I have to land squarely on Square's side on this one. As far as I can tell, Square has handled this matter exactly as I would expect and hope. They communicated professionally and clearly with Jason. Jason responded with empty threats and demands, and clearly does not understand or respect his responsibilities in his business relationship. Getting money quickly from a merchant account is a privilege, not a right. That privilege is afforded in exchange for honoring the chargeback process, which for good reason initially favors the consumer by provisionally reversing the transaction. When a chargeback occurs - as clearly stated in Square's initial email - "The respective financial institution notifies Square and debits the funds from Square."

Chargebacks are not fun, but they are a fact of life. When a consumer challenges are credit card charge, the consumer is entitled by law and contract to have their case heard, and in the meantime the middlemen must make sure they won't be left holding the empty moneybag.

It is entirely reasonable for the Square to make sure funds are available to pay the consumer debt should the consumer prevail - Square will be out that money regardless of whether Jason pays up.

To be frank, based on his attitude, Jason seems like the sort of guy who would refuse to pay up if the dispute had been decided against him and he disagreed with the determination. This is exactly the reason Square was and always will be justified in freezing the amount associated with any chargebacks. There is a process for handling chargebacks that you submit your self to in exchange for the convenience of getting money quickly from the credit card system. That money is only yours if the consumer does not challenge the charge - usually they don't, but you are responsible to pay if they do, and you are responsible for funding your account to cover whatever level of chargebacks your business sustains.

It is entirely reasonable for:
1) Square to freeze funds associated with chargeback attempts. At this point, Square is out those funds.
2) Square to withdraw funds from a link account if the Square account is empty. It's the responsibility of the merchant to keep funds available to handle chargebacks, as I'm sure is clearly stated in their agreement. If the merchant has kept all funds out of reach of Square, by withdrawing all their money from the account and keeping the associated bank account empty, the merchant is indicating that they do not intend on fulfilling their end of the bargain on having a merchant account - namely honoring chargebacks and the determination process for chargeback disputes. If this withdraw results in NSF fees, particularly for a chargeback of such a small amount, that is the merchant's fault for not funding their account. Furthermore, NSF fees are easily avoidable by depositing funds the same day - why Jason did an electronic transfer is beyond me.

Based on Jason's ignorance of his own responsibilities, his refusal to keep money available to handle chargebacks, his empty and immature threats to "go to the press" among other things, and his general disregard for his role in the business relationship, I would expect Square probably wants to terminate his account, but will decide against that as it would be more bad PR than it's worth. They would be justified, however, holding funds for a longer period of time, since it's clear he refuses to keep funds available to handle chargebacks and to honor the largely fair chargeback process.

The only counter point I can think of is that, for a certain chargeback/total charge ratio, it does seem Square could take the risk and absorb any funds deficit. That is not traditionally how things work though, and since Square is doing their best to get merchants paid as quickly as possible, it only seems fair that merchants would do their best to ensure Square they intend to honor their end of the bargain. If Square did take on this risk for small chargeback amounts for merchants in good standing (say < 3% of total charges,) this would delay someone like Jason's understanding of the chargeback process until a real problem occurred - like a large number of customers demanding refunds. That might ultimately hurt Square more than it helps, both financially and in PR.