Independent sales organization, Electronic Merchant System (EMS), must pay more than $5.4 million in residuals to a sales agent due to breach of contract. This decision, which originated from a dispute over residuals and how contract conditions are interpreted, could lead to major complications for those, like ISO agents, in the merchant acquiring sector.
Unless EMS appeals the ruling by U.S. District Court for the Northern District of Ohio, EMS must pay the damage to Infinity Capital LLC, doing business as Choice.
Background on the Case
Choice worked as an ISO agent selling payment processing services for EMS for five years. With EMS’s approval, Choice began selling for other ISOs in 2015. Three years later, EMS ends its partnership with Choice, claiming it violated a non-solicitation clause.
In 2018, Choice tried to sell 65% of its residuals to a bank, which wanted to change the agreement to ensure its right the residuals was protected. EMS rejected any amendments and the sale to the bank fell apart. Eventually, EMS ended the amended contract and stopped pay residuals, which totaled $133,000 per month, to Choice.
Choice filed a claim, stating was wrong when it stopped paying. EMS alleged that once Choice brought them a customer, the ISO agent couldn’t offer the customers any services.
The court found that EMS should pay Choice $5.4 million because it is equal to 120 months of residuals it did not receive. Furthermore, the judge ruled that EMS did not have the authority to terminate the residual and breached its contract by doing it.
EMS plans to appeal the decision.
How The Decision May Impact Future ISO Contracts
Though the decision does offer a guide on how to draft ISO contracts and how all parties should handle questions related to their agreement, it may make other agents and processors vulnerable.
Processors should provide clear, concise definitions of what constitutes solicitation but does not unreasonably limit trade by agents. Additionally, independent sales organizations should have contracts that include cure rights, breach protections, and language that explains how problems are resolved when they arise.
ISOs and sales agents that have unclear existing agreements or issues over residuals may seek to challenge them in court following this decision. To avoid litigation, both agents and organizations may want to review and amend any unclear passages in their contracts.
ISOs and agents should stay tuned to see if EMS’ case ends up in front of an appeals court. If the decision is overturned, then things will go on as usual. However, if the decision is overturned, it could have major implications for the merchant-acquiring industry.
In the meantime, it would be beneficial to review existing contracts and ensure that the language is tight, addressing issues related to residuals, and includes a way to handle challenges from agents.
Become an ISO Agent
Salespeople interested in becoming an ISO agent should consider EMB’s program. EMB is a high-risk merchant account provider that offers solutions that fit business’ needs.