SAN JOSE, Calif. (11/10/09)--Heartland Payment Systems and VeriFone Holdings are in a legal spat over their merchant processing terminals, with merchants are caught in the middle. Any problems with transactions at the merchant level could seep into the payments transactions from the merchants to financial institutions, including credit unions. Both the Princeton, N.J.-based Heartland Payment Systems and San Jose, Calif.-based VeriFone have filed lawsuits against each other in recent weeks. VeriFone claims that a design for processing terminals in Heartland's new end-to-end encryption system infringes on one of its patents. In turn, Heartland's suit says VeriFone is using unfair trade practices to keep its business (ISO&Agent Weekly Nov. 5). The two companies have worked together for years. But in January, Heartland announced a large data breach that compromised millions of cardholders accounts. The breach and its continuing impact on Heartland's finances have prompted a drive toward tougher encryption of its payments processing system. As a result, Heartland decided to use its own end-to-end encryption platform. VeriFone said it told Heartland that it will terminate its "support relationships" affecting joint customers on Dec. 31. Roughly 75% of Heartland's customers in the retail, restaurant and petroleum markets rely on VeriFone systems, said VeriFone (Finextra.com Nov. 3). But on Nov. 3, VeriFone offered to provide "alternative support" for its Heartland merchant clients. To use the VeriFone support service in 2010, Heartland merchants must register by Dec. 15 with VeriFone. If the two companies can't solve their differences to ensure a smooth transition for merchants, problems could arise during transactions and in the payments system. Heartland last week reported a $13.6 million third-quarter loss, compared with net income of $13.4 million for the same quarter in 2008 (Reuters Nov. 3).