The opposing sides present their case. Afterward, both sides go through the transcript and prepare a document which looks like the judge's decision and findings. Of course, each side produces a document with the outcome they want. Since judges are busy and don't like to do unneccessary work, each attorney hopes that the judge will agree with his document and simply sign his name. Naturally, this rarely happens. What usually happens is that the judge reviews both documents and choses the one that he agrees with the most. Then he adds his changes and has the resulting document re-typed for his signature.
Now it is possible that the document I was sent is actually the decision as prepared by the plaintiffs against Paypal and not the actual judge's decision. It is possible that it is also a complete forgery. But it does seem to present both sides of the arguments and it sides with Paypal in some situations and with the plaintiffs in others. Also, I can't see someone going to the trouble of forging a 19 page document just to fool me. So I believe it to be genuine.
What is presented below is a summary of the document I was sent, based on my interpretation. I am not an attorney. I want to present the arguments and the decision as I understand them. Draw your own conclusions.
Background
Three plaintiffs came forward to bring a class action lawsuit against Paypal on behalf of themselves and unnamed others. In general, they allege that Paypal has poor customer service, possibly over 100,000 unresolved complaints, hides their toll free phone number, requires customers to provide numerous and burdensome personal documents before it undertakes an investigation, responds to emails with form letters, refuses to provide details or explanations with regards to its investigations and provides no procedure by which a customer can appeal the results of an investigation. Plaintiffs allege that when a customer can contact Paypal, the representatives are combative and rude, refuse to answer specific questions, hang up in middle of phone calls, require customers to fax information but provide inoperative fax numbers and refuse to allow customers to speak to managers.
Plaintiffs allege that Paypal profits from its alleged acts and omissions because customers either abandon their efforts to recover their money or because it retains interest collected on the funds it has held during the investigation process.
Paypal objects to portions of the declarations and supporting exhibits as vague and ambiguous, improper opinion or conclusion, lacking foundation and violating the Best Evidence Rule. These objections are overruled.
Specific Complaints
Plaintiff 1, C.C. alleges that he never opened a Paypal account. On February 15, 2002, without his knowledge or consent, Paypal removed $110 and $450 from his bank account. He had difficulty contacting Paypal but on February 25, Paypal acknowledged the error and returned the entire sum of $560 to his account. He is seeking reimbursement of $208.50 which was charged by his bank for insufficient funds penalties. Paypal disputes this figure but refuses to provide their own or any documentation of their investigation.
Plaintiff 2, R.T. alleges that on February 24, 2002 Paypal transferred funds from her checking account to four individuals without her knowledge or consent. She had difficulty finding a toll-free number and was placed on hold for lengthy periods of time when using a long distance number. Her calls were terminated without anyone handling her problem. She emailed them and received a reply to address her problem to two specific email IDs. One was returned as undeliverable. The other did not respond. She called the long distance number again and after a lengthy period on hold, was instructed to report her problem to another number. There she was told that Paypal had verified that she did not initiate the transaction and a letter would be sent with instructions for reporting the problem in writing. During this time, the recipients of these payments emailed to inquire why these payments were sent.
About February 27, 2002, Paypal informed R.T. that it intended to take money from her checking account because her bank had declined a different transaction. R.T. called Paypal to instruct them to stop removing funds from her bank account. Paypal explained that there was nothing they could do to stop these transactions and R.T. was forced to pay $27 to her bank to block all subsequent electronic transactions from Paypal. R.T. contacted Paypal again to ask for the letter they had promised to send her.
On March 6, 2002, Paypal sent R.T. a series of emails explaining that because her bank had declined its attempted transfers, Paypal intended to charge her credit card. R.T. was forced to cancel her credit card and have a new one issued to block Paypal from accessing her funds. As of the date the suit was filed, Paypal had not acknowledged that R.T. had reported an erroneous withdrawal or that an error had occurred, nor had it undertaken any investigation of R.T.'s complaint.
Plaintiff 3, J.R. alleges that he registered an account with Paypal and linked his email address to that account. On January 29, 2002, a third party appropriated his Paypal user name and linked a similar email ID with one extra letter to that account. The third party then sold two Apple computers on eBay and the buyers deposited their money into the fraudulent account. When the buyers complained, Paypal restricted J.R.'s account without notice or explanation.
When J.R. learned that his account had been restricted, he contacted Paypal to inquire as to the reason. Once informed of the circumstances, he explained that he had not sold the computers and that the email ID used was similar to his. At the time he filed the suit, more then 45 days has elapsed since he informed Paypal of its error, he had not received any information with respect to the status of any investigation and Paypal had not unrestricted his account.
User Agreement
Paypal customers open and account by completing an online application. A prospective customer clicks a box at the bottom of the application which reads "[you] have read and agree to the User Agreement." A link to the user agreement appears at the bottom but the link need not be pressed for the application to be processed. The User Agreement consists of 25 printed pages and 11 sections, each containing a number of subparagraphs. The User Agreement contains a clause forcing the customer to agree to commercial arbitration in Santa Clara, California.
Discussion
As I understand it, an agreement to submit to arbitration is binding unless "generally applicable contract defenses, such as fraud, duress or unconscionability, may be applied to invalidate." Here the User Agreement is "governed by and interpreted under the laws of the State of California." The Court therefore had to determine whether under California law (1) a valid agreement to arbitrate exists and if so, (2) whether the agreement encompasses the dispute at issue.
Agreement to Arbitrate
Under California law, "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." The Court must interpret the parties' written agreement so as to give effect to the parties' mutual intention.
It is undisputed that C.C.'s claims are not subject to arbitration. (C.C. was not even a Paypal customer.) At the time that R.T. entered into the agreement with Paypal, the arbitration clause did not exist in the User Agreement. Paypal argued that R.T. was bound to the current agreement, including the arbitration clause, because the agreement she saw binds her to any subsequent revisions.
From notes at the bottom, it appears that Paypal argued that R.T. did sign up when that agreement was in place, then presented some documents to prove it, then later submitted other documents which contradicted this. "The Court agrees that the filing did not comply with the Local Rules, and one may reasonably infer from the circumstances that PayPal's counsel at the very least were negligent in their original representations to the Court. The Court does not take such irregularities lightly and will not hesitate to impose sanctions should this situation arise again. Nonetheless, because it concludes that the interests of justice are best served by reaching Plaintiffs' unconscionability arguments, the Court has given counsel the benefit of the doubt and has considered the Supplemental Material. The Court agrees that PayPal has made a weak showing, but for purposes of the instant motion, it will assume without deciding that that circumstantial evidence is sufficient to demonstrate that R.T. and J.R. entered into agreements with PayPal."
Unconscionability
Unconscionability has two components. 1) The existence of unequal bargaining positions and hidden terms. 2) Overly harsh or one-sided results. A claim of unconscionability cannot be determined by merely examining the contract; there must be an inquiry into the circumstances under which the contract was executed, its purpose and effect.
Paypal does not dispute that their agreement meets these conditions. They argue that because it does not concern essentials such as food and clothing and because Plaintiffs had alternative sources for the same services, these conditions do not apply and reference another case where that was the ruling. The other case was rejected as a comparison because it involved sophisticated investors and there were other companies offering the same services without the same restrictive clause. With Paypal, the customers are often not sophisticated and there was no proof offered to show that competing services do not also have the same restrictive clauses.
Even a procedurally unconscionable agreement may be upheld if it is found to be reasonable. PayPal's arbitration clause appears to permit the customer a choice of options, providing that "either you or Paypal may seek any interim relief from a court of competent jurisdiction in Santa Clara County." But another section states that PayPal at its sole discretion may restrict accounts, withhold funds, undertake its own investigation of a customer's financial records, close accounts and procure ownership of all funds in dispute. PayPal alone makes the final decision with respect to a dispute. It is also noted that the User Agreement "is subject to change by PayPal without prior notice."
PayPal argues that nothing in the User Agreement precludes a customer from using the court system pending the outcode of an arbitration proceeding. Plaintiffs present evidence that PayPal has frozen accounts and retained funds that it alone determined were subject to dispute. The User Agreement allows PayPal to act unilaterally. While in theory the customer can seek relief in the courts, the cost of doing so would be prohibitive in relation to the amounts typically in dispute. A customer may resolve disputes only after PayPal has had control of the disputed funds for an indefinite period of time. Although PayPal alone may amend the User Agreement without notice or negotiation, a customer is bound to any and all such amendments. PayPal has not shown that "business realities" justify such one-sidedness.
Prohibition against Consolidation of Claims
The subject arbitration clause expressly prohibits PayPal customers from consolidating their claims. A recent California Court of Appeals case determined that a large credit card company could not enforce this prohibition because most claims would involve consumers seeking the return of small amounts of money. The court concluded that such circumstances raise "the potential for millions of customers to be overcharged small amounts without an effective method of redress.."
Costs of Arbitration
Plaintiffs claim that the cost of an individual arbitration under the User Agreement is likely to exceed $5,000 and would be cost-prohibitive. PayPal disputes the Plaintiffs' calculations, contending that arbitration under the consumer rules of the American Arbitration Association would only cost a filing fee of approximately $125.
The arbitration clause itself expressly undercuts PayPal's assertion. It states that arbitration takes place in accordance with the commercial arbitration rules. Because the clause does not state who bears the cost, under California law each party is required to pay a share of the "expenses and fees of the neutral arbitrator, together with other expenses of the arbitration incurred by a party for his own benefit."
"By allowing for prohibitive arbitration fees and precluding joinder of claims (which would make each individual customer's participation in arbitration more economical), PayPal appears to be attempting to insulate itself contractually from any meaningful challenge to its alleged practices. Under these circumstances, the Court concludes that this aspect of the arbitration clause is so harsh as to be substantively unconscionable."
Venue
Although it is true that forum selection clauses generally are presumed valid, a forum selection clause may be unconscionable if the "place or manner" in which arbitration is to occur is unreasonable taking into account "the respective circumstances of the parties." The record in this case shows that PayPal serves millions of customers across the United States and that the amount of the average transaction through PayPal is $55.00. PayPal cites no California authority holding that it is reasonable for individual customers from throughout the country to travel to one locale to arbitrate claims involving such minimal sums. Limiting venue to PayPal's backyard appears to be yet one more means by which the arbitration clause serves to shield PayPal from liability instead of providing a neutral forum in which to arbitrate disputes.
Disposition
Having considered the terms of the User Agreement generally and the arbitration clause in particular, as well as the totality of the circumstances, the Court concludes that the User Agreement and arbitration clause are substantively unconscionable under California law and that arbitration cannot be compelled herein. Good cause therefor appearing, IT IS HEREBY ORDERED that the motions to compel individual arbitration are DENIED.
DATED: August 30, 2002 JEREMY FOGEL
United States District Judge