Opinion
Civil Action No. 18278
Date Submitted: October 10, 2001
Date Decided: October 22, 2001
Andre G. Bouchard, Joel Friedlander, Esquires, of BOUCHARD MARGULES FRIEDLANDER, Wilmington, Delaware, Attorneys for Plaintiff.
Gary W. Lipkin, Esquire, of COZEN O'CONNOR, Wilmington, Delaware: of Counsel: Benjamin E. Zuckerman, Esquire, of COZEN O'CONNOR, Philadelphia, Pennsylvania, Attorneys for Defendants.
MEMORANDUM OPINION
This case presents yet another example of the dangers of being a middleman. Once a middleman has put together two parties who do not need him to do a deal, he is vulnerable if those two parties choose to deal with each other, without paying compensation to him.
One way middlemen protect themselves from such exploitation is through contract. In this case, plaintiff Cura Financial Services N.V. extracted a contractual commitment from defendants Electronic Check Services, Inc. ("ECS"); ECS's President Raymond Moyer; and ECS's Chief Executive Officer Gary Robinson, that they would not deal with Cura's confidential bank sources without Cura's permission, and would not otherwise circumvent Cura in dealing with Cura's bank sources. ECS is a Delaware corporation that was in the credit card processing business.
Cura is a corporation founded by Michael J. Begley and is a one-man shop, and I generally do not refer to it further, but instead refer only to Begley, its sole owner. Begley set up Cura to exploit opportunities to process credit card transactions for the offshore gaming industry on Curacao. Begley had high-risk gaming merchants who wanted to process transactions, and was looking to put together a processor and offshore bank who would be willing to handle the merchants' business.
By late 1998, ECS was interested in processing for gaming merchants and working with Begley to put together a processing relationship with an offshore bank. After the defendants agreed to hold Begley's bank sources confidential, Begley introduced the defendants to the Bank of Aruba ("Aruba Bank" or "Aruba") and worked to establish a processing relationship between it and ECS. Begley made progress with Aruba but without much help from ECS. Once it became apparent that ECS did not want to include Begley in the substantive discussions with Aruba, Begley told ECS to stay away from the Bank. Begley later repeated these instructions even more clearly.
ECS, Moyer, Robinson ignored Begley and forged a processing relationship with Aruba through another company, defendant Electronic Payment Exchange, Inc. ("EPX"), which purchased all the assets of ECS in the summer of 1999, which is controlled by Moyer. and which Robinson serves as an executive. Contrary to Begley's reasonable expectations, EPX did not compensate him for finding Aruba Bank and never afforded him the opportunity to bring gaming merchants to the relationship for processing, a task that is typically handsomely rewarded by credit card processors. Instead, EPX processed over $244 million in transactions through Aruba Bank without paying Begley a dime. Through Aruba, EPX was able to process a large amount of work for high-risk pornography merchants who desired to process with an offshore bank.
In this opinion, I conclude that defendants ECS, Moyer, and Robinson are liable for breach of contract, and that defendant EPX is liable for tortious interference with contract. I award Begley an amount of damages that errs on the side of understating his injury because the record evidence regarding the relevant industry standards and financial performance is less specific than is optimal.
I. Factual Background Begley Heads To The Island of Curacao
Michael Begley, who had spent the bulk of his career in the real estate business, moved to the Island Territory of Curacao in 1996 to manage a service bureau for the offshore gaming industry. Curacao had recently passed legislation legalizing offshore gaming, and Begley was hired to run the physical facility that would provide some of the first gaming merchants with space to conduct their operations.
But Begley soon was at odds with his employer and out of a job, and returned for a brief period to Colorado. Unemployed but undaunted, he returned to Curacao in 1997 and re-focused his energies on the potential gains that could come to someone who could help gaming merchants in Curacao process Internet credit card transactions for their hapless clients.
To succeed, Begley needed to be able to broker a three-cornered relationship involving these components:
• A gaming merchant who needed to process credit card transactions with gambling clients;
• An Internet payment gateway that would provide online payment processing for the gaming merchant; and
• A Visa or MasterCard-affiliated bank that would provide merchant accounts to the gaming merchants and sponsor the payment gateway with the relevant credit card association(s) ( i.e., an "acquiring bank").
Begley Fosters A Relationship With Gaming Merchants
When he returned to Curacao, Begley obtained a modest contract with a gaming merchant named Galaxy Sports to do various tasks. One of Begley's tasks was to find Galaxy an operating bank account on Curacao, which Begley did.In time, Begley struck up a social relationship with the relatively tight-knit gambling community, and began to pitch business ideas to them. One such idea was "Casino Watch," conceived as a negative data base that would provide gaming merchants with information about gamblers who had defrauded or refused to pay other gaming merchants. Information of that sort was thought to be useful to the offshore gaming community because gamblers are more likely not to pay than consumers of most other services and goods.
In the summer of 1997, Begley received $20,000 in seed capital from four gaming merchants to start Casino Watch, and used his new business as an entré to meet other gaming merchants. It was Begley's goal to fold Casino Watch into an overall credit card processing operation, which would provide merchants with access to a high quality negative data base, a payment processor, and a credit card acquiring bank. Begley hoped that he could require merchants to any processing relationship to use Casino Watch for each transaction.
In the meantime, however, Begley operated Casino Watch on a monthly subscription basis, with the ultimate goal of requiring merchants to any processing relationship to use the system for each transaction. He touted its benefits to the members of the Interactive Gaming Council ("IGC"), an industry trade group. Begley went to industry meetings, and traveled to other islands and nations that also hosted the gaming industry to sign up subscribers. At one time or another, Casino Watch was subscribed to by over a dozen gaming merchants.
Begley Tries To Find A Bank To Process Credit Card Transactions For The Offshore Gaming Merchants
Curacao's gaming merchants had several problems in trying to make money in credit card transactions from clients who were not physically present on the island. First, the United States was not crazy about having domestic banks issue accounts to offshore gaming merchants who were marketing their services to American citizens and skirting legal prohibitions. Another difficulty was the nature of the gaming business itself. Not every financial institution was enthusiastic about having casino clients, especially because casino merchants were thought to be high-risk clients.
Gambling transactions involve a substantial risk that customers will not pay, and will in fact deny that they made the transactions at issue. When a customer refuses to pay, a "chargeback" problem arises, in which the credit card company holds responsible every entity between itself and the customer. When the chargebacks of an acquiring banks' merchant clients become a problem for the credit card company, the credit card company can impose sanctions under its agreement with the bank. These costs are on top of potential losses the bank faces if the merchant goes under, the clients are nowhere to be found, and the bank is required to make the credit card company whole.
Thus, a bank which issues a merchant account to a gaming merchant assumes more than usual risk. The bet that the bank must make is that the higher discount rate it can charge to high-risk merchants for credit card transactions and other safeguards the bank can require ( e.g., use of a negative data base) will justify accepting the merchant as a client.
In 1997 and 1998, Begley went in search of banks that would accept this risk and process for gaming merchants. To that end, he obtained a list of the acquiring banks in the region, and worked with the former managing director of a local bank (the McLaughlin Bank, later the Antilles Banking Corporation) to develop leads. These efforts were complicated by a high profile event in which a regional acquiring bank that was serving a large number of Caribbean gaming merchants exited the business, after losing a great deal of money due to merchant chargeback problems. Later on, Begley also reached agreements with other former bankers to look for banks to process for the gaming industry. The premise of these relationships was that if they could find an acquiring bank for the merchants, they would receive a cut of any business processed through the bank in the form of basis points.
The evidence supports the inference that there were not many banks processing for the gaming industry in the Caribbean at that time; it appears that only the Bank of Nevis and the Bank of St. Kitts were widely known to have been doing so. Begley did, however, identify a few banks which did not rule out processing for the gaming community.
One was Secure Bank, with whom Begley met in the fall of 1997. At that time, Begley shared with Secure Bank the identities of some of his gaming contacts. Eventually, Secure Bank told Begley that they were not interested in going forward with processing for the industry. Later on, Begley found out that was not true. Secure Bank entered the business in a major way, but did not include Begley in its efforts. From this time on, Begley took steps to protect himself by refusing to disclose contacts and information without contractual protections.
The other bank that Begley worked on is central to this case: Orco Bank ("Orco"), a one-office, one story operation located on a side street in Curacao. In September 1997, Begley presented Orco's Managing Director, Fons Simon, with a formal business plan that described the potential market for credit card processing for the offshore gaming industry, and the components of a possible processing relationship. These included the use of Casino Watch, and a bonding program to reduce the risk of chargebacks.
Simon did not follow up on Begley's proposal, but did continue to meet with Begley from time to time about the idea.
Unbeknownst to Begley, Simon was more interested in processing for the gaming industry than he let on. Before October 1998, however, Simon was not in a position to act. As of that time, Simon was only Managing Director of Orco Bank, which itself was not a registered Visa and MasterCard acquiring bank which could open merchant accounts. Orco's subsidiary, the Bank of Aruba, was an acquiring bank but its Managing Director did not favor processing for the gaming industry. In October 1998, Simon became Managing Director for Aruba Bank as well, putting himself in a position to get Orco and Aruba Banks involved.
Begley Contacts Payment Processors, Including ECS
The third party to any processing relationship is a payment processor. One of the processors who Begley contacted was defendant ECS, a small Delaware credit card processor run by defendants Robinson and Moyer. Robinson was the son of ECS's founder and was its putative Chief Executive Officer and largest stockholder. Moyer was ECS's President. These titles are misleading. ECS was a sleepy company without much energy until Moyer came on board. Moyer's ambitions and energy had led ECS into the on-line credit card processing business, and he was ECS's driving force as of the period when Begley first became involved with ECS in 1997.
In April 1997, Begley met with Moyer and Robinson in Tampa, Florida and tried to get ECS interested in processing for the gaming industry. Robinson was interested, but Moyer had concerns. A few months later, Begley contacted Moyer again and arranged a visit to ECS's Delaware offices. By October, Moyer had overcome his reluctance; that month, he authorized and executed a Sales Representative Agreement between ECS and Begley's entity, plaintiff Cura.
The Agreement reflected the industry custom of paying intermediaries a percentage of the dollar volume processed by merchants the intermediaries procure for a processor, for so long as the merchant processes with the processor. In addition, with respect to the method by which Begley would be compensated for bringing gaming merchants to ECS for processing, the Agreement contemplated the following:
• ECS would keep the first 100 basis points difference between its "buy rate" ( i.e., the interest rate at which it could obtain money from the acquiring credit card bank) and the "merchant discount rate" ( i.e., the rate which ECS could charge the gaming merchant for processing transactions). Any additional basis points between the buy rate and the merchant discount rate were to be shared equally between ECS and Begley.
• ECS and Begley were to share the fees from automated clearinghouse ("ACH") transactions equally.
• All merchants Begley brought to the relationship were to be required to use Casino Watch.
JX 11.
The Sales Representative Agreement was unusual in another respect. According to Moyer, it was one of the most lucrative packages ECS had ever offered to an intermediary. Moyer and Robinson are profit-maximizers, and the attractive terms they offered to Begley reflected their perception that gaming clients could be charged a high buy rate that would translate into large profits, thus justifying a higher than ordinary payment to the broker who brought those clients to ECS.
According to Begley, Moyer agreed to travel to Curacao on November 3, 1997 to participate in meetings with gaming merchants lined up by Begley. To Begley's embarrassment, Moyer never showed up. Begley was angered, and thereafter made no attempt to find merchants to process for ECS. His anger was complemented by another, perhaps more important, reason for his lack of effort to find merchants for ECS.
By 1998, it had become clear that the federal government was willing to prosecute offshore casinos who attempted to do business in the United States. This led domestic banks to conclude that it was imprudent to enter into processing relationships with offshore gaming concerns. As a result, even if Begley could find gaming merchants to process with ECS, he still needed to find an offshore bank willing to act as the acquiring institution. By the end of the year, however, Begley thought he was on the brink of doing just that.
Cura And ECS Resume Their Relationship
in December 1998, Begley swallowed his pride and renewed contact with ECS. By this time, Begley felt that he could procure the key third part of a processing relationship: an acquiring bank. Because Begley had worked regularly with gaming merchants and had been helping many of them look for banking relationships, he was confident that he could bring them to the table. Thus, he viewed the time as right to engage in serious discussions with a credit card processor.
Upon renewing contact, Begley explained that any processing for the industry would have to be done through an offshore bank, and that he had the banking contacts to make the initiative work. He informed Moyer that he expected that ECS could process $100 million in the first year of any processing relationship. Moyer and Begley arranged to speak by phone on December 30, 1998.
Moyer evidenced continued interest in processing for the gaming industry. On December 30, 1998, Begley expressed to Moyer his desire for an arrangement with ECS, whereby Begley would have the exclusive right to bring gaming merchants to ECS for processing. Begley also wanted to require merchants to use Casino Watch, and a guarantee that ECS could not strike a deal with his contacts without compensating him. Although the conversion did not yield a precise agreement, Begley and Moyer agreed to move forward with further discussions. At Moyer's request, Begley sent him a copy of the Sales Representative Agreement.
Moyer replied with comments to that Agreement, observing generally that it " look[ed] good to [him]." Moyer did not accede to the same compensation formula as in the Agreement, but did not indicate that Begley's compensation would be materially less. Rather, he simply indicated that the formula in the Agreement no longer worked because ECS's pricing structure had become "slightly more complicated." Moyer appeared to agree to an equal split of ACH transaction fees, and to requiring Begley's gaming clients to use Casino Watch. He demurred on a provision giving Begley the right to move his clients if ECS did not pay Begley his compensation. Moyer indicated that the stock ownership was changing at ECS and that he needed to "clear" that provision with his new partners. At trial, Moyer admitted that statement was intentionally false.
JX 41 (emphasis added).
JX 42.
Id.
Eschewing caution, Moyer and Begley proceeded to deepen their relationship without having reached a formal contractual agreement. On January 19, 1999, Moyer sent Begley an e-mail stating that Robinson would soon be on his way to Curacao to solidify their partnership. The e-mail stated that "[Robinson] can cut a deal with you on the spot and is predisposed to doing so.
JX 50.
Begley Arranges For ECS To Meet With Aruba Bank
With a visit from Robinson imminent, Begley contacted Fons Simon at Aruba Bank to arrange a meeting. On January 18, 1999, Begley wrote Simon a letter indicating that he would be bringing a payment processor to Curacao soon and urging Simon to consider Internet processing. He also included a copy of a confidentiality and non-circumvention agreement that he hoped to have the Bank execute. Begley promised Simon that he would deliver a one-page summary describing the basic requirements the payment processor would have of the Bank. On January 20, 1999, Begley did just that, after discussing ECS's requirements the previous day with Robinson by phone. At that time, Begley also informed Simon of exactly when Robinson would be arriving, and suggested meeting on Monday, January 25, 1999. The letter pitched the opportunity to Simon this way:
This is a very nice opportunity for one of the offshore banks herein Curacao or Aruba. By my calculations in the past year the Internet casinos and sport books have processed almost one billion dollars with VISA and MasterCard and this is just the genesis of this business. The future is very promising.
JX 51.
Simon agreed to the meeting, but did not sign the confidentiality and non circumvention agreement. Begley did not complain, perhaps because he was, as I now discuss, successful in obtaining ECS's signature on such a document.
ECS Signs A Confidentiality and Non-Circumvention Agreement
On January 20, 1999, Begley sent Moyer a brief e-mail stating: "Please have Gary review and sign the attached Confidentiality Non-Circumvention Agreement and fax to me prior to his arrival." Moyer received the e-mail. He understood that the purpose of the proposed Agreement was to ensure that ECS could not learn the names of Begley's contacts, cut Begley out of the picture, and deal with Begley's contacts directly. Moyer forwarded the e-mail and attachment to Robinson, and authorized Robinson to execute the proposed "Non-Circumvention Agreement."
JX 53.
Robinson read, understood, and signed the Agreement, the basic terms of which follow:
WHEREAS:
. . . (C) . . . CFS has a relationship with certain offshore banks (Banks) and [Gaming] Clients who would like to process credit card transactions and electronic payments;
(D) The parties wish to work together and to share certain information and contacts in confidence in connection with the Processing Services and the establishment of a Processing relationship between the Clients, ECS and the Banks and CFS.
(E) Each of the pates hereto requires assurances of integrity of the other party and the confidentiality of the shared information and contacts necessary to facilitate the Processing Services.
NOW IT IS HEREBY AGREED as follows:
1. Non-circumvention.
ECS shall respect the sources and the contacts of CFS relating to the Processing and the Processing Services and shall not, without prior written permission of CFS, contact the Banks, sources and contacts of CFS, or circumvent or attempt to circumvent CFS, in whatever manner, directly or indirectly, in connection with the (proposed) Processing Services. This non circumvention clause is also binding on all affiliates, subsidiaries, agents, consultants and other intermediaries associated with ECS.
2. Non-Disclosure
The parties acknowledge that all information concerning the (proposed) Processing and Processing Services, the identity of actual and/or prospective Banks as well as agents, intermediaries financial institutions, corporations or other business entities which are now or later become involved in such Processing or Processing Services, is highly confidential. Such information shall be held in strict confidence and shall only be disclosed with the other party's prior written approval, except when required by any applicable law. If disclosed with the other party's prior written approval, such information still may only be disclosed on a need to know basis.
3. Compensation
It is agreed and understood that in the event of any breach of this Agreement CFS is entitled to all legal and equitable remedies including but not limited to damages, and the recovery of costs, expenses and attorneys fees in pursuing such remedies.
4. Representation.
Each of the parties shall sign this Agreement separately and individually, and on behalf of their corporations and any subsidiaries, divisions, employees, agents, partners, and consultants whom they represent and/or with whom they may be affiliated for Processing.
JX 54 (emphasis added).
In particular, Robinson understood that the Agreement was "a document that was pretty standard in the industry that says that I'm — we're going to do business, and I'm not going to go around you." Robinson also understood that the Agreement was going to bind all the officers and employees of ECS, including Moyer and himself.
Tr. 1006-08.
Robinson waited until he got to Curacao on January 24 to hand Begley an executed copy of the Non-Circumvention Agreement. Until that happened, Begley had not informed Robinson or Moyer of the identity of Aruba Bank or any of his other banking or gaming contacts.
Once the Non-Circumvention Agreement was signed, Begley freely discussed his sources and contacts. In particular, he revealed the fact that he was taking Robinson to meet with Aruba Bank the next day. Robinson had never heard of that bank before he heard it from Begley.
On January 24, 1999, Begley and Robinson talked in general terms about how a future processing arrangement would work. The next day Begley introduced Robinson to certain gaming merchants, but the introductions were little more than that. Rather, the main business of the day involved a meeting at Aruba Bank with Simon and his assistant. During the meeting, Begley and Robinson described how a processing relationship could be structured between ECS and Aruba Bank. The Aruba Bank participants asked a number of questions regarding the consequences the relationship would have on Aruba in terms of staffing, technology, and liability risk. Although the parties did not reach any preliminary accord, Aruba Bank did signal a willingness to consider a processing relationship.
Robinson and Begley then called Moyer and reported on how the day went. This was the first time that Begley had spoken to Moyer regarding Aruba Bank. At this time, Moyer was unaware of the Bank's existence. During the call, Robinson and Begley asked Moyer to find out what company did the back-end processing for Aruba and Orco Banks. Moyer responded by e-mail that Equifax did the processing for Aruba, but had never heard of Orco Bank. Begley replied that "ORCO Bank from Curacao is the parent bank of ARUBA Bank." Moyer responded, "We should be good to go then."
JX 59.
Id.
Id.
The Relationship Between Begley And ECS Comes Apart And Begley Tells ECS To Stay Away From Aruba Bank
Begley followed up on the meeting with Simon. On January 26, 1999, he and Robinson sent Moyer an e-mail outlining the information that Simon desired and requesting that Moyer send it to Simon. The next day Begley asked Moyer to send him copies of any information or correspondence Moyer transmitted to the bank.In the same time frame, Begley delivered to Simon a package of information about ECS's bonding company, which Begley had received from Moyer. Begley also attempted to arrange another meeting with Simon. In connection with those efforts, Begley sent Moyer another e-mail on January 31, 1999 asking that Moyer call him and again requesting copies of any information Moyer sent to the Bank.
On February 2 and 3, 1999, Robinson sent Begley two odd c-mails. In the first e-mail, he assured Begley that Moyer had sent the requested information to Simon. Robinson then encouraged Begley to move forward, in these terms:
All information requested has been forwarded by e-mail to Fons. . . . Ball is in your court. We need to hear from them that they are ready to proceed. Ray and I will then submitt [sic] a program and contract to them. If they accept you can begin bringing us potential clients. With no contact, and no processing, this deal is "Losing Legs". So go kick some ass, we need this to get from the idea stage to the reality stage. . . . right now.
JX 66.
Begley needed no encouragement to move ahead. He had been diligently pursuing the deal. His e-mail response to Robinson simply asked for copies of the information Moyer had sent to Simon "so I know what is going on." Robinson's reply was evasive. He assured Begley that the information had been sent, but said he did not have a copy and did not offer to have one sent to Begley. Robinson also told Begley to hurry up and get Simon to do a deal because "New investors [were] very close." This was untrue.
Id.
JX 66.
Begley succeeded in his attempt to schedule another meeting with Simon. On February 4, 1999, Simon sent a Begley an e-mail stating:
Dear Mike,
We are very interested in pursuing this venture. We are in the process of verifying certain internal issues.
Give me a call on [M]onday the 9th.
Best regards,
Fons
JX 67 (emphasis added).
This was the first concrete expression by Simon of serious interest in moving forward with a deal.
In the meantime, Begley and ECS discussed compensation issues. Begley sought 25 basis points on the gross processing done by ECS through Aruba Bank, plus an exclusive right to bring gaming merchants to the relationship. Begley contemplated that a Casino Watch transaction fee would be charged to all the merchants once the full-blown processing system was established. Begley also wanted a cut of the ACH fees.
Moyer and Robinson were unwilling to commit to any firm arrangement. At trial, they say that they were unwilling to pay Begley any more than a modest flat fee for simply putting ECS in touch with Aruba Bank. I do not credit their testimony, because it is not reflected in any of the written communications they sent to Begley and because Moyer and Robinson have repeatedly been untruthful during the course of the events involved in this case. I do, however, believe that they were evasive and had not committed to any firm compensation agreement with Begley. But I also conclude they led Begley reasonably to believe that they would be willing to pay Begley basis points for finding Aruba Bank and bringing merchants to the relationship. As to the latter, ECS admitted at trial that it always expected (as per the earlier Sales Representative Agreement) to compensate Begley in basis points for any merchants he convinced to process through ECS.
For example, on February 6, 1999, Robinson wrote Begley and informed him that ECS had "been contacted by other banks with the same idea, and . . . will have our own off-shore relationship within the month. So we need to move and quickly if the `Mike B Deal' is to fly. I like Fons and Chris and I believe the Orco deal to be our preference. But we won't wait for anybody." JX 69. The statement that ECS had been contacted by other banks and could put together another deal within the month was false.
As to the former, I base this conclusion on Robinson's reply to an e-mail in which Begley unambiguously requested 25 basis points on "all of the business processed" by ECS through Aruba Bank as an "override," i.e., in addition to the basis points Begley would receive for bringing gaming merchants to the relationship. Robinson answered that "We are certainly willing to compensate you as an agent with some type of formula similar to the one you are presenting here. However, since we don't know what our "`buy' rate will be, we cannot begin cutting deals." This was consistent with Begley's recognition that the shape of any final compensation package would depend on what deal ECS and Begley could strike with Aruba Bank. In a later February 11, 1999 e-mail, Robinson again assured Begley that ECS knew that it had an obligation to compensate him for his services: "Ray and I are aware that you are entitled to compensation for your assistance in setting up this program with the bank and the merchants who may want to us[e] it. We however cannot at this tune lock in exactly what that compensation may be."
JX 69.
JX 70 (emphasis added).
On February 24, 1999, Begley flew to Aruba to meet with Simon and Sudesh Manichand, Aruba Bank's credit card operations manager. Begley then learned that the information he had earlier requested on behalf of Aruba Bank had not been sent by ECS. Begley made note of the Bank's information needs and compiled it in an e-mail that he sent to Manichand. Manichand replied that "I have reviewed your e-mail and I suggest that you go ahead with compiling the information as you outlined. Please keep us posted about your progress.
I find that the requested information was never earlier sent by Moyer. Moyer's communication to Aruba has never been produced in this litigation. Given this, Robinson's repeated failure to send the communication to Begley upon request, and the contemporaneous later c-mails from Begley and Manichand referencing the need for information that Moyer supposedly had already provided, I conclude that Moyer is at best mistaken in his recollection that he sent the requested information to Aruba Bank.
JX 82.
Before receiving Manichand's reply, Begley had already informed Robinson that the Bank needed certain information in order to move ahead. Robinson did not answer Begley's request until Begley sent him another e-mail on March 2, 1999. Robinson sent two replies. In the second, he sent a cursory answer to the Bank's questions, which did not answer the Bank's concerns in any professionally adequate manner. In his initial reply sent moments earlier, Robinson wrote;
JX 79.
JX 87.
I did get your e-mail. This "3-way" process has already become sluggish and unproductive. The question[s] you posed were the same ones we answered at the first meeting. I saw Ray's e-mail and it did contain the ECS/bank agreements along with all other information requested. Mike, no [one] "represents" Ray and I except Ray and I. Your part is to introduce Ray and I to the "decision makers" at Orco and set up a time and date for a conference call to move forward if that is what they truly want. We will take it from there and close the deal. I would not even attempt to put this together myself without getting our "tech" people, our bonding people, Ray etc., all involved. What we need from you is very basic: Who (decision makers), what (phone number), when (do they want us to call), and most of all . . . How can we set this up so that is [sic] would be acceptable to them. We want them to sign clients, we will do everything else . . . our contract will be with the bank only (not the books). WE will underwrite and do all processing (ACH and CC)[.] If they are ready to go, answer the question above and we will put this on the fast track. You start to make money once all this is done.
JX 86.
Begley was understandably upset by this answer. His information requests had been reasonable and it was also his reasonable expectation that he would be involved in negotiating the final processing relationship with Aruba Bank. ECS's desire to cut a deal on its own, using Begley's lead, was not one Begley was willing to satisfy. Thus, on March 7, 1999, Begley wrote to Robinson stating:
After reading this e-mail I was a little disappointed. I don't think what the bank is requesting is unreasonable in any way. Given your reaction [think it would be better if you and Ray went on to some of your other offshore contacts and struck a deal with them. When you get that deal wrapped up if you are interested in me marketing for you let me know.
JX 89 (emphasis added).
Robinson and Moyer understood that Begley had instructed ECS to stay away from Aruba Bank. That is, they knew that they did not have Cura's consent to proceed with further contacts with Aruba Bank. After the March 7 communication, Begley turned to other projects.
In April, 1999, Begley was injured seriously in a car accident. He was eventually flown off-island for further treatment, and ended up in the hospital in Florida. That is where he next heard word from ECS.
The Defendants Defy Begley's Demand That It Stay Away From Aruba Bank
To understand what happened next, some context is required. As of spring 1999, one of ECS's largest clients was "CC Bill," an entity that essentially helped on-line pornography businesses with the business side of their operations. It provided services to various merchants and had a contract with ECS to process their credit card transactions.
`Pornography' is defined as "[s]exually explicit pictures, writing, or other material whose primary purpose is to cause sexual arousal" The American Heritage Dictionary of the English Language, 1367 (4th ed. 2000). The industry prefers the euphemism "adult entertainment" Without making any moral judgment about the matter, I prefer to use a straight-forward term that better reflects the fact that these businesses sell access to explicit images of sexual activity which one can confidently assume do not exist within a larger literary or theatrical context. Put more bluntly, these merchants do not provide online access to Nabokov or Joyce, or even serious filmmakers like Stanley Kubrick and Nagisa Oshima whose works included strong sexual content.
Like gaming merchants, porn merchants like CC Bill had to worry about chargeback problems. Clients often denied having made transactions, and parents often refused to pay bills that resulted from the misuse of their credit cards by minor children. Not only that, not all financial institutions were willing to work with porn merchants in the first place, and several U.S. banks were ending their involvement with the porn industry.
Within the porn industry, there also existed a perception that it was easier to process credit card transactions offshore. It was believed in 1999, for example, that Visa and MasterCard would tolerate a higher level of chargebacks in the Caribbean than it would in the domestic United States. This belief was largely wrong. What was not wrong is that there were real advantages to processing offshore for high-risk merchants. For example, banks in the Caribbean were accorded more laxity on a subcategory of chargebacks, known as "CDCs," involving customers who were dissatisfied with the services they received and refused to pay. Apparently, porn merchants run a higher risk of this particular type of chargeback. In the United States, banks were subject to a separate 1% limit on CDCs, which meant that merchants would be more easily terminated. In the Caribbean, banks did not face this additional, lower limit on CDCs.
Although CC Bill was processing with domestic banks in 1999, it saw the utility of moving its processing offshore. Earlier in 1998, the sales agent, who had brought CC Bill to ECS, Charles Bryant, called Moyer. Bryant had learned that a credit card processing firm was looking to establish a relationship with a bank in the Caribbean to process for porn merchants. Bryant wanted Moyer to have ECS get in the game and beat that processing group to the punch. I infer that what motivated Bryant was his fear that his porn merchant clients, like CC Bill, might move their processing work offshore if they could. If they moved their work, Bryant could lose his commission stream.
Bryant asserts that he mentioned Aruba Bank during the 1998 call with Moyer. Whether he did or not is irrelevant, because Bryant's call made no impression on Moyer. As of the time ECS signed the Non-Circumvention Agreement, Moyer had no recollection of hearing of Aruba or Orco Bank. Moyer never pursued Bryant's suggestion, and his access to a relationship with Aruba Bank in 1999 resulted solely from the work done by Begley.
Bryant, however, did play a role in reigniting ECS's desire for a relationship with Aruba Bank. In late April 1999, Bryant got wind that another processing group was close to striking a deal for offshore processing with Aruba Bank. Contrary to his usual deferential approach to Moyer, Bryant was aggressive and upset. He chided Moyer for not pursuing the offshore processing more aggressively.
At trial, Bryant said that he had no personal reason to push the issue hard. That is implausible. More plausible is that Bryant's porn merchant clients were seriously interested in moving their processing offshore. Bryant therefore wanted his processor, ECS, to develop the capacity to do so quickly. Otherwise, Bryant might lose all of his commission stream, or have to take a lower cut because he would have to share his piece with his industry friend who was involved in the talks with Aruba Bank. For its part, ECS did not want to risk losing Bryant's clients for itself, either. CC Bill was one of its best accounts.
The defendants' counsel has continually argued that they had no real interest in processing offshore and always had access to sufficient banks to process their work for pom merchants. I believe that the defendants' substantial efforts to forge a relationship with Aruba, their efforts to find another offshore bank, and their decision to move key clients to the Aruba relationship make this claim unsustainable. The defendants' commercial actions belie their counsel's rhetoric.
After speaking with Bryant, Moyer called up Robinson and chewed him out for not closing a deal with Aruba Bank. Robinson got to work on it right away.
ECS Circumvents Begley And Cuts Its Own Deal With Aruba Bank
Even though Begley had told ECS to leave Aruba Bank alone, Robinson did not do so. Without receiving Begley's permission, Robinson made phone contact with Aruba Bank. Robinson claims that he tried to speak with Begley but could not reach him. I accept that Robinson might have made faint-hearted attempts to reach Begley. I do not accept that he made serious attempts. Although it was more difficult to reach Begley during this period because he was hospitalized, Begley was receiving his e-mail and phone messages. Since Begley had always replied to e-mails promptly, Robinson or Moyer could have tried to reach him that way.
Even if Robinson's own e-mail was down, he could have asked Moyer to send one for him
In any event, Robinson did send Begley an e-mail on April 30, 1999 in which he confessed that he had contacted Aruba Bank, but that he "had no intention of going around" Begley Robinson said that ECS was not interested in developing a relationship with the gaming industry, but was looking for new banks "in order to spread our processing so that no one bank controls our fate." In particular, Robinson referred to the fact that ECS wished to shift existing accounts to Aruba. In exchange for helping ECS set up a meeting with Aruba Bank, ECS offered to pay Begley $5,000 as a finder's fee.
JX 92.
Id.
Then we can continue to work in [sic] the Sportsbook project (I think at least we could do the ACH work right away)[.] Obviously we could work out additional compensation for the ACH stuff and hope fully down the road we can process for your guys. [R]ight now the bonding company is not crazy about the idea but I'm working on them.
JX 92.
After receiving this e-mail, Begley feared that ECS was trying to cook up a deal with Aruba Bank without him. He tried to reach Fons Simon several times by phone but was unsuccessful. Therefore, on May 7, 1999, he sent Robinson an e-mail stating:
Begley suspects that Simon had also concluded by that time that cutting out the middleman was useful. Although not critical to this decision, Begley's suspicion seems well-founded. Before that time, he had never had a problem getting in touch with Simon in a relatively prompt fashion.
I received your e-mail and your phone call but I have been in the hospital recuperating from an accident so I couldn't respond immediately. I reviewed your e-mail with great interest and reviewed your other c-mails over the last few months. The long and short of it is this. You said several times that you and Ray have other offshore banks that you can pursue. I suggest you pursue them.
I introduced you to ORCO so that WE could pursue a processing relationship with them. You were not responsive when the bank asked me to get some information from you. If you recall you signed an NON-CIRCUMVENTION AGREEMENT before I introduced you to ORCO. I suggest you reread that agreement and cease all contact with the bank until you have made the proper financial arrangements with me or I will take legal action.
As for the offer of $5,000 that is out of the question. The offer is entirely inadequate.
JX 93 (emphasis added).
The next day Begley called Robinson by phone and left a message. Robinson did not return his call. Begley reiterated his demand that ECS stay away from Aruba Bank on May 24, 1999 by re-sending the same e-mail.
Instead of heeding Begley's request, ECS met with Aruba Bank anyway. On May 20, 1999, Moyer and Robinson met with Aruba to try to cut a deal that would leave no part of the action for Begley.
Up until June 22, 1999, Begley's repeated attempts to reach Robinson failed. On that day, however, Begley caught Robinson answering his phone at home. During the conversation, Robinson argued that ECS's renewed contact with Aruba Bank had been suggested by Equifax. This was false.
Before Begley had reached Robinson, Moyer and Robinson had made yet another trip to meet with Aruba Bank. This culminated in an August 26, 1999 agreement between a successor entity to ECS, "EPX," and Aruba Bank. Under that agreement, EPX and Aruba Bank were each permitted to sign up customers, keep the basis points attributable to any merchants they signed, and pay the other a $ 0.10 transaction fee for their respective accounts. Schedule B to the agreement prevented EPX from quoting a merchant rate to any merchant that already had any type of account with Aruba Bank. It was also understood between the parties that Simon would take the lead on signing up gaming merchants. Simon wanted and secured a commitment from EPX that it would not do a deal with another bank in the region, and an understanding that Simon had first dibs on approaching gaming merchants. Begley, of course, got nothing.
JX 107 Schedule C; Simon Dep. 91-92.
Id., Schedule B.
EPX and Aruba Bank did not inform Begley of their agreement. EPX did not tell Begley that he was welcome to bring gaming merchants to it for processing through Aruba Bank.
Not until May 2000 did Begley learn firm information that EPX was processing through Aruba Bank. In response, Begley had his attorney send a prompt demand letter to Moyer. Moyer sent an amazing response, which reads in pertinent part as follows:
The defendants' argument that Begley unfairly sat on his rights and failed to mitigate his damages is without merit and warrants no elaborate discussion.
On March 1, 1999 substantially all of the assets of Electronic Check Services, Inc. ("ECS") were sold to Electronic Payment Exchange, Inc. ("EPX"). As such, Mr. Gary Robinson is no longer a stockholder of EPX nor is he an officer of EPX.
Our office currently has no agreement on file with your client nor are we aware of such an agreement. I would be interested in seeing copies of the agreements describe[d] in your letter.
I spoke with Mr. Robinson who states that your client's involvement was actually detrimental to any developing relationship between ORCO Bank and ECS. It is clear to me that the relationship EPX developed is with a different bank and was developed with a different relationship altogether. An EPX merchant who also had an ongoing banking relationship with Aruba Bank initiated the discussions, which culminated in a processing relationship for EPX. I cannot address the issue surrounding agreements between Cura and ECS. If your client believes he has a claim, I suggest he litigate. I absolutely am unwilling to negotiate a financial settlement.
JX 125.
At trial, Moyer admitted that he lied in the letter. The lies are numerous. For example, it was disingenuous for Moyer to claim that Aruba Bank was different than the bank to which Begley introduced ECS. Since late January 1999, Moyer and ECS knew that Orco's affiliate Aruba Bank would be doing the processing. It was also false that EPX had learned of Aruba Bank through one of its merchants with a relationship with Aruba. Other falsehoods exist, but I focus next on the most important, which deals with EPX.
In his deposition, Eons Simon did testify that Begley's involvement was a negative factor. I do not credit this testimony, which was supposedly based on bad things Simon heard about Begley. By the time of his deposition, Simon had an interest in minimizing Begley's role so as to maintain good relations with the defendants. I give more weight to the undisputed fact that Simon met and talked with Begley fairly regularly before May, 1999, was seriously exploring a deal with ECS using Begley as the go-between, and sent Begley an e-mail in February 1999 using the closing "Best Regards" rather than, e.g., the more impersonal and typical "Sincerely." See JX 67.
The Creation of EPX
At the time ECS signed the Non-Circumvention Agreement, it was planning a change in its ownership structure. The change would formalize the operational reality, which was that Moyer and the other employees at ECS were the driving force behind the company's growth. Through a merger, Moyer would buy out Robinson and other of the original ECS stockholders and put the company under his own majority control.
According to Moyer, EPX was created on March 1, 1999. On that day, Moyer contends that EPX purchased all of ECS's assets in exchange for certain cash payments and the assumptions of certain debts. But it was not until June 15, 1999 that EPX was formally incorporated. As late as June 1, 1999, ECS entered into a multi-year contract with Equifax Card Services, Inc.
JX 159.
JX 99.
Even more telling are the plain facts of how Moyer and Robinson went about things. If ECS ceased conducting operations as of March 1, 1999, why did they not inform Begley of that fact? If, as Moyer claimed, ECS was not operating after March 1, 1999 and Robinson had no authority to act on behalf of EPX, how come Moyer asked Robinson to close a deal with Aruba Bank in late April 1999? How come Moyer asked Robinson to continue to work towards that end thereafter? How come Robinson referred to ECS doing a deal with Aruba Bank in communications with Begley in May of 1999?
There are two possible plausible answers. One is that Moyer and Robinson were trying to mislead Begley. The other is that Moyer and Robinson did not distinguish between ECS and EPX, treated them as the same entity, and saw the formalization of any asset transfer as a minor matter. I find the second alternative more likely.
The operative reality is that one of the assets that EPX received in the eventual sale with ECS was the knowledge it had obtained from Begley regarding Aruba Bank. EPX continued working on the Aruba Bank matter in a seamless fashion, with Robinson acting as Moyer's cat's paw. Indeed, Robinson was later named EPX's "International Banking Director," a paid position charged with, among other things, facilitating EPX's relationship with Aruba Bank.
Moyer's later May 23, 2000 letter was a blatant attempt to bully Begley into going away without a fight. Moyer apparently did not realize that Begley had kept a file of all his communications with Moyer and Robinson that detailed their personal involvement in the prospective transaction with Aruba Bank through Begley.
The EPX-Aruba Bank Processing Relationship
By late 1999, ECS's successor EPX, was set up to process for Aruba Bank. Simon brought three gaming clients to the table, two of which were Casino Watch subscribers with whom Begley had a relationship. Charles Bryant signed up several porn clients through EPX. The most significant was CC Bill.
By May 2000, CC Bill had shifted almost all of its business to the EPX-Aruba Bank processing relationship. From February 2000 until June 2001, CC Bill processed over $140 million worth of transactions through Aruba Bank. During that same period, another $104 million in transactions was processed through other merchants, for a total of over $244 million. This represented a large percentage of EPX's overall processing during the period.
EPX did not produce reliable financial information sufficient to allow much precision here, but it is clear that the Aruba Bank relationship involved a sizeable percentage of EPX's overall activity, and appears to have generated an even greater percentage of its revenue.
The majority of the transactions were for porn merchants rather than gaming merchants. Although EPX prepared materials to help Simon market to the gaming community, Simon did not bring an appreciable amount of gaming work to the relationship. And those gaming merchants he did bring processed less than $10 million worth of transactions. At no time did EPX enlist Begley's help to seek gaming merchants. Instead, EPX itself made some unsuccessful attempts to sign up gaming merchants.
The high-risk nature of porn merchants exacted a toll on the EPX-Aruba Bank relationship, especially in view of the fact that Aruba only received a ten cent per transaction fee for handling the work of EPX's porn clients. In the summer of 2000, EPX signed up a porn client who processed nearly $30 million in transactions in two months. The client ran up large chargebacks, causing Aruba Bank to make a claim against EPX's bond. Eventually, Aruba Bank terminated several of the clients to the processing relationship.
Had Aruba Bank been a United States bank, visa and MasterCard fines could have been imposed under the relevant credit card association rules as a result of this problem. Because of Aruba Bank's Caribbean location, a two-month grace period existed under the regional rules that prevented the imposition of fines. This is an example of one of the benefits of offshore processing.
EPX continued to want to do business with Aruba Bank, however. When Aruba Bank lacked sufficient capital in proportion to its processing levels, EPX placed several million dollars on deposit with Aruba. CC Bill also deposited $2 million with Aruba Bank on an interest-free basis for this same purpose. There is no reason to believe that either EPX or CC Bill acted charitably; it is more plausible that they made these deposits because it was important to them to continue processing through Aruba Bank.
Shortly before trial, Aruba Bank terminated CC Bill as a merchant. This termination was not EPX's idea; indeed, it had been processing heavy volumes for CC Bill through Aruba in the months before termination. Aruba Bank made the decision independently because it wished to restructure its Internet processing, and in particular to revise the small fees it was receiving for processing the porn work. According to Fons Simon, EPX "would like to continue and to do even more business with [Aruba Bank]."
Simon Dep. 108.
The value of access to offshore processing for EPX and CC Bill is demonstrated by the evidence that both sought to find offshore banks to supplement the capacity they had obtained through Aruba Bank. Both feared having only one offshore relationship and undertook efforts to find another offshore bank. EPX pursued offshore banks through Robinson, who had been named EPX's international banking director. For its part, CC Bill engaged Begley as a finder and promised to pay him 100 basis points on any business CC Bill processed through a bank he found.
For instance, in an e-mail to Robinson dated April 26, 2000, Moyer stated that it was "probably time to . . . look for another banking relationship outside of Aruba and Curacao. I spoke with Ron Caldwell from CC Bill yesterday. He is extremely nervous that his and effectively our adult business is now concentrated at one bank and if that bank had a change of heart, we would all be left without a borne for the offshore processing." JX 122 (emphasis added).
JX 143.
CC Bill was only one of the entities which engaged Begley as a bank finder in the period 1999 to the present. After his accident, Begley did not return to live on Curacao and devoted less attention to the offshore gaming industry. Instead, Begley lived in the United States and pursued banking and processing relationships for domestic high-risk merchants and processors.
II Begley's Claims
Begley alleges that defendants ECS, Moyer, and Robinson are liable for breach of the Non-Circumvention Agreement. Knowing that Begley had told them to stay away from Aruba Bank and having signed a contract that gave Begley that right, these defendants, Begley asserts, went ahead and forged a relationship with Aruba Bank without compensating Begley or providing him a fair opportunity to participate.
Begley claims that EPX is equally culpable for the breach under the doctrine of tortious interference with contact. He alleges that EPX learned of Aruba Bank from the other defendants, was on notice of the Non-Circumvention Agreement, and yet went ahead and contracted with Aruba Bank, in violation of his contractual rights. In the alternative, Begley contends that EPX was unjustly enriched because it was able to exploit his efforts to cultivate Aruba Bank to its own exclusive advantage.
To remedy these wrongs, Begley seeks an award of damages to compensate him for the value of his services in brokering the relationship with Aruba Bank and the lost profits he suffered by being denied the opportunity to bring gaming and other merchants to the EPX-Aruba Bank processing relationship.
III. Legal Analysis A. The Non-Circumvention Agreement Was Breached And Each of The Defendants Is Liable
EPX was only able to reach a processing agreement with Aruba because ECS, Moyer, and Robinson breached their contractual commitment not to "contact" Aruba without Cura's consent, to hold Aruba's identity confidential, and not to circumvent Begley. The defendants do not spend much time arguing that their conduct did not breach the literal and plain terms of the Non-Circumvention Agreement, because such an argument is clearly refuted by the evidence. Both Moyer and Robinson knew that Begley had told them to stay away from Aruba Bank, a demand that the Agreement plainly required them to respect.
The defendants' primary argument that they are not liable for breach of contract is that the Non-Circumvention Agreement is unenforceable because it does not specify the compensation Begley was to receive in the event that ECS and Begley were able to land a credit card acquiring bank, to which Begley could bring gaming and other merchants for processing. In the absence of a specified compensation term, the defendants contend that the Non-Circumvention Agreement was not an enforceable contract at all.
I do not embrace this argument. The Non-Circumvention Agreement is a binding contract. In exchange for valid consideration — the right to learn Begley's sources — ECS and the others bound to the contract agreed to specific restrictions on their conduct towards those sources. This arrangement was a commercially reasonable way to proceed in a context in which ECS was uncertain about the ultimate compensation Begley and it could receive, and in which ECS therefore argued that Begley's compensation could not be determined until the terms of a deal with an acquiring bank could be negotiated. In the presence of uncertainty, Begley protected himself by extracting a veto power over ECS's ability to exploit his bank sources without his permission. ECS was interested enough in obtaining access to Begley's sources that it agreed to this unambiguous provision. Any further term regarding compensation was not essential to this arrangement.
The idea that confidentiality agreements arrived at during the preliminary stages of commercial negotiations are unenforceable is not one that has won favor with this court. See, e.g., Alliance Gaming Corp. v. Bally Gaming Int'l, Inc., Del. Ch., C.A. No. 14440, lett. op. at. 7, 1995 Del. Ch. LEXIS 101 at *9 Jacobs, VX (Aug. 11, 1995) ("The practice of requiring a bidder to sign a confidentiality and standstill agreement as a condition to allowing due diligence access to confidential information, is well recognized and accepted.").
It is, of course, relevant that the Non-Circumvention Agreement does not outline the compensation ECS agreed to pay Begley for various services in a processing relationship, or specify liquidated damages to serve as a measure of Begley's injury in the event of a breach. These factors complicate the court's determination of the appropriate remedy for a breach of the Agreement, but they do not render the Agreement non-binding on the signatories.
The next issue is what defendants are liable for the breach that occurred. ECS is clearly liable. It was still in existence as of the time of breach and was clearly bound by the Agreement.
I conclude that Robinson and Moyer are also bound by the Agreement. In the usual course of things, the contract would have been binding solely on ECS and Cura, and not their employees. But here the Agreement specifically provided that the parties signed the Agreement "separately and individually, and on behalf of their corporations and any subsidiaries, division, employees, agents, partners, and consultants whom they represent and/or with whom they may be affiliated for Processing." When Robinson signed the contract, he understood himself to binding himself personally, as well ECS and other employees of ECS, including Moyer. For Moyer's part, he was President of ECS and had personally authorized Robinson to sign the Agreement. Robinson clearly "represented" Moyer and had authority to bind Moyer to the contract. In his communications with Begley, Moyer led Begley reasonably to believe that Robinson was authorized to act on Moyer's behalf and I find implausible Moyer's contention that he never bothered to read the Non-Circumvention Agreement.
JX 54 (emphasis added).
In Bell-Ray Co. v. Chemrite (PTY) Ltd., 181 F.3d 435, 445 (3d Cir. 1999), Judge Stapleton noted that under "traditional agency principles . . . an agent can be bound by the terms of a contract . . . if she is made a party to the contract by a principal acting on her behalf with actual, implied, or apparent authority."
Billops v. Magness Constr. Co., Del. Supr., 391 A.2d 196, 198 (1978) (apparent authority exists when "[m]anifestations by the alleged principal . . . create a reasonable belief in a third party that the alleged agent is authorized to bind the principal. . . .").
Binding the individual employees of ECS to the Non-Circumvention Agreement made commercial sense. Begley would suffer injury from misuse of his sources regardless if it was an ECS employee who personally exploited those sources, rather than ECS itself. By binding ECS employees to the Agreement, Begley protected himself from harm of this kind.
The predicate for EPX's liability is a bit more complicated. EPX did not exist until June 15, 1999, after the time that ECS, Moyer, and Robinson breached the Non-Circumvention Agreement. Although the parties have not dilated on this issue, the court is tempted to conclude that EPX purchased ECS's contract rights as one of ECS's assets. According to EPX's accountants, EPX bought all of ECS's assets. This clearly included the knowledge that ECS procured from Begley through the relationship embodied in the Non-Circumvention Agreement, which knowledge EPX exploited to enter a lucrative processing relationship with Aruba. Having accepted this asset for itself, it is unclear how EPX can avoid the liabilities that go with it. The justice of such a finding would also be certain, given that the asset sale left ECS as a shell without sufficient assets to address the needs of prospective creditors like Begley. Another way to look at the issue would be that ECS assigned the Non-Circumvention Agreement to EPX.
See R.M. Williams Co. v. Frabizzio, Del. Super., 1993 Del. Super. LEXIS 55 at *30-*31 Goldstein, J. (Feb. 8, 1993) (where a defendant was not a formal party to the underlying contract, but undertook to perform the duties of the seller as defined in that contract and to share with her husband all the benefits due to the seller under the contract, she was jointly liable for breach of the agreement, having made herself by her conduct a party to the contract) ( citing Restatement (Second) of Agency § 99, Retention of Benefits as Affirmance (1958)).
Rather than approach the issue in this manner, Begley argues that it is clear that EPX is liable under the doctrines of tortious interference with contract or for unjust enrichment. I agree with him that these doctrines are sufficient to hold EPX accountable for the contractual breach.
To establish a claim of tortious interference with contract, Begley must demonstrate: (1) a contract (2) about which [EPX] knew and (3) an intentional act that is (4) without justification and is (5) a significant factor in causing a breach of the contract and resulting injury. These elements are obviously satisfied here given EPX's exploitation of confidential information it improperly received from the other defendants who were parties to the Non-Circumvention Agreement. Therefore, EPX is equally responsible for the breach.
CPM Indus., Inc. v. Fayda Chems. Minerals, Inc., Del. Ch., C.A. No. 15996, 1997 Del. Ch. LEXIS 175, at * 23, Jacobs, V.C. (Nov. 26, 1997) ( citing Irwin Leighton, Inc. v. Win. M. Anderson Co., Del. Ch., 532 A.2d 983, 992 (1987); Restatement (Second) of Torts § 766 (1979)).
In the alternative, it is clear that EPX would be unjustly enriched were it allowed to take confidential information it learned from ECS, Moyer, and Robinson which was subject to the Non-Circumvention Agreement and to exploit that information for its own gain, without compensating Begley for the services he provided in identifying Aruba Bank and facilitating a processing relationship with it. Begley worked for over a year to cultivate Aruba Bank, only to have the defendants usurp that relationship without paying him a dime. Because I conclude that EPX is liable for tortious interference with the Non-Circumvention Agreement, however, I do not focus further on this alternative source of liability.
The defendants' counsel tried to impress upon the court the fact that Aruba Bank's existence and interest in credit card processing was not a "secret." How this distinguishes this case from any other situation when a broker finds a seller or another necessary party to a commercial relationship is unclear. If it was no secret that someone wanted to sell their home, can I stiff my real estate agent if she actually found the seller for me? This argument also slights the fact that it was Begley who cultivated Aruba and got Simon to the point where he was "very interested in pursuing [a] venture" with ECS. JX 67.
A recent opinion of the Delaware Supreme Court describes the elements of an unjust enrichment claim, which elements have been satisfied by Begley. Schock v. Nash, Del. Supr., 732 A.2d 217, 232-33 (1999).
An opinion of the New York Court of Appeals addressed a situation analogous to this one. In Bradkin v. Leverton, 257 N.E.2d 643 (N.Y. 1970), the plaintiff was employed by a corporation to identify businesses which needed financing. The plaintiff was to be paid a commission for finding such a business, and 10% of which the net profits the corporation made in any second or later financing of the business. The plaintiff found a business, and the corporation paid him a commission. When the time came for the second financing, however, an officer of the corporation made the second financing investment rather than the corporation itself. The officer made a $1,000,000 profit but refused to pay the plaintiff his 10% share.
Because I conclude that Moyer and Robinson are liable directly under the Non-Circumvention Agreement, I do not reach Cura's claim they are liable for tortious interference with that Agreement.
B. Begley Is Entitled To Damages And Attorneys' Fees
Cura seeks damages to compensate him for two distinct types of injuries he suffered as a result of the defendants' breach: (1) the failure of the defendants to compensate him for his valuable introduction to and work with Aruba Bank; and (2) the lost profits and opportunities caused by the defendants' usurpation of the Aruba Bank relationship, by which Begley was denied the ability to forge a relationship with Aruba through another processor and, more importantly, the chance to bring gaming merchants to the EPX-Aruba processing relationship. The second category includes both the basis points Begley hoped to gain by bringing gaming merchants to a processing relationship and the fees he expected to reap by requiring participants in a processing relationship to use Casino Watch.The court's ability to determine Begley's damages with precision is hampered by the murky nature of the market involved in this case. What is in issue is the value of certain services and opportunities in the market to provide credit card processing and offshore banking services to offshore gaming and porn merchants. The evidence suggests that this is a niche market, the standards of which are not readily discernible. Nor is this a market in which the processing needs of the participating merchants in terms of dollar volume is easy to establish.
Regardless of the lack of precision these realities cause, the evidence does demonstrate that Begley is entitled to a significant award of monetary damages. Under the prevailing law, Begley must present "sufficient evidence to provide a reasonable basis for the [fact finder] to estimate with a fair degree of certainty his probable loss." Under Delaware law,
Moody v. Nationwide Mut. Ins. Co., Del. Supr., 549 A.2d 291, 293 (1988).
the standard remedy for breach of contract is based upon the reasonable expectations of the parties ex ante. This principle of expectation damages is measured by the amount of money that would put the promisee in the same position as if the promisor had performed the contract. Expectation damages thus require the breaching promisor to compensate the promisee for the promisee's reasonable expectation of the value of the breached contract, and, hence, what the promisee lost.
Duncan v. Thera Tx, Del. Supr., 775 A.2d 1019, 1022 (2001) ( citing Restatement (Second) of Contracts § 347 cmt. a).
Here, Begley had the contractual power to veto ECS's dealings with Aruba Bank. As a result of this and the defendants' statements to him regarding compensation, Begley reasonably expected to share in the benefits of any processing relationship ECS forged with Aruba Bank. His reasonable expectations included compensation for his services in brokering the relationship between ECS and Aruba Bank, as well as additional compensation for any gaming merchants he could bring to the processing relationship thereafter. Although the terms of his compensation had not been worked out, these elements were essentially acknowledged by the defendants. Because of the defendants' contractual breach, the court is left in the position of figuring out what would have resulted in the event that the defendants had behaved properly. This necessarily involves some level of imprecision.
But the fact that Begley's damages claim turns on events that did not transpire does not mean that his claim must be rejected. As recently as this year, the Delaware Supreme Court articulated the appropriate measure of damages for a party injured because its contractual right to sell stock during a particular period had been impaired. Although there was no basis to determine whether the injured party would have in fact sold at any particular point in time during the black-out period, the Supreme Court fashioned a damages remedy to vindicate the injured party's right to trade during that period. Its practical approach is in keeping with prior Delaware precedent and the trend of modern contract law, which recognize that "[r]easonable certainty is not equivalent to absolute certainty; rather, the requirement that plaintiff show defendant's breach to be the cause of his injury with "reasonable certainty' merely means that the fact of damages must be taken out of the realm of speculation."
Id., passim.
Tanner v. Exxon Corp., Del. Super., C.A. No. 79C-JA-5, 1981 Del. Super. LEXIS 819, *3, Stiftel, J. (July 23, 1981) ( citing, inter alia, 5 ARTHUR L. CORBIN, CORBIN ON CONTRACTS, § 1020 at 124 (1964)); see also 22 Am. Jur. 2d Contracts § 626 at 687; 3 Restatement (Second) of Contracts § 352 cmt. a (1981). This approach is exemplified by Harrington v. Hollingsworth, Del. Super., C.A. No. 89C-JL3, 1992 Del. Super. LEXIS 154, *11-*13 Lee, J. (Apr. 15, 1992). In that case, a commercial fisherman testified that had the defendant constructed a larger commercial fishing boat on time, the fisherman would have been able to catch more sea bass and double his annual income. Because the commercial fisherman was an experienced bass fisherman, the Superior Court held that this testimony was sufficient to establish a basis for lost profit damages with reasonable certainty.
In applying this approach to the facts of this case, I intend to proceed cautiously and conservatively. If anything, I err in favor of the defendants. This is demonstrated by the extent to which I have discounted certain of Begley's evidence, which would support a higher award. At the same time, the evidence convinces me that any materially lesser award would reward the defendants for committing an intentional breach of contract. The defendants' own misconduct brought about many of the uncertainties that make fixing a damages remedy a less than scientifically precise exercise. As the Restatement (Second) of Contracts puts it:
Doubts [about the extent of damages] are generally resolved against the party in breach. A party who has, by his breach, forced the injured party to seek compensation in damages should not be allowed to profit from his breach where it is established that a significant loss has occurred. A court may take into account all the circumstances of the breach, including willfulness, in deciding whether to require a lesser degree of certainty, giving greater discretion .to the trier of the facts. Damages need not be calculable with mathematical accuracy and are often at best approximate.
3 Restatement (Second) of Contracts § 352 cmt. a (1981), in R.M. Williams, 1993 Del. Super. LEXIS 55 at *40 (emphasis added). See also 5 CORBIN ON CONTRACTS, supra § 1020, at 126-27 (1964); 3 E. ALLAN FARNSWORTH, FARNSWORTH ON CONTRACTS, § 12.15 (2d ed. 2000).
Because the defendants intentionally breached the Non-Circumvention Agreement, it is just that they bear a fair share of the costs of that uncertainty that their own improper acts caused.
R.M. Williams Co., supra, at *39-*40 (when contract is breached through an act of egregious bad faith, the plaintiff's burden to prove its damages with certainty is reduced).
That the defendants should bear some of the brunt of uncertainty they created is reinforced by their own contemporaneous acknowledgement that the appropriate compensation to Begley could not be determined until a processing relationship with Aruba Bank was finalized. By cutting Begley out of the loop, the defendants ensured that he had no role in the Aruba negotiations and no chance to obtain his fair share of the profits and opportunities from that relationship.
As his principal argument for damages, Begley has presented a chart illustrating his view of the type of profits he could reasonably have expected to make if EPX had included him in a processing relationship with Aruba Bank. Begley's chart assumes that he would receive 100 basis points on any processing done by gaming merchants through the relationship; that he would receive a 25 basis point override on all business processed by EPX through Aruba Bank ( i.e., Begley would receive 25 basis points on nongaming work and a total of 125 basis points on gaming work), and that Begley would receive a 50% share of Casino Watch transaction fees of $1.00 a transaction, based on an average transaction value of $250.
Pl. Op. Post Tr. Br. at 47.
Likewise, his expectation that a $1.00 transaction fee could be charged for Casino Watch seems overly ambitious. As of spring 1999, Casino Watch operated on a subscription rather than transactional basis. While it is not implausible to think that a negative database like Casino Watch could become a mandatory part of a processing relationship, there is an insufficient basis to infer that the charge could be so pricey. Moreover, Begley sold Casino Watch before EPX began processing with Aruba Bank. He did so because the Interactive Gaming Council had conducted a selection process to determine which negative data base its members should use. Casino Watch came in second to a larger competitor, to which Begley sold the business for $65,000.
For these reasons, I cannot simply accept Begley's request for damages. I do, however, give weight to the analysis that butresses his damages request, as I now explain. In coming to a damages award, I focus on two key issues: (1) the value of Begley's services in finding an offshore bank for EPX, and (2) the opportunities Begley lost to bring gaming merchants to the EPX-Aruba Bank relationship.
1. Begley Performed A Valuable Service In Finding Aruba Bank For The Defendants
The record evidence supports the conclusion that credit card processors will pay real value to someone who can locate an offshore bank for them, especially a bank that is willing to process for high-risk merchants. The evidence also demonstrates that it is much more difficult for a processor to find an offshore bank to process for high-risk merchants than it is for a processor to find high-risk merchants.
Without describing all the evidence in detail, I note that at trial, the following evidence was presented:
• That Begley requested 25 basis points from ECS on all work ECS processed through Aruba Bank as an override in addition to basis points for gaming merchants. Robinson's reply indicated that an arrangement similar to that would be accepted by ECS.
• That EPX moved all of the business of one of its major clients, CC Bill, to the Aruba Bank relationship. This shows how much EPX (and CC Bill) valued the ability to process offshore.
• That EPX itself attempted to find another offshore bank in 2000 and 2001 without success. Gary Robinson undertook this task himself and failed.
• That EPX was worried in 2000 that it had only one offshore bank and feared the loss of its offshore processing capacity.
• That Begley was engaged by several clients in 2000 and 2001 to look for an offshore bank. At least two of these clients were willing to pay Begley 100 basis points on any work processed through a foreign bank as compensation. These clients included EPX's client, CC Bill, thus showing that CC Bill valued access to offshore processing highly because it was willing to pay Begley handsomely to find another offshore bank at a time when CC Bill was processing through Aruba. Indeed, one of Begley's clients agreed to pay additional basis points to sub-agents working with Begley to find a bank.
• That Card Service international, a major credit card processor which is much larger than EPX, spent nearly a million dollars in an unsuccessful attempt to locate an offshore bank for processing.
I reject the defendants' argument that they simply moved the entire account of a major client on Charles Bryant's whim.
See JX133, 150 (Begley contract with CTI); JX 142 (Begley contract with Summit Payment, Inc.).
JX 143.
All of this evidence persuades me that Begley performed a valuable service for the defendants by identifying Aruba Bank and facilitating a processing relationship with it.
2. The Lost Opportunity To Bring Gaming Merchants To The Relationship
When ECS began working with Begley on a relationship with Aruba Bank, the clear focus was on attracting gaming merchants. This was an opportunity that Begley had been working for two years to exploit. By bringing together ECS and Aruba Bank, he would accomplish the key task necessary to give gaming merchants on Curacao access to a convenient way to process their credit card transactions.
Begley, of course, suffered the fate feared by every middleman — he was cut out by ECS and Aruba Bank. Having been brought together by Begley, ECS and Aruba Bank discarded him as no longer useful. Neither wanted to pay him, and Aruba Bank wanted first crack at signing up gaming merchants. It was thus most convenient for them to simply disregard him.
Through its participation in this behavior, the defendants deprived Begley of a valuable opportunity. While I do not have confidence that Begley could have brought $500 million in processing to the relationship in three years, the evidence does persuade me that Begley had the contacts to bring a significant amount of gaming work to the relationship. Through his Casino Watch clients and the gaming merchants who had used him to help them find a bank, Begley had the capacity to direct merchants to a high quality processing relationship.
The defendants concede that EPX pays sales agents who find merchants, and does so in the form of basis points on any transactions processed by EPX for the merchant in perpetuity. The previous Sales Representative Agreement is evidence that the defendants believed that gaming merchants were particularly attractive, since the compensation terms in that Agreement were generous. Moreover, Moyer told Begley that the Sales Representative Agreement "looked good" in January 1999 when they were discussing the structure of how Begley would be compensated. The record also contains evidence that other entities pay intermediaries, such as Charles Bryant, basis points for landing merchants.
3. The Court's Determination of The Amount of Damages
The difficult question is how to reduce the harm suffered by Begley to a specific number. That difficulty results in part from the fact that EPX eventually centered its relationship with Aruba mostly on porn, rather than gaming, merchants. This appears to have flowed from EPX's own desire to place its porn merchants with an offshore bank, and from its decision to allow Aruba to have the first crack at getting gaming business and to take only a puny share of any profits generated by merchants Aruba located. Taken together, this resulted in a relatively insubstantial amount of gaming work flowing through the relationship. The difficulty of quantifying damages is also affected by what I perceive were the limits on Aruba's processing capacity, given its small size and capital. These limits might well have placed a ceiling on the total amount of processing Aruba could have done, irrespective of how many merchants were willing to process with it. Although that ceiling was materially above the $244 million total processing during the relevant time period, it is questionable whether Aruba could have doubled the amount of work it processed in that short time frame.
But the reality that came to pass would have been different had Begley been at the table. Trade-offs would likely have been made, such as according Begley a greater override in exchange for focusing the relationship on work for EPX's porn merchants. Likewise, EPX and Aruba Bank would likely have employed Begley as the finder of gaming merchants, at which he would have likely had far more success than Aruba Bank, given his closer ties to the gaming community.
I confront these uncertainties by clinging to some known facts. The record reveals that EPX processed over $244 million in work through Aruba Bank as of the time of trial. During this same period, EPX's profitability as a company soared, at the same time as the company was able to make major investments in technology development that were unnecessary to processing for the Aruba clients. Even based on its own self-serving and unreliable evidence, EPX made a profit of 240 basis points on the Aruba Bank processing after accounting for all costs reasonably associated with that processing.
The court's ability to determine EPX's exact profits from its relationship with Aruba Bank is compromised by the defendants' failure to present reliable financial information. Instead, they presented a moving target that kept changing in order to show that a relationship they had striven to maintain was in fact a money loser. Without burdening the reader with a full explication of the reasons I conclude that the relationship was profitable, I simply note that: (1) Moyer testified that CC Bill was a very profitable client he did not want to lose; (2) EPX moved all of the CC Bill work to Aruba; (3) EPX had its most successful years after beginning to process with EPX; (4) EPX presented no testimony from a company official sufficiently familiar with the company's finances to back up the claim that the relationship was unprofitable; (5) EPX was willing to invest millions of dollars in Aruba for a nominal return so Aruba could continue processing for EPX; and (6) EPX did not "discover" that the relationship was unprofitable until it needed to argue that in this case; and (7) EPX desired to continue processing through Aruba and was doing so on a high-volume basis until Aruba terminated CC Bill in June 2001.
My damages ruling also reflects the industry practice, by which an intermediary who finds a merchant is paid the agreed-upon level of basis points for all transactions processed, regardless of the eventual profitability of that processing for the processor. That is, the industry practice is that processors assume the risk of chargeback problems or their own failure to manage costs related to merchants they accept for processing.
Deploying the conservative approach I described above, I find that a total damages award to Begley equal to 100 basis points of the gross processing volume EPX processed through Aruba Bank as of trial and 100 basis points of any such future processing is appropriate. This award could be viewed as underestimating the damage to Begley, in view of the evidence that there are market participants which would pay 100 basis points to someone just for finding an offshore bank such as Aruba Bank for processing. Put more bluntly, the record evidence would support a quantum meruit award of 100 basis points to Begley solely as compensation to him for finding Aruba Bank, and an award to him of additional damages for the loss of his ability to bring gaming merchants to the table. Uncertainties exist, however, regarding exactly the level of gaming business Begley could have brought to the table and Aruba's capacity to process that work and the porn merchant work EPX funneled to it. This is not to say that I do not give substantial weight to the evidence Begley presented regarding his ability to bring gaming merchants to the table. I credit his view that he could have brought significantly more gaming work to the relationship than Simon did, but am dubious that he could have generated $500 million in processing in a three-year period. Thus, I choose a cautious approach to compensating Begley, which provides him with a total of 100 basis points as damages for his uncompensated work in bringing Aruba Bank together with the defendants and for his lost opportunity to bring gaming merchants to the relationship for processing.
This award, if anything, slights the lost opportunities Begley in fact suffered, and is best seen as the minimum value Begley would have received had the defendants behaved properly. My reluctance to award a larger sum flows from among other things, the dearth of reliable financial information about the gaming industry in Curacao and the looseness of the relevant "industry" standards at issue.
The damage award, however, will include pre-judgment interest at the statutory rate. The parties shall agree on the calculation of that amount. The Non-Circumvention Agreement also provides that in the event of breach, Cura shall be "entitled to all legal and equitable remedies . . . and the recovery of costs, expenses and attorney's fees in pursuing such remedies." This unambiguous provision entitles Begley to an award of his attorney's fees and expenses. The parties shall consult and try to reach agreement on the level of such award. In the event that the parties do not agree, they shall seek the scheduling of a prompt hearing to decide that issue.
See Burge v. Fidelity Bond and Mortg. Co., Del Supr., 648 A.2d 414, 421 (1984) (recognizing contractual undertaking as exception to "American Rule" requiring litigants to pay their own counsel fees.).
IV. Conclusion
For the foregoing reasons, judgment shall be entered for the plaintiffs against all the defendants. The parties shall confer on the form of an implementing order and submit it to the court within ten days.
The New York Court of Appeals held that the plaintiff had pled an unjust enrichment or "quasi-contract" claim against the defendant officer because the defendant had essentially taken over the finder's fee contract from the corporation and then attempted to avoid paying the plaintiff the contractually contemplated commission. Thus, the court stated that "it would be against good conscience for the defendant to retain the benefits of the contract which the plaintiff made with the defendant's corporation without compensating the plaintiff for the services he fully performed pursuant to that contract. Accordingly, if the plaintiff proves the allegations of his complaint, he will be entitled to recover from the defendant, as damages, the amount which the defendant's corporation had obligated itself to pay him if there was a "second financing' . . ." Id. at 647.