How Fintechs Can Lower Liability

The key is to review customer contracts at least annually. Here are three crucial reasons why.

When used properly, litigation is an important and effective tool for enforcing a company’s contractual obligations and other rights. However, some individuals and entities misuse the legal process, bringing meritless lawsuits in an attempt to force companies into paying monetary settlements to avoid the disruption, risks, and cost of litigation.

Fintech companies are particularly at risk of facing meritless lawsuits. They are customer-facing and often have contracts with hundreds of thousands, if not millions, of customers. That broad contractual reach substantially increases the risk of litigation, including class-action lawsuits that can cost millions of dollars to defend and irreparably harm a company’s reputation.

Fortunately, there is one simple step companies can take to minimize the likelihood of lawsuits and financial exposure: Fintech companies should review their contracts at least annually, particularly customer-facing contracts such as merchant terms and conditions.

The Law Changes

Why? Here are three reasons.

First, regular reviews are important to ensure that previously enforceable terms have not become unenforceable through a recent change in the law. This is a particularly important issue in the fintech industry, where laws are still being developed and constantly changing.

For example, last year Maryland passed HB777, which prohibits certain payment processors from charging a termination fee greater than $500. Though payment processors conducting business in Maryland may be generally familiar with the new law, there are nuanced provisions they may overlook.

Notably, under one provision, certain payment processors can charge a termination fee under $500, but only if the fee is disclosed clearly and conspicuously in a bold, 12-point font.

Another important example involves restrictive covenants, such as non-solicitation agreements. Many fintech companies rely on an internal or external sales force to solicit merchants and to maintain goodwill with those merchants once they become customers. That goodwill is invaluable, and it is important that it be protected.

While many fintechs wisely rely on non-solicitation agreements to protect their customer relationships, they typically do not regularly review the terms of those agreements to make sure they comply with current laws.

For example, in many states, the laws are becoming friendlier to employees/independent contractors, meaning that broad non-solicit provisions that may have been enforceable a few years ago are not enforceable now. If a fintech company does not regularly review its restrictive covenants, it may learn that they are unenforceable when it is too late, for example, when it loses a lawsuit seeking to hold a former employee accountable for stealing its customer or proprietary information.

Key Protections

Second, fintech companies should review their contracts, particularly merchant terms and conditions, to ensure that they contain all of the available contractual protections.

For example, many fintech companies are unaware that their contracts can often include terms that (1) shorten the statute of limitations by several years, and (2) allow merchants or others to bring written complaints about errors or overcharges within a few months or waive any claims relating to such issues.

These terms and others can materially reduce, if not eliminate, liability. Indeed, I recently represented a fintech company that used a contractual written notice provision and, as a result, it was able to have a class action dismissed.

Moreover, even where litigation continues, these terms can dramatically reduce financial exposure. For example, a contractual term reducing the statute of limitations from four years to one year will effectively reduce financial exposure to any claim by 75%.

The right time to add these provisions is before a lawsuit is filed. Waiting until litigation commences is often too late and will likely result in the loss of benefits of the protections.

Legacy Risks

Third, over the last several years, the fintech industry has experienced substantial consolidation through mergers and acquisitions. As a result, many fintech companies are now using legacy contracts—i.e., contracts from the company they acquired—without having reviewed and/or revised them to ensure they contain critical protections.

For example, in light of the Supreme Court’s decision in the Concepcion case and the more recent cases applying and expanding it, it is relatively easy to prevent the massive exposure associated with class-action litigation: simply include in your terms and conditions an arbitration clause with a class-action waiver.

But many fintech companies lack that basic term in their contracts, often because they use legacy contracts they acquired through an acquisition without reviewing them for this detail. As a result, the acquiring company does not realize that it has inherited, and is unknowingly using, contracts that lack an arbitration clause with a class-action waiver; i.e., they are using contracts that unnecessarily leave them exposed to class-action litigation.

A simple review of legacy contracts allows an acquiring company to make sure its contracts have all the necessary protections, including, where appropriate, a class-action waiver. This is not to say that it is always appropriate to have an arbitration clause with a class-action waiver, but the decision about whether to incorporate such a clause should be made knowingly after careful and thoughtful deliberation. But it is important to determine whether you have a class-action waiver and, if not, decide whether one is appropriate before a class-action lawsuit has been filed, that is, before it is too late.

Having your contracts reviewed and updated can ensure they contain the protections a fintech company needs while materially reducing the risk of facing costly and disruptive litigation in the future. By avoiding litigation, fintech companies can focus on growing their business and their profits.

—Steven J. Rosenwasser is an Atlanta-based shareholder in the commercial litigation practice of Greenberg Traurig LLP.