SPIRIT LOCKER, INC. v. EVO DIRECT, LLC, 09-CV-1582 (JG).

• Citation: 696 F. Supp.2d 296
• Decision Date: 19 March 2010
• Docket Number: No. 09-CV-1582 (JG).,09-CV-1582 (JG).
• Parties: SPIRIT LOCKER, INC., Plaintiff, v. EVO DIRECT, LLC, d/b/a Evo Merchant Services, Inc., Defendant.
• Court: U.S. District Court — Eastern District of New York

696 F. Supp.2d 296

SPIRIT LOCKER, INC., Plaintiff, v. EVO DIRECT, LLC, d/b/a Evo Merchant Services, Inc., Defendant.

No. 09-CV-1582 (JG).

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

March 19, 2010.

Carella, Byrne, Bain, Gilfillan, Cecchi, Stewart & Olstein, P.C. by Lindsey H. Taylor, Roseland, NJ, Seeger Weiss LLP by Christopher Seeger, Stephen A. Weiss, New York, NY, Freed & Weiss LLP by Eric D. Freed, Jeffrey A. Leon, Eric C. Brunick, Chicago, IL, for Plaintiff.

Pepper Hamilton LLP by Kenneth J. King, Angelo Stio, Michael J. Canavan, New York, NY, for Defendant.

MEMORANDUM AND ORDER

JOHN GLEESON, District Judge:

Spirit Locker, Inc. brings this diversity action against EVO Direct, LLC ("EVO"), alleging that an early termination fee in the contract between the parties is an unlawful penalty. The complaint asserts causes of action for deceptive practices and for unjust enrichment. EVO now moves to dismiss each of these claims. For the reasons explained below, I grant EVO's motion to dismiss the deceptive practices count, but deny the motion to dismiss the unjust enrichment claim.

BACKGROUND

A. Factual Background

EVO, a Delaware LLC with its principal place of business in the state of New York, provides electronic payment processing services. Retailers pay EVO to process their customers' credit card payments. On March 22, 2008, Spirit Locker, an Alabama liquor store, engaged EVO's services. The parties entered into a contract in which EVO agreed to process all of Spirit Locker's Visa, MasterCard and American Express credit and debit card payments for three years. See Compl. Ex. A. The parties' contract was embodied in a Merchant Services Agreement. In return for credit card processing, Spirit Locker agreed to pay a monthly sum that differed every month, depending on the volume and type of transactions processed by EVO for Spirit Locker. Though the Merchant Services Agreement is a standard form provided by EVO, the major price terms, including EVO's percentage cut, were initially left blank and written into the contract at the time of the agreement.¹See id.

EVO's early termination fee ("ETF")— the subject of this action—is first mentioned on the second page of the Agreement: "I/We understand and agree to the following ... (9) An early closure fee of $395.00 will be paid to EVO if the Merchant Processing Agreement is not terminated in accordance with the Terms and Conditions." Compl. Ex. A. In addition, the parties agreed to EVO's standard-form Terms and Conditions, which list the contract's ancillary provisions in three dense pages of fine print. There, deep in a paragraph headed "Action Upon Termination," the Agreement again mentions the ETF, stating as follows:

Early Termination. If you terminate this agreement before the end of the Initial Term, or before the end of any successive Renewal Term, in violation of the procedure set forth in Section 13(B) above,² ... you will immediately pay ... as liquidated damages, a closure fee of $395.00. You agree that this fee is not a penalty, but rather is reasonable in light of the financial harm caused by the early termination of this agreement.

Id. Ex. A, § 13(C).

The Merchant Processing Agreement selects New York law to govern the contract, and requires Spirit Locker to bring claims arising out of or relating to the agreement in a court of competent jurisdiction in Nassau County, New York. Compl. Ex. A, § 16(B). The Agreement also provides that if one of its provisions is found to be illegal, the invalidity of that term does not affect the rest of the Agreement. Id. § 16(J).

Just three months in to the three-year term, Spirit Locker cancelled the agreement, citing "shoddy service and improper charges." Compl. ¶ 24. As a result, EVO imposed the $395 ETF, which was automatically debited from Spirit Locker's account on file with EVO. Id. Ex. B.

B. Procedural History

On April 16, 2009, Spirit Locker filed a complaint against EVO in this Court, alleging that the ETF is an unlawful penalty and that EVO is guilty of deceptive practices.³ The complaint alleges that EVO charges its customers the $395 ETF whether they cancel service fifteen days into the contract period or one day before the contract is scheduled to expire. Compl. ¶ 16. Moreover, according to Spirit Locker, EVO imposes its flat-rate $395 charge regardless of the reason for cancellation, even if the cancellation is the result of non-existent, poor, or otherwise inadequate service. Id. ¶ 17.

Spirit Locker alleges that the ETF is not a reasonable measure of EVO's anticipated or actual loss from an early termination, and that the ETF is not intended to compensate EVO for damage, but rather is designed to serve as a disincentive for customers to switch to competing services in the event that they become dissatisfied with EVO's services. Compl. ¶¶ 20-21. The real purpose of EVO's ETF, Spirit Locker claims, is to stifle competition in the electronic payment processing industry by preventing merchants from shopping around for the best service. Id. ¶ 23. The complaint asserts that the ETF provision has permitted EVO to collect revenues and generate enormous profits, not only by receiving the ETFs, but also by tethering customers to EVO for the duration of the original contract period and beyond. Id. Spirit Locker alleges that EVO presents its standard Merchant Processing Agreement to prospective customers on a "take it or leave it" basis, id. ¶ 3, and contends that the ETF is deceptive because EVO describes it inaccurately as a liquidated damages clause, falsely dressing up an unlawful charge as an unquestionable fee. Id. ¶ 42.

The complaint purports to state a class action; the proposed class encompasses "all customers/subscribers to EVO's electronic payment processing applications, pursuant to contracts that include an early termination fee provision or who EVO has charged an ETF." Compl. ¶ 2. The complaint also proposes a sub-class of all subscribers to whom EVO charged an ETF (the "charged class"). Id. ¶ 29. Spirit Locker asserts that EVO is liable on three counts. In Count One, Spirit Locker claims that the agreement's ETF scheme violates New York General Business Law § 349, and demands damages on behalf of Spirit Locker and the charged class. Compl. ¶¶ 37-47. Count Two purports to state a claim for unjust enrichment, and seeks restitution of ETFs paid by Spirit Locker and by other members of the charged class. Id. ¶¶ 48-53. In Count Three, Spirit Locker seeks, on behalf of the entire class, a declaration that the ETF is an unenforceable penalty. Id. ¶¶ 54-61.

EVO now moves to dismiss Count One (the statutory consumer fraud claim) and Count Two (the unjust enrichment claim) under Federal Rule of Civil Procedure 12(b)(6). The motion does not challenge Count Three (the unlawful penalty/declaratory judgment claim).

DISCUSSION

A. Legal Standards on a Motion to Dismiss

Motions to dismiss pursuant to Rule 12(b)(6) test the legal, not the factual, sufficiency of a complaint. See, e.g., Sims v. Artuz, 230 F.3d 14, 20 (2d Cir.2000) ("At the Rule 12(b)(6) stage, `the issue is not whether a plaintiff is likely to prevail ultimately, but whether the claimant is entitled to offer evidence to support the claims.'") (quoting Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir.1998)). Accordingly, I must accept the factual allegations in Spirit Locker's complaint as true, see Erickson v. Pardus, 551 U.S. 89, 94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) (per curiam), and draw all reasonable inferences in favor of the plaintiff. See Bolt Elec., Inc. v. City of New York, 53 F.3d 465, 469 (2d Cir.1995). However, "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions." Ashcroft v. Iqbal, ___ U.S. ___, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009).

In Iqbal, the Supreme Court offered district courts additional guidance regarding motions to dismiss under Rule 12(b)(6). Citing its earlier decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), the Court explained:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.

129 S.Ct. at 1949 (internal citations and quotation marks omitted).

In deciding EVO's motion to dismiss, I may consider documents attached to the complaint as exhibits, or documents upon whose terms the complaint relies. Chambers v. Time Warner, Inc., 282 F.3d 147, 152-53 (2d Cir.2002).

B. The Challenged Counts

1. The Statutory Consumer Fraud Claim (Count One)

Section 349 of the New York General Business Law declares unlawful "deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any service" in the State of New York. N.Y. Gen. Bus. Law § 349(a). As originally enacted in 1970, the provision gave the New York Attorney General exclusive enforcement power. See id. § 349(b). In 1980, however, the New York legislature amended the law to grant a private right of action to "any person who has been injured by reason of any violation" of § 349(a)'s prohibition on deceptive practices. Id. § 349(h).

A § 349 plaintiff is entitled to her actual damages, or to $50, whichever amount is greater. Id. Though proof of scienter is not necessary to establish a violation, see Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank N.A., 85 N.Y.2d 20, 25, 623 N.Y.S.2d 529, 647 N.E.2d 741 (1995), a court may increase a damages award where the defendant has willfully or knowingly violated the section. In those circumstances, the court may award up to three times the plaintiff's actual damages, so long as the total damages do not exceed $1000. N.Y. Gen. Bus. Law § 349...