By Eugene Rome and Liz Wang
Rome & Associates A.P.C.
Any merchant who processes mid- to high-risk transactions understands that at some point he or she may have to deal with fines assessed by an ISO, an acquiring bank and a card company such as Visa Inc. and MasterCard Worldwide.
If a card company assesses fines upon an acquiring bank in connection with a merchant's processing activities, the bank will usually pass the fines on to the merchant, whether or not the fines were assessed properly. So while the merchant is not in direct contractual relationship with the card company, the merchant still ultimately pays the price.
However, in a recent case, a California state court acknowledged - possibly for the first time - that a merchant may be able to bring legal claims directly against a card company if the merchant wishes to challenge an improper assessment of fees.
In the typical payment processing hierarchy, the bank and the card company are parties to an agreement, whereby the card company gets a contractual right to assess fines upon the bank if, for example, chargeback activity of one of the bank's merchants exceeds certain permissible thresholds set by the card company or if some other prohibited activity, such as the miscoding of transactions, occurs.
The card company further requires the bank to incorporate into the bank's processing agreements with merchants certain rules and regulations the card company promulgates.
The ISO and the bank, in turn, enter into processing agreements with merchants, whereby the bank almost always gets a contractual right to pass on to merchants fines the card brands impose in connection with processing activities. (While the bank has authority to assess said fines, whether the merchant is notified by the ISO or directly by the bank is a matter of practice, not regulation.) Thus, merchants are required to adhere to the terms of their merchant processing agreements as well as to the card brand rules.
But what if a card company improperly assesses fines on the bank in connection with a merchant's activity? Naturally, the bank will pass the fines along to the applicable merchant, and if the merchant wants to keep the account operational he or she will pay the fines.
The bank may object to the improperly assessed fines on the merchant's behalf. But this assumes the merchant received notice that a card company assessed the fines and is able to determine the fines are improper, demonstrate to the bank the fines are improper, convince the bank to contact the card company and express the merchant's objections, and get the bank to follow up with the card company until the dispute is resolved.
Yet with the merchant ultimately footing the bill, the bank has little incentive to advocate zealously on the merchant's behalf, particularly so where its most valued relationship is with the card companies. This raises an important question: What redress does a merchant have against a card company that erroneously assesses fines for which the merchant is ultimately on the hook?
This was the central issue in a case filed in Los Angeles Superior Court for the Central District of California in December 2009 and titled, "Solar Haze Limited, et al. v. St. Kitts-Nevis-Anguilla National Bank Limited, et al."
The case involved Visa's assessment of $548,000 in fines upon the bank, St. Kitts-Nevis-Anguilla National Bank Ltd., in connection with Solar Haze's processing activities. The bank, in turn, passed the fines along to Solar Haze.
After examining the pertinent documents, Solar Haze determined Visa had applied incorrect standards in finding that Solar Haze's activities were subject to fines. However, Solar Haze was not a party to an agreement directly with Visa, under which it could have asserted claims such as breach of contract or breach of the contractual covenant of good faith and fair dealing.
Ultimately, Solar Haze brought a lawsuit against Visa under quasi-contractual theories. Visa demurred (it asserted the plaintiff's allegations may be true but plaintiff was not entitled to prevail in a lawsuit), and after extensive briefing and argument by the parties, the court allowed the case to proceed past the demurrer stage despite the lack of a direct contractual relationship - called contractual privity - between Solar Haze and Visa.
Solar Haze's counsel Eugene Rome, who is co-author of this article, argued that, by virtue of Visa's insistence that the merchant's payment processing transactions must be subject to Visa's rules, an obligation was created between Visa and the merchant. He asserted that, in essence, there was an implied-in-fact contract that was binding upon Visa.
Rome further argued that, because the funds ultimately paid to Visa in payment of the fines were traceable to Solar Haze, Solar Haze was entitled to proceed with certain equitable claims against Visa.
The court found that claims based on equitable principles such as restitution and money had and received were potentially viable and ultimately withstood a demurrer. The case was settled soon thereafter.
The authors believe the Solar Haze ruling is the first case in which a court has upheld a direct claim by a merchant against one of the card companies for violation of its rules. The ruling marks an important development for merchants seeking to challenge what they feel are improper assessments of fines by card companies.
While the absence of contractual privity was previously deemed to be the death knell of a merchant's rights vis-a-vis the card companies, this court recognized that, based on certain principles of equity, a merchant may be able to seek a reversal of a card brand's improperly assessed fines or a return of the merchant's improperly applied funds.
Eugene Rome and Liz Wang are commercial litigators practicing in the payment processing field. They have litigated numerous credit card processing and electronic payment disputes on behalf of ISOs, Internet payment service providers, acquiring banks, aggregators and high-risk merchants. They can be contacted at 310-282-0690 or by e-mail. erome@romeandassociates.com.
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