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Spirit Locker, Inc. v. EVO Direct

March 19, 2010


The opinion of the court was delivered by: John Gleeson, United States 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.


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.*fn1 See 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,*fn2 ... 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.*fn3 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 dressingup 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).


A. Legal Standards on a Motion ...

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