SO: "Is that fair?"

Some ISO agreements should lead their signatories to exchange the above words before signing. I have decided to write about ISO non-compete, or non-competition, clauses because they often absorb a significant portion of the time spent negotiating ISO agreements as well as processor agreements with banks.

A non-competition clause is a clause in an agreement whereby one party promises to not compete with the other party, usually for a specific period of time, in a specific geographic market and within a specific product category.

There is a large variety of non-compete clauses, and this column could not provide a definitive guide to interpreting all of them; however, there are two guiding rules to keep in mind:

1. A non-competition clause should be limited as to time, geography and product type.

2. A non-competition clause should not be so restrictive that it prevents someone from earning a living.

Following are 10 points to keep in mind when negotiating a non-competition clause in an ISO agreement:

1. Should the Deal Include a Non-competition Clause?

   Before getting into the 'nitty gritty' of a non-competition clause, step back and consider whether or not the agreement should even contain the clause. The obligation of an ISO to not compete with a given processor is something that is not delivered without some consideration.

   In other words, if a contract is going to prevent an ISO from selling for other processors during the term of the agreement, then the pricing for the ISO should be correspondingly more favorable.

   Also, from a practical business perspective, if an ISO sells for a single processor, does that processor have the ability to fully service the market where the ISO intends to sell?

   It should also be noted that the effect of a non-compete clause during the term of an agreement might be the same as that of an exclusivity clause. Exclusivity clauses and non-competition clauses are similar because they both impose fundamental restrictions on ISOs in relation to their ability to sell for other processors.

2. Term

   This is one of the most important elements of a non-competition clause. Once you have decided that a non-compete clause will be part of an agreement (see Item 1), then there is really no controversy over the clause being in effect for the full term of the agreement.

   The controversy with the term most often arises over exactly how long the non-competition clause remains in effect following termination of the agreement.

   The term of the non-competition clause, taken together with its other elements, should not be so long as to effectively deprive the ISO of its ability to carry on its business. The term of the clause is also a function of its scope.

   For example, if an ISO is selling for Processor A and then terminates its agreement with Processor A to sell for Processor B, it is customary for the ISO to not solicit business from merchants who were with Processor A at the time of the termination of that agreement for a period of between one and two years.

   However, it is not common and it would also be unreasonable for the ISO to not sell for any processor other than Processor A for any period of time following termination of the agreement with Processor A. Term is therefore intimately related to scope.

3. Product Scope

   A well-drafted non-competition clause should describe specifically what products and services are covered by the clause. For example, services that the ISO could be prevented from selling may be "those services provided by the Processor"; or they may be "any services related to payment processing."

   Try to draft the clause so that it most accurately reflects the intention of the parties to the agreement. Note that when a non-competition clause refers to "not selling services provided by the processor," the clause should indicate whether that definition of services exists at the time of the:

   • formation
   • termination
   • or following termination of the agreement

   For example, if Processor A does not sell loyalty card products, but begins selling them one year following termination of the agreement, the former ISO must be able to decide, based on a reading of the non-competition clause, whether or not it can sell loyalty card services to Processor A merchants during the term of the non-competition clause.

4. Geographic Scope

   A well-drafted non-competition clause will address the issue of geographic scope. In other words, the clause should specify the areas where the ISO is not permitted to carry on the activities in question.

   For example, if a given ISO was selling in the Northeast, and Processor A (with whom the ISO has terminated its relationship) is focused on the Northeast, it generally would not be reasonable to prevent the ISO from selling in the Southwest.

   The geographic scope of a non-competition clause should be tailored to the true business needs of the processor and the realistic abilities of the ISO.

5. Validity in Light of Agreement

   At any moment during the term of an agreement and following the termination thereof, you can pause to consider which of the clauses in the agreement are in effect and which are not. I must preface the following comments with a 'don't try this at home' warning:

   Suppose you are an ISO that has already terminated its ISO agreement with Processor A. If Processor A has been grossly delinquent in paying residuals to you, then you should pause to consider whether you are still bound by a surviving non-competition clause in the terminated agreement.

   In an effort to avoid being immodest, I try to avoid sending readers to their lawyers, but this particular scenario is one in which I strongly recommend seeking legal advice.

   The principle your lawyer will use to advise you is that a party to an agreement may breach the terms of that agreement (such as a non-competition provision), if the other party to the agreement is so grossly in default as to have implicitly terminated the effectiveness of the agreement.

6. Consideration

   ISOs should think about what they are giving up when agreeing to a non-competition clause; and they should agree to nothing less than adequate compensation for that forbearance.

7. Clear Drafting

   I cannot overemphasize the importance of clear drafting in agreements. Processors should note that a court could strike down a non-competition clause for being too broad and therefore unenforceable.

8. Non-solicitation Clause

   A non-solicitation clause is a clause whereby one party promises to not solicit employees or entice employees away from the other.

   This clause really deserves a column of its own, but I address it here in order to make a distinction between a non-competition clause and a non-solicitation clause.

   Both parties to an ISO agreement stand to benefit from a well-drafted bilateral non-solicitation clause. As many readers know, there are many horror stories of reps being pulled in one direction or another against the wishes of one of the participants in a dying Processor-ISO relationship.

9. Enforceability

   Processors beware; it is not easy to enforce a non-competition clause. In addition, if the clause is enforced it could be very difficult to assess the damages that processors may wish to recover from an ISO that is in violation of a non-competition clause.

   Realistically, in order to recover damages, the damages would have to be significant enough to hire litigation counsel and keep them paid through the term of litigation.

   My recommendation to processors is to create business motivation on the part of ISOs to comply with non-competition clauses so as to avoid, if possible, the cost of litigation to enforce them.

10. Dovetail with New Relationship

    When an ISO terminates a relationship with Processor A, for example, the ISO should always verify that its new deal with Processor B is a deal it can implement in light of the wording of the old deal with Processor A.

    Often the subtleties in the wording of ISO agreements can mean the difference between an acceptable new deal and one that will put into peril the residual stream from Processor A.

    The non-competition clause is only one of many important clauses in an ISO agreement. As always, I advise caution in all your contractual negotiations.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, Attorney at Law: email: atlas@adamatlas.com or phone: 514-842-0886.