap to compete directly with CapX. See id. ¶ 44. In addition, while Compton and Garcia introduced CapX to Sigue Corporation as a potential client for prepaid cards, the two entities “never reached an agreement”; instead, Compton and Garcia brought Sigue to another provider. See id. ¶¶ 45-47.
Compton, Garcia and Benson introduced CapX to other ISOs, including SecuraBull, which recruits ISOs and brings in merchants. See id. ¶¶ 48-49. SecuraBull entered into an ISO agreement with CapX. See id. ¶ 48. In violation of the Business Services Agreement, Compton and Garcia, on behalf of ProfitSTAT, entered into a joint venture with SecuraBull, under the name SecuraProfit, LLC. See id. ¶ 54.
On April 20, 2017, CapX entered into an ISO agreement with MiCamp Solutions, LLC (d/b/a MiCamp Merchant Services) (“MiCamp”) that provided for CapX to be paid residuals for merchants placed with MiCamp. See id. ¶ 56; see generally id. ¶ 83. However, Compton, Garcia and Benson “failed to push the few ISO's who have boarded merchants through CapX to pay for merchant processing equipment provided by MiCamp.” Id. ¶ 57. As a result, MiCamp is withholding residuals from CapX, which paid for the costs of the terminals. See id. ¶ 58.
CapX named its anticipated “discount for cash” product “WAVit” and filed a trademark registration on May 26, 2017. See id. ¶ 30. But Compton and Garcia never possessed the “discount for cash” technology that they touted to CapX to induce it to enter into the Business Services Agreement, nor did they possess even the intellectual property required to develop “discount for cash” technology. Id. ¶¶ 81-82. Instead, after entering into the Business Services Agreement, Compton and Garcia “sought out” MiCamp “to create the technology they had promised CapX.” See id. ¶ 83. MiCamp ultimately developed a “clover app”[2] for the “discount for cash” technology, and MiCamp has been holding out the “WAVit” mark as its own, in violation of CapX's trademark. See id. ¶ 86.
Compton and Garcia also introduced CapX to SplitIT, an Israel-based company, which had technology that would enable customers to pay a portion of the balance due during a purchase and the remaining amount over time. See id. ¶ 59. CapX entered into an agreement with SplitIT North America. See id. ¶ 60. Compton did not disclose to CapX that he is the CEO of SplitIT North America, which had been formed days earlier, nor did Garcia and Benson disclose that they were employed by SplitIT North America. See id. ¶¶ 61-63.
In violation of their Agreements with CapX, defendants Compton, Garcia and Benson have been sending CapX customers, prospective customers and sales representatives to Bryte Payments, a competitor of CapX. See id. ¶ 74. For example, Compton, Garcia and Benson “worked . . . to move” Hotel V, a merchant of CapX, to Bryte Payments. See id. ¶ 75.
In addition, Compton, Garcia and Benson falsified expenses and reimbursement requests and used CapX funds for personal and/or alternate purposes. See id. ¶ 77....
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