Judge Overturns PayPal
Arbitration Policy

Refuses to Dismiss Class Action Suit

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September 9, 2002
A federal judge has ruled that PayPal's mandatory arbitration policy is unfair to customers who have disputes about how their accounts are being handled. U.S. District Judge Jeremy Fogel of San Jose, CA, also refused to dismiss a lawsuit that seeks class-action status on behalf of thousands of PayPal customers.

Fogel's ruling struck down PayPal's policy that requires customers to submit disputes to private, binding arbitration in Santa Clara County, CA, rather than suing in court. Fogel said the policy violated business arbitration standards set by the California Supreme Court in 2000.

PayPal is the largest and fastest-growing Internet-based payment service. It has more than 17 million customers and says it is adding 28,000 new acounts each day. The company has entered into an agreement to be acquired by online auctioneer EBay for $1.5 billion.

Customer complaints have been growing along with PayPal's customer base. Plaintiffs in the proposed class-action suit say that the online money mover has accumulated a backlog of more than 100,000 customer complaints. The company allegedly stalls customer grievances for months while freezing their account and pocketing any interest that accrues.

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Judge Fogel said that by refusing to combined multiple grievances from a single customer and by requiring customers to pay a share of arbitration fees, the company was effectively insulating itself from "any meaningful challenge to its alleged practices."

With an average PayPal transaction of $55, Fogel said it was unfair to expect customers to pay part of the cost of an arbitration and he said it was equally unfair to require customers around the nation to travel to Santa Clara County for arbitration.

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