Every week, I get a call from an agent or ISO (whom we will simply call the “agent”) complaining that an ISO or other upstream processing partner (whom we will simply call the “processor”) owes the agent money, but won’t pay. They are invariably asking what they should do. Although the question is simple, the answer is complicated and extremely fact-specific.

The first step in responding is figuring out whether the processor is not paying the agent because it cannot, or is choosing to not pay for other reasons.

This in and of itself may prove challenging.

For example, where the processor has taken the action as a result of a civil investigative demand by federal regulatory authorities, the processor may be prohibited from disclosing the fact of the investigation to the agent or its merchants. The processor may offer a pre-textual reason for cutting off revenues in lieu of the real reason. The processor may simply stop responding to phone calls and emails and stop paying the agent without any explanation. Thus, getting to the truth often requires getting lawyers involved to exert pressure on the processor. That may be as simple as a telephone call, or may require the filing of a lawsuit.

On the other hand, the processor may be completely candid about its reasons for not paying.

Perhaps the processor can’t pay because its sponsoring bank or upstream partner has cut off its revenues. This might happen because of an investigation or lawsuit by federal regulators – such as the Federal Trade Commission (“FTC”) or the Consumer Financial Protection Board (“CFPB”) – or other action by the Card Brands regarding the processor itself, or problematic merchants within its portfolio.

In situations like this, the best strategy may be for the agent to step into the processor’s shoes and attempt to take ownership of the problem to eliminate the obstacle blocking the payment stream. Depending on the facts, that may mean funding the defense and settlement of federal regulatory claims against the processor and its upstream partners; advancing payment of Card Brand fines against the acquirer; and/or prosecuting breach of contract, indemnity and guaranty claims against the merchant (or merchants) that caused the problem.

Whether such an approach makes sense usually depends on a careful analysis of the agent’s potential return on investment. Many times, it may not make sense and the best choice may be to take the loss and walk away. This is especially true in cases where the amount at issue is painful–—but not devastating—to the agent’s business. It’s also true when the processor has plainly engaged in wrongdoing and appears to be going “down for the count” no matter what.

Perhaps the processor is choosing to not pay the agent for other reasons.

The processor may blame the agent for referring a bad merchant (or group of merchants) that has caused the processor problems with its upstream partners or federal regulatory authorities. As a result, the processor may have simply chosen to divert the agent’s residual stream to fund the associated legal costs according to its own subjective sense of justice.

Perhaps the agent actively referred merchants in the past and earns significant monthly commissions on those referrals, but has stopped sending new accounts to the processor in favor of a new business relationship. Many processors are quick to discover a contractual pretext for cutting off the revenue stream in “what have you done for me lately” cases, as I like to call them.

In these situations, the best strategy may be filing a lawsuit, subject to several qualifications.

First, the outcome in litigation is usually dictated primarily by leverage rather than by the question of who is right. Even though a contract may favor the agent’s legal position in a dispute so that the agent has a likelihood of prevailing on his claims, it may nonetheless favor the processor’s position with respect to question of leverage and the cost of “winning.”

Does the contract provide for prevailing party attorneys’ fees? If not, then each side will be responsible for paying its own lawyers. Therefore, whether it makes sense to sue may depend on the amount at issue relative to the anticipated time and cost of prosecuting the claim.

Does the contract contain a liability limiting clause capping the amount of any potential recovery, and/or prohibiting any claim for consequential or punitive damages? The contract may limit the amount or type of recoverable damages to such an extent that it’s simply not worth it to file a lawsuit.

Does the contract contain a mandatory arbitration provision?

Arbitration also means no jury and thus, presumably, a more dispassionate and sophisticated decision-maker to resolve the dispute, which is a leverage stick that may lean either way depending on the nature and underlying facts of the claim.

Arbitration often provides a more efficient mechanism for resolving a dispute, but may prove prohibitively expensive depending on the particular terms of the arbitration clause. Does it provide for arbitration before a single arbitrator or a panel of three arbitrators? How does it allocate the arbitration costs between the parties? Does it provide for an award of arbitration costs to the prevailing party? Where is the arbitration to be held and what rules apply?

The answers to these questions are key to a cost-benefit analysis for both sides and hence central to the question of leverage. Thus, even if the agent has the better side of the legal argument, these considerations may weigh against the agent filing suit.

In those situations, that may mean negotiating with the processor to achieve an acceptable compromise, like the agent setting up a separate reserve or receiving a reduced revenue stream for a period of time. Or it may mean that the better choice for the agent is to accept the loss and simply move its merchant portfolio to another processor.
In short, “what to do you when your processor stops paying you” is a multi-faceted question involving numerous practical and strategic considerations that goes far beyond a basic legal analysis and it defies a simple, formulaic answer.

The information contained in this article is for informational purposes only. Please consult an attorney before relying upon it for your specific legal needs. Theodore F. Monroe is an Attorney whose practice focuses on the electronic payment and direct marketing industries. For more information about this article or any other matter, please e-mail Monroe at [email protected]