New England Biz Law Update
A Rhode Island Superior Court judge has ruled that an independent contractor who was responsible for generating new business for a Rhode Island company could not be sued for tortious interference after leaving to start a competing firm.
The Rhode Island company, in the business of providing credit card transaction processing services, argued that because the independent contractor took clients with him, he should be deemed to have tortiously interfered with the contractual relationships that existed between the company and its clients.
Judge Michael A. Silverstein disagreed and awarded summary judgment to the independent contractor.
“To punish a competitor business for trying to solicit clients, and thereby advancing its own self-interest, would go against the weight of the factors laid out in the Restatement [(Second) of Torts],” the judge wrote.
The company also alleged that the independent contractor violated a restrictive covenant contained in the parties’ signed agreement.
Silverstein found that summary judgment could not be granted because of a dispute over whether the independent contractor’s signature was a forgery.
The 18-page decision is Precision Payments, Inc., et al. v. East Commerce Solutions, Inc.
Providence, R.I., attorney Jeffrey B. Pine represented the company. The independent contractor was defended by Providence lawyers Brian LaPlante and Michael J. Jacobs.
Shifting loyalties
East Commerce Solutions, Inc. was a sales agent — or “member service provider” as referred to in the industry — for credit card processors, including Elavon, Inc. Under a contract between them, East Commerce would solicit merchants and set the merchants up so that they had the capability of accepting payment by credit card. Elavon would then be the processor of the credit card payments made to those merchants.
At a conference in November 2009, Joel King approached East Commerce’s chief executive officer, Edward Medeiros. The two agreed to terms whereby King would work directly for East Commerce.
King was responsible for generating new business by soliciting merchant applications and agreements for credit card transaction processing. If a merchant terminated a relationship with it, East Commerce could charge a cancellation fee per the clause contained within the merchant receipt, which stated “Cancellation of your account may result in a cancellation fee.”
In early 2010, King gave thought to forming his own business. In August of that year, he formed Precision Payments, Inc., a company similar in nature to East Commerce.
By late 2010, King stopped submitting client merchants to East Commerce and instead began soliciting merchants for Precision Payments, including merchants whom he had previously secured as clients for East Commerce. In all, 56 merchants that King had procured for East Commerce terminated their relationship with East Commerce and engaged the services of Precision Payments.
Once East Commerce discovered the conduct of King, they stopped paying commissions and residuals owed to him.
King and Precision Payments responded by bringing suit for monies due and owing. Their complaint also alleged overcharging “termination fees” of former East Commerce, and now Precision Payments, clients.
East Commerce filed a counterclaim alleging tortious interference with prospective and existing contractual relationships, breach of contract and unjust enrichment.
Industry norm
In defending against the tortious interference counterclaim, the independent contractor asserted that East Commerce often solicited new businesses, and in doing so would pay termination fees owed by its new clients. Thus, he argued, East Commerce could not claim that the practice of soliciting someone else’s existing clients was the cause of tortious interference when it engaged in the very same conduct.
“If East Commerce were to prevail then, according to Plaintiffs, it would chill the industry norm and practice that are required for competition to exist among credit card processing companies: for example, no merchant would leave his or her current processing servicer because of the threat of having to pay a termination fee,” Silverstein said.
The judge found that East Commerce allowed its own employees to solicit other accounts and offered to pay any early termination fees associated with the pursuit of those accounts.
“[T]his course of conduct is common in the credit card processing industry, and a practice that Defendant engages in regularly,” he stated.
“[T]he fifth Restatement factor, which seeks to balance the social interests of the parties, would be offended should the Court find that this type of conduct amounts to intentional and unjustified interference,” Silverstein said. “A finding that Plaintiffs tortiously interfered would upset the balance in the industry.”
In support of its breach of contract counterclaim, East Commerce contended that — regardless of the validity of the restrictive covenant that the independent contractor denied signing — he violated his duty of loyalty by soliciting merchants away from East Commerce while still in the employ of East Commerce.
“While an independent contractor may not always owe a duty of loyalty, he or she will when he or she is also considered an agent,” the judge said. “Therefore, for an independent contractor to owe a duty of loyalty, he or she must also be considered an agent.”
Silverstein concluded that no agency relationship existed between King and East Commerce.
“While East Commerce asserts a number of factors — including providing training and supplying leads — that it contends created an agency relationship, it fails to substantiate how these factors relate to King,” the judge said.
“King worked free of oversight from East Commerce, was paid by commissions earned, was not provided office space, and scheduled his own hours,” Silverstein continued. “All of this, combined with the fact that the Alleged Signed Agreement (the validity of which is contested) stated that an agency relationship was not established, clearly indicates that King was an independent contractor of East Commerce and not an agent. Therefore, King owed no duty of loyalty to East Commerce by virtue of his relationship to East Commerce.”
