've written these words here before, but they deserve to be repeated: Payments is a litigious business. In recent years, we've witnessed merchants suing card associations over pricing and acceptance policies (read: Wal-Mart, et al v. Visa and MasterCard); government agencies taking on the card associations for alleged violations of antitrust laws (the U.S. Justice Department v. Visa and MasterCard); and even internecine squabbles, such as the lawsuit filed earlier this year by Visa against First Data Corp. over a new transaction processing scheme (Green Sheet, June 10, 2002, issue 02:06:01).

But one trend that hasn't been discussed - and that certainly deserves the attention of the industry - is the scourge of lawsuits filed by merchants whose card-acceptance privileges have been terminated and bank accounts have been frozen, most typically because of chargebacks.

There's a lesson to be learned here, and it seems to me that this lesson has more to do with the adequacy of contract disclosures than anything else. Banks and merchant acquirers need to be more upfront about the rights and liabilities of merchants who contract for card services.

Henry Polmer, a partner in the Washington, D.C., offices of Piper Rudnick, agrees. "Banks are in the stronger position here," says Polmer, an attorney who has represented numerous banks and payments organizations. "And, in their own self-interests, they need to draft contracts that unambiguously address the circumstances in which they can freeze accounts. Banks should never put themselves in the position where each party's rights are not crystal clear."

Disputed Chargebacks

A case in point: First Data Merchant Services, two banking companies that process payments through First Data, and others are being sued by a small New York company. The owner of the company, known as One Solution Corp., claims she was put out of business when bank accounts maintained by the company, as well as her personal checking account, were frozen in response to a spate of disputed chargebacks.

The case, filed by Beth Garnett and One Solution Corp., is pending in the Supreme Court for the State of New York, County of Nassau. (This is not the highest state court in New York, although the name might suggest that it is.) Defendants, in addition to First Data, include Banc One POS Services Corp., Paymentech, JP Morgan Chase Bank, American Express and Yahoo! (the Internet services company). Garnett's father, Miles Garnett, a self-proclaimed expert in accounting and securities law, is pressing the case on her behalf. He's asking for an award of damages in excess of $60 million.

The particulars of the lawsuit involve an online storefront (JoeMommaComputer) established in 1999 by Beth Garnett through Yahoo to sell computer products. Yahoo had arrangements with Banc One and Paymentech to acquire card transactions initiated through the Yahoo Shopping Mall, of which JoeMommaComputer was a part.

Garnett personally guaranteed a "click-through" agreement with Yahoo and the resulting merchant services agreement with Banc One and Paymentech, arranging for transactions to be posted to One Solution's account at Chase Manhattan Bank (now JP Morgan Chase).

By Internet standards, JoeMomma Computer seemed to fare well. Garnett claims there were more than 3,500 orders in 1999 alone and that between early 1999 and early 2000 the company had gross sales totaling about $2 million.

Then, it seems, the issue of chargebacks came to a nasty head. Banc One and Paymentech terminated the processing arrangement with JoeMommaComputer and requested that Chase "freeze" accounts maintained by Garnett (both for herself and One Solution).

Without access to credit card clearing systems, or to her bank accounts, Garnett claims One Solution and JoeMommaComputer were effectively put out of business.

Miles Garnett is livid and has vowed to pursue this case through every available legal venue. The primary legal assertion he has made is that Chase had no right freezing the accounts of One Solution and Beth Garnett, absent a court order. Freezing the accounts without a court order, the suit alleges, was a breach of contract and placed Banc One, Paymentech and Chase in violation of the laws of the state of New York.

What the courts must now decide, it seems, is whether under the circumstances of this case Chase breached its contract with Garnett by freezing her account at the request of Banc One and Paymentech.

Allegations of Racketeering and Fraud

But the legal mudslinging gets richer: Miles Garnett has raised the specter of federal anti-racketeering statutes. And in filings with the court and in telephone interviews, he has suggested that First Data and its merchant-acquiring partners are playing fast and loose with merchants' money. In a telephone interview, Garnett conceded the racketeering charges may not stick. "But that doesn't change the facts," he said. In legal filings and interviews he portrayed an industry of closely affiliated companies that engage in a "pattern" of racketeering in order to rip off unsuspecting merchants.

He also raised questions about First Data's accounting practices, suggesting that they "leave much to be desired" and that he has had discussions about this with "authorities."

A spokesman for First Data declined to comment on the lawsuit filed by Garnett and One Solution. He did concede this is not the first time First Data has been sued by a disgruntled merchant. It may, however, be the first time the company has been sued by a tenacious lawyer who seems committed to slinging it out in court (on behalf of his daughter) until the bitter end.

Contracts Need To Be Clear

Could this all have been avoided? I think so, and I believe others who are involved in the card acquiring business would agree.

It's time for banks and other acquiring organizations to start writing contracts in plain, readable English!

It's anybody's guess as to who invented the fine-print contract, but payments companies seem to have elevated the process to an art form. Many of the folks who are opening merchant card accounts these days are individuals who have grown accustomed to the rights accorded them under U.S. consumer protection laws.

I'm not suggesting that the card acquiring industry wrap itself in the language of consumer protection regulations, but acquirers do need to be clear about what it is expected of a person who opens a merchant card account.

If a personal guarantee means that the person is actually personally liable for everything that goes through that account (or goes wrong), it's incumbent upon the company writing the contract to explain, clearly, what that means. If it means the person's personal bank accounts can be frozen, their assets seized, they need to understand that. The result may be that in the end fewer contracts are signed, but it also should mean fewer trips to court to defend business practices.

And perhaps more important, it could save this industry the agony of federally mandated disclosures and the government micro-management that accompanies such mandates.

Patti Murphy is Contributing Editor of The Green Sheet and President of Takoma Group. She can be reached at pmurphy@takomagroup.com.