United States: New York Supreme Court Rules that Merchant Lacks Standing to Sue MasterCard over Data Security Breach Assessments; All Merchants Left in Peril as a Result if MasterCard Unlawfully Imposes Data Breach Assessments

On May 5, the Commercial Division of the New York Supreme Court for Westchester County dismissed the complaint in Jetro Holdings, LLC v. MasterCard International, Inc., in which Jetro, a leading food service wholesaler, had sued to recover approximately $6 million in fees and assessments imposed by MasterCard in the wake of data security breaches suffered by Jetro.

The fees and assessments at issue had been collected by MasterCard in the first instance from Jetro's acquirer/processor PNC Bank ("PNC"), and in turn indemnified by Jetro. In dismissing Jetro's complaint, the court rejected Jetro's argument that Jetro, as PNC's indemnitor, should be equitably subrogated to the rights of PNC to recover from MasterCard the fees and assessments in question, on the ground that MasterCard had violated both its own rules and New York law in imposing and collecting those fees and assessments. The court also rejected Jetro's alternative argument that Jetro had valid claims in its own right against MasterCard that entitled Jetro to recover the fees and assessments by reason of MasterCard's unlawful actions in collecting them. The decision's denial of any right of action by Jetro against MasterCard under these circumstances puts all merchants at extreme peril, because if the Jetro court's ruling is upheld on appeal or followed by other courts in similar cases against MasterCard, all merchants will be essentially defenseless in the event MasterCard unlawfully imposes assessments arising out of data security breaches, unless they have included language in their acquirer/processor agreements either absolving themselves of any liability, or granting themselves an assignment of the acquirer/processor's claims against MasterCard, were MasterCard to act unlawfully in imposing such assessments.

Jetro entered into a contract with PNC under which PNC agreed to serve as Jetro's "acquiring bank" within the MasterCard network, meaning that PNC would authorize Jetro to accept MasterCard-branded cards in its stores and process transactions made with those cards. In return, Jetro agreed to pay PNC an interchange fee; to comply with MasterCard's rules for payment card network members as set forth in MasterCard's Standards; and to indemnify PNC against any fines and assessments that MasterCard might impose. PNC, in turn, contracted with MasterCard to serve as an acquiring bank in the MasterCard payment network, and to comply with the Standards. The Standards state that an alleged data security breach at a merchant like Jetro constitutes an Account Data Compromise Event ("ADC Event") when it results, directly or indirectly, in the unauthorized access to or disclosure of payment card account data. Upon determining in its sole discretion that a breach constitutes an ADC Event, MasterCard then unilaterally calculates what it deems to be fraud losses and operational expenses incurred by MasterCard issuers as a result of the breach, and collects assessments for those losses, plus additional fines, from the merchant's acquirer/processor (here, PNC).

The basis for Jetro's complaint stems from two incidents in 2011 and 2012 in which cybercriminals breached Jetro's computer network, and inserted malware into Jetro's system that attempted to capture payment card data. After each incident occurred, MasterCard unilaterally determined that an ADC Event had taken place and unilaterally determined what losses it deemed its credit card issuers to have suffered as a result of the event. MasterCard's agreement was with PNC, not Jetro, so MasterCard collected from PNC both a case management fee and monetary assessments equal to the amount of the issuers' supposed losses, as unilaterally determined by MasterCard. PNC then invoked the indemnity clause in its contract with Jetro, and withheld from funds that were otherwise due to Jetro the fees and assessments that MasterCard had collected from PNC. Jetro then brought suit against MasterCard to recoup these amounts.

In its complaint, Jetro alleged that MasterCard violated its own Standards in imposing and collecting the fees and assessments in question, by concluding that the incidents in 2011 and 2012 constituted ADC Events even though it lacked evidence that any payment card data was stolen in these incidents, and by imposing fines and assessments even though it lacked evidence that MasterCard issuers suffered any losses as a result of these incidents. Jetro further alleged that MasterCard violated New York law in imposing and collecting the fees and assessments, because the MasterCard Standards are not valid liquidated damages provisions under New York law and as a result the fees and assessments were unenforceable contractual penalties. Although Jetro was not in contractual privity with MasterCard, Jetro argued that it should be equitably subrogated to the contractual rights of PNC to seek recovery of the fees and assessments from MasterCard on the ground that MasterCard acted unlawfully and without authority in imposing and collecting them. In the alternative, Jetro asserted claims in its own right directly against MasterCard seeking recovery of the fees and assessments, arguing that MasterCard's unlawful collection of the fees and assessments constituted unjust enrichment, and that by unlawfully levying these fines and assessments MasterCard had obtained money that in equity and good conscience belonged to Jetro.

In ruling on MasterCard's motion to dismiss the complaint, the court agreed with Jetro that the doctrine of equitable subrogation in New York extends beyond the scope of insurance law, and encompasses "every instance in which one party pays a debt for another for which another is primarily answerable, and which in equity and good conscience should have been discharged by the latter." However, it found that the equitable subrogation standard was not met, because MasterCard was not answerable to Jetro for the payments of the fees and assessments, notwithstanding the fact that MasterCard imposed the fees and assessments based entirely on Jetro's conduct and having dictated to PNC the terms of the agreement between PNC and Jetro and with constructive knowledge that Jetro would be required to indemnify PNC in full for MasterCard's unlawful actions. The court held that, because cybercriminals allegedly stole the payment card data that formed the basis for MasterCard's unilateral determination of the amounts to collect from PNC and make discretionary payments to issuers, MasterCard could not be deemed responsible for the damages incurred by Jetro based on MasterCard's alleged unlawful actions. The court similarly dismissed Jetro's direct unjust enrichment claims, finding that Jetro did not directly convey any benefit on MasterCard as any funds that MasterCard received were obtained directly from PNC as a result of the MasterCard/PNC agreement.

Were the court's opinion to be upheld on appeal (Jetro filed a notice of appeal on May 24, 2016), and/or followed by other courts in similar cases against MasterCard, it would leave a merchant essentially defenseless against any and all unlawful actions MasterCard may take in imposing an issuer reimbursement assessment based on the merchant's having suffered a data security incident, no matter how egregious MasterCard's actions may be, unless the merchant's agreement with its acquirer/processor absolves the merchant of any obligation to indemnify or reimburse the acquirer/processor for, or grants the merchant an assignment of the acquirer/processor's right to recover, were MasterCard to act unlawfully in imposing any such assessment. The Jetro court found nothing inequitable about Jetro's being forced to bear the fees and assessments at issue, even though Jetro's complaint alleged and the court's opinion did not dispute that MasterCard acted in direct violation of both its own rules and New York law in imposing and collecting those assessments. On the logic of the court's opinion, then, MasterCard could allegedly impose any issuer reimbursement assessment that strikes its fancy following a data security breach, in any amount that MasterCard may unilaterally choose and in direct violation of both its own rules and New York law, and a merchant that has agreed to indemnify its acquirer/processor against such an invalid and unlawful assessment and has not gotten an assignment of the acquirer/processor's claim to recover that assessment is helpless to do anything about MasterCard's alleged unlawful actions.

The Jetro court's ruling and analysis appears to be inconsistent with New York equitable subrogation law, as one would think that, where Party A has blatantly violated both its contract with Party B and applicable law in collecting an amount from Party B, that would paradigmatically be a case where "equity and good conscience" would call for subrogating Party B's indemnitor to Party's B's rights to recover the unlawfully collected money from Party A. The court's ruling on Jetro's direct claims found that MasterCard could not be unjustly enriched at Jetro's expense, because MasterCard received the fees and assessments directly from PNC, rather than Jetro. However, this reasoning is at odds with NY law, which does not require a direct flow of funds from the plaintiff to the defendant but rather only that the relationship is not too attenuated. Here, MasterCard's contract with PNC exists solely to facilitate transactions between MasterCard and Jetro and, in particular, MasterCard imposed the fees and assessments based on conduct by Jetro. The ruling is also inconsistent with how other courts have addressed similar claims. In Genesco v. Visa, the Middle District of Tennessee agreed, based on facts indistinguishable from those alleged by Jetro, that a merchant could assert common-law claims directly against Visa for unlawfully imposing fines and assessments consequent to a data breach. Similarly, in Aldo Group Inc. v. Moneris Solutions Corp. the Court of Appeal for Ontario allowed Aldo to sue MasterCard directly, finding on facts indistinguishable from those alleged by Jetro that Aldo could directly assert causes of action including unjust enrichment.

The Jetro court's ruling is thus vulnerable to challenge both on appeal and in other similar cases brought against MasterCard in other courts. But the ruling should not be ignored, because of the perilous position all merchants will be in if the ruling is either upheld on appeal or followed in other cases. In order to protect against this peril, every merchant should carefully review its acquirer/processor contract to make sure that it either absolves the merchant of any obligation to indemnify or reimburse its acquirer/processor for any unlawfully imposed MasterCard assessment or (as was the case in Genesco) grants the merchant an assignment of the acquirer/processor's claims to recover any such assessment from MasterCard. In addition, every merchant should carefully review its insurance policies to ensure that they provide adequate coverage were MasterCard to unlawfully impose assessments. Otherwise, the merchant would be left helpless if MasterCard acts unlawfully in imposing fines, fees, and/or assessments when the merchant is unfortunate enough to suffer a data security breach.

Ropes & Gray is representing Jetro in this lawsuit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.