Cheng v. PayPal, Inc.

Background

Tingyu Cheng alleged that he used a PayPal account to receive compensation from college students for tutoring services. PayPal allegedly accused him of receiving payments in violation of its Acceptable Use Policy, permanently restricted his account, froze its balance for 180 days, and then confiscated the entire $76,994.40 balance. Cheng asserted claims for breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, conversion, and common count.

When Cheng created the account, he checked a box stating that he had read and agreed to PayPal’s User Agreement and clicked a button labeled “Agree and Create Account.” The User Agreement included a provision requiring the parties to resolve disputes through individual, final, and binding arbitration, while allowing qualifying individual claims in small claims court. The agreement also stated that the Federal Arbitration Act governed its interpretation and enforcement and that Delaware law governed the agreement and related claims.

Cheng first filed the same claims in Santa Clara County Superior Court. After PayPal moved to compel arbitration, Cheng dismissed that case and filed this federal action less than two weeks later. PayPal moved to compel arbitration in the federal case and requested the costs it incurred in the state-court litigation.

Arbitration Ruling

The court applied the Federal Arbitration Act and Delaware substantive law. It explained that it had to decide whether the parties agreed to arbitrate and whether the agreement covered the dispute. The court answered both questions in PayPal’s favor.

The court held that the arbitration provision covered Cheng’s claims because it applied broadly to “any and all disputes or claims” between Cheng and PayPal, including contract and tort claims. Cheng did not dispute that his claims fell within the provision’s scope.

Cheng argued that the provision was unconscionable, meaning unfairly imposed or unreasonably one-sided, because PayPal had greater bargaining power, drafted the User Agreement by itself, placed the arbitration provision in a lengthy document, required a physical-mail opt-out within 30 days, and limited its promise to pay arbitration fees for claims under $10,000. The court rejected these arguments. It held that the clickwrap agreement was valid because Cheng had to take two affirmative steps showing assent, that the agreement gave him notice of the arbitration term, and that the opt-out opportunity meant he had a meaningful choice. The court also held that PayPal’s arbitration-cost provisions were not unreasonably one-sided, particularly because the agreement allowed additional costs to be advanced when necessary to prevent arbitration from becoming prohibitively expensive.

The court therefore held that the arbitration agreement was valid, enforceable, and applicable to Cheng’s claims. It granted PayPal’s motion to compel arbitration and dismissed the federal action without prejudice to a later action to confirm or vacate an arbitration award.

Costs

Under Federal Rule of Civil Procedure 41(d), a court may order a plaintiff who dismisses an action and later files an action based on the same claim against the same defendant to pay all or part of the earlier action’s costs. The court found that a partial award was warranted because Cheng provided no explanation for dismissing the state case while PayPal’s arbitration motion was pending and then refiling the identical case. The court stated that this caused PayPal some unnecessary expenditures.

The court included attorneys’ fees within the recoverable costs, but reduced the award to account for work from the state case that PayPal reused in the federal case. It found PayPal’s requested billing rates reasonable, reduced certain hours, and awarded the full amount for work useful only in the state case. The court also awarded $5.72 in filing fees.

Disposition

The motion to compel arbitration was GRANTED. The case was DISMISSED WITHOUT PREJUDICE to filing a later action to confirm or vacate the arbitration award. PayPal was AWARDED $5,485.72 in costs under Rule 41(d).