Can a Merchant Sue You for a Chargeback?

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It’s known as “friendly fraud” for a reason. Although chargebacks provide valuable protection to cardholders, over the years they’ve been subject to abuse. More than 70 percent of payment-related fraud losses each year are estimated to be friendly fraud, according to Juniper Research. This means customers make a purchase, keep the item and reverse the charge, leaving the merchant to take the loss. For that reason, merchants have begun cracking down on chargebacks, sometimes filing legal action against some of their customers.

Tips

  • If a merchant suspects that you have used chargebacks as a form of "friendly fraud", they are within their legal right to file a lawsuit against you and pursue criminal charges, if applicable.

What Is a Chargeback?

Say you’re up late one night, surfing the internet, and you see an ad for a fancy piece of jewelry or some expensive workout equipment. You enter your credit card information and go to bed, sure that in a few days, your item will arrive. Only later you find that the merchant was a scam artist and, despite repeated phone calls, you still haven’t seen the item or a refund. Thanks to chargeback protections, you only need to contact your credit card issuer to ask that the charge be reversed. You’ll have to provide documentation that the transaction was fraudulent and your repeated attempts to contact the merchant have been unsuccessful. More often than not, though, chargebacks are decided in the customer’s favor.

What Is the Chargeback Process?

Once you’ve provided all necessary information, the card issuer sends information on the disputed charge to the merchant, which has the opportunity to submit a response. The acquirer reviews all of the relevant information and makes a decision. If the chargeback is granted, the charge is removed from the customer’s account and the merchant loses the money, plus any chargeback fees. Those fees usually cost the merchant $25 per transaction regardless of the amount of the original purchase. But if the merchant shipped the item or provided a service, that business has also handed over a product or employee time, with nothing to show for it.

The Problem with Chargebacks

The chargeback process is a relatively simple one for customers, generally requiring only a phone call and a reason for the dispute. It’s the customer’s word against the merchant’s, and the system is set up to protect customers, not businesses. As a result, merchants have the option of seeking recourse through the legal system, which puts customers in the position of defending themselves against a lawsuit. If your chargeback is legitimate, chances are you’ll see your refund and hear no more about it, but you should hold on to your documentation just in case. Anything you have that can show you had a legitimate problem and tried to resolve it through customer service will help. If your chargeback was fraudulent, you may have reason for concern.

The Creditor’s Rights

Although responding to your dispute is the business’s only recourse during the process, after the ruling, the merchant still has options. If a business has proof of chargeback fraud, criminal charges can be filed, with penalties of jail time if found guilty. The seriousness of the charge is related to the amount of the purchase, with grand larceny requiring a purchase of hundreds or thousands of dollars. At the very least, the merchant can file a lawsuit to try to recoup any losses. It’s important to realize, though, that this usually isn’t in a merchant’s best interests, since legal fees will often put the cost to prosecute higher than the amount the company lost. But a merchant may decide to sue based on the principle or perhaps to make an example out of you.

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About the Author

Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.