CHEAT SHEET ■ Impending operations. There has been a notable increase in initiatives ■ The merchant class action. In recent years, the plaintiffs’ class action ■ ■ set forth by the US Federal Trade Commission and the US Consumer bar has become fixated on the complex pricing models that processors Financial Protection to cut off “bad merchants” from the payment and ISOs use to deliver services to merchant customers. When faced system. This trend is sometimes referred to as “Operation Choke Point.” with a merchant class action suit, in-house counsel should review the ■ Preventative measures. There are many steps that processors and processing agreement, reevaluate sales training, and consider arbitration. ■ ■ Chip tech. The transition to EMV or “chip” cards in the ISOs can take to mitigate the risk of litigation, including: (1) carefully ■ monitoring chargeback ratios, (2) being wary of multilayered or United States was a hasty process that left many merchants complicated merchant structures, (3) documenting departures from credit without the certified equipment. As a result, the merchant policies, and (4) reviewing online complaints and chargeback narratives. that accepts the card bears the risk of the chargeback. The Onslaught of Litigation in the Payments Acquiring Industry (and How to Mitigate Risk) By Theresa A. Vitello, Edward A. Marshall, and Theresa Y. Kananen The acquiring side of the payments industry — comprised of the banks, payment processors, and independent sales organizations (ISOs) that recruit and service merchants wishing to accept credit and debit cards — remains relatively obscure in the public consciousness. These players facilitate trillions of dollars in transactions and provide the rails on which the modern consumer economy operates, but they do so quietly. When all goes as planned, they merely reside in the background of every payment card transaction, whether it takes place at a traditional brick-and- mortar establishment or an online retailer. 60 ASSOCIATION OF CORPORATE COUNSEL
THE ONSLAUGHT OF LITIGATION IN THE PAYMENTS ACQUIRING INDUSTRY (AND HOW TO MITIGATE RISK) For years, litigation activity involv- regulatory enforcement action by an income stream in the form of pro- cessing fees and/or residuals. ing these entities has refmected this the US Federal Trade Commission relative anonymity. Aside from the (FTC) or the US Consumer Financial At the same time, however, the increasing ferocity with which the FTC occasional lawsuit involving a disgrun- Protection Bureau (CFPB). Referred tled merchant or an unhappy business to (albeit at times too loosely) as and the CFPB have come afuer the pay- “Operation Choke Point,” recent ments space, and the apparent attempt partner (or, at worst, legal wrangling following a data breach), processors initiatives by these government bod- to deputize industry players as sur- ies spawned from the realization that rogate agency watchdogs, has drawn and ISOs rarely found themselves staring down a signifjcant litigation cutting ofg “bad” merchants’ access to a fair amount of criticism. A histori- the payment ecosystem is an efgective cal overview helps to understand the threat. Over the past four or fjve years however, things have changed. way to shut down companies engaged ungirding of these criticisms. in consumer deception (think bogus Government actors seeking to hinder Historical development of businesses engaged in “undesirable” peddlers of miracle nutraceutical Operation Choke Point products, online coaching programs, consumer transactions have taken aim at the processors and ISOs that allow or debt-relief scams that trap vulner- Historically, processors and ISOs were able consumers into recurring monthly those businesses to accept payment merely asked to assist the government cards. Tie class-action bar has begun charges for worthless or nonexistent in its pursuit of unsavory merchants to see the industry as a potential deliverables). Tius, the government by responding to subpoenas and civil source of lucrative challenges (afuer all, has looked to augment enforcement investigative demands. Tiat made when any individual defendant helps actions against the unsavory merchants sense. Chargeback histories, to which facilitate the fmow of billions of dol- through the exertion of pressure on processors have access, can illuminate lars, attacking even a per-transaction processors and ISOs who work with just how disgruntled consumers of rounding error may be an attractive the (perceived) bad actors. a merchant’s goods or services have fjght). Additionally, the card brands Tie objectives animating these regu- become. Underwriting fjles can shed (e.g., Visa and MasterCard) have latory actions may be understandable light on merchant ownership, and how rolled out “chip” cards in the United — even laudable. Not all consumers scammers have structured their orga- States — which is the most complex are savvy enough to understand that nizations to avoid efgective oversight by and fractured payment system in the they have the legal right to “charge- the card brands (which have their own world — on an incredibly compressed back” bogus transactions, leaving a interests in aggressively ferreting out timetable, altering the allocation of large number of individuals victimized and shutting down consumer fraud). risk for counterfeit transactions as a and uncompensated by unscrupulous Tiis state of afgairs lasted until result of this more robust fraud-pre- businesses. And, to be fair, there have recently, when the government decided vention technology. Tie friction cre- always been some bad apples in the to get more aggressive. It began to seek ated by these changes, perhaps unsur- payments space that have worked a ex parte asset freezes over merchant prisingly, has landed where Americans little too hard to keep bad merchants in assets, and slip in language purporting gravitate in times of uncomfortable business with the hope of maintaining to require the turnover of processor change: the courts. In short, the litigation risks fac- ing the payments industry are graver Theresa A. Vitello is vice president and assistant general counsel at EVO Payments International. now than they have ever been — but theresa.vitello@evopayments.com those risks can be efgectively mitigated. Preventative maintenance within an organization, coupled with experi- enced counsel on the front lines, can Edward A. Marshall is a partner at Arnall Golden Gregory. He serves as chair of the firm’s materially reduce a processor or ISO’s business litigation team and is co-chair of the firm’s payment systems practice. exposure to the growing threat. Tiis edward.marshall@agg.com article explores how. Regulatory enforcement actions Theresa Y. Kananen is a partner at Arnall Golden Gregory. She is part of the firm’s litigation and (a.k.a. Operation Choke Point) employment practices and serves as a co-chair of the firm’s payment systems practice. Perhaps the most existential threat theresa.kananen@agg.com a processor or ISO can face is a 62 ASSOCIATION OF CORPORATE COUNSEL
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