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Litigation Trends Impacting Processors and ISOs: How to Keep You and Your Company Safe

Edward A. Marshall and Theresa Y. KananenMAC West Regional | September 7, 2017

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Litigation Trends Impacting Processors and ISOs

Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) Enforcement Actions

EMV Litigation Merchant Class-Action Litigation

© 2017. Arnall Golden Gregory LLP

FTC and CFPB Enforcement Actions

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Ongoing FTC and CFPB Activity

Historical FTC Activity – CIDs– Asset Freeze Orders and Contempt

Actions (depleted reserves)– TSR Claims (making it unlawful to

provide “substantial assistance” to telemarketing merchant while “consciously avoiding knowing” that the merchant is engaged in deceptive practices)

– Section 5(a) of the FTC Act, 15 U.S.C. § 45(a) (prohibiting “unfair or deceptive acts or practices in or affecting commerce”)


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Growing CFPB Threat– 2010 Dodd-Frank Act, 12 U.S.C. §

5536(a)(1)(B) (making it unlawful for “any . . . service provider to engage in any unfair, deceptive, or abusive act or practice”)

– 2010 Dodd-Frank Act, 12 U.S.C. §5536(a)(3) (making it unlawful for “any person to knowingly or recklessly provide substantial assistance to a covered person or service provider in violation of section 5531 of this title [prohibiting unfair, deceptive, or abusive acts or practices]”)


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The Dangers: – Joint and Several Liability for Consumer Injury – Invasive Government Oversight of Operations


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Targeted Merchant Industries Telemarketing Short-Term Lending Debt Collection Financial Coaching and Debt Relief

Services “Biz Opps” and Work-from-Home

Opportunities Internet-Based IT Support Nutraceutical Sales Negative Option Marketing Payment Aggregators and Payment

Facilitators*


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Perceived Red Flags

Intake: General– Departure from internal risk and

credit policies– Ignoring MATCH indicators– Ignoring related, terminated

merchants– Ignoring previous merchant or

principal rejections– Lax underwriting in the face of

guaranties, indemnification, or reserves


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Perceived Red Flags

Intake: Merchant Principals– Merchant principal’s criminal

history– Merchant principal’s subprime

credit score– Incomplete merchant

applications– Difficulty connecting with

merchant principals


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Perceived Red Flags

Intake: Laundering– Straw Merchants (“credit card

laundering” and “factoring”)– Multiple MIDs, same merchant– Disparities in merchant details

across applications– Physical address inconsistency

with described business activity


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Perceived Red Flags

Monitoring – Chargeback ratios (3% to 31%)– Disturbing chargeback narratives– Poor reviews (including BBB)– Material departures from

projected sales (volume, per-transaction amounts)

– Lack of transparency vis-à-visthe card brands (including actively assisted load balancing)


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Causes for (Cautious) Optimism

Regulatory Appreciation of Industry Self-Regulation– ETA Guidelines on Merchant and ISO Underwriting and Risk

Monitoring (v. 2) FTC v. WV Universal Management LLC (M.D. Fla.) CFPB v. Intercept Corporation (D.N.D.) CFPB v. Universal Debt Solutions, LLC (N.D. Ga.)


EMV Litigation

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EMV Litigation

March 2016: B&R Supermarket, et. al. v. Visa Inc., et.al., 1:17-cv-02738 (E.D.N.Y.)

May 2016: WalMart v. Visa Inc., No. 652530/2016 (N.Y.Sup. Ct.)

May 2016: Home Depot v. MasterCard, et. al., 1:16-cv-05507 (E.D.N.Y.)

June 2016: The Kroger Co. v. Visa Inc., 1:16-cv-00693 (S.D. Ohio)


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EMV Litigation B&R Supermarket: The Big Challenge

The Lawsuit: The EMV liability shift as a whole is beingchallenged as a violation of anti-trust laws, including theSherman Act and analogous state statutes

The Allegations: The big four card networks, EMVCo, and a number of large issuing banks agreed to roll out the EMV liability shift in lockstep, which constitutes an unlawful conspiracy in restraint of trade

Motion to Dismiss: On September 30, 2016, Defendants’ Motion to Dismiss was granted in part and denied in part.


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EMV Litigation B&R Supermarket: The Motion to Dismiss

The Defense: Plaintiffs did not meet their pleading burden toplausibly establish a conspiracy in restraint of trade, whichrequires specific evidentiary allegations of conspiracy, andnot just allegations of parallel conduct

The Ruling: Motion denied as to the card brands, butgranted as to the issuing banks


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Rationale as to Card Brands:

Statements by Visa and MasterCard executives

Meetings through EMVCo and the Smart Card Alliance

Lock step roll-out of rule changes that implemented the EMV shift

Judicial attack on anti-steering rules

Departure from how EMV was rolled out in other countries


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Rationale as to issuing banks:

Issuing banks didn’t actually implement the liability shift; that happened through changes to the card brand rules

Allegations did not establish that the issuing banks were controlling the card brands

Outcome: Issuing banks dismissed but ordered to preserve documents, as it’s conceivable they could be added to the lawsuit again in the future. Discovery is open.


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EMV Litigation Walmart and Kroger Litigation: Signature Verification Challenges

The Lawsuit: Kroger and Walmart respectively seek declaratory judgment to resolve a dispute of contract interpretation regarding the verification and routing of debit cards. They claim that Visa’s interpretation violates the Durbin Amendment’s prohibition on exclusivity agreements

The Allegations: Visa has interpreted its agreements with these retailers in an unlawful manner by insisting that the retailers:

abandon PIN-only verification of debit card transactions and accept signature verification

offer cardholders the choice of having their transactions routed through the Visa’s debit network or a third party network, and honor the cardholder’s choice


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EMV Litigation


Walmart and Kroger Litigation: Signature Verification Challenges

The Defense: Visa contends that its “Honor all Cards” ruleprohibits merchants from rejecting cards that have signatureverification only

Procedural Posture:

Kroger: Visa moved to dismiss, claiming Kroger improperlytried to invoke a private right of action under the DurbinAmendment, and that the contract between Visa and Krogerbarred its claims. But those filings are under seal…

Walmart: Visa answered and filed counterclaims againstWalmart for declaratory judgment as to the same contract, andfor fraudulent inducement, claiming it did not know Walmartintended to accept only PIN verification of debit cards

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EMV Litigation


Home Depot Litigation: A Hybrid

The Lawsuit: Like the B & R plaintiffs in the big EMV challenge,Home Depot alleges that Visa and MasterCard have committed anti-trust violations under the Sherman Act and analogous state laws

The Allegations: Like Kroger and Walmart, Home Depot alleges thatVisa and MasterCard are unlawfully trying to force merchants awayfrom PIN transactions to accept signature verification because thereis a higher associated interchange fee, which they have conspired tofix at a supra-competitive rate

Procedural Posture: Transferred from the Northern District ofGeorgia to the Eastern District of New York; transcript of courtproceedings currently restricted

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EMV Litigation


What Can Non-Parties on the Acquiring Side Expect?

Direct Litigation Exposure

Third party discovery requests

Document Subpoenas

Depositions

Communications from merchants

Rulings on validity of the liability shift and verification methods for debit cards

Merchant Class-Action Litigation

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Merchant Class Action Challenges

Challenges to:– Perceived Fee Disparities– Fee Increases – Inflation of “Interchange”

Diverse Claims: – Breach of Contract; Unjust

Enrichment; “Unconscionabilty”– Fraud– RICO


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Challenges to Processing Agreement Terms:– Fee increases (with or without

notice)– Limitation of liability (as function of

processing fees)– Time limitations on reporting

statement discrepancies– Attorneys’ fee provisions – Class action and jury-trial waivers

Few, if any, rulings on the merits


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Preventative maintenance:– Processing Agreement review– Consider making certain

provisions conspicuous – Distinguish between third-party

pass-through fees and processing fees for purposes of notice

– Consider including class action waivers

– Consider including individual merchant arbitration provisions


For more information:

Edward A. Marshall ([email protected])Theresa Kananen ([email protected])

All rights reserved.

This presentation is intended to provide general information on various regulatory and legal issues. It is NOT intended to serve as legal advice or counsel on any particular situation or circumstance.


mailto:[email protected]

mailto:[email protected]

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