Opinion ID: 1235030
Heading Depth: 3
Heading Rank: 1

Heading: Sovereign's Breach of Contract Claim Against Fifth Third.

Text: As noted, Sovereign's contract claim is based on the theory that it is a third-party beneficiary of Fifth Third's Member Agreement with Visa. As also noted, that agreement required Fifth Third to ensure that BJ's complied with the Visa Operating Regulations, and § 5.2.h.3.b. of that agreement prohibits Merchants from retaining Cardholder Information. Sovereign contends that Fifth Third breached that contract by not ensuring BJ's compliance. Historically, under Pennsylvania law, in order for a third party beneficiary to have standing to recover on a contract, both contracting parties must have expressed an intention that the third-party be a beneficiary, and that intention must have affirmatively appeared in the contract itself. Scarpitti v. Weborg, 530 Pa. 366, 609 A.2d 147, 149 (1992) (citation omitted). Sovereign appropriately concedes that it is not an express third-party beneficiary of the Visa-Fifth Third Member Agreement. However, in Scarpitti, the Pennsylvania Supreme Court adopted § 302 of the Restatement (Second) of Contracts. Id. That provision allows an intended beneficiary to recover for breach of contract even though the actual parties to the contract did not express an intent to benefit the third party. Section 302 provides as follows: Intended and Incidental Beneficiaries (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intentions of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance. (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary. Under § 302, Sovereign's contract claim depends on whether the recognition of a right to performance in Sovereign is appropriate to effectuate the intentions of both Visa and Fifth Third in entering into their member agreement and whether the circumstances indicate that Visa (the promisee) intend[ed] to give Sovereign the benefit of the promised performance. As noted earlier, the district court converted Fifth Third's Rule 12(b)(6) motion to dismiss to a motion for summary judgment and ordered limited discovery. The ensuing discovery included production of numerous documents as well as the deposition of Visa's designated representative, Alex Miller. Fifth Third relies in part on Miller's testimony that he was not aware that Visa intended to create a direct right of enforcement under the Operating Regulations among Members and he has never seen a document that would allow a Member to step into Visa's shoes under its contract with other members and enforce the Operating Regulations. Miller testified in part as follows: [T]he core purpose of the Operating Regulations is to set up the conditions for participation in the system, to set up the rules and standards that apply to that ultimately for the benefit of the Visa payment system, the members that participate in it and other stakeholders such as cardholders, merchants, and others who may participate in the system as well. Fifth Third further contends that Miller also made it clear that the Operating Regulations' prohibition against retaining Cardholder Information, which Fifth Third claims was enacted long after it entered into its agreement with Visa, was not to benefit any individual member or class of members. Rather, according to Miller: [t]he purpose of the CISP program ... is to maximize the value to the Visa system as a whole. That can include the protection of any entity that may be involved in the use or  or handling of cardholder data, so it's to protect a cardholder, the privacy of their information, to protect their confidence in using the Visa system, to protect issuers, to protect acquirers, to protect merchants; and by creating a system that protects cardholder data, generally it's to maximize the usage and value of the Visa payment system for all of those participants. Miller was asked whether, even though there may have been multiple purposes for requiring the Acquirer to ensure Merchant compliance with the regulations, at least one such reason was to protect Issuers. Miller responded as follows: The part of your question I'm struggling with is to say whether that was the purpose or not. I think I summarized what the purpose was. One of the entities that is impacted by the Cardholder Information Program is issuers, as well as acquirers, merchants and cardholders. So my understanding was the purpose was not directed at any one of those entities but to maximize the value of the system in protecting cardholder information for all of the participants. Finally, Fifth Third notes that in responding to a question about whether Visa intended to give Issuers the benefit of the Acquirer's compliance with the CISP, Miller testified: Visa designed the CISP program to benefit the Visa system as a whole, to drive confidence in the integrity of the Visa system, to drive greater, greater efficiency, to drive cardholder security, and to do that from requirements that apply to all Visa members that designed ultimately to yield a more efficient system on behalf of all those participants. In sum, Fifth Third contends that Miller's deposition testimony clearly shows that the intent of the Operating Regulations, and more particularly the prohibition on Merchant retention of Cardholder Information, is to benefit the Visa system as a whole and not Sovereign or any particular Issuer in particular. Accordingly, Fifth Third argues that it is entitled to summary judgment on Sovereign's breach of contract claim. Sovereign responds that there is a genuine issue of material fact as to Visa's intent which precludes summary judgment. Sovereign notes that in August 1993, Visa wrote a memorandum entitled Retention of Magnetic-Stripe Data Prohibited. [5] The memorandum described a new section of the Operating Regulations prohibiting the storage of magnetic-stripe data, i.e., Cardholder Information. It read in part as follows: To protect the Visa system and Issuers from potential fraud exposure created by databases of magnetic-stripe information, Section 6.21 has been revised. Effective September 1, 1993, the retention or storage of magnetic stripe data subsequent to the authorization of a transaction is prohibited. Acquirers are obligated to ensure that their merchants do not store the magnetic-stripe information from Visa Cards for any subsequent use. Sovereign contends that this August 1993 memorandum shows that Visa understood and clearly intended that Issuers such as Sovereign (and PSECU) would obtain direct benefits from the requiring members to ensure that magnetic-stripe data was not retained. Sovereign further contends that other evidence obtained from Visa shows that Visa expressly understood and intended that the prohibition would provide direct benefits to Issuers and that the type of harm suffered by Sovereign was specifically intended to be avoided by compliance with the prohibition. Visa published an on-line article entitled Issuers and Acquirers Are At Risk When Magnetic-Stripe Data Is Stored, in May 2003. The article stated that the CISP was established to preclude a compromise that could lead to the duplication of valid magneticstripe data on counterfeit or altered cards, because such a data compromise impacts Issuers, Acquirers, cardholder goodwill and the integrity of the payment system. Sovereign submits that this article is additional evidence that the prohibition against retaining Cardholder Information contained in the magnetic strip was intended to directly benefit Issuers. Finally, Sovereign relies on the following exchange during Miller's deposition: Q: [by Fifth Third's counsel] Is it fair to say that the operating regulations are not intended to benefit a single group of participants, but the Visa payment system as a whole? Objection. Leading. A: [by Miller] It's fair to say that the core purpose of the operating regulations is to set up the conditions for participation in the system, to set up rules and standards that apply to that ultimately for the benefit of the Visa payment system, the members that participate in it and other stakeholders such as cardholders, merchants and others who may participate in the system as well. (emphasis added). Q: They may have some incidental benefit; is that correct? Objection Leading, and calls for a legal conclusion. A: The bylaws and operating regulations, by their terms, apply only to members. So to the extent you mean they might have benefits beyond the rules that apply to other stakeholders, that's correct. They're not directly parties to these rules. (emphasis added) Sovereign argues that, despite the best efforts of Fifth Third's counsel, the italicized portions of Miller's testimony demonstrate that Visa understood that Issuers are more than incidental beneficiaries of the Member Agreements. Rather, it shows that Visa expressly understood that other classes of participants, such as Issuers, were intended and foreseeable beneficiaries of a Member Agreement, even though they are not parties to a particular agreement. Sovereign also argues that in granting summary judgment to Fifth Third, the district court did not apply well-settled summary judgment standards. Rather, according to Sovereign, the district court acted like a fact-finder by weighing conflicting or ambiguous evidence and making credibility determinations. The district court explained: In the face of this evidence of Visa's intent [i.e., Miller's deposition testimony], we do not believe that the single August 1993 reference to benefiting issuers nor the ambiguous core purpose statement is sufficient evidence to lead a reasonable jury to find for [Sovereign] on the contract claim. 2006 WL 1722398 at  (emphasis added). It further commented: It cannot be disputed that Sovereign benefits from the prohibition on the retention of magnetic-stripe data. It is probably also true that as an issuer it has the greatest need for such a prohibition, and benefits the most from it, since its cardholders' information is at risk if a merchant or other entity retains such data so that it is subject to theft. But one essential part of the test for third-party-beneficiary status is that the promisee, here Visa, must have intended to benefit the third party. There is sufficient evidence on summary judgment to state that Visa had no such intent. In sum, as Fifth Third argues, Sovereign is at most an incidental beneficiary of the member agreement between Visa and Fifth Third, and an incidental beneficiary has no right to enforce a contract, no matter how great a stake it might have in doing so. Id. (emphasis added). We disagree with Sovereign's claim that the district court did not apply well-settled summary judgment standards. In Saldana v. Kmart Corp., 260 F.3d 228 (3d Cir.2001), we discussed the familiar principles governing summary judgment: When reviewing an order granting summary judgment, we exercise plenary review and apply the same test a district court applies. Under Federal Rule of Civil Procedure 56(c), that test is whether there is a genuine issue of material fact and, if not, whether the moving party is entitled to judgment as a matter of law. In so deciding, a court must view the facts in the light most favorable to the nonmoving party and draw all inferences in the party's favor. A court should find for the moving party if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. The party opposing summary judgment may not rest upon the mere allegations or denials of the pleading; its response, by affidavits or as otherwise provided in this title, must set forth specific facts showing that there is a genuine issue for trial. There is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. Such affirmative evidence  regardless of whether it is direct or circumstantial  must amount to more than a scintilla, but may amount to less (in the evaluation of the court) than a preponderance. Id. at 231-32 (citations omitted) (emphasis added). In a later case, In re CitX Corp., 448 F.3d 672, 677 (3d Cir.2006), we commented that to survive summary judgment on his claim ... [a nonmovant] must present sufficient evidence to allow a reasonable jury to find in his favor. Moreover, in one of the leading, and oftcited, summary judgment standard cases, Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), the Supreme Court noted that [b]y its very terms, Rule 56(c) provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact. Id. at 247-248, 106 S.Ct. 2505 (emphasis in original). The Court went on to explain: As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted.  More important for present purposes, summary judgment will not lie if the dispute about a material fact is genuine, that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. at 248, 106 S.Ct. 2505. Therefore, the district court did not err in referring to a reasonable jury or substantial evidence in its summary judgment analysis. However, even though we do not agree with Sovereign's contention that the district court misstated the rule for granting summary judgment, we agree that the court misapplied those principles and erroneously granted summary judgment. In order to be an intended beneficiary of the Visa-Fifth Third Member Agreement, Sovereign has the burden of producing, inter alia, sufficient evidence that Visa intended to give it the benefit of the Fifth Third's promise to Visa to ensure that BJ's complied with the provision of the Member Agreement prohibiting Merchants from retaining Cardholder Information. We believe that Sovereign met that burden. We do not, however, regard the May 2003 on-line article entitled Issuers and Acquirers Are At Risk When Magnetic-Stripe Is Stored as indicative of an intent to benefit a particular Issuer such as Sovereign or PSECU. That article simply states the reason for the prohibition against retention of Cardholder Information, viz., a data compromise that could result from storage of magnetic-stripe data impacts Issuers, Acquirers, cardholder goodwill, and the integrity of the system. However, we do believe that Visa's August 1993 memorandum, entitled Retention of Magnetic-Stripe Date Prohibited, and Miller's core purpose deposition testimony raise a genuine issue of material fact regarding the intent of the Visa and Fifth Third Member Agreement. That was sufficient to preclude the grant of summary judgment on Sovereign's breach of contract claim. In his deposition, Miller testified that the core purpose of the Operating Regulations was to benefit the Visa system and the members that participate in it. Admittedly, any indication of an intent by Visa to specifically benefit Issuers is arguably undermined by Miller's references to other shareholders such as cardholders, merchants and others who may participate in the system as well. Nonetheless, his testimony clearly suggests an intent by Visa to benefit Issuers. An argument to the contrary is tantamount to claiming that since Visa intended to benefit 35 everyone who was part of the Visa system, it did not specifically intend to benefit anyone. However, the fact that it intended to benefit several Members or classes of Members does not negate the possibility that it intended to benefit individual Issuers such as Sovereign. Moreover, as recited earlier, the August 1993 memorandum provides, in relevant part: To protect the Visa system and Issuers from potential fraud exposure created by databases of magnetic-stripe information .... Acquirers are obligated to ensure that their merchants do not store the magnetic-stripe information from Visa Cards for any subsequent use. (emphasis added). Thus, the memorandum clearly states that Acquirers must act to protect Issuers by ensuring that their Merchants do not retain Cardholder Information. Accordingly, the August 1993 memorandum is sufficient evidence by itself to create a genuine issue about whether Visa intended to give Sovereign the benefit of Fifth Third's promise to Visa to ensure BJ's compliance with the provisions of the Visa-Fifth Third Member Agreement. Therefore, we will reverse the district court's grant of summary judgment to Fifth Third on the breach of contract claim and remand for further proceedings on that claim. [6]