By Adam Atlas
Attorney at Law
Ten years ago, I wrote an article about termination titled "The termination gamble." The editor at The Green Sheet suggested I revisit the topic. This is an updated version of that earlier article.
Terminating an ISO agreement is like terminating a marriage. You never know whether it will be amicable or how hard the other party will fight for custody (of the merchants). Most ISO agreements have an initial term (such as three or five years), followed by automatic renewals for successive one- or two-year terms.
Most also permit ISOs to terminate the agreement within a certain time (for example, 90 days before the end of the then-current term). Every time that window approaches, ISOs consider whether that year is the year to exercise the right of termination. As an ISO, keep the following points in mind when thinking about exercising your right of termination:
Make sure you actually have a right to terminate the agreement. Although most agreements do provide this, some do not. When an agreement has no specific term and no right to terminate, state laws may permit the agreement to be terminated at any time. Thus, agreements should always provide for a term and a mechanism for termination, even if they automatically renew.
After the initial term, the right of termination is usually available once per year. Be careful to get your notice in on time. Many agreements state that notice of termination must be sent at least 90 days before the end of the then current term. If you miss that deadline, you may be locked in for another year.
The most important question to answer before terminating an ISO agreement is whether the outgoing processor will continue to pay residuals following termination. Many agreements provide for payment of residuals following termination, but those payments are often subject to conditions, such as continued merchant support and non-solicitation. Look closely at the entire agreement to make sure there really are post-termination residual rights and that they are not unreasonably limited.
Processors typically require ISOs to not solicit merchants on behalf of another processor, particularly concerning the merchants the ISO brought to the processor. If you solicit your merchants after terminating your agreement with the processor, you could lose your residuals and also get sued.
Going one step deeper, consider whether you are allowed to solicit merchants who, of their own volition, decided to terminate their merchant agreements with the outgoing processor. These merchants are a source of many disputes over terminated ISO agreements. ISOs usually leave processors because of poor service or poor scruples. Merchants eventually catch on to these practices and will likely want to follow the departing ISOs. Do not violate your old ISO agreement's non-solicitation provisions when helping these merchants.
When terminating your relationship with a processor, if thinking about taking some of the other agents or ISOs of that processor with you, examine your ISO agreement to see if you are allowed to do this. Most ISO agreements are weak on this point; however, even if the agreement does not prevent you from that kind of solicitation, be careful that you are not liable for "tortious interference in contract." This is a general common law prohibition against inducing individuals to terminate contracts into which they have entered.
Even when you are not expressly prohibited from soliciting someone else's agents, this doesn't mean that the court will permit you to pilfer a processor's entire agent roster. Always act with prudence and moderation when your actions will affect someone else's business.
Non-solicitation clauses are often challenged. This is especially so when they are used to prevent a person from earning a living. That said, the general expectation in the industry is that if an agent brings a merchant to an ISO and the ISO pays residuals on the merchant, the agent should not re-solicit the merchant to take the account elsewhere. Cases wherein a court allowed an agent to get away with solicitation should not be relied upon as a free pass for agents to move merchants.
Upon termination, you may wish to be bought out. Whether or not your agreement provides for a specific buyout price, some processors are willing to buy out an ISO if the price is right. The market varies wildly between 12 and 40 times the monthly residual payment and could easily vary outside those parameters. Carefully negotiate and document a residual buyout to avoid surprises. Watch out for processors that promise to buy at a certain multiple but then pay 30 days after you sell, thereby permitting them to earn one month of your revenue for free.
In a precious few ISO agreements, ISOs have the right to cause the member bank to assign its rights in the merchant agreement to a third party. This is a right that is usually exercised upon certain conditions being met. Sometimes an exit fee accompanies this right. Once again, carefully negotiate and document the movement of merchants upon termination, or otherwise.
If you're thinking of entering into a new ISO relationship upon termination of your old one, think about whether the two relationships will conflict. For example, if the old relationship is exclusive, do not enter into a new one until the old one is officially over.
Many long-term, healthy relationships explode upon termination. Most of these explosions I have seen occurred because the processor and ISO had wildly different expectations regarding their respective rights and obligations upon termination. To avoid these explosions that can cost you years of work, keep a very open relationship with your processor. Also, have all promises made to you in writing, even by e-mail. Such documents will help you prove your understanding of each party's intent if a dispute ever arises.
Try to not make your ISO agreement termination anything like a divorce. Rather, it should be a proud moment when you finally get to exercise rights that have been laying in wait for years. Exercise these rights, however, with caution.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, email Adam Atlas, Attorney at Law, at firstname.lastname@example.org or call him at 514-842-0886.
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