Affinion Benefits Group, LLC v. Econ-O-Check Corp. (784 F. Supp. 2d 855, 2011)

Citations

784 F. Supp. 2d 855

Full opinion text

MEMORANDUM OPINION

THOMAS A. WISEMAN, JR., Senior District Judge.

Plaintiff Affinion Benefits Group, LLC (“Affinion”) filed suit against Defendant Econ-O-Check Corp. (“EOC”) alleging that EOC intentionally and wrongfully induced a large number of Affinion’s clients to breach their contracts with Affinion, in violation of Tennessee common law and statute, Tenn.Code Ann. § 47-50-109, and engaged in unfair and deceptive conduct in violation of the Tennessee Consumer Protection Act (“TCPA”), Tenn.Code Ann. § 47-18-109. Now before the Court is EOC’s Motion for Summary Judgment (Doc. No. 98) seeking judgment in its favor and dismissal of all claims against it. Specifically, Econ-O-Check asserts that Affinion cannot establish, as a factual matter, the requisite elements of its claim for inducement of breach of contract and has not stated a valid claim for violation of the TCPA. The major part of EOC’s motion targets Affinion’s contracts themselves: EOC argues that those portions of Affinion’s contracts that it is charged with inducing Affinion’s clients to breach are unenforceable as a matter of law. (Doc. No. 117, at 2.) EOC argues that, because the existence of an underlying valid and enforceable contract is a required element of any claim for inducement to breach, the inducement claims necessarily fail. It argues on essentially the same basis that it cannot be liable under the TCPA either.

Also before the Court is Affinion’s own motion for summary judgment as to EOC’s counterclaims for Sherman Act violations and intentional interference with business relationships, and as to EOC’s requests for a declaratory judgment that certain provisions in Affinion’s contracts are unenforceable and a permanent injunction preventing Affinion from enforcing those provisions in its existing contracts and from using such provisions in future contracts Affinion also seeks summary judgment as to EOC’s affirmative defense that the contracts upon which Affinion’s inducement claims are premised are illegal and therefore unenforceable.

After considering the parties’ arguments and the entire record, and holding not one but two hearings on the motion, the Court finds that EOC is entitled to partial summary judgment in its favor. Specifically, the Court will grant summary judgment to EOC on Affinion’s claims of inducement of breach of contract on the basis that the contract provisions at issue, the so-called “same or similar” and “continuation of benefits” clauses contained in Affinion’s contracts with its bank customers, are unenforceable as a matter of law and public policy. In all other respects, EOC’s motion will be denied. Affinion’s motion for summary judgment will be denied in its entirety.

I. STANDARD OF REVIEW

Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(c) (2). The movant has the burden of establishing that there are no genuine issues of material fact, which may be accomplished by demonstrating that the nonmoving party lacks evidence to support an essential element of its case. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). To avoid summary judgment, the nonmovant “must do more than simply show that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). “[Sjummary 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.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

In evaluating a motion for summary judgment, the evidence must be viewed in the light most favorable to the nonmoving party. Adickes v. S.H. Kress & Co., 398 U.S. 144, 158-59, 90 S.Ct. 1598, 26 L.Ed.2d 142 (1970); see Reeves v. Sanderson Plumbing Prods., Inc., 530 U.S. 133, 150, 120 S.Ct. 2097, 147 L.Ed.2d 105 (2000) (stating that the court must draw all reasonable inferences in favor of the nonmoving party and must refrain from making credibility determinations or weighing evidence). In responding to a motion for summary judgment, however, the nonmoving party “may not rely merely on allegations or denials in its own pleading; rather, its response must — by affidavits or as otherwise provided in this rule — set out specific facts showing a genuine issue for trial.” Fed.R.Civ.P. 56(e)(2). Moreover, the existence of a mere scintilla of evidence in support of the nonmoving party’s position will not be sufficient; there must be evidence on which the jury reasonably could find for the nonmoving party. Anderson, 477 U.S. at 251, 106 S.Ct. 2505.

Where, as here, the parties have filed cross-motions for summary judgment, each party as a movant for summary judgment bears the burden of establishing that no genuine issue of material fact exists and that it is entitled to a judgment as a matter of law. The fact that one party fails to satisfy that burden on its own Rule 56 motion does not automatically indicate that the opposing party has satisfied the burden on its own motion. In reviewing cross-motions for summary judgment, courts should “evaluate each motion on its own merits and view all facts and inferences in the light most favorable to the nonmoving party.” Wiley v. United States, 20 F.3d 222, 224 (6th Cir.1994). “The filing of cross-motions for summary judgment does not necessarily mean that the parties consent to resolution of the case on the existing record or that the district court is free to treat the case as if it was submitted for final resolution on a stipulated record.” Taft Broad. Co. v. United States, 929 F.2d 240, 248 (6th Cir.1991) (quoting John v. Louisiana, 757 F.2d 698, 705 (5th Cir.1985)). The standard of review for cross-motions for summary judgment does not differ from the standard applied when a motion is filed by one party to the litigation. Taft Broad. Co., 929 F.2d at 248.

II. ECON-O-CHECK’S MOTION FOR SUMMARY JUDGMENT

A. FACTUAL BACKGROUND

The facts set forth herein are undisputed or viewed in the light most favorable to Affinion for purposes of Econ-O-Check’s motion.

Affinion and Econ-O-Check are competitors in the business of providing “enhanced checking account services” to banks and other financial institutions (“FIs”) such as credit unions. “Enhanced checking accounts” are accounts that bundle a variety of services and products into a single package, including such items as accidental death and dismemberment insurance, hotel and restaurant discounts, and identity theft protection, among others. The specific products and services that Affinion provides to the customers of a particular FI vary depending upon the desired program or programs agreed to by the FI. Affinion is the largest company in the enhanced checking account products industry, but, according to Affinion, FIs also have access to various other resources that they can combine to create “customer-targeted account products and programs,” and to provide value, savings, and convenience for their account holders, including features like personalized checks, on-line banking services, and ATM cards. (D. Smith Dep. at 632:23-633:3.)

Affinion does not bring customers to the FIs with which it works. Rather, Affinion works directly with FIs to provide services to new or existing account holders at the bank. Typically, for bank customers opening new accounts that include bundled services as a result of a contract between the FI and Affinion, the customer is charged a single service fee by the FI for what the parties refer to as an “embedded account.” That is, for an embedded account, there is a routine monthly service charge on the customer’s account, debited directly by the bank, from the time the customer opens the account. (D. Smith Dep. 636:4-8.) The service fee includes both the FI’s charge for banking services associated with the account, and Affinion’s fee for non-banking services associated with the account. For these embedded accounts, Affinion does not receive the identity or account numbers of the individual account holders participating in the enhanced checking account. In addition, bank customers with embedded accounts are not necessarily aware that the enhanced services that are part of their account are offered by a third-party company separate and apart from the bank with which they are entering into a relationship. It is clear that a substantial majority of the customer accounts at issue here are “embedded” accounts, for which the partner financial institution debits the customer’s account directly on a regular basis and remits to Affinion its portion of the fees collected.

In situations where a customer already has an account but chooses to enroll in a suite or package of services offered by Affinion through the bank, the customer may pay a separate fee, in addition to whatever service charge he is already paying in association with the particular account. (D. Smith Dep. 635:16-24.) This type of arrangement is referred to in the industry as an “overlay” account. Affinion’s 30(b)(6) witness, Douglas Smith, testified that he was not sure whether any of the banks at issue in this lawsuit had “overlay” accounts or whether they only had “embedded” accounts. (D. Smith Dep. 635:25-636:3.) In any event, “overlay” accounts comprise a very small minority of the total accounts Affinion services. For these accounts, Affinion typically has been provided with the customers’ unencrypted account numbers, and debits each customer’s account directly and remits to the partner FI its portion of the fees collected. It is unclear to the Court whether these “overlay” accounts are implicated in the present suit.

Affinion’s relationship with its FI customers is governed by contract. Typically, Affinion or one of its affiliates enters into exclusive-dealing contract with the particular FI with a minimum term of three to five years, an auto-renewing provision of one year or longer, and the option to terminate by giving notice of intent to terminate at least 120 days prior to the end of the initial term or a renewal term. (See Complaint, Ex. E, Doc. No. 1-1, at 21-25 (March 2006 Fee Income Program Schedule and Joint Marketing Agreement (“JMA”) between The Farmers Bank and Progeny Marketing Innovations, Inc. (“PMI,” Affinion’s predecessor-in-interest)); Complaint, Ex. G, Doc. No. 1-1, at 27-32 (April 2004 Fee Income Program Schedule and JMA between Pioneer Community Bank, Inc. and PMI).)

Contained in the sample agreements submitted with the Complaint are two “post-termination” provisions that do not go into effect until after the contract term between Affinion and the bank ends. The first provision is a type of “non-compete” clause to which the parties refer as the “same or similar” clause, which generally prohibits the FI from offering the same or similar “enhanced” checking programs to its customers for one year after termination of the Affinion program. In the 2006 sample contract, this clause reads as follows:

FI acknowledges that CFMG [an Affinion affiliate or predecessor] has expended substantial time and expense in the development and implementation of the Programs, that the Programs incorporate the intellectual property, proprietary knowledge and know-how of CFMG, and that the Programs offer valuable benefits and services to Members. Accordingly, FI will not ... for a one (1) year term after expiration or termination of each Program Schedule, market or make available to any of its Customers any program that is similar to, in whole or in part, the Program offered thereby.

(Complaint, Ex. E, JMA ¶ 6, Doc. No. 1-1, at 24.) The 2004 sample JMA provides an identical recitation of the bank’s recognition of the Affinion affiliate’s investment in the “Programs” pursuant to which the bank agrees “to not offer, directly or indirectly, ... a program the same as, or substantially similar to any Program to its Customers ... for one year following termination for any reason.” (Complaint, Ex. G, JMA ¶ 6, Doc. No. 1-1, at 28.) Affinion acknowledges that, pursuant to that provision, the financial institution “would not be able to offer enhanced-checking services to new or existing customers for a full year after termination.” (Smith Dep. 792:16-19.)

The second type of provision to which EOC objects is a “continuation of benefits” (“COB”) clause which requires that if a bank ever terminates its contract with Affinion, and the bank’s program is an “embedded” program, then the bank must give Affinion all the enrolled account holders’ names, addresses and account information so that Affinion can bill the client directly for the non-banking services that Affinion was already providing in conjunction with the banking services. The COB clauses typically state that the FI’s customers who had been receiving services indirectly supplied by Affinion as part of their enhanced checking accounts “shall automatically continue” to receive those services as a separate bundle directly from Affinion:

The parties acknowledge and agree that ... in the event of termination of any individual Program or alternatively the entire Agreement, Members of the affected Program shall automatically continue to receive their Benefits, Program Fees shall continue to be collected in accordance with the Program Schedule....

(2004 JMA ¶ 5.3; cf. 2006 JMA ¶ 5.5.) The same language is echoed with greater detail in the Fee Income Program Schedules that accompany the JMAs:

In the event of termination of this Fee Income Program Schedule for any reason, Fee Income Members shall automatically continue to receive their Fee Income Benefits through FSA, which is entitled to collect its fees through the Automated Clearing House (“ACH”) in accordance with the Membership Agreement made between FSA and each Fee Income Member at the time of enrollment in the Fee Income Program; provided however, that if for any reason FSA is prohibited from collecting such fees through the ACH, then FI shall, directly or through designated service providers ... bill and collect such fees from the Fee Income Members on behalf of FSA and forward such fees to FSA. In such event, FI shall provide [Affinion] with the Fee Income Member information necessary to facilitate a notification mailing at least 60 days prior to the effective date of the Fee Income Program termination and shall authorize [Affinion] to prepare and send such notification to Fee Income Members on behalf of FI. Such notification shall inform Fee Income Members (i) that FI no longer desires to provide the Fee Income Program as part of its checking account portfolio, (ii) that their Fee Ipcome Benefits shall automatically continue to be provided by FSA, (iii) the amount of the monthly fee that will be automatically charged to their accounts for the provision of the Fee Income Benefits and (iv) that they may discontinue their receipt of the Fee Income Benefits at any time by sending [Affinion] a completed waiver of Benefits form (sent to Fee Income Members in such notification) or by calling [Affinion]’s call center.

(2006 Fee Income Program Schedule ¶ 6, Compl. Ex. E, Doc. No. 1-1, at 22; D. Smith Dep. 788:25-789:7.) If, however, the program is already based on direct ACH billing by Affinion, then Affinion already has possession of the enrolled account holders’ contact and account information and has no need to obtain the information from the bank in order to continue billing account holders for services.

In either event, prior to or concurrently with a FI’s termination of its contract with Affinion, Affinion sends a letter to bank customers enrolled in the program, informing them of the FI’s termination and the account holder’s right to continue receiving benefits from Affinion. Most, though not all, of the notice letters do not give the consumer the opportunity to “opt in” to continue receiving benefits from Affinion; rather, they typically require the consumer to “opt out” if she does not want to continue receiving benefits. (Smith Dep. 512:4-513:21 & Ex. 131; March 2006 Fee Income Program Schedule ¶ 6.)

Affinion asserts that the bank customers all sign an enrollment form at the time they open their account at the bank, they authorize Affinion to access that account information for billing purposes, and therefore have authorized the bank to provide Affinion with the necessary information for it to bill the customers directly (i.e., names, addresses, and account numbers). In that regard, the enrollment forms used by Affinion and the banks with which it contracts vary slightly in content. What follows is a sampling of the relevant content of the forms that are in the Court’s record, all of which are titled “Membership Agreement,” “Membership Enrollment,” or “Membership Enrollment Agreement”:

As the signer of this Membership Enrollment, you ... are enrolled as members of Financial Services Association (FSA).... By signing, you authorize your FI or its service provider to debit your checking account for your monthly membership dues, if applicable, and to remit the portion of any applicable fee used to pay your insurance premium to the Plan Administrator.

(Doc. No. 53-1, at 8; Doc. No. 124-12 (emphasis added).)

Member acknowledges receipt of program membership materials and insurance disclosures. Member agrees to the terms of the insurance coverage, other services, any applicable monthly membership dues, and any announced changes in fees or services....

(Doc. No. 53-1, at 8 (emphasis added).)

As the signer of this Membership Enrollment you ... are enrolled as members of Financial Services Association (FSA).... Your monthly membership dues, if applicable, will be conveniently deducted from your checking account by either your FI or FSA o/nd part of it will be used to pay your insurance premium.

(Doc. No. 53-1, at 9 (emphasis added).)

As the signer of this Membership Enrollment, you ... are enrolled as members of Financial Services Association (FSA)....

By signing, you authorize your FI and/or the Plan Administrator to debit your checking account at your FI directly or by electronic debit for your monthly membership dues, if applicable. A portion of the monthly membership dues will be used to pay your insurance premium.

(Doc. No. 53-1, at 11 (emphasis added).)

As the signer of this Membership Enrollment, you ... are enrolled as members of Financial Services Association (FSA).... You may cancel your membership at any time by completing a Waiver of Benefits form, which may be obtained from your FI or FSA.... Your monthly membership dues, if applicable, will be conveniently deducted from your checking account by either your FI or FSA, and part of it will be used to pay your insurance premium.

(Doc. No. 53-1, at 12 (emphasis added).)

Member acknowledges receipt of program membership materials and agrees to the terms of the insurance coverage, other services, any applicable monthly membership dues, and any announced changes in fees or services.

(Doc. No. 53-1, at 12 (emphasis added).)

(Doc. No. 53-1, at 13 (emphasis added).)

Several of the quoted membership enrollment forms reference Financial Services Association (“FSA”), which is apparently associated with Affinion, though the relationship has never been adequately explained to the Court. Operationally, Affinion treats FSA as Affinion and vice-versa (D. Smith Dep. 180:2-7), although the relationship between Affinion and FSA is never disclosed to the bank’s customer either. (D. Smith Dep. 190:10-13.) In any event, according to Affinion, when a customer signs an enrollment card referencing FSA, the customer then has a relationship with Affinion as well.

In the “manual situation,” that is, in the case of embedded programs which make up the majority of the programs at issue here, Affinion does not receive copies of the enrollment cards; the financial institutions retain possession of them. (Nelms Dep. 45:14-23.) In situations where the customer elects to participate in an Affinion program after having already opened an account, he authorizes Affinion to debit his account directly through ACH at the time of his enrollment in the program, in which case Affinion obtains a copy of the enrollment card. (Nelms Dep. 45:25-46:1.)

As indicated above, while the FI and Affinion continue to operate under their Joint Marketing Agreement, the FI’s customers typically continue to receive a package of certain benefits in conjunction with their checking accounts that are paid for through their monthly service charge that is debited by the FI; some but not all the benefits associated with that fee are provided by Affinion. When a bank whose customers are enrolled in an “embedded” program terminates a contract with a COB provision, and the customers do not “opt out” from continuing to participate in the program upon receiving notice of their ability to do so, the customers will not necessarily continue receiving from Affinion the same package of services they had been receiving from the bank; rather, Affinion continues to provide the same benefits it was providing before and begins charging a separate fee specifically for those services, irrespective of what services the bank continues to offer (and charge the client for). (Smith Dep. 411:15-413:20.)

According to Doug Smith, Affinion’s two primary interests in the COB provisions are (1) Affinion’s “eoncern[ ] about the end member’s experience,” and (2) to ensure that Affinion “recoup[s] the upfront costs” of implementing its relationship with the bank. (Smith Dep. 247:4-8.) Smith also agreed that the COB provision operates to “prevent[ ] competitors from converting existing accounts.” (D. Smith Dep. 248:4-9.) Likewise, one effect of the “same or similar” provision is to “prevent ... a bank from switching its provider from Affinion to Econ-O-Check, or some other competitor in the marketplace.” (D. Smith Dep. 336:6-11.) Affinion asserts that the purpose of this non-compete is “to protect account holders from opportunistic poaching” (Doc. No. 140, Pl.’s Add’l Statement of Material Facts ¶ 47.) EOC insists that Affinion includes the one-year non-compete provision as an unreasonable restraint of trade in order to protect its revenue and monopoly power.

Affinion spends a great deal of time, money and expertise to implement new programs at financial institutions. (See Verified Complaint, ¶¶ 8-9; A. Dick Expert Report ¶¶ 92-97.) For financial institutions that implemented new programs with Affinion from 2005 through 2007, the average time it took to recover upfront costs was approximately nineteen months (Greenberg Dep. 111:9-11), and the minimum time was ten months (4/22/2009 Decl. of D. Smith, Doc. No. 55, at ¶ 3). The typical length of Affinion’s contract term is three to five years, well in excess of the nineteen-month average length of time for recouping its costs. According to Affinion, however, it continues to incur additional ongoing marketing expenses and non-financial investments in its partner programs, and continues to build the financial institutions’ account-holder base participating in the enhanced-checking program through the term of the contract. (Alexander Dep. 41:18-42:8.)

Affinion does not always implement COB after a financial institution terminates. According to Doug Smith, “COBs are expensive and they don’t necessarily always end up being profitable.” (Smith Dep. 513:6-7.) Smith also testified that, as a practical matter, it was not always possible to enforce the COB. (Smith Dep. 441:23-25.) Affinion’s “termination reports” from 2007 through 2009, which list pending terminations (Smith Dep. 500:12-14), identify fewer than ten percent of the terminations listed as “COB.” (Smith Dep. 502:25-505:7 & Ex. 129.) Smith testified in his deposition that he could not “say definitely one way or the other whether Affinion would have pursued COB with respect to all of the banks it has identified in this litigation that it contends were tort[i]ously interfered with.” (Smith Dep. 156:3-8.)

B. ANALYSIS AND DISCUSSION

1. Affinion’s Claims of Inducement of Breach of Contract

EOC argues that Affinion cannot present evidence sufficient to create a jury question as to each of the elements of its claims for inducement of breach of contract or for violation of the Tennessee Consumer Protection Act. EOC focuses its arguments, however, on the question of the legality and enforceability of Affinion’s COB and the “same or similar” non-compete provisions. Specifically, EOC argues that the “same or similar” provisions are unenforceable because they violate state law, as a result of which no claim for inducement to breach those provisions will lie. EOC similarly argues that the COB clauses in Affinion’s contracts violate federal banking statutes and regulations as well as the NACHA Operating Rules and “Regulation E,” which govern banks, and for that reason are likewise unenforceable under state law. In addition, EOC argues that the same provisions are unenforceable under federal antitrust law.

To prevail on a claim for inducement of breach of contract under both the Tennessee common law and statute, Tenn. Code Ann. § 47-50-109, a plaintiff must first prove, as a threshold matter, the existence of a legal and enforceable contract. Hanger Prosthetics & Orthotics E., Inc. v. Kitchens, 280 S.W.3d 192, 205 (Tenn.Ct. App.2009); New Life Corp. v. Thomas Nelson, Inc., 932 S.W.2d 921, 926 (Tenn.Ct. App.1996); Emmco Ins. Co. v. Beacon Mut. Indem. Co., 204 Tenn. 540, 322 S.W.2d 226, 231 (1959). If the contract provisions upon which Affinion’s claims are based are unenforceable as a matter of law and/or public policy, then Affinion’s claims based upon EOC’s inducement of the breach of those particular provisions will necessarily fail. See Givens v. Mullikin, 75 S.W.3d 383 (Tenn.2002) (holding that the plaintiff had not stated a claim for inducement to breach a contract where she had not alleged facts sufficient to show the existence of an enforceable underlying contract); TSC Indus., Inc. v. Tomlin, 743 S.W.2d 169, 172 (Tenn.Ct.App.1987) (noting that where a plaintiff has no legal right to enforce a contract, he cannot maintain an action against a third party for inducing its breach).

EOC maintains that the contracts that are the subject of Affinion’s inducement claims are unenforceable because the provisions Affinion alleges were breached— the “same or similar” and COB clauses— are unenforceable as a matter of Tennessee and Federal law. We turn to that issue now.

(a) Enforceability of “Same-or-Similar” Clauses under Tennessee Law

As set forth above, the “same-or-similar” provision as it typically appears in Affinion’s contracts states that the signatory bank “will not ... for a one (1) year term after expiration or termination of each Program Schedule, market or make available to any of its Customers any program that is similar to, in whole or in part, the Program offered thereby.” (Complaint Ex. E, March 2006 JMA ¶ 6, Doc. No. 1-1, at 24; see id. Ex. G, April 2004 JMA ¶ 6, Doc. No. 1-1, at 28 (in which bank agrees “to not offer, directly or indirectly, ... a program the same as, or substantially similar to any Program to its Customers ... for one year following termination for any reason”).)

EOC analogizes these clauses to covenants not to compete that more typically appear in the context of employment contracts. EOC contends that Affinion’s non-compete clauses constitute agreements in restraint of trade that serve no legitimate business purpose and, instead, exist only to discourage or prohibit legitimate competition. EOC argues that, as such, the clauses are unenforceable. Affinion does not dispute that the clauses in question are covenants not to compete, but argues that they are reasonable in scope and duration and necessary to protect Affinion’s legitimate business interests.

A typical covenant not to compete in the employment context prevents the employee from practicing her trade within a certain area for a specific period of time after termination of the employment agreement. See, e.g., Murfreesboro Med. Clinic, P.A. v. Udom, 166 S.W.3d 674, 676 (Tenn.2005) (a medical doctor employed by a hospital agreed that, upon the termination of his employment contract, for any reason, he would not engage in the practice of medicine within a twenty-five mile radius of Murfreesboro, Tennessee for a period of eighteen months). Most of the case law in Tennessee concerns non-competes in the employment context. Generally, such covenants are disfavored as restraints of trade and are construed strictly in favor of the employee. Id. at 678; Hasty v. Rent-A-Driver, Inc., 671 S.W.2d 471, 472-73 (Tenn.1984). Covenants not to compete are not per se invalid; rather, they may be enforced if they are reasonable under the particular circumstances. Hasty, 671 S.W.2d at 472 (citing Allright Auto Parks, Inc. v. Berry, 219 Tenn. 280, 409 S.W.2d 361, 363 (1966)). Determining whether an agreement in restraint of trade is reasonable, and therefore enforceable, is a question of law for the Court where the material facts are undisputed. Baker v. Hooper, No. 03A01-9707-CV-00280, 1998 WL 608285, at *6 (Tenn.Ct.App. Aug. 6, 1998); See Murfreesboro Med. Clinic, 166 S.W.3d at 683 (holding physicians’ covenants not to compete are unenforceable and void as a matter of public policy).

The contract clauses at issue here do not arise in the employment context; rather, they are ancillary to joint marketing agreements between a supplier of insurance and other products (Affinion) and financial institutions (banks and credit unions). The “same or similar” clauses, however, are clearly “restraints on trade” and have the effect if not the form of a covenant not to compete: They prevent banks from engaging with third-party competitors who would provide the same type of services to the bank’s customers that Affinion has already been providing. In other words, the primary effect of the same-or-similar clause is to prevent non-parties to the agreement (e.g., EOC) from competing directly with Affinion. The bank that is actually a party to the covenant is restricted vis-a-vis other banks, with which Affinion does not directly compete. That is, the particular FI to which the covenant applies is prevented, for a year, from offering enhanced checking services that are the same as or similar to those it previously offered through Affinion and, in that manner, is unable to compete with competitor banks in the community that are still offering such services and products. In other words, the non-compete clause directly restricts the bank in its competition with other banks, and indirectly hinders Affinion’s would-be competitors from offering their products to that bank.

Although these provisions arise outside the employment context, and are entered into between companies with relatively more bargaining power than the average employee, they are still restraints on trade, and the Court concludes that Tennessee courts, if called upon to consider these provisions, would view them in essentially the same light it views non-competes in the employment context. As such, the provisions are enforceable under Tennessee law only if they are reasonable under the circumstances. Tennessee courts have instructed that the factors to be considered in assessing reasonableness include whether the covenant not to compete seeks to protect a legitimate business interest, the economic hardship imposed on the restricted party, and whether such a covenant would “be inimical to the public interest.” Allright Auto Parks, 409 S.W.2d at 363. To serve a “legitimate business interest,” a non-compete clause must protect some interest “over and above ordinary competition” such that, without the non-compete, “an unfair advantage in future competition” would arise. Vantage Tech., LLC v. Cross, 17 S.W.3d 637, 644 (Tenn.Ct.App.1999).

With regard to these considerations, Affinion argues that the clause is intended to protect legitimate business interests, as explained in the JMA itself:

[FI] acknowledges that [Affinion] has expended substantial time and expense in the development and implementation of the Programs, that the Programs incorporate the intellectual property, proprietary knowledge and know-how of [Affinion], and that the Programs offer valuable benefits and services to the Members.

(Compl. Ex. E ¶ 6, at 24, Ex. G at 28.) Affinion asserts that because it spends such a great deal of time, money, and expertise in implementing programs at the financial institutions, the established programs are

desirable to Affinion’s competitors because there is no need for initial marketing or training or enrolling account holders because Affinion has already done all of that work. The competitor is able to swoop in and have an automatic membership base with immediate revenue. The competitor is then able to avoid start-up costs associated with implementing a new program and avoid the lag time between initiation of service and collection of premiums. Competitors are able to lure financial institutions away because this “conversion” model has little to no costs, allowing the competitor to offer the same services and benefits to the account holders at the same price, while at the same time promising the financial institutional a greater portion of the fees collected from account holders.

(Affinion’s Mem. Opp. Summ. J. at 17-18, Doc. No. 189, at 22-23 (internal citations to the record omitted).) Affinion further argues that the one-year limited term of the same-or-similar clause is reasonable in duration because the “average” time frame within which Affinion recoups its upfront costs in implementing a program is nineteen months, and, further, that there are some institutions from which Affinion “never” recouped its set-up costs. (Id. at 18 (citing Greenberg Dep. 108:7-17).) In addition, Affinion contends that even if it is able to recoup its costs during the contract term, it “continues to incur additional ongoing marketing expenses and non-financial investments in its partner programs, and continues to build the financial institutions’ account-holder base participating in the enhanced-checking program. (Id.)

As EOC points out, however, the duration of Affinion’s contracts is typically five years and at least three years in length; Affinion has actually been in business relationships with many of its FI partners for decades; and Affinion’s claim that there are banks from which it never recoups its upfront costs is not actually supported by the citation to the record. Further, to be clear, Affinion does not allege here that EOC has induced FIs to breach their Joint Marketing Agreements with Affinion; rather, the institutions are terminating the relationships at the expiration of the initial term or a renewal term of the JMA in accordance with its provisions. Affinion alleges only that EOC is encouraging the banks to disregard the one-year covenants not to compete that go into effect after Affinion’s relationship with the bank has otherwise ended. It is undisputed, however, that by that time, Affinion has generally recouped its upfront costs; Affinion has not produced a single example of a situation in which it had not done so. More to the point, once a JMA has terminated in accordance with its own terms, Affinion has either recouped its costs or it has not; that fact will not change as a result of enforcement of the non-compete. In short, the one-year covenant not to compete has no direct bearing on Affinion’s ability to recoup its upfront costs. Instead, the point of the covenant can only be to prevent the financial institution from entering into a relationship with Affinion’s competitors for an entire year, and thereby to discourage the bank from ever terminating its relationship with Affinion in the first place, even if the termination is in accordance with the contract itself, and even if Affinion’s competitors are offering lower prices or more desirable services and products.

Affinion’s other proffered legitimate business interests are similarly flimsy. To the extent Affinion provided the banks with specialized training, EOC has shown that it retrains bank employees to use its own systems and products. Affinion does not provide banks with valuable customer relationships and, in fact, the bank customers are generally unaware of Affinion’s existence as an independent entity. With respect to Affinion’s argument that it incurs ongoing costs during the course of its relationship with the bank, the fact is that any company in business incurs similar expenses. Moreover, those costs certainly are not going to be recovered through the enforcement of the non-compete. Again, either Affinion is making a solid return on sales of products and services to the financial institutions during the duration of the Joint Marketing Agreements or it is not. Finally, although Affinion clearly has an interest in protecting its trade secrets and confidential information, the non-compete has no apparent effect on the protection of those interests.

Affinion points to the case of Statco Wireless, LLC v. Southwestern Bell Wireless, LLC, 80 Ark. App. 284, 95 S.W.3d 13 (Ark.Ct.App.2003), as a case that has found a non-compete similar to those used by Affinion to be enforceable. In that case, the appellee, Southwestern Bell Wireless (“Bell”) was in the business of selling cellular phone service, and the appellant, Statco Wireless (“Statco”) became an authorized agent for Bell in a large metropolitan area, selling Bell’s services exclusively in return for commissions paid by Bell. The agency agreements incorporated a covenant not to compete in which Statco agreed that, for a year following termination of the agency agreements, it would not induce customers to choose the services of any Bell competitor, nor otherwise sell or promote cellular services offered by any competitor. For three years, the parties enjoyed a profitable relationship, and Statco became one of Bell’s most successful agents. During the fourth year, a dispute arose over compensation, and Statco notified Bell that it was terminating the relationship and that it would begin selling competitors’ services. Bell immediately sought an injunction prohibiting Stat-co from violating the covenant not to compete. A trial was held and the trial court upheld the covenant and enjoined Statco from violating it. On appeal, the Arkansas Court of Appeals upheld the trial court’s decision on the basis that the covenant protected a valid business interest, and that it was not overly broad either geographically or temporally.

Specifically, the court found that Bell had a valid interest in protecting its customer lists, noting that customer lists “have been looked upon ... as a most valuable asset that is especially worthy of protection, particularly in a situation, such as the one here, where an agent is servicing customers away from the principal’s place of business and builds up personal relationships that bind the customer to him instead of the principal.” Id. at 17. In response to Statco’s argument that it, not Bell, had actually developed the customer list and customer relationships through its own effort, the court found that this argument actually reinforced Bell’s position, because Statco had acted as Bell’s agent, not on its own behalf, and had worked to enroll subscribers to become Bell customers. The court also recognized a protectable interest in Bell’s agent-compensation plans and bid proposals.

There, as here, the covenant at issue was part of an arms-length contract entered into between business entities, was a “conspicuous part of the contract,” and the parties agreed in the contract that the covenant was necessary to protect the interests of the party in whose favor it was given. In the case at bar, however, the banks do not function solely as agents for Affinion in enrolling banking customers — the customers are legitimately the bank’s customers and only tangentially or indirectly customers of Affinion, of whose existence the customers are generally unaware. Moreover, Affinion has not actually argued that the purpose of the non-compete is to protect valuable customer lists — it contends the non-compete is to prevent “opportunistic poaching” by its competitors and to prevent “potential confusion” on the part of account holders. And perhaps most importantly, the court’s discussion of the factual background in Statco does not reveal whether Statco breached the parties’ agency agreement when it terminated the contract, or whether it terminated the parties’ relationship in accordance with the contract’s provisions for termination. The discussion also does not indicate whether the covenant not to compete took effect at all in the latter situation, that is, at the natural expiration of the parties’ agency agreement. In the present case, the non-compete only goes into effect after the expiration of a contract term, regardless of whether Affinion and the particular bank have been in business for five years or twenty years.

Largely on the basis of that fact, the Court finds, under the particular circumstances of this case, that Affinion has not shown that it seeks to protect a legitimate business interest. Even if it did, it has not shown that the one-year non-compete is reasonably designed with a view toward protecting that interest. In other words, although Affinion obviously would like to prevent EOC and other competitors from “poaching” on systems and programs Affinion has invested time and money in implementing, its method of doing so appears to unduly hamper the individual banks’ ability to terminate their relationship with Affinion, and is also mimical to individual consumers’ interest in obtaining competitive pricing for the same bundled services and products. Because the one-year covenant continues in effect even after the expiration of a JMA contract by its own terms, and thereby effectively hamstrings banks’ ability ever to change providers should they wish to do so, it stifles ordinary competition.

For all these reasons, the Court finds that the one-year non-compete is not valid and enforceable. Making the covenant of shorter duration would not render it more reasonable, because it does not protect a valid business interest in the first place. The Court agrees with Affinion that excision of these clauses is possible; the finding that the clauses are not enforceable does not affect the validity of the Joint Marketing Agreements as a whole. However, to the extent Affinion’s inducement claims are premised upon breach of these provisions, they must fail on the basis that the provisions themselves are unenforceable.

(b) Enforceability of the COB Clauses

Next, EOC argues that the continuation-of-business (“COB”) clauses in Affinion’s JMAs are unenforceable and void as against public policy because they require banks to violate federal law as well as binding rules pertaining to electronic funds transfers in several separate ways: (1) by requiring banks to disclose their customers’ nonpublic personal information to Affinion in violation of the Gramm-Leach-Bliley Act (“GLBA”); (2) by requiring banks to disclose their customers’ unencrypted account numbers to Affinion in violation of the GLBA; and (3) by enabling Affinion to debit directly bank-customer accounts without valid authorization, in violation of 12 C.F.R. § 205.10, or “Regulation E,” and also in violation of and the Operating Rules and Guidelines of the National Automated Clearing House Association (“NACHA”).

Affinion describes the effect of the COB provision as follows:

During a contract term, Affinion either i) debits the account holder’s account through what is known as ACH (automatic recurring electronic funds transfer) and remits a portion of the monthly payment to its financial institution customer, or ii) the financial institution charges the account holder a banking fee and then remits a portion of the monthly payment to Affinion.... When a financial institution terminates a contract with Affinion, the COB provision provides that the financial institution will work with Affinion to effectuate the continuation and billing of the program users.

In instances where Affinion was already billing by ACH, Affinion has possession of the customer contact and account information and simply sends a letter to the account holder explaining the existing COB procedures, including the account holder’s option to cancel the benefits at any time. In the case of a manual billing to an account holder, the account holder has signed an enrollment form at the very beginning of the relationship authorizing the financial institution and/or the program administrator (Affinion) to debit his or her account. Relying upon these original forms, together with the opt-out letter and packet sent to the account holder upon the financial institution’s termination of the relationship with Affinion, Affinion continues to provide the benefits the consumer has selected and is receiving by his or her choice, but starts to directly bill the account holder through ACH.

(Doc. No. 110, at 27-28.) Affinion points out that EOC’s motion does not address the situations in which Affinion has already been directly debiting an account-holder’s account through ACH; it only addresses the way Affinion deals with the “embedded” or “manual-billing” situation, where the bank has been debiting the customer account and remitting a portion of the fee to Affinion.

(i) The Gramm-Leach-Bliley Act

Congress enacted the Financial Modernization Act, also known as the Gramm-Leach-Bliley Act (the “GLBA” or the “Act”), Pub. Law 106-102, §§ 501-27 (1999), codified at 15 U.S.C. §§ 6801-6809, in 1999. The stated purpose underlying the GLBA is “to enhance competition in the financial services industry by providing a prudential framework for the affiliation of banks, securities firms, insurance companies, and other financial service providers.” H.R. Conf. Rep. No. 106-434, at 245 (1999), reprinted in 1999 U.S.C.C.A.N. 245, 245. Realizing that the adoption of the Act would afford such financial institutions even greater access to consumers’ personal financial information, H.R. Rep. 106-74, pt. 3, at 106-07 (June 15, 1999), Congress granted broad privacy protections to consumers, giving them the power to choose whether their personal information would be shared by financial institutions. Regulations implementing the GLBA were issued jointly by the by the Federal banking agencies (the Office of the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) for banks and savings associations, on June 1, 2000. See 15 U.S.C. § 6804 (authorizing rulemaking); 65 Fed. Reg. 35162 (June 1, 2000).

(A) Disclosure of Unencrypted Account Numbers

Under the GLBA and its implementing regulations, a financial institution may not disclose an unencrypted account number to any nonaffiliated third party “for use in telemarketing, direct-mail marketing, or other marketing through electronic mail to the consumer.” 15 U.S.C. § 6802(d); cf. 12 C.F.R. § 40.12(a).

There are two exceptions to this prohibition. First, account numbers may be shared by a financial institution with a third-party agent or service provider to perform marketing of the financial institution’s o%m products and services, as long as the agent or service provider does not have the means to directly initiate a charge. Second, the account number may be provided to a partner company in a private label or affinity credit card program. 12 C.F.R. § 40.12(b)(1) & (2). Clearly, neither of those exceptions applies in this case.

Affinion’s position, however, is that § 6802(d) does not apply at all because, at the time it is obtaining customer account numbers from the FI, it is not doing so for the purpose of marketing. Affinion contends instead that, after the FI has given notice that it will not renew the JMA, Affinion seeks to contact the parties’ joint customers for the purpose of enabling it to continue providing the same products and services it has already been providing to those customers, at the customers’ request.

To the contrary, the Court finds that Affinion seeks the account information specifically for the purpose of conducting a marketing campaign to retain customers of the FI that it might otherwise lose after the termination of the FI’s relationship with Affinion and the concurrent termination of the bank’s responsibility under the JMA to market Affinion’s products. This is true whether Affinion is obtaining the account numbers before or after expiration of the JMA. Marketing does not end simply because the customer is already using a product, particularly given that the customer is concurrently being given notice of its right to “opt-out” of continuing to receive services and products from Affinion. The Court therefore finds that § 6802(d) applies, that neither exception to that provision applies, and that the banks are not permitted to give unencrypted account numbers to Affinion for the purpose of enabling it to market its products to the bank’s customers.

(B) Disclosure of Nonpublic Personal Information

Moreover, under the GLBA, a financial institution may not share “nonpublic personal information” with a non-affiliated third party unless the institution provides the customers with a notice of its privacy policies both at the time the customer relationship is established and annually thereafter, and gives the customer a notice that information may be provided to such party and that the customer has the opportunity to prevent the transfer of such information (to “opt out”):

(a) Except as otherwise provided in this subchapter, a financial institution may not, directly or through any affiliate, disclose to a nonaffiliated third party any nonpublic personal information, unless such financial institution provides or has provided to the consumer a notice that complies with section 6808 of this title.

(b) Opt out

(1) In general

A financial institution may not disclose nonpublic personal information to a non-affiliated third party unless—

(A) such financial institution clearly and conspicuously discloses to the consumer, in writing or in electronic form or other form permitted by the regulations prescribed under section 6804 of this title, that such information may be disclosed to such third party;

(B) the consumer is given the opportunity, before the time that such information is initially disclosed, to direct that such information not be disclosed to such third party; and

15 U.S.C. § 6802(a) & (b)(1).

There are exceptions to the notice and opt-out requirements as well. For instance, the opt-out notice is not required when an FI provides such information to a third party as part of a “joint marketing program”:

This subsection shall not prevent a financial institution from providing nonpublic personal information to a nonaffiliated third party to perform services for or functions on behalf of the financial institution, including marketing of ... financial products or services offered pursuant to joint agreements between two or more financial institutions.....

Id. § 6802(b)(2) (emphasis added).

Ironically, Affinion argues that § 6802(d) does not apply because, as discussed above, it does not seek to obtain bank customers’ account numbers for the purpose of marketing, but then argues that banks may provide it with customer information without complying with the notice and opt-out provisions because it is engaged in a joint-marketing program with the banks. While the Court finds, as set forth above, that Affinion is engaged in marketing its own, products after the termination of a JMA with a bank (and the bank’s giving notice of intent not to renew the JMA), it is by definition no longer engaged in the “marketing ... financial products or services offered pursuant to joint agreements” at the time it seeks to contact customers directly for the purpose of engaging the customers to maintain the products and services they have been receiving through Affinion. Consequently, the “joint-marketing exception” to the notice and opt-out requirements does not apply to this situation. See also 12 C.F.R. § 40.13(a)(1)(i) & (ii) (requiring that the joint-marketing contract must expressly prohibit the third party (ie., Affinion) from using non-public information “other than to carry out the purposes for which the bank disclosed the information,” that is, for joint-marketing purposes); id. § 40.13(a)(2) (stating that the contract governing the relationship meets the regulatory requirements if it prohibits the nonaffiliated third party from “disclosing or using the nonpublic personal information except as necessary to carry out the joint marketing”). Because Affinion’s contacts with the bank’s customers after the bank has given its notice of non-renewal or after the actual expiration of the JMA are not in furtherance of the joint-marketing program, such contacts would not fall under this exception.

However, the statute provides an additional exception for the disclosure of nonpublic personal information “as necessary to effect, administer, or enforce a transaction that the customer requests or authorizes, or in connection with ... [servicing or processing a financial product or service that a consumer requests or authorizes.” 15 U.S.C. § 6802(e)(1)(A); 12 C.F.R. §§ 40.14(a)(1). Affinion asserts that its obtaining account numbers and other personal information from banks after termination or notice of non-renewal falls within this exception, because Affinion seeks merely to continue providing the same services or products that it was providing, at the customers’ requests, prior to termination of the JMA between Affinion and the individual bank.

EOC argues that this exception does not apply because the “product” Affinion wants to continue providing (for example, a life insurance policy and identity-theft protection), at least with respect to the “embedded” accounts discussed above, is actually different from the original product requested by the customer, which was enrollment in a checking account program that also included a life insurance policy, identity theft protection, and perhaps other banking-related services such as free checks and overdraft protection. Likewise the fee the customer has been paying since enrolling is a single fee that covers both the maintenance fee on the checking account plus whatever other enhancements the bank offered, as well as whatever services Affinion has been providing. As a result, EOC argues, the post-termination benefits offered by Affinion are necessarily different from the original “product” purchased by the customer — that is, a checking account with a package of associated benefits. Instead, what Affinion offers post-termination is a different package of benefits comprised only of the products Affinion was contributing, and the fee for these products is not necessarily one that the customer has negotiated and agreed to, since he will now be paying at least two fees instead of one, which may or may not total the single fee he was previously paying in association with his account. The Court agrees that, as EOC argues, “the fundamental product is completely different.” (EOC Reply Brief, Doc. No. 159, at 4.)

Moreover, even if the Court were to accept Affinion’s counter-argument that the unbundled products are still the same products the customer previously requested and authorized, and even assuming that the total price for all the unbundled products is equivalent to the bundled price, the fact remains that the only reason Affinion has need to obtain customer information, and specifically account numbers, is so that it may directly debit customers’ accounts in the event they do not opt out of continuing to receive the products from Affinion. In that regard, the Court finds that the discussion below, regarding Affinion’s authority to effect ACH debits on customers’ account under Regulátion E and the NACHA Operating Rules, necessarily informs the interpretation of the GLBA and its implementing regulations: There is no sense in which it is necessary, required, lawful or appropriate for the FIs to share customer account numbers with Affinion in order to permit Affinion to effect ACH debits that are not properly authorized. And, as is also discussed below, the banks’ customers, at least those bank customers whose accounts Affinion has not been debiting directly all along, appear not to have actually authorized ACH debits by Affinion. In short, an ACH debit to be effected by Affinion is not a transaction that has been knowingly requested or validly authorized by the consumer. Moreover, even if 12 C.F.R. § 40.14 could be read to permit the disclosure of customer information and account numbers to permit Affinion to continue to provide insurance-related and other products to the customers, other regulations specifically prohibit Affinion’s use of the account information by effecting direct debits on customers’ accounts. The Court turns next to that issue.

(ii) Regulation E, 12 C.F.R. § 205.10

When the Electronic Funds Transfer Act was enacted, the Federal Reserve was given the responsibility to develop the implementing regulation. The resulting regulation, “Regulation E,” 12 C.F.R. § 205.10, is intended to protect consumers from unauthorized transfers, and to govern the rights and responsibilities of those entities providing electronic payment services to consumers. The Regulation defines what businesses must do to obtain valid permission from a consumer to initiate a recurring electronic (“ACH”) debit against a consumer’s account at a bank or a credit union.

Regulation E states in pertinent part: Preauthorized electronic fund transfers from a consumer’s account may be authorized only by a writing signed or similarly authenticated by the consumer. The person that obtains the authorization shall provide a copy to the consumer.

12 C.F.R. 205.10(b). The Official Staff Commentary and Interpretation further provide that “[a]n authorization is valid if it is readily identifiable as such and the terms of the preauthorized transfer are clear and readily understandable.” 12 C.F.R. Pt. 205, Supp. I, Official Staff Interpretation of § 205.10(b), at ¶ 6.

EOC argues that the “authorizations” upon which Affinion relies to directly debit customer accounts after a partner FI terminates its contractual relationship with Affinion do not meet the requirements of Regulation E because the language used on the forms upon which Affinion relies does not “authorize” an electronic debit in “clear and readily understandable” language. In that regard, as reflected in the discussion of the facts above, the Court notes that the language used on the enrollment forms varies. That language includes the following, as well as variations on these terms:

Member agrees to the terms of the insurance coverage, other services, any applicable monthly membership dues, and any announced changes in fees or services....

(Doc. No. 53-1, at 8 (“Membership Enrollment”).)

Your monthly membership dues, if applicable, will be conveniently deducted from your checking account by either your FI or FSA....

(Doe. No. 53-1, at 9