Court Of Appeals Speaks Up For The Payments Industry

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When the Seventh U.S. Circuit Court of Appeals on Monday (Nov. 30) slapped down the Cook County sheriff for trying to cut off payments on behalf of Backpage.com, the appellate court in effect set new rules for payment processors and card brands. The panel didn’t voice an objection to Visa and MasterCard opting to cut off Backpage, but merely to a law enforcement agent trying to persuade—bully?—those businesses.

In short, the panel stood up for the payments industry and ordered that Sherriff Thomas J. Dart not “coerce or threaten credit card companies, processors, financial institutions, or other third parties with sanctions intended to ban credit card or other financial services from being provided to Backpage.com.”

Backpage offers ads for a wide range of services, including rentals, real estate and jobs, as well as sexually-oriented adult-themed offerings. It was the adult-themed offered where the sheriff found his objections.

In the panel’s decision, the judges said Dart’s tactics went too far. “The Sheriff of Cook County, Tom Dart, has embarked on a campaign intended to crush Backpage’s adult section— crush Backpage, period, it seems—by demanding that firms such as Visa and MasterCard prohibit the use of their credit cards to purchase any ads on Backpage, since the ads might be for illegal sex-related products or services, such as prostitution. Visa and MasterCard bowed to pressure from Sheriff Dart and others by refusing to process transactions in which their credit cards are used to purchase any ads on Backpage, even those that advertise indisputably legal activities,” the panel said.

The jurists argued that Dart knew he couldn’t win the law, so he opted for sneakier methods, to try and get payments companies to do what he couldn’t. “The sheriff decided to proceed against Backpage not by litigation but instead by suffocation, depriving the company of ad revenues by scaring off its payments-service providers. The analogy is to killing a person by cutting off his oxygen supply rather than by shooting him.”

The pressure came in the form of a letter that Dart sent MasterCard and Visa. Sent on official Sherriff stationery, the letter said “As the Sheriff of Cook County, a father and a caring citizen, I write to request that your institution immediately cease and desist from allowing your credit cards to be used to place ads on websites like Backpage.com.”

The panel analyzed the words that Dart used. “Notice that he is sheriff first, father and citizen second; notice his use of the legal term ‘cease and desist’; notice that he calls MasterCard ‘your institution,’ implying that the same letter is going to other ‘institutions’—namely other credit card companies—in other words, that he is organizing a boycott. And notice that he doesn’t demand that ‘your institution’ refuse to allow ‘your credit cards’ to be used to pay just for ads on Backpage’s website that promote illegal products or services—he demands that ‘your institution’ cease and desist from placing any ads ‘on websites like Backpage.com.'” The panel added: “Visa and MasterCard got the message and cut all their ties to Backpage.”

The panel also found that he was implying that if MasterCard and Visa did not agree, they might be considered “criminal accomplices.”

The panel said that there was little subtlety nor doubt about the intent of Dart’s payment card letter. “Further insight into the purpose and likely effect of such a letter is provided by a strategy memo written by a member of the sheriff’s staff in advance of the letter. The memo suggested approaching the credit card companies (whether by phone, mail, email, or a visit in person) with threats in the form of ‘reminders’ of ‘their own potential liability for allowing suspected illegal transactions to continue to take place’ and their potential susceptibility to ‘money laundering prosecutions and/or hefty fines.’ Allusion to that ‘susceptibility’ was the culminating and most ominous threat in the letter.”

The decision also referenced an affidavit from Visa, where the Visa exec said “at no point did Visa perceive Sheriff Dart to be threatening Visa.” The panel, rather directly, called BS.

Said the decision: “What would one expect an executive of Visa to say? ‘I am afraid of the guy? He is in effect calling me an accomplice of a criminal organization (Backpage), and I’m afraid he might pull strings to get me investigated and even prosecuted by any one of several federal or state agencies?'”

In case the panel had any lingering doubts, Dart’s director of communications sent an E-mail to Visa. The court described the contents of that e-mail, plus some delightful internal Visa messages about it.

First, the e-mail the sherriff’s communications chief sent to Visa: “Wanted to give fair warning that we will be having a press conference tomorrow morning” and that “obviously the tone of the press conference will change considerably if your executives see fit to sever ties with Backpage and its imitators. Of course, we would need to know tonight if that is the case so that we can ensure the Sheriff’s messaging celebrates Visa’s change in direction as opposed to pointing out its ties to sex trafficking.” (Yes, the communications chief went there.)

The panel then revealed an exchange of internal Visa messages. Said one Visa employee: “Love the subtle messages they’ve been sending us that could easily be taken for blackmail.” The second Visa employee said that he had gone over the communications director’s head and spoken with that person’s boss and said “he needs to tone down the threatening language. All of his e-mails as a public employee are, of course, discoverable and public, if anyone asks for them. Sigh.”

The ruling painted Visa and MasterCard as the victims. “It’s true that the Communications Decency Act does not immunize the credit card companies or Backpage from federal criminal liability. Remember that in the June letter, Dart made ominous reference to the federal money-laundering statute. It’s unlikely that credit card companies would be prosecuted as aiders and abettors of Backpage, any more than the landlord of premises occupied by Backpage would be; but obviously credit card companies don’t like being threatened by a law-enforcement official that he will sic the feds on them, even if the threat may be empty. At oral argument, Dart’s attorney reminded us that ‘nowhere in Sheriff Dart’s letter does it say that he thought that they [the credit card companies] were accomplices to a crime.’ But the letter implies that they are—and it was the letter that prompted the credit card companies to abandon Backpage. They are unlikely to reconsider on the basis of a lawyer’s statement at oral argument, months after the initial threat.”

The justices also looked at the payment card business implications of the threats. “It might seem that large companies such as Visa and MasterCard would not knuckle under to a sheriff, even the sheriff of a very populous county. That might be true if they derived a very large part of their income from the company that he wanted them to boycott. But they don’t. Backpage’s monthly revenue from ‘adult’ ads was recently estimated at $9 million and its total revenue in 2014 at $135 million, whereas the combined net revenue of MasterCard and Visa in that year exceeded $22 billion. The revenue they derived from Backpage’s adult ads must have been a small fraction of their overall revenue, especially since not all of Backpage’s ad customers pay for their ads with a MasterCard or Visa credit card. Yet the potential cost to the credit card companies of criminal or civil liability and of negative press had the companies ignored Sheriff Dart’s threats may well have been very high, which would explain their knuckling under to the threats with such alacrity.”

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