veryone in the payment processing business knows about non-compete clauses. Everyone also knows about confidentiality clauses. However, very few people know that a confidentiality clause can be used as a non-compete clause.

Here is how this unusual clause can surprise an unsuspecting ISO. Suppose you are an ISO and you sign a standard form agreement with a reputable processor. As you would expect, there is a standard non-competition clause barring the ISO from soliciting merchants of the processor for the term of the agreement, and perhaps for some time after the end of the term.

Now, look a little deeper into the fine print of the ISO agreement, at the confidential information clause. First you'll notice the standard wording regarding the confidential information and indicating that neither party may disclose that information to any third party without consent of the person who disclosed the information.

More likely than not, the agreement will provide that the confidentiality clause is to survive long after termination, specifically after the end of the post-termination non-compete period. Suppose that the ISO Agreement runs its course, without any disputes through the end of its term and even past the end of the non-compete period.

The unsuspecting ISO then believes it has the right to solicit its old merchants from the old processor as the non-compete clause has expired. The ISO goes ahead and moves merchants from the old processor to a new processor. The old processor then sues the ISO for violation of the agreement.

What went wrong here? The ISO did not fully realize the implications of the confidentiality clause as a hidden non-compete clause.

A confidential information clause acts as a non-compete clause when the processor relies on its wording to prevent the ISO from using merchant information to solicit merchants for another processor.

Keep these important considerations in mind when reading a confidential information clause in an ISO agreement to avoid the problems mentioned above:

• Definition of Confidential Information. If you are an ISO, try to make sure that the definition of confidential information does not include information concerning the identities of merchants. In other words, try to maintain the right to hold on to the identities of the merchants after the end of the non-compete clause.
• Ownership of Confidential Information. Make sure to define which party to an ISO agreement owns the confidential information exchanged under the agreement throughout the term, and following the term, of the agreement. For example, when an ISO collects information concerning a new prospective merchant, at what point does that information become the property of the processor, if at all? If you are an ISO, it is preferable for the information to remain the property of the ISO. If the agreement provides portability rights, those rights should also be reflected in how they are assigned in confidential information. For example, if you are an ISO and have the right to move its portfolio to a third party (subject to certain conditions), the ISO agreement should reflect the fact that the third party assignee of the portfolio should also be entitled to rights in confidential information concerning the portfolio.
• Survival. When reviewing any ISO agreement, always think about which clauses will survive and not survive termination. Those that survive termination, such as confidentiality clauses, should not be drafted so as to interfere with the rights of the ISO following termination. For example, a surviving confidentiality clause should not prevent the ISO from using the processor's merchant information to service the merchants following termination. When a clause survives past termination, but does not have a specified length of time for which it survives, that does not necessarily mean it will survive forever.
• Repeat Clause in Agent Agreements. If you are an ISO with a collection of non-competition and confidentiality clauses throughout your main ISO agreement, make sure that your reps are bound by the same obligations in their agent agreements. Otherwise, you may find yourself taking on liability for a rogue agent, on your own.
• Best ISO Defense. If you are an ISO and are subject to a standard confidentiality clause that the processor is trying to enforce as a non-compete clause, remember that you are probably the first party to the ISO agreement to come into contact with merchant information. The ISO is therefore in a position to make the argument that merchant information belongs to the ISO and not to the processor. This will not work in all cases, and processors will most likely be very surprised to read this paragraph. Processors need to consider the implications of confidentiality clauses, because they can cut both ways.
• Free-For-All After End of Residuals. The title is an exaggeration, but the discussion concerning the application of confidentiality clauses as non-compete clauses should be taken into consideration principally while residuals are still being paid.

It's difficult, but not impossible, for a processor to enforce rights of non-competition based on a confidentiality clause after it has stopped paying residuals to an ISO. Everything will depend on the wording of the agreement, and the applicable law.

This column highlights the use of confidential information clauses as non-compete clauses; readers should be on the "look out" for non-compete clauses buried in other parts of the ISO agreement as well. Most agreements are drafted in a generally organized manner, but only a thorough reading of an agreement, from end to end, will give the reader a sense of its full intent.

For instance, I have seen relatively weak non-compete language under the non-compete heading of an agreement, when the same agreement also included harsh non-compete language in the termination section. Looking at only the non-compete section would not give a full sense of how that issue was treated under the agreement.

As always, I caution ISOs and processors alike to read their agreements closely to make sure they accurately reflect the deals they wish to make.

I wish all Green Sheet readers a great summer.

In publishing The Green Sheet, neither the author nor the publisher are 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 by e-mail at atlas@adamatlas.com or phone at 514-842-0886.