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Value Linx Services, LLC v. Linx Card, Inc.

United States District Court, D. Oregon, Portland Division

August 1, 2019

VALUE LINX SERVICES, LLC, an Oregon corporation and PRIORITY PAYMENT SYSTEMS WEST, an Oregon corporation, Plaintiffs,
v.
LINX CARD, INC., a Delaware corporation; LINXPAY, INC., a California corporation; and LPH FINANCIAL, INC., a California corporation, Defendants.

          Darian A. Stanford Paul W. Conable Steven D. Olson Tonkon Torp LLP Attorneys for Plaintiffs

          Brian T. Kiolbasa Pilar C. French Lane Powell, PC Attorneys for Defendants

          OPINION & ORDER

          MARCO A. HERNÁNDEZ UNITED STATES DISTRICT JUDGE

         This matter comes before the Court on Defendants' Motion to Dismiss Plaintiffs' First Amended Complaint [ECF 23] and Motion to Strike Declaration of Tyler Young [ECF 28].

         For the reasons that follow, the Court GRANTS in part and DENIES in part Defendants' Motion to Dismiss as follows: The Court denies Defendants' Motion as to Claims One, Four, and Five. The Court, however, grants Defendants' Motion as to Plaintiffs' Claims Two and Three. The Court dismisses those claims without prejudice and with leave to amend. To the extent that Plaintiffs intend to file a Second Amended Complaint, the Court directs Plaintiffs to do so no later than August 15, 2019.

         The Court also GRANTS Defendants' Motion to Strike insofar as the Court declines to consider the Young Declaration and attached Exhibits in ruling on Defendants' Motion to Dismiss.

         BACKGROUND

         The following facts are taken from Plaintiffs' First Amended Complaint [ECF 22] and are assumed to be true at this early stage of the proceedings:

         Plaintiff Priority Payment Systems West (“PPSW”) is a credit-card processing company founded by Tyler Young. Plaintiff Value Linx Services (“VLS”) is a related entity that Young created specifically to handle business with Defendant Linx Card, Inc.[1]

         Linx is a payment-processing company that, as relevant to his case, sells gift cards bought at kiosks within cannabis dispensaries to allow consumers to purchase cannabis products without cash. VLS and Linx entered into a contract under which, as detailed below, VLS marketed Linx systems to cannabis retailers.

         Defendants LinxPay, Inc., and LPH Financial, Inc., are California corporations that either share an address with Linx or are located nearby. Both LinxPay and LPH Financial made payments to VLS under its contract with Linx. From these facts Plaintiffs allege Linx delegated its duty to pay VLS to LinxPay and LPH Financial.

         Because of restrictions under federal law, recreational-cannabis retailers have generally operated on a cash-only basis. Linx's products and services presented a mechanism by which consumers and retailers could complete transactions using a credit card. Linx placed kiosks inside the stores of participating cannabis retailers at which customers could use their credit card to buy a gift card. Those customers could then purchase cannabis products using the gift card, obviating the need for the consumer to complete the transaction in cash. Linx profited from these arrangements in three ways: (1) by charging a $2.00 “load fee” each time a consumer loaded money onto a Linx card; (2) by charging a $0.35 “transaction fee” every time a Linx card was redeemed at a retail store; and (3) by collecting a 2.75% “discount fee” from the retailer on every sale using a Linx card.

         After learning of Linx's business from an associate, Young reached out to Linx's founders, Patrick Hammond and Kevin Senn, to propose forming a business relationship. On October 18, 2016, VLS and Linx entered into a contract by which “VLS would attempt to attract cannabis retail merchants in Oregon and elsewhere to use the [Linx] card system.” First Am. Compl. [ECF 22] ¶ 12. Plaintiffs allege Linx had only eight active cannabis retail customers at the time they entered into the contract, two of which were in Oregon.

         With respect to retailers that VLS convinced to user the Linx system, the contract provided Linx would be paid a $2.00 load fee, the $0.35 transaction fee, and a 2.95% discount fee.[2] These standard rates under the contract are referred to collectively as the “buy rate.” If VLS could convince the retailers to enter into agreement to pay more than the buy rate, then VLS would earn 90% of the additional revenue while Linx would keep the remaining 10%. This split of the additional revenue above the buy rate is known as the “residual split.”

         Once the VLS portfolio reached a cumulative $1 million in processing volume, the contract provided Linx's “discount fee” would drop from 2.95% to 2.85%, with VLS earning the additional portion of the residual split. Once the VLS portfolio reached a cumulative $2 million in processing volume, the discount fee was to fall to 2.75%, the transaction fee would drop to $0.30, and VLS's share of the residual split was to increase to 95%.

         The contract provided all residual payments to VLS were due within three to five business days of the end of each calendar month. In addition, the contract entitled VLS to its residual split even after the termination of the contract so long as retailers secured by VLS continued to use the Linx system.

         With respect to the relationship between VLS and Linx, the contract provided VLS could promote Linx products in any state and would become the exclusive reseller of Linx products in Oregon after VLS attracted 25 retailers to use the Linx system. Moreover, after Linx “attained its initial goals” in Oregon, the contract provided VLS “could also receive exclusivity for the entire Pacific Northwest.” First Am. Compl. ¶ 12. As for Linx's obligations, it agreed “not to pursue any end user's [sic] without VLS involvement for at least six months” and that Linx would “provide at no cost to the [retailer] or VLS a full iPad station” on which to complete transactions. Id.

         After entering into the contract Young set up Norml (which was later replaced by VLS). Young also diverted half of PPSW's credit-card processing workforce to work on matters related to Linx and hired a new salesperson primarily to work on the Linx contract. In December 2016 Young travelled to California to meet with Linx management. During those meetings Young discussed investing $100, 000.00 in Linx. Senn and Linx's head of sales, John Wilson, however, told Young “to invest that $100, 000.00 in VLS' sales efforts instead.” First Am. Compl. ¶ 14. Plaintiffs allege “[i]n exchange for such investment and for devoting his time and energy to VLS and LINX rather than to PPSW's traditional credit card sales business, Kevin Senn and John Wilson promised that LINX would provide financial rewards.” Id. ¶ 15. In particular, Plaintiffs allege Senn and Wilson promised Young that if “VLS invested $100, 000 into VLS's sale efforts and focused on VLS rather than PPSW's credit card processing business, Mr. Young and VLS would be paid at or in excess of the level of Zach Senn (represented at around five percent) in the event of an exit.” Id. As a result of this conversation Young and VLS spent approximately $130, 000.00 enhancing VLS's sales efforts, shifted all but one PPSW credit-card employee to the Linx contract, and Young devoted “nearly all of his time” to the Linx matters.

         By the end of July 2017 VLS signed over 60 “cannabis merchant applications” with retailers, of which 52 were actively using Linx services in August 2017 and 56 were actively using Linx services in September 2017. The “majority” of those retailers agreed to pay fees at the following rates: $3.00 load fees, $0.55 transaction fees, and 4.99% discount fees. Id. ¶ 17. By mid-May 2017 VLS had achieved the $1 million threshold necessary to lower Linx's discount rate to 2.85%. In July 2017 VLS achieved the $2 million threshold necessary to make the discount rate drop to 2.75%, the transaction fee to fall to $0.30, and VLS's residual share to rise to 95%.

         Plaintiffs allege Linx's residual payments to VLS were chronically late from the outset of their contractual relationship. The residual payments that VLS received came from either LinxPay or LPH Financial. By January 5, 2018, VLS had earned approximately $174, 742.15 in residual payments. Defendants, however, had only paid $141, 381.15 to VLS. Defendants did not make any residual payments for 2018. Although Defendants paid an additional $33, 361 to VLS on May 1, 2018, Plaintiffs allege that amount only resolved the outstanding residual amounts from 2017. Plaintiffs allege they are entitled to residual payments in the amount of approximately $365, 627.00 for 2018 with additional amounts for 2019 and prospective residual entitlements.

         In Claim One Plaintiffs bring a breach-of-contract claim against all Defendants. In Claim Two Plaintiffs bring a claim for breach of the covenant of good faith and fair dealing against all Defendants on the basis that Linx “attempt[ed] to interfere with Plaintiffs' ability to perform under the 2016 Contract.” Id. ΒΆ 35. In Claim Three Plaintiffs bring a claim against Linx for breach of an oral contract on the basis that Linx failed to pay Plaintiffs the amount equal to five percent of Linx's valuation as promised by Senn and Wilson at the December 2016 meeting. In Claim Four Plaintiffs bring a promissory-estoppel claim against Linx on the basis that VLS invested $130, 000.00 in its company related to the Linx contract in detrimental reliance on the promises made at the December 2016 meeting. ...


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