Process Am., Inc. v. Cynergy Holdings, LLC

• Decision Date: 05 October 2016
• Docket Number: August Term, 2015,Docket No. 15-2081-cv
• Citation: 839 F.3d 125
• Parties: Process America, Inc., Plaintiff–Counter–Defendant–Appellant, v. Cynergy Holdings, LLC, Defendant–Counter–Claimant–Appellee.
• Court: U.S. Court of Appeals — Second Circuit

839 F.3d 125

Process America, Inc., Plaintiff–Counter–Defendant–Appellant,

v.Cynergy Holdings, LLC, Defendant–Counter–Claimant–Appellee.^*

Docket No. 15-2081-cv

August Term, 2015

United States Court of Appeals, Second Circuit.

Argued: June 6, 2016

Decided: October 5, 2016

Mitchell C. Shapiro , Carter Ledyard & Milburn LLP, New York, New York, for

Plaintiff–Counter–Defendant–Appellant Process America, Inc.

Michael C. Marsh (Jennifer C. Glasser, Katherine E. Giddings, and Diane G. DeWolf, on the brief), Akerman LLP, Miami, Florida and Tallahassee, Florida, for Defendant–Counter–Claimant–Appellee Cynergy Holdings, LLC.

Before: Sack and Lynch, Circuit Judges, and Murtha, District Judge.^**

Gerard E. Lynch, Circuit Judge:

This case arises from the termination of a commercial relationship between Plaintiff–Counter–Defendant–Appellant Process America, Inc. (“Process America”) and Defendant–Counter–Claimant–Appellee Cynergy Holdings, LLC (“Cynergy”). Process America is an Independent Sales Organization (“ISO”) that, prior to the termination of their relationship, solicited and referred merchants to Cynergy, a bankcard processor. Following the termination of the relationship between Process America and Cynergy, Process America sued Cynergy for breach of contract. Cynergy counterclaimed, contending, among other things, that Process America improperly solicited Cynergy's clients. Following a series of interim decisions and a bench trial limited to the issue of damages on Cynergy's counterclaims, the district court held that although both parties had breached the contract, Cynergy's liability was capped by the contract. The district court awarded Cynergy a net total of $8,521,182 in damages. Process America appeals.

BACKGROUND

I. Merchant Services Generally

The parties are involved in the “merchant services” industry, which provides credit and debit card transaction processing services to merchants. The basic mechanics of the process by which bankcard transactions are conducted may be summarized as follows:

[T]he customer presents a credit card to pay for goods or services to the merchant; the merchant relays the transaction information to the acquiring bank; the acquiring bank processes the information and relays it to the network [e.g., Visa or MasterCard]; the network relays the information to the issuing bank; if the issuing bank approves the transaction, that approval is relayed to the acquiring bank, which then relays it to the merchant. If the transaction is approved, the merchant receives the purchase price minus two fees: the “interchange fee” that the issuing bank charged the acquiring bank and the “merchant discount fee” that the acquiring bank charged the merchant.

In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig ., 827 F.3d 223, 228 (2d Cir. 2016).

Acquiring banks—which are also known as “sponsor banks”—are financial institutions that are members of the Visa or MasterCard network. Generally, the acquiring banks delegate merchant solicitation, processing, underwriting, and customer service obligations to “Processors,” who manage card transaction processing, ISO recruitment, merchant customer services, liability for merchant losses, and fraud monitoring, and to ISOs, who solicit merchants to offer them the services of an acquiring bank and access to a Processor. An ISO's primary role is to solicit new merchants and then provide first-line customer support. ISOs are paid a portion of the discount fee paid by merchants to the acquiring bank.

II. The Relationship between Cynergy and Process America

Cynergy provides back-end processing services for credit and debit card transactions through its relationship with its acquiring bank, Harris Bank N.A./Moneris (“Moneris”). After receiving funds from the issuing bank, Moneris receives, and holds, merchant funds for one to three days before remitting any portion to the merchant. Cynergy calculates the money due to merchants through its proprietary platform called VIMAS.

In 2004, Process America signed a standard ISO agreement (the “ISO Agreement”) with Cynergy's predecessor, Cynergy Data (hereinafter “Old Cynergy”).¹ Pursuant to the ISO Agreement, Process America sold Cynergy's bankcard processing services to merchants and received as compensation a portion of the discount fee charged to merchants, known as “residuals.”

As relevant to this appeal, the ISO Agreement states that Cynergy “owns” the merchant agreements solicited by Process America, but that, upon satisfaction of certain benchmarks, ownership of those agreements will “vest” in Process America. J.A. 202. That contract provision also describes the mechanism by which Process America may transfer the merchant accounts to a third-party processor. Additionally, the contract contains a non-solicitation clause that bars Process America from soliciting any merchant with whom Cynergy has a contract for a period of five years following the termination of the ISO Agreement and also contains a damages cap limiting Cynergy's liability. The contract further provides that Cynergy must continue to make residual payments to Process America unless Cynergy terminated the contract “due to a material breach” by Process America. J.A. 210.

The ISO Agreement also incorporates by reference the rules created and enforced by the credit card networks, Visa and MasterCard (the “Rules”). The Rules prohibit ISOs like Process America from directly accessing or holding merchant funds, which must instead be held by acquiring banks.

Under the terms of the ISO Agreement, Process America is fully liable for merchant chargebacks, which are consumer reversals of transactions, typically due to fraud. In order to reduce chargeback losses, Process America developed the “Chargeback Reduction Incentive Program,” known as “CRIP.” Process America characterizes CRIP as a rewards program funded by Process America's own residuals wherein merchants who followed a list of “best practices” were rebated a portion of their fees. Cynergy, by contrast, characterizes CRIP as a merchant reserve in which, in clear contravention of the Rules, Process America retained funds owned by merchants to offset the cost of chargebacks.

III. Termination of the Relationship

In January 2011, Moneris sent Cynergy a letter stating, in relevant part, that:

[O]ne of Cynergy's ISOs, Process America, appears to be retaining funds from Merchants as security against merchant liabilities. Because this would clearly fall within the definition of Merchant Reserves in Cynergy's attestations and make those attestations inaccurate, we wanted to formally register our concerns regarding Process America's practices and demand that the following actions be taken immediately ...

1. Terminate Process America as an ISO....

Until these steps have been taken, Moneris considers Cynergy to be in breach of its obligations....

J.A. 1350. In response, Cynergy informed Moneris that it was taking steps to identify merchant funds held by Process America, but would “not immediately terminate Process America's processing agreement,” and would instead not renew the agreement upon its expiration in May 2011. J.A. 1355. Moneris responded that, “[i]f the funds in this reserve have been returned in full as you indicate below, then it would appear that that particular breach has now been cured,” J.A. 1352, but also requested a full audit of Process America's accounts.

Shortly after receiving the letter from Moneris, Cynergy ceased making residual payments to Process America. Approximately one month later, Cynergy sent Process America a letter stating in part:

We hereby notify you that we find you in material breach of the [ISO] Agreement. Among other provisions, we find that you have breached your representations and warranties under Sections 4.1 F (No Violation) and 4.1 G (Compliance). These breaches stem from your withholding and maintaining merchant funds in reserve in violation of the Rules. Naming a reserve an insurance program merely obfuscates the facts but does not lessen the violation or the breach. Further, we find that you are in material default pursuant to Sections 6.3 C (False Representation), 6.3 D (Breach) and 6.3 E (Goodwill) also in relation to your withholding and maintaining merchant funds as a reserve. As a result of the Section 6.3 C and 6.3 E events, we hereby terminate the Agreement immediately and intend to fully enforce ramifications upon termination.

Despite the Events of Default that we believe to be irrefutable, pursuant to Section 6.2 B of the Agreement by providing notice ninety days prior to the renewal date, either party may choose not to renew the Agreement and as such we hereby provide notice of non-renewal. To be clear, this notice is not relief from your Events of Default but clear notice that we shall ensure your contract will not continue.

This letter is provided in accordance with the notice provisions of Section 7.2 of the Agreement.

J.A. 2619–20. Process America then contracted with approximately 25% of the merchants in its portfolio of merchant agreements (the “Portfolio”) on behalf of another processor and subsequently sold that portion of the Portfolio for approximately $2 million. In attempting to get merchants to change processors, Process America referenced Old Cynergy's earlier bankruptcy and, in some instances, suggested that funds held in the merchant's account could be at risk. Following the period in which Process America sought to induce merchants to switch processors, a number of merchants canceled their contracts with Cynergy. In total, the rate of post-termination attrition was 79%. The attrition rate for the six-month period preceding termination was 16%.

IV. Procedural History

Process America sued Cynergy, alleging breach of contract and other causes of action. Cynergy counterclaimed, alleging, inter alia , that Process America had breached the contract by soliciting merchants and selling the Portfolio and, in the process of soliciting merchants, had also defamed...