Evans v. Paypal, Inc.

Background

The plaintiffs alleged that PayPal froze their accounts after asserting that they had violated PayPal’s User Agreement or Acceptable Use Policy. They alleged that PayPal then seized account funds as liquidated damages. The complaint asserted nine claims: conversion, violations of the federal Racketeer Influenced and Corrupt Organizations Act and Electronic Funds Transfer Act, breach of written contract, breach of fiduciary duty, violation of California Business and Professions Code § 17200, unjust enrichment, declaratory relief, and accounting. The plaintiffs sought to represent a class of PayPal users whose funds had allegedly been seized for purported violations of the Acceptable Use Policy.

When the plaintiffs created their accounts, they agreed to PayPal’s User Agreement by checking a box stating that they had read and agreed to it and then clicking an account-creation button. The agreement included an arbitration provision covering disputes and claims under federal and state statutes, common law, contract, tort, fraud, misrepresentation, or other legal theories. It also required claims to be brought individually and waived class and representative proceedings. The agreement provided an opportunity to opt out of arbitration.

PayPal’s Motion

PayPal moved to compel arbitration under the Federal Arbitration Act. It argued that the User Agreement’s arbitration provision covered all of the plaintiffs’ claims and that the class-action waiver barred the proposed class case. The plaintiffs opposed the motion and argued, among other things, that PayPal had not shown that they agreed to arbitration, that the provision was unfair, and that PayPal’s account-seizure practice and control over alleged policy violations made the agreement invalid.

Court’s Analysis

The court applied Delaware substantive law because the User Agreement contained a Delaware choice-of-law provision. It first concluded that the arbitration provision covered the dispute because it broadly applied to all disputes and claims between the plaintiffs and PayPal, including the types of federal, state, and common-law claims asserted in the complaint.

The court also found that PayPal had shown assent. PayPal submitted a declaration describing the account-sign-up process, and the plaintiffs did not dispute that process. The court held that a customer may be bound by an online agreement without reading its terms when the customer is placed on notice that the agreement changes legal rights. The court also noted that the first page of the User Agreement identified the arbitration provision and that users could opt out.

The court rejected the plaintiffs’ arguments that the arbitration provision was unconscionable. Unconscionability is a contract doctrine concerning terms that are unfair because one party lacked a meaningful choice or because the terms were unreasonably favorable to the other party. The court found no procedural unconscionability from the agreement’s take-it-or-leave-it format, the location of the arbitration provision, or PayPal’s control over the agreement. It also found no substantive unconscionability in the arbitration-cost provisions or in the provision requiring each claimant to pursue claims individually.

The court declined to decide whether PayPal’s liquidated-damages practice was unlawful or whether PayPal’s terms were otherwise illusory. It explained that, on a motion to compel arbitration, the court could decide issues concerning the formation and performance of the arbitration agreement, but not the underlying merits of the dispute.

Ruling and Effect

Judge Beth Labson Freeman granted PayPal’s motion to compel arbitration. The court held that the agreement was valid and enforceable and that the plaintiffs’ claims fell within its scope. The court dismissed the action without prejudice to filing a later action to confirm or vacate an arbitration award. The order did not decide the merits of the plaintiffs’ claims about PayPal’s account freezes or seizures.