The automated teller machine branding deal JPMorgan Chase & Co. and Cardtronics Inc. struck two years ago kicked off a wave of similar agreements and was viewed by the industry as an innovative and inexpensive way for the banking company to extend its reach.
However, the third participant in that agreement, Duane Reade Inc., has been less than thrilled with the outcome. It is seeking to recover nearly $2 million from Cardtronics, a claim the two companies have agreed to put in the hands of a mediator.
Steven Paradise, an attorney for Cardtronics, said the issue centers on the fees due to Duane Reade for transactions made at the Chase-branded ATMs in its stores. Once the branding deal took effect, transactions by JPMorgan customers no longer incurred an ATM fee. Just how Duane Reade was to be compensated by Cardtonics for that ATM traffic is something that apparently has been a point of contention for quite some time.
The New York drugstore operator filed a lawsuit last June, and in a filing Tuesday with the Securities and Exchange Commission, Cardtronics said that Duane Reade is seeking $600,000 for the period up to the time of the suit's filing, plus another $100,000 for each month since then, for a total of about $1.8 million.
Mr. Paradise, a partner in the New York law firm Vinson & Elkins LLP, said that JPMorgan Chase is "not a party to this dispute," that neither party is seeking any kind of "relief" from the New York banking company, and that neither party "is seeking, through the lawsuit, to terminate this agreement."
A spokesman for JPMorgan Chase would not discuss the suit.
Independent ATM companies typically make money by charging people a fee to use their machines; the merchant that hosts the ATM generally is entitled to a share of these fees. The deal negotiated between Cardtronics and JPMorgan Chase changed the playing field, because JPMorgan Chase customers can use the machines for free. Such deals are designed to extend the bank partner's ATM network, and to increase transaction volume for the ATM company.
The ATM operator receives a fee from the bank to compensate for the lost fees. (Users who are not the bank's customers still pay a transaction fee.)
In its complaint, Duane Reade cited an October 2005 letter from Cardtronics that said: "In the month immediately preceding the effective date of any branding deal, we determine once and only once, the number of surcharged transactions conducted by the branding bank's customers and thereafter, through the balance of the term, Cardtronics guarantees Duane Reade the fees due and payable from those specific transactions. It does not matter if the branding bank's transactions go up or down."
Using that formula, Cardtronics determined Duane Reade's compensation by the volume of transactions conducted by JPMorgan Chase cardholders in February 2005, the month before the branding contract took effect.
However, Duane Reade countered in its suit that, under its agreement with Cardtronics, the ATM company had no right to make this calculation "once and only once," and that its fees should increase, because the branding agreement has increased activity on the machines.
Duane Reade said it wants Cardtronics to recalculate the volume and fees every month. "Because the volume of Branding Surcharge Transactions was expected to increase once a brand was selected (and in fact the volume has increased exponentially), Cardtronics sought to pay an artificially low and improperly reduced amount of fees."
A spokeswoman for Duane Reade would not discuss the suit, which was filed in the U.S. District Court for the Southern District of New York but has been moved to the Supreme Court for the State of New York.
Cardtronics contends that Duane Reade is not losing any income from increased transaction volume from JPMorgan Chase customers, because additional customers were unlikely to use the machines before the branding deal was in place.
"The unmistakable purpose of this credit for Branding Surcharge Transactions was to prevent Duane Reade from losing its share of surcharge revenue from those Chase cardholders that previously were willing to pay a surcharge to use the Cardtronics ATMs," Cardtronics said in a December court filing. However, "Cardtronics did not promise to compensate Duane Reade for ATM transactions by Chase cardholders that would use the ATMs only after they were branded 'Chase.' "
Cardtronics, which operates 25,000 ATMs nationwide, has struck similar deals with other banking companies. Sovereign Bancorp Inc. of Philadelphia, Commerce Bancorp Inc. of Cherry Hill, N.J., Huntington Bancshares Inc., and Guaranty Bank have set up branding arrangements for Cardtronics machines in CVS Corp. drugstores.
Mike DeAngelis, a spokesman for CVS, wrote in an e-mail that ATM transaction volume has increased since the branding deals took effect. He would not give any details about the Woonsocket, R.I., company's arrangement with Cardtronics, except to say that his company receives "the same compensation" from Cardtronics "regardless of the bank-branding partner," and that CVS is "happy with the relationship."
Mr. Paradise said that a judge has "suggested" that the two companies settle the issue through mediation, which is nonbinding. Cardtronics and Duane Reade have agreed to do so soon, he said, though he would not give a precise date.
