EcommerceBytes-NewsFlash, Number 2672 - November 11, 2011     1 of 4

New Developments in PayPal Class Action Lawsuit over Payment Holds

By Kenneth Corbin

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Online sellers who feel they have been burned by PayPal's policy of holding funds for as long as six months are looking to overtake a separate legal action in California against the payment processor and its parent company eBay.

Plaintiffs in the class-action lawsuit Fernando vs. PayPal are asking a judge in California's Northern District to intervene in the related case of Zepeda vs. PayPal on the grounds that they involve essentially the same charges, and that any rights accorded to one class would be available to the other.

"These two actions are substantially overlapping if not identical," attorneys for the plaintiffs wrote in their motion requesting to intervene.

They are asking Judge Saundra Brown Armstrong to strike or dismiss the Zepeda class allegations. Failing that, they are seeking a stay on that case pending the resolution of their own.

PayPal is opposing the request to intervene, both on procedural grounds as well as the potential settlement that the litigants have reached in the Zepeda case. PayPal and the Zepeda plaintiffs participated in mediation in May, which resulted in an agreement on a class settlement. PayPal said that it plans to submit the proposed settlement to the court for preliminary approval "shortly."

"In the 18 months that Fernando has been pending, the Fernando plaintiffs' litigation efforts have consisted of no more than the filing of an amended complaint and several requests for extensions of time," PayPal contended in its opposition to the request for consolidation filed with the court late last month. "Indeed, the Fernando plaintiffs' request for a stay is simply an attempt to hijack the settlement in this case in an attempt to make up for their own extended inaction."

Attorneys for the Zepeda plaintiffs have yet to respond to Fernando counsel's request with a court filing, and did not respond to requests for comment. The court is scheduled to hold a hearing on the motion to intervene and strike Feb. 14 of next year.

The Two Cases

Zepeda vs. PayPal
Civil Action No. 10-cv-02500 EJD, filed June 7, 2010, Lawyer: Freed & Weiss LLC

Fernando vs. PayPal
Case No. 10-CV-01668 PVT, filed April 19, 2010 , Lawyer: Marina Trubitsky & Associates

At issue is PayPal's practice of withholding funds from sellers in transactions that seemingly have no suspicious circumstances, and then, refusing to explain why.

The plaintiffs in the Fernando case are alleging that PayPal's practice of holding funds for up to 180 days or longer is fraudulent, and in violation of its user agreement, the Electronic Funds Transfer Act and the terms of a 2004 settlement the company agreed to in resolution of an earlier lawsuit in the Comb et al vs. PayPal case, which dated to 2002.

The Zepeda plaintiffs claim that PayPal's practices constitute a breach of contract, breach of fiduciary duty, violate the California Consumers Legal Remedies Act and California Unfair Competition Law, and that PayPal has been unjustly enriched.

"We have in place a holds policy that is for the benefit of consumers," Anuj Nayar, PayPal's director of communications, said in an emailed statement. "While we cannot specifically comment on the pending litigation or any particular seller's account due to our privacy policy, in general, PayPal may require that a seller hold funds in their account, either through a reserve or a hold, if PayPal believes there may be a high level of risk associated with the user, their account or any of their transactions. Many factors are considered by PayPal when considering whether holds should be placed on a seller's account such as the seller's account and transaction activity, information provided by credit reporting agencies, the rate of customer disputes, the type of business a seller runs, average delivery timeframes, customer satisfaction, performance and history, among other factors."

Attorneys for plaintiffs in both cases are arguing on behalf of proposed classes that would be essentially the same - those sellers in the United States whose accounts were frozen or otherwise limited by PayPal's practice of holding funds, which, they allege, is inappropriate and a violation of its user agreement and relevant statutes.

The Fernando plaintiffs are arguing that their claims against PayPal are broader than those at issue in the Zepeda case, contending that their rights could be impaired if the Zepeda case were to continue on a separate track.

Attorneys for the plaintiffs in the Fernando case said that they only learned about the Zepeda case by chance in April, when an associate at the law offices of Marina Trubitsky came upon it when searching on the Web. Soon after, the plaintiffs filed a motion to relate the case with Zepeda, which Judge Jeremy Fogel, then presiding over the case, ordered in August.

The litigation includes examples of funds held from transactions on eBay as well as other websites.

The Zepeda plaintiffs allege that they received notice from PayPal in the form of emails or "prepared phone scripts" that the holds were in effect as a result of "excessive risk involved," "security issues" or "suspicious activity."

They further claim that PayPal's representatives flatly refused to provide any information about the specific transactions that could explain the holds.

"Class members who inquire of PayPal as to the reasons behind PayPal's actions are told PayPal will not explain its actions absent a subpoena," the Zepeda complaint reads. "In other words, PayPal holds money belonging to plaintiffs and the class and tells them they have to get a subpoena or court order just to discover the reason why PayPal is denying plaintiffs and the class access to their own money."

Judge Fogel Unreceptive to Zepeda Claims
In February, Judge Fogel granted PayPal's motion to dismiss the Zepeda plaintiffs' first amended complaint, issuing an order that roundly rejected each of the allegations. Following that dismissal, the plaintiffs can submit a second amended complaint, but have yet to do so in light of the pending settlement.

Fogel was unreceptive to the claims of fraud, breach of contract and unjust enrichment.

"Plaintiffs allege that PayPal breached the express terms of the user agreement by placing their accounts on hold "without reason to believe that Plaintiffs were engaged in restricted activities,"" he wrote, addressing the plaintiffs' citation of section 10.4 of PayPal's user agreement, in which it asserts the right to close, suspend or limit access to a user's account or funds to protect itself from liability for up to 180 days "if reasonably needed to protect against the risk of liability."

"Plaintiffs' claim for breach of contract is unpersuasive," Fogel wrote. "Even assuming that plaintiffs did not engage in any restricted activities and that PayPal thus lacked authority to place their accounts on hold pursuant to section 10.4, this court cannot infer that the holds amount to breach of the user agreement. This is because the user agreement contains at least two other provisions that give PayPal broad discretion to place holds on its users' accounts, neither of which requires that the users have engaged in restricted activities."

The judge referred to sections in the user agreement in which PayPal asserts that it can place holds or reserves on funds "at its sole discretion" for transactions that it believes may carry a "high level of risk."

Fogel also noted that the plaintiffs had failed to identify a section of the user agreement that compels PayPal to provide an explanation in the event of a hold.

PayPal has filed a motion to dismiss the Fernando plaintiffs' first amended complaint. The court is scheduled to hold a hearing on that motion Feb. 14, the same day it plans to consider the motion to intervene and strike the Zepeda case.

About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.

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