TradeHill Inc., an online company that specialized in the exchange of bitcoins (a type of digital currency), sued online and mobile payment processor Dwolla Inc. Trade Hill alleged Dwolla's reversal of its "no chargebacks" policy, done without prior warning, bankrupted TradeHill.
Bitcoin open source software allows irreversible peer-to-peer payments using bitcoins, which are distributed through the Bitcoin network. In its federal complaint, filed in the Northern District of California March 5, 2012, TradeHill claimed it was "one of the world's leading resources for Bitcoin."
TradeHill customers made purchases from TradeHill and participated in the Bitcoin exchange through Dwolla. TradeHill said it decided to do business with Dwolla, as opposed to other companies like PayPal Inc., because of Dwolla's low 25 cent transaction fee and because Dwolla advertised it did not chargeback and claimed "that its transactions were 'as good as cash.'"
TradeHill said some of its customers began fraudulently purchasing TradeHill services in the summer of 2011 by asking for chargebacks from Dwolla after their TradeHill purchases. Dwolla, despite its alleged no chargeback policy, complied with these customer requests.
In essence, these customers worked out a way to get TradeHill services for free, TradeHill said. TradeHill also claimed that, despite repeated requests, Dwolla never produced the customer affidavits that asked for these chargebacks.
"Dwolla has not provided a single affidavit supposedly associated with these chargebacks; as such, TradeHill can only allege these affidavits existence," the TradeHill complaint said. "If these affidavits do not in fact exist, Dwolla simply reversed these transactions for no reason."
TradeHill claimed it was never told of the chargebacks and said it discovered them when the number of credited transactions did not tally with sales. To confirm its suspicion that Dwolla was crediting accounts and then charging back, TradeHill created a program to match transactional histories from one day to the next.
TradeHill said its program quickly discovered credited transactions were being reversed to "pending transactions" on a daily basis by Dwolla.
TradeHill also stated in the lawsuit that Dwolla reacted to its chargeback complaints by scrubbing its website of "nearly all references to the 'no chargeback' policy." TradeHill stated, "Dwolla, finding out that its 'no chargeback' policy was a very poor long-term business strategy (especially if customers expected Dwolla to abide by it), changed its entire marketing strategy and business model.
"At the same time, Dwolla was also making it blatantly clear through the unconscionable arbitration provision and other changes to its website that it had no intention of resolving the dispute with TradeHill and believed it was under no obligation to do so."
TradeHill said Dwolla's actions left it unable to pay its bills and forced it to close its business and give up its bitcoin Internet domains.
TradeHill is asking for return of "all consideration previously paid by TradeHill to Dwolla," a finding that Dwolla waived its right to arbitration, compensatory damages, civil damages and punitive damages plus interest on these damages.
Dwolla Chief Executive Officer Ben Milne responded to the TradeHill suit, calling TradeHill's allegations "unfounded" and expressing outrage that TradeHill contacted the press with news of the lawsuit prior to informing Dwolla of the filing.
Milne defended his company saying, "A necessary byproduct ... of fraud is bank-level reversals, 'chargebacks' issued by the institutions on behalf of the victims, not Dwolla.
"With that said, we will not play accomplice to sources of ongoing fraud. In such cases, we move quickly and act appropriately to facilitate restitution on behalf of the financial institution and its members (the victims). This is required by federal and state consumer protection laws, but more importantly it's the right thing to do."
Milne said his company is happy to go to court to address the concerns of merchants who believe they were "wronged to the point of litigation."
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