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Negotiating noncompetition with a gorilla

By Adam Atlas

A handful of processors in the merchant acquiring industry hold gorilla-size market share. They are so big that some divisions within the company might not know what the other divisions are up to.

This lack of communication and coordination affects the way these processors negotiate noncompetition clauses in ISO agreements.

A noncompetition clause, for example, would prohibit Party A from competing with Party B through the practice of soliciting merchants who already signed up with Party B

As an ISO, if this clause were included in your agreement with one processor, you could not solicit business (offer another processor's services) in the future from the merchants you referred to that processor.

Given the nature of such clauses, try to have some measure of protection for yourself included. For example, the clause could state that the processor's other ISOs would not be allowed to solicit the merchants you referred.

When negotiating noncompetition clauses with large processors, keep the following in mind:

ISO obligations

Your agreement with any processor, regardless of its size, would almost always require you to not solicit the merchants you referred to that processor. In other words, if you bring a merchant to a processor, don't expect to have the right to move that merchant somewhere else any time soon.

A "gorilla" processor, however, is likely to have a number of ISOs and agents working for it. The processor would therefore want to protect not only the merchants you brought to it, but also all its merchants, regardless of which ISOs brought them.

The latter is something you should strongly consider negotiating. That negotiation will boil down to whether the processor is in the business of allowing the "re-signing" of its own merchants.

Some processors are and some are not. If the processor does permit its ISOs to do this, then do not expect an obligation in the agreement that would prevent you from doing so.

When you sell for a processor with considerable market share, to be prevented from selling to all of that processor's merchants could have a material impact on the number of merchants to whom you have the right to sell.

Processor obligations

The first draft of any ISO or agent agreement (coming from a large processor) will typically include nothing that would prevent the processor from soliciting merchants.

In a perfect ISO world, a processor would never let any of its ISOs re-sign merchants once they have been signed. As it happens, the world is not perfect.

The larger a processor grows, the more likely it is that processor would permit ISOs to re-sign its own merchants. The question then becomes, Where in the agreement can you ask for protection from the processor from a gratuitous re-signing of all its accounts by other ISOs?

The answer is that most processors, large and small, would be willing to commit to not intentionally encouraging their other ISOs to go about re-signing the merchants you have just brought on board. The larger the processor, however, the less you should expect in this regard.

Merchant relationships

Legally, no relationship exists between an ISO (or agent) and a merchant whom the ISO referred to a processor. In the real world, however, the real relationship - the pith and substance - between a merchant and his acquiring entity lies with the ISO or agent who signed that merchant.

In this regard, the ISO or agent is tied to the merchant like any salesperson is tied to a customer.

Although not subject to any written agreement, that relationship is one of the most important in the acquiring business. A merchant's inclination to sign with anyone, let alone the same processor, will be heavily influenced by the merchant's relationship with his salesperson.

When the rubber hits the road and other ISOs come after your merchants (and they will), your best protection is the relationship you have with your merchants. A secondary and less effective line of defense is your agreement with your processor, which may or may not permit its other ISOs from poaching your merchants.

The upside

The right to poach the merchants who also work with your processor is a two-sided coin. On one side, you're competing with other ISOs that have the same sales toolkit as you. On the other, you can solicit a large number of merchants without worrying about unknowingly running afoul of a noncompetition clause.

Right of notice

If your agreement would prohibit you from signing merchants who already work with your processor, ask your processor to provide a notice should you mistakenly breach that obligation. You could be soliciting its merchants without knowing it.

So, it's right and fair for you to ask your processor to send you a notice informing you that a given merchant you submitted is off-limits. You should not be liable for a wrong you could not have possibly prevented.

Knowledge qualifier

In addition to receiving notice from the processor, also make sure any noncompetition clause includes something like "ISO shall not knowingly solicit merchants ... ." In addition to the notice requirement, the word "knowingly" would provide another layer of protection. It would protect you from being penalized for doing something wrong you could not possibly have known about in advance.

Both perspectives

The best way to get what you want out of a negotiation is to spend a moment thinking about what the other side wants. Understanding the opposite position makes your position that much stronger.

When negotiating a noncompetition clause with a large processor, consider the processor's perspective. If the processor were to prevent all its ISOs from re-signing its existing merchants, then it would see a significant decline in new merchant applications. As such, the processor may prefer to allow this kind of in-house poaching. Once you see both sides of the story, try to propose a middle ground.

Noncompetition clauses often trigger breaches of ISO agreements. Negotiate them with much caution and attention to detail. Never hesitate to shop around for a clause that is best for you. Finally, once you sign an agreement containing a noncompetition clause, do not breach it.

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, e-mail Adam Atlas at or call him at 514-842-0886.

Article published in issue number 060902

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