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Small merchants who sued the credit card associations alleging a conspiracy connected to the conversion to chip credit and debit cards may proceed with their lawsuit, a judge has ruled. Billions of dollars could be at stake.

California federal court Judge William Alsup ruled Sept. 30 that a set of small merchants who sued Visa, MasterCard, Discover and American Express over the so-called EMV conversion back in March may indeed win their case and denied the card associations’ motion to dismiss the lawsuit.

The small merchants say their fraud bills have skyrocketed since conversion to chip debit and credit cards was mandated Oct. 1, 2015, blaming a backlog in bank-mandated certification of the chip card point-of-sale terminals they purchased. Stores that don’t use chip cards must now foot the bill for certain kinds of fraud, but the merchants maintain they were placed in an impossible circumstance by their banks and MasterCard, Visa, Discover and American Express.

Consumers can see evidence of the conflict when they shop at a store with a chip-ready point-of-sale terminal that hasn’t been turned on; it may even have a sticker that says “Swipe Card.”

On Friday, Alsup ruled the merchants’ allegations that the associations conspired against them when setting the conversion date and liability rules has enough evidence to proceed.

However, the legal victory by merchants is only a first step. Next, they must be certified as a class, and ultimately, they would have to win their case at the trial level.

Still, with the ruling, the merchants have cleared a significant legal hurdle. Now the associations must submit to discovery.

“We are disappointed that the court denied our motion,” MasterCard said in a statement. “As we move into the next phase of the process, we believe we have strong case that will allow us to put this matter behind us and focus on driving our business and relationships with our customers.”

American Express, Discover and Visa declined to comment.

As I’ve written before, the lawsuit claims the initial two plaintiffs — Milam’s Market and Grove Liquors — faced 88 chargebacks for fraudulent transactions totaling $9,196.22 from MasterCard and Visa between October 2015 – when the liability shift took place — and March 2016, plus a $5 chargeback fee for each item.

The stores were penalized because they weren’t yet accepting the new chip-enabled EMV credit cards. In the lawsuit, the stores said they had purchased the necessary equipment, but were not able to turn the readers on until certification — a step they allege was out of their control.

The associations argued against the conspiracy allegations by saying that they had input from merchants while setting the liability deadline. However, Judge Alsup found the small merchants’ arguments convincing enough to allow the lawsuit to proceed.

“Defendants … argue that the presence of merchants ‘in the room’ renders the alleged conspiracy implausible,” he wrote in his motion. “Not really. We would expect the giant retail chains to be involved in the planning, for they would be the first to get certified.”

In other words, involvement from the large retailers in the planning process doesn’t necessarily preclude the associations from conspiring against small retailers, the judge found.

“Plaintiffs have also alleged certain ‘plus factor’ that, when considered cumulatively, nudge the alleged conspiracy from conceivable to plausible as to Visa, MasterCard, and American Express,” Alsup continued.

The case against Discover has a nuanced difference, but Alsup ruled separately that its motion to dismiss was also denied.

The judge did dismiss merchant banks from the lawsuit, but noted that a case against them could be pulled back into the lawsuit if evidence points toward involvement in a conspiracy.

Since the lawsuit was filed, Visa and Mastercard have both announced initiatives to ease the burden of the kinds of things the merchants have complained about — namely caps on small-dollar chargebacks and a streamlined process for certification. The judge noted those steps were only taken after the lawsuit was filed.

“In the end, our hope is to secure some relief for the millions of merchants — many of them small businesses — who have suffered and continue to suffer enormous losses from this conspiracy,” Patrick J. Coughlin, an attorney representing the grocery store owners, said in a statement.

Remember, EMV chip cards are designed to prevent fraud in-stores, but they do little to shield against online card fraud, so it’s a good idea to still keep a close eye on your statements. And, if you ever have reason to believe your personal information was breached alongside your card numbers, keep an eye on your credit. (You can do so by pulling your credit reports for free each year at AnnualCreditReport.com and viewing two of your credit scores for free every 14 days on Credit.com.) A sudden drop in your scores is a sign identity theft is occurring.

Image: Valeriya

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