Article's Authored by Mr. Rianda

Back to Articles

What is an ISO’s Liability for Moved Merchants

A sales agent approaches you with a proposition. The sales agent has a portfolio of merchants that it has placed with another ISO and wants to move all those merchants over to your ISO. Sounds like a good deal for you right? Maybe not. As will be explained below, if you decide to accept these merchants you could be sued, even if you never signed a written contract agreeing not to move the merchants in question.

The Set Up:

Sales agents in our business often find that they need to move from one ISO to another ISO. Sometimes the reason is as simple as the sales agent is looking for a larger share of the residuals and moves on to a new, better paying ISO. Other times a sales agent will be forced to move due to more drastic circumstances such as the sales agent committing fraud and getting caught by its ISO. No matter what the situation, when a sales agent moves to a new ISO, the merchants that the sales agent placed with its old ISO can come into play.

Since the sales agent is the one that signed up all the merchants and often has a personal relationship with them, the sales agent can often convince the merchants it has placed with one ISO to move to a new ISO. This is usually a bad idea for the sales agent, given the fact such actions could jeopardize being paid all the residuals by the old ISO. But, if the old ISO already has ceased paying the sales agent its residuals, or the sales agent can make a lot more money placing the merchants with a new ISO, sometimes the temptation will be too great for the sales agent to resist.

Once the sales agent has decided to move its portfolio of merchants, it needs to find the merchants a new home. That is the focus of this article and where the new ISO comes into play. If a sales agent comes to you and wants to move a portfolio of merchants over to you, many ISOs believe that they can take on those merchants without any potential liability. However, the reality of the situation is that the new ISO has some very real legal exposure.

The Contracts:

To understand the potential liability of the new ISO, we have to first define the written contracts that are important to this analysis. The relevant contracts to this discussion are the existing merchant agreements with the old ISO for the portfolio of merchants that is being moved and the sales agent’s agent agreement with the old ISO.

Every merchant is required under the card association rules to enter into a written merchant agreement with the sponsoring bank and in most instances an ISO is also a party to those agreements. Most merchant agreements cannot effectively be terminated by the merchant during the initial three year term and any automatic renewals of the merchant agreement. In addition, most merchant agreements call for the merchant to exclusively process with that one bank and/or card processor. Consequently, in order not to violate the merchant agreement, the merchant is obligated to continue processing exclusively with the ISO the sales agent places the merchant with for a minimum of three years before the merchant can move to another processor.

The typical sales agent agreement in our industry contains a non-solicitation provision that serves to keep the sales agent from moving any merchants it places with an ISO to a competitor of that ISO. Again, in the industry those provisions outlast the term of the agent agreement and can apply for 3 to 5 years or more after the agreement terminates. Assuming there is such a provision in place that applies to the sales agent that wants to move its portfolio to you, how does that make you, as the new ISO, subject to any liability?

The New ISO’s Potential Liability:

In many states, tort law serves to impose liability for certain actions, even in the absence of a written contract. That is reflected in one of the definitions of a tort in Black’s Law Dictionary as a “legal wrong committed on the person or property independent of contract.” So as you can see, this potentially sets up the situation where you as the new ISO, if there is a tort that applies, could be held liable even if you are not a party to the relevant merchant agreement or sales agent agreement.

Of course, there is a tort that is recognized in California and many other states that is right on point called “intentional interference with contractual relations.” The tort of intentional interference with contractual relations requires: (1) a valid contract between plaintiff and a third party; (2) defendant’s knowledge of this contract; (3) defendant’s intentional acts designed to induce a breach or disruption of the contractual relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting damage.

As you can see from the definition, it is likely that the new ISO where the merchants are being moved to (which will be the defendant if it sued) will fall afoul of this tort. If the old ISO (the plaintiff in the lawsuit) is a party to the merchant agreement and agent agreement, the first element is fulfilled. The second element “knowledge of the contract” by the new ISO is usually relied upon by the new ISO to try to get out of liability by claiming it did not know about the contract but that is easily remedied by the old ISO. All the old ISO has to do is send a letter to the new ISO informing the new ISO that (i) the sales agent is moving merchants that belong to the old ISO and (ii) the old ISO has written contracts with all the merchants and the sales agent. If in the face of all that knowledge the new ISO continues to accept the merchants that the sales agent is moving, it has committed an intentional act in furtherance of the tort and also will be disrupting the contracts in question since the merchants have no right to move and the sales agent has no right to move those merchants.

The final element is damages and those will be easy to prove. In a lawsuit, the old ISO will be able to subpoena the records of the new ISO to identify all the merchants that were moved from the old ISO to the new ISO. Once that is done, damages usually can be calculated based on a multiple of the value of the monthly residuals that were lost by the old ISO, by a discounted cash flow as relates to those merchants or some other method as allowed under the law. As to the new ISO, it may get to keep that portfolio of merchants, but it may also have to pay for them, including the portion of the residuals that were paid to the sales agent in question. That portfolio that looked so inviting could end out costing you many times what you earn from it and you’ll have to pay legal fees to defend yourself to boot. The moral is that if you get an “opportunity” like this, you might want to think twice about acting on it.

Back to Articles