PSW Inc., a credit card processing company for Internet merchants, filed a lawsuit Aug. 16 in Rhode Island 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 12-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.
A statement from PSW Inc., through the offices of Sinapi, Formisano & Company, Ltd., added that "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."
Referenced in the complaint are past court decisions regarding 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 [decided in 2001], 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."
What a positive outcome for PSW might mean for adult billing companies in the future is not at issue, according to Richard A. Sinapi, lead attorney for PSW. "As an advocate for my client, my role is to obtain a resolution of the case and provide the relief that it seeks: monetary damages. Whether or not Visa later on changes its policies, frankly, is not going to affect my client, because they effectively put him out of business. There are other situations where, legally, if a [defendant] is forced to change its way of doing business, it can be beneficial to a plaintiff; unfortunately, this is not such a case."
However, he added that, "Not as an advocate of my client, but as a member of the public, one would certainly hope that the defendants in this case, either as a result of the case or as a result of other actions that are taken in the wake of the case, change the way they do business, in the interests of the adult industry and in the interests of the consumer.
"I'm just saying this as a consumer. If I hadn't handled this case, I wouldn't be aware of the fact that merchants and consumers, ultimately, are being damaged by the way the defendants are doing business; I never would have known that, had I not researched the case."
PSW Billing processed Internet consumer credit card sales, mostly for companies in the adult entertainment industry. "PSW played the role of what is called an 'aggregator,' or middleman, between Website clients and defendant First Financial Bank... " the company's statement says. "The role of defendant First Data Merchant Services was to assist First Financial with the processing of credit card transactions."
When much more stringent Visa and MasterCard regulations targeting chargebacks went into effect, these companies also "imposed excessive, retroactive and progressive penalties or 'recovery fees,'" the statement explained, "which progressively increased from $25 per chargeback and a $25,000-per-month fine all the way up to a maximum of $100 per chargeback and a $100,000-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 hold back 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 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."
John Lombardi, a principal of PSW, said, "Knowing that this lawsuit is coming, it is obvious at this point that [First Financial and First Data Merchant Services] are holding these funds as 'leverage,' although I could probably use a stronger word to describe this tactic."
Visa/MasterCard and First Data Corporation had not responded to requests for comment at the time this story was posted.