A sales agent presents a proposition to move a portfolio of merchants from one ISO to another. While it sounds like a good deal for the ISO that receives the portfolio, it might not be. The ISO that accepts the merchant portfolio could be sued, even if it has not signed a written contract agreeing not to move the merchants in question.
The Set Up
Sales agents often move from one ISO to another. Sometimes the reason is as simple looking for a larger share of residuals and moving to a better-paying ISO. Other times sales agents are forced to move because their ISOs caught them committing fraud. No matter the situation, when a sales agent moves to a new ISO the merchants the sales agent placed with its old ISO can come into play.
Since the agent is the one that signed up the merchants and often has a personal relationship with them, the agent often can convince them to move to the new ISO. This is usually a bad idea because such actions could jeopardize the residuals agents should receive from 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 agent to resist.
The Contracts
Defining the written contracts involved in the scenario is important in understanding the potential liability involved. Existing merchant agreements and the agent’s agreement with the old ISO are relevant.
Every merchant is required under card association rules to have a written merchant agreement with the sponsoring bank and, in most instances, an ISO is a party to those agreements. The merchant cannot terminate most merchant agreements during the initial three-year term and any automatic renewals of the merchant agreement.
In addition, most merchant agreements call for the merchant to process exclusively with one bank and/or card processor. 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 agent agreement contains a nonsolicitation provision that serves to keep the agent from moving any merchants to a competitor. Those provisions outlast the term of the agent agreement and can apply for three to five 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, how does that make the new ISO subject to liability?
Potential Liability
In many states, tort law serves to impose liability for certain actions even in the absence of a written contract. A tort is “legal wrong committed on the person or property independent of contract,” according to Black’s Law Dictionary. This potentially sets up the situation where the new ISO, if there is a tort that applies, could be held liable even if it is not a party to the relevant merchant agreement or agent agreement.
There is a tort recognized in California and many other states 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.
It is likely that the new ISO (which will be the defendant if it is 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 new ISO usually relies upon the second element, which is “knowledge of the contract,” 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.
The old ISO can send a letter to the other ISO and state the agent is moving merchants that belong to the old ISO and the old ISO has written contracts with all the merchants and the agent. If in the face of all that knowledge the new ISO continues to accept the merchants, it has committed an intentional act in furtherance of the tort. It 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 are 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 the agent moved from one ISO to another. They can calculate damages by a multiple of the value of the monthly residuals lost by the old ISO, by a discounted cash flow as it relates to those merchants or by other methods as allowed under the law.
The new ISO may get to keep the merchants, but it may also have to pay for them, including the portion of the residuals that the ISO paid to the sales agent in question.
The information contained in this column is for informational purposes only and should not be used to reach a conclusion in a particular area. The legal principles discussed were accurate at the time the article was written but are subject to change. Please consult an attorney before making a decision using only the information provided in this article.
