Fraud
ERI Brands LLC et al. v. PayNetWorx LLC et al.
Date: July 3, 2025
Issue: Whether the merchants adequately alleged facts to survive a motion to dismiss from Pathward that it is not liable for negligent misrepresentation, negligence, fraudulent inducement, conversion and accounting.
Case Summary: An Ohio federal court narrowed two online merchants’ lawsuit after finding that while certain contracts may make Pathward and PNX liable for the payment company’s alleged fraud, they may also block some of the merchants’ other claims about misrepresented fees and card network compliance.
ERI Brands LLC and Rocket Systems Inc. (plaintiffs) are online merchants. Defendant PayNetWorx LLC is a Texas company that provides payment processing services to merchants. Defendant Pathward National Association is an acquiring bank of Visa, Mastercard, American Express and Discover. Plaintiffs allege Pathward secretly recouped chargebacks on disputed transactions involving customers of both parties, and that Pathward charged them for service fees the bank never incurred. Plaintiffs accused Pathward of negligent misrepresentation, negligence, fraudulent inducement, and conversion.
Judge Matthew McFarland partially granted Pathward’s motion to dismiss. At the outset, the court ruled that Pathward’s reliance on the Merchant Application introduced material outside the pleadings, so it could not consider the document at this stage under Federal Rule 12(b)(6).
In addition, the court dismissed the negligence misrepresentation and negligence claims because the economic loss rule barred them. The economic loss rule prevents parties from recovering damages from purely financial harm caused by unintentional torts such as negligence. Because the plaintiffs only alleged that they incurred fines and unnecessary fees, the court found those harms were purely economic and held that plaintiffs could not pursue negligent misrepresentation or negligence claims.
The court also dismissed the fraudulent inducement claim under Federal Rule 9(b). The rule requires plaintiffs to plead fraud with particularity, including the time, place, and content of the alleged misrepresentations; the fraudulent scheme; the defendants’ intent; and the resulting injury. The court agreed with Defendants that plaintiffs failed to plead specific facts showing that Pathward fraudulently induced them to enroll in its services. The court then found that plaintiffs alleged enough facts to support a fraud claim against PNX, but not against Pathward.
Although the court dismissed the fraud claim against Pathward, it allowed the conversion claim against both defendants to proceed because plaintiffs alleged a valid principal-agent relationship between PNX and Pathward. The court also denied plaintiffs’ request for an accounting, explaining that it could not assess whether damages were easily calculable until further discovery clarified the issue.
Bottom Line: The court barred plaintiffs from bringing claims of negligent misrepresentation, negligence, fraudulent inducement and accounting against all defendants. The court did, however, allow them to pursue their fraud and conversion claims. The case will now head to discovery.
Documents: Opinion
