The Green Sheet Online Edition
January 10, 2011 • Issue 11:01:01
Merchant sues U.S. Bank for alleged data breach cover-up
An Arizona-based merchant, Paintball Punks, recently filed a class-action lawsuit against U.S. Bank that alleges the bank failed to protect Paintball Punks and other merchants from financial losses resulting from a breach of the bank's credit card data.
The suit, originally filed in Hennepin County (Minnesota) District Court in November, was removed to the U.S. District Court in Minneapolis on Dec. 6, 2010. The complaint against U.S. Bank asserts that the bank allowed compromised card accounts to remain active and didn't notify affected cardholders, instead covering up the data breaches.
Paintball Punks, which sells paintball supplies online, claims the data breach resulted in the merchant receiving nine fraudulent orders totaling $11,259.91 that were billed to U.S. Bank-issued credit cards. The transactions in question occurred between August and December 2009.
When cardholders disputed the charges, U.S. Bank processed chargebacks against Paintball Punk's bank account for the amount of the fraudulent transactions.
New type of complainant
Paul Rianda, a California attorney who specializes in the bankcard industry, commented that cases involving a merchant bringing a class action suit against a bank for losses stemming from a data breach are unusual. "Usually it's the cardholders bringing class actions," Rianda said. "Maybe these guys are a little more aggressive."
Ross Federgreen, founder of CSRSI, a consulting firm specializing in electronic payments and data privacy management, believes that - depending on its outcome - the suit by Paintball Punks could stimulate the filing of other suits by merchants seeking relief from chargebacks under similar circumstances.
"Even though [merchants] may not be culpable, they are the ones that suffer significantly," Federgreen said. He pointed out that merchants sometimes absorb "almost a triple penalty," via the cost of the chargeback, the chargeback fee and the loss of the merchandise.
"The fact that the case is getting coverage early on is very important," Federgreen added. "It's something that would be useful to keep an eye on as it matriculates to various motions, proceedings, and ultimately to court."
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