On June 7, 2019, the US Court of Appeal for the Sixth Circuit held that the district court did not err in awarding judgment in favor of business as it was exempt from liability under a “consequential damages waiver” contained in the “Merchant Agreement” executed with the data processing company.
By way of background. Two data breaches attacked Spec’s Family Partners’ payment card system, leading to millions of dollars in damage-control costs, which the major credit card brands and their associated bank passed on to First Data, the company processing payments for Spec’s.
First Data began withholding routine payments to Spec’s to make up the difference. Spec’s ultimately refused to pay First Data, relying on the consequential damages waiver in the Merchant Agreement. When Spec’s filed suit, First Data had withheld approximately $2.2 million (the total would eventually reach $6.2 million).
Interpreting the contract between the parties, the district court awarded judgment to Spec’s and made two findings. First, “it held that the card brand assessments constituted consequential damages, thus barring liability for Spec’s under the Merchant Agreement’s limitation clause. Second, it refused to treat the assessments as “third-party fees and charges,” for which Spec’s would have liable under the Merchant Agreement.
On appeal, the Sixth Circuit agreed with the district court that the assessments passed down to merchant were consequential damages. The Merchant Agreement excluded consequential damages from liability under a limitation of the indemnification clause.
The court also noted that third-party fees do not refer to liability for data breach. It deemed that “third-party fees and charges” in the contract referred to “routine charges associated with card processing services rather than liability for a data breach”. The merchant did not materially breach Merchant Agreement.
Spec’s Family Partners, Ltd. v. First Data Merch. Servs. LLC, 2019 U.S. App. LEXIS 17151, 2019 FED App. 0294N (6th Cir.), __ Fed. Appx. __, 2019 WL 2407306 is available at http://www.opn.ca6.uscourts.gov…