One of the most important and contentious issues in the bankcard
industry is the circumstances under which an ISO can terminate a sales
agent’s residual payments. I have been on both sides of these types of
disputes and know that there are sometimes good reasons to cancel a
sales agent’s residuals. However, I have also experienced a number of
instances where a sales agent’s residuals payments were terminated
improperly. Below I will discuss why termination of residual payments
is such an important issue in the industry, suggestions on how to
resolve this dilemma and also tips for agents to minimize the potential
for losing their residuals.
What is the problem?
In our industry, sales agents are at the mercy of ISOs when it comes to
the payment of residuals. There are very few industries like the
bankcard industry where sales agents are wholly and utterly dependent
upon their vendors. However, in our world, ISOs can and do terminate
a sales agents livelihood sometimes without a valid reason and they
usually get away with it.
The problem is exacerbated by the fact that most agent agreements,
especially those that have not been reviewed by counsel for the sales
agent, contain very vague language as to when the sales agent’s
residuals may be terminated. Many agreements state that a sales
agent’s residuals can be terminated upon a “material breach” of the
agreement. The definition of a material breach is hard to define and
varies from relationship to relationship based upon many factors, one
if which , is how long the parties have been involved in the
relationship. In addition, other contracts may contain a provision
that state a sales agent’s residuals maybe terminated for things as ill
defined as “unsound business practices.” These poorly defined
termination provisions that favor the ISO can give it great latitude in
terminating a sales agent’s residuals.
The sales agent is also handicapped by other factors that make it
difficult for a sales agent to prevail if indeed an ISO terminates a
residual payment. Sales agents may be geographically located across the
country from the ISO that they rely upon for their residual payments.
If a sales agent’s residual is terminated, it has to retain an attorney
where the ISO is located, which is often an expensive process.
Even if the sales agent is receiving decent residual income it is time
consuming and costly for it to hire an attorney across the country and
pay that attorney, especially when it is not receiving any further
residual payments. The sales agent must file a cross-country lawsuit,
which could take one to three years to resolve with the hopes that it
would eventually be able to prevail against the ISO. Given this state
of affairs, most agents generally just prefer to walk away rather then
go through the process of suing an ISO.
What is the Solution?
One way to resolve this issue would be to have an industry sponsored
dispute resolution process that would allow the parties to quickly and
cheaply resolve issues relating to residual termination. Either
through one of the non-profit organizations in the industry or as a
separate organization, there could be mediation or arbitration services
provided to allow agents and ISOs to discuss the reasons for the
termination of the residuals. Resolution of disputes could be
accomplished by arbitration in front of a panel of industry experts
that would allow for quick disposition of these types of cases, at a
reasonable cost.
Agents must also empower themselves by protecting their own interests.
Agents must ensure they do not enter into one-sided agent agreements
with the ISO, and ensure that terms within the contract are as much as
possible, to their advantage. One of the first things that should be
in such a contract is that the agent gets its attorneys fees for
pursuing the ISO if it is found that the residual payments were
wrongfully terminated. If that provision is not in the agreement, the
ISO has no incentive to settle the case since it will not have to pay
the sales agent’s legal fees. An ISO can prolong such a case for years
in order to wear down the sales agent into accepting a minimal
settlement.
Another way to try to minimize the potential for an agent to lose its
residuals is to enter into an agreement with a local processor. If the
processor is located in the same state, or at least the same geographic
region as the sales agent, it is much easier for the sales agent to
negotiate with the ISO and sue the ISO, if indeed the residuals are
wrongfully terminated. A sales agent that can drive over to the ISO
is more likely to be taken seriously by an ISO than one located on the
other side of the country. As stated above, trying to litigate a case
across country (including flying witnesses etc) can be very difficult
and expensive. By contracting with a local ISO, the potential expenses
in the event of litigation are minimized.
However, even if the sales agent, is not able to enter into a contract
with a local ISO, it can still attempt to increase its chances of
prevailing in any future litigation, by providing that any legal action
under the contract will occur in a state that is close to the sales
agent. While most ISO contracts call for any litigation to be held in
the state where the ISO is located, the sales agent can request that
the litigation commence in a neutral state that is closer to the sales
agent and I have seen many times where it has been allowed. At least
this minimizes some of the financial impact of litigating with a
non-local ISO.
The easiest way for sales agents to minimize the potential for losing
their residuals is to make sure they enter into contacts with reputable
ISOs. In addition, it is up to the sales agent to ensure that the
agent agreement is not one-sided and that the agent has a reasonable
basis to sue the ISO if indeed the ISO wrongfully terminates the
residual payments. A sales agent cannot rid itself of the potential of
losing its residuals but at least it can make it harder on the ISO to
terminate the residual payments by following some simple steps.
** The information contained herein is for informational purposes only
and should not be relied upon in reaching a conclusion in a particular
area. The legal principles discussed herein were accurate at the time
this article was authored but are subject to change. Please consult an
attorney before making a decision using only the information provided
in this article.
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