Process America, Inc. v. Cynergy Holdings, LLC
839 F.3d 125
| 2d Cir. | 2016Background
- Process America (an ISO) had an ISO Agreement with Old Cynergy/Cynergy to solicit merchants and receive residuals; the contract contained an Ownership Trigger mechanism, a specific transfer procedure (Section 2.6.B), a five‑year non‑solicitation clause (Section 3.8), a survival clause, and a damages cap (§4.6).
- Process America met the performance benchmarks (Ownership Trigger Event) but did not follow Section 2.6.B’s procedures (notice/right of first refusal, exit fee, and execution of assignments) before soliciting and moving ~25% of the merchant Portfolio to another processor post‑termination.
- Cynergy (via its processor Moneris) learned Process America ran a program called CRIP; Moneris warned Cynergy that CRIP looked like a prohibited merchant reserve and demanded action. Cynergy then stopped paying residuals and gave notice of nonrenewal/termination citing CRIP.
- Process America solicited merchants after termination, allegedly defamed Cynergy to induce transfers; post‑termination attrition rose to 79% vs. 16% pre‑termination. District court found Process America breached the non‑solicit clause, Cynergy breached by withholding residuals (but was limited by the contract cap), and awarded Cynergy net damages; Process America appealed.
- On appeal the Second Circuit affirmed liability rulings (solicitation breached the Agreement; damages cap applied because Cynergy’s withholding was not shown to be willful) but vacated the damages judgment and remanded because the district court failed to offset Cynergy’s damages by residuals Cynergy had improperly withheld.
Issues
| Issue | Process America (Plaintiff) Argument | Cynergy (Defendant) Argument | Held |
|---|---|---|---|
| Whether Process America’s post‑trigger solicitation and sale of merchant accounts violated the ISO Agreement | Ownership vested on the Ownership Trigger Date when benchmarks were met, so Process America had rights to transfer/sell without complying with §2.6.B | The Agreement allows transfers only via §2.6.B (notice, ROFR, exit fee, Moneris/Cynergy approval); solicitation before complying was barred by the non‑solicit clause | Solicitation and sale without complying with §2.6.B breached the Agreement; solicitation violated the §3.8 non‑solicitation provision |
| Whether Cynergy’s withholding of residuals excused Process America from the non‑solicit obligation | Cynergy’s failure to pay residuals was a material breach that excused Process America’s post‑termination solicitation | Withholding was an asserted contractual remedy; Cynergy’s breach was not so material as to excuse Process America’s continuing prohibitions | Withholding residuals did not excuse Process America’s obligation not to solicit; Cynergy’s withholding was not a material breach that discharged Process America’s duty |
| Whether Cynergy’s liability for breach was limited by the contract damages cap and whether Cynergy’s conduct was willful to defeat the cap | Cap should not apply because Cynergy’s withholding (and other conduct) constituted willful misconduct | Cap applies; Process America failed to show Cynergy acted with tortious willful intent to inflict harm | The damages cap (§4.6) limits Cynergy’s liability; Process America failed to create a triable issue that Cynergy’s breach was willful/tortious so the carve‑out did not apply |
| Proper measure of damages and effect of residuals withheld by Cynergy | District court’s attrition‑based damages calculation is flawed and should exclude amounts that would have been paid as residuals (or otherwise reduce award) | Damages are based on increased attrition; withholding residuals doesn’t offset Cynergy’s recovery because solicitation post‑termination justified withholding | District court’s attrition methodology and causation findings affirmed, but judgment vacated and remanded: Cynergy’s recoverable damages must be reduced/offset by the residuals it improperly withheld because those were benefits Cynergy retained from the contract breach |
Key Cases Cited
- In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., 827 F.3d 223 (2d Cir.) (describing card‑processing mechanics)
- Bryant v. Maffucci, 923 F.2d 979 (2d Cir. 1991) (summary judgment reviewed de novo)
- Zaretsky v. William Goldberg Diamond Corp., 820 F.3d 513 (2d Cir. 2016) (summary judgment standard)
- Hadden v. Consol. Edison Co. of N.Y., 34 N.Y.2d 88 (N.Y. 1974) (material breach/substantial failure to perform doctrine)
- Metro. Life Ins. Co. v. Noble Lowndes Int’l, Inc., 84 N.Y.2d 430 (N.Y. 1994) (interpretation of "willful misconduct" carve‑out in liability‑limitation clauses)
- Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490 (2d Cir. 1995) (offset of benefits saved from breach when calculating contract damages)