Retail Duo Hits Networks, Banks, and EMVCo With Chargeback Suit, Seeks Class Status

The liability shift by which merchants not prepared to accept EMV chip cards now must bear responsibility for counterfeit card fraud has given rise to a federal antitrust lawsuit seeking class-action status for merchants.

The 47-page complaint, filed Tuesday in U.S. District Court for the Northern District of California, comes just over five months after the liability shift took effect Oct. 1. Named plaintiffs in the suit are B&R Supermarket Inc., which operates as Milam’s Market, and Grove Liquors LLC. Both retail companies are based in the Miami area and operate stores in South Florida.

The suit names 18 defendants, including seven networks, 10 financial institutions, and EMVCo., a network-controlled standards body that drew up the EMV specification. Network defendants include Visa Inc., MasterCard Inc., American Express Co., and Discover Financial Services, but also included are foreign systems UnionPay and JCB Co. Ltd., which are based in China and Japan, respectively. Among bank defendants are many of the nation’s largest institutions, including Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc., and Wells Fargo Co.

The merchants, which are not yet ready for EMV, seek treble damages for what they claim are chargebacks and chargeback fees that have totaled more than $10,000 stemming from 88 chargebacks from Oct. 1 through Feb. 15. In the same period a year earlier, the merchants incurred only four chargebacks, the complaint says. The entire class of such merchants total hundreds of thousands of members that have incurred “billions of dollars” in chargebacks and fees since the shift took effect, according to the suit.

The merchants allege the defendants engaged in a “conspiracy” to fix a liability-shift date they knew merchants could not meet because of certification backlogs and other complications.

The suit may be the first such action against card networks and banks, but it may also be far from the last as chargeback losses pile up for unprepared merchants. “This [suit] does not come as a surprise,” says Anita L. Boomstein, who specializes in payments as a partner at New York City-based Hughes Hubbard & Reed LLP, via an email message. “Merchants have been getting hit with huge amounts of chargebacks under the liability shift.”

Defendants in the case, most of whom are no strangers to litigation in recent years, are mostly remaining mum as they ponder the merchant complaint. “We are reviewing the lawsuit and have no further comments at this time,” says a Visa spokesperson. Spokespersons for AmEx and Discover refused to comment.

A MasterCard spokesperson, however, argued merchants have not been pressured to adopt EMV. “We\’re aware of the filing and are currently reviewing the claims,” the spokesperson says via email. “There was never a requirement for any party—issuer or merchant—to move to EMV. Using insights from merchants, issuers, and others, our [EMV] roadmap and the related liability shift provided incentives to prompt for the most secure ways to pay. We have and continue to work with parties across the industry—merchants, issuers, processors, manufacturers—to assist in this migration.”

In the complaint, the merchants advance the theory that the defendants knowingly imposed an EMV deadline that many merchants, especially smaller ones, could not meet in an effort to transfer losses for fraud stemming from counterfeit, and in some cases lost-and-stolen, cards to merchants. Much of the difficulty involved in meeting the shift date, they complain, resulted from delays imposed by the need to certify complex point-of-sale systems for chip card acceptance, a process the suit alleges was out of merchants’ control.

The lawsuit goes on to paint the EMV migration as a process imposed on merchants without their consent. The suit complains that merchants were not consulted about the liability shift, nor were they permitted to opt out of the process. In addition, the suit alleges, the networks offered no compensation to merchants in exchange for costs they incurred in undergoing the transition to EMV. One form of compensation that could have been offered, and was offered in other markets that shifted to EMV, the suit says, was reduction in interchange costs.

The merchants’ case comes as the issue of chargeback liability is receiving increasing attention now that enough time has lapsed since the shift date for chargebacks that formerly would have been borne by issuers to hit merchants.

The plaintiffs are represented in the case by Robbins Geller Rudman & Dowd LLP, San Diego, and Devine Goodman Rasco & Watts-Fitzgerald LLP, Coral Gables, Fla.