240 Million Dollar Law Suit

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240 million dollar lawsuit filed against Visa, MasterCard, and First Financial. PSW, Inc. files antitrust lawsuit against Mastercard and Visa.

PSW, Inc., a credit card processing company for internet merchants, filed a lawsuit today in federal district court against MasterCard and Visa alleging violations of various state and federal anti-trust laws and seeking over $240 million in damages. Also named as defendants in the lawsuit are First Financial Bank and First Data Merchant Services, both of which are owned by Colorado based First Data Corporation. The twelve-count complaint also alleges claims for interference with contractual relations, breach of the covenant of good faith and fair dealing, conversion, embezzlement, and breach of contract.

The lawsuit is filed in the wake of an estimated $3.5 billion dollar settlement agreed to by MasterCard and Visa in an anti-trust lawsuit spearheaded by Wal-Mart and the decision by a federal court in 2001 in an action brought by the Justice Department in the case of United States v. Visa, wherein MasterCard and Visa were found to have conspired to unreasonably restrain competition in the markets for credit cards and credit card processing in violation of federal anti-trust laws.

The complaint alleges that the defendants used monopoly power to employ policies and practices that unreasonably excluded competition and restrained trade in the credit card and credit card processing markets, which was not outweighed by any countervailing pro-competitive effects. PSW alleges that as a result of this conduct, it was forced to pay higher prices for network services, pay excessive fees, fines and penalties, and comply with unknown, continuously changing, and commercially unreasonable rules and directives of the defendants, at significant expense. As a consequence, PSW claims that the defendants’ usurped PSW’s profits and good will and forced it out of business.

The conduct complained of by PSW includes agreements which courts have held in the past to constitute violations of federal anti-trust law, including horizontal concerted refusals to deal, price-fixing, geographic market divisions, and price discrimination. PSW also claims that in light of the court decision in United States v. Visa, federal anti-trust law prohibits MasterCard and Visa from disputing PSW’s contention that they unreasonably restrained trade and excluded competition. The only thing left for the court to decide is whether PSW was hurt by the anti-competitive conduct and, if so, the amount of damages it sustained.

The lawsuit is the epitome of a classic David and Goliath struggle, pitting the small privately held PSW against the two credit card giants and the wholly owned subsidiaries of a worldwide leader in electronic commerce and payment processing services. Visa and MasterCard together control over 73% of the volume of transactions on general purpose cards in the United States. In terms of cards issued, they control about 85% of the market. Meanwhile, First Data Corporation is a global mammoth in electronic commerce and payment services doing business with financial institutions in more than 70 countries on six continents and employing more than 30,000 employees worldwide.

Richard A. Sinapi, lead attorney for PSW characterized the dispute simply as a case of “Power corrupts, absolute power corrupts absolutely. Where there is lack of competition, there is market power. Where there is market power, there is greed and corporate arrogance. Whether it is IBM, Microsoft, or MasterCard and Visa, the story is always the same. MasterCard and Visa’s conduct which was challenged in the Wal-Mart and United States v. Visa cases was patently unreasonable, anti-competitive and unlawful. Yet they resisted challenges to this conduct until the eve of trial in the Wal-Mart case and appealed the decision in United States v. Visa to the Supreme Court. As PSW’s case illustrates, MasterCard and Visa have not changed their ways. The story will not change until either the Justice Department seeks and obtains appropriate injunctive relied to reign in such conduct or some judge or jury issues an award of punitive damages in an amount sufficient to make MasterCard and Visa sit up and take notice. Until then, small businesses like PSW and the average consumer will suffer.”

PSW's business involved processing payment card sales to consumers for internet purchases of goods and services delivered by the operators of various websites, many of which comprised the largest companies in the adult entertainment industry. Website clients hired PSW to process customer credit and debit card purchases of their on-line entertainment services. PSW played the role of what is called an “aggregator” or middleman, between website clients and defendant First Financial Bank, which acquired or accepted payments from consumer credit cards. The role of defendant First Data Merchant Services was to assist First Financial with the processing of credit card transactions.

PSW’s troubles began when MasterCard and Visa continued to unilaterally reduce the allowable percentage of what are known in the trade as chargebacks—credit card payments to merchants like PSW which are reversed and credited back to the consumer due to purported fraud or non-authorization. Aside from the fact that it is impossible for an internet merchant to dispute such a claim—because there is neither a paper receipt nor electronic swiping of the card to verify the transaction, the parallel schemes employed by MasterCard and Visa had the perverse effect of actually penalizing those merchants who took appropriate steps to combat purported internet fraud. Moreover, these parallel programs imposed excessive, retroactive and progressive penalties or “recovery fees” which progressively increased from $25.00 per chargeback and a $25,000.00 per month fine all the way up to a maximum of $100.00 per chargeback and a $100,000.00 per month fine.

In order to cover “potential” fines and penalties which MasterCard or Visa may have imposed for purported excessive chargebacks, First Financial and First Data Merchant Services continued to holdback ever increasing sums from payments due PSW, eventually holding back over $1.6 million in what is known in the trade as a “reserve account.” As a consequence, PSW was unable to pay and began to lose its website clients and was also consequently unable to attract new clients. When PSW complained, First Financial and First Data Merchant Services terminated their processing arrangement with PSW, effectively putting it out of business.

Even though it has been over ten (10) months since PSW was terminated and no fines or penalties have been assessed by MasterCard or Visa, First Financial continues to hold back over $1.6 million in PSW’s reserve account and refuses to release the funds. “Knowing that this lawsuit is coming, it is obvious at this point that they are holding these funds as ‘leverage,’ although I could probably use a stronger word to describe this tactic,” suggested John Lombardi, a principal of PSW.

While it is anticipated that the defendants will claim that PSW is the instrument of its own demise because it was allegedly poorly run and failed to comply with commercially reasonable requirements of operation imposed by contract, this defense is contradicted by a “smoking gun” in the case. The “smoking gun” evidence is in the form of documented communication to defendant First Data Merchant Services from Shared Global Systems, an entity which the defendants’ required PSW to hire to provide credit card processing fraud protection services. In that communication, PSW was praised for its excellent reputation in the industry and its efforts to diligently comply with defendants’ myriad and ever changing requirements. It also expressly warned that PSW could not survive with the level of funds which First Financial and First Data Merchant Services were continuing to hold back in PSW’s reserve account. Like First Financial and First Data Merchant Services, Share Global Systems is also wholly owned by First Data Corporation.

In 2002, Visa reported that it had more than 1 billion cards in circulation worldwide, while MasterCard reported that it had more than 590 million cards in circulation worldwide. Also in 2002, Visa reported that more than 1.8 trillion products and services were purchased using its cards, while MasterCard reported more than 13.6 billion transactions involving the use of its cards.


c/o Sinapi, Formisano & Company, Ltd.

100 Midway Place, Suite 1

Cranston, Rhode Island o2920

Contact Information:    

Richard A. Sinapi, Esq.

(401) 944-9690

(e-mail copy of complaint available upon request)

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