United States District Court,
N.D. California,
San Jose Division.
Craig COMB and Roberta Toher, on behalf of themselves and all others
similarly situated and on behalf of the general public of the United States,
Plaintiffs,
v.
PAYPAL, INC., Defendant.
Jeffrey Resnick, on behalf of himself and all others similarly situated and on
behalf of the general public of the United States, Plaintiffs,
v.
PayPal, Inc., Defendant.
Nos. C-02-1227 JF (PVT), C-02-2777 JF (PVT).
Aug. 30, 2002.
Two subscribers to electronic disbursement
service, and one nonsubscriber who had funds removed from bank account by
service supplier, sued supplier, alleging violation of federal and state laws.
Supplier moved to compel individual arbitration pursuant to contract for
service. The District Court, Fogel, J., held that: (1) arbitration clause was procedurally
unconscionable, and (2) clause was substantively unconscionable.
Motion denied.
West Headnotes
[1] Alternative Dispute Resolution 
134(6)
(Formerly 33k6.2 Arbitration)
Arbitration
clause contained in standard contract, under which electronic disbursement
services were made available to subscriber, was procedurally unconscionable
under California law as contract of adhesion; contract was offered on a take it
or leave it basis, with no opportunity for negotiation, and there was no
evidence that similar services were available from competitors not requiring
arbitration of claims.
[2] Alternative Dispute Resolution 134(6)
(Formerly 33k6.2 Arbitration)
Even if agreement to arbitrate is
procedurally unconscionable, it may nonetheless be enforceable under California
law if the substantive terms are reasonable.
[3] Alternative Dispute Resolution 134(6)
(Formerly 33k6.2 Arbitration)
[3]
Alternative Dispute Resolution 134(2)
(Formerly 33k6.2 Arbitration)
Under
California law, substantive unconscionability precluded enforcement of
arbitration provision in contract for electronic disbursement services;
mutuality was lacking, as service provider could determine that dispute existed
and freeze accounts without notice to subscriber, who had no corresponding
rights, subscribers had no right to consolidate claims, each of which was
likely to be small, subscribers were required to pay high proportion of
arbitration costs, and any litigation to secure relief pending arbitration was
required to be brought in California, which would be inconvenient forum for
many subscribers.
*1165
Gary
A. Peterson, Jacoby & Meyers, Oakland, CA, Patricia
I. Avery, Wolf Popper, LLP, New York City, for
Jeffrey Resnick.
David
J. Brown, Michael
Shawn Connell, Brobeck, Phleger & Harrison,
LLP, San Francisco, CA, David S. Harris, Brobeck, Phleger & Harrison, LLP,
East Palo Alto, *1166 CA, Molly
Moriarty Lane, Stephanie
Johnson, Brobeck, Phleger & Harrison, Palo
Alto, CA, for PayPal, Inc.
Ann Saponara, Daniel
C. Girard, Eric
H. Gibbs, James
A.N. Smith,
Rosemary
M. Rivas, Girard, Gibbs & De Bartolomeo, LLP,
San Francisco, CA, for Mark Fawcett, Craig Comb, and Roberta Toher.
ORDER DENYING MOTIONS TO COMPEL INDIVIDUAL ARBITRATION
FOGEL, District Judge.
Plaintiffs seek injunctive relief and related
remedies on behalf of a purported nationwide class for alleged violations of state
and federal law by Defendant PayPal, Inc. ("PayPal"). PayPal moves to compel individual arbitration
pursuant to the arbitration clause contained in its standard User Agreement and
the Federal Arbitration Act ("FAA"), 9
U.S.C. § 1,
et seq. The Court has read and considered the moving, responding and
supplemental papers as well as the oral arguments presented by counsel on
August 12, 2002. For the reasons set forth below, the motions will be denied. [FN1]
FN1. On March 29, 2002, the Court determined that the above
entitled cases are related pursuant to Civil L.R. 3-12(b).
I. BACKGROUND
A. Customer Complaints
PayPal is an online payment service that
allows a business or private individual to send and receive payments via the
Internet. A PayPal account holder sends
money by informing Paypal of the intended recipient's e-mail address and the
amount to be sent and by designating a funding source such as a credit card,
bank account or separate PayPal account.
PayPal accesses the funds and immediately makes them available to the
intended recipient. If an intended
recipient does not have a PayPal account, the recipient must open an account to
access the payment by following a link that is included in the payment
notification e-mail. PayPal generates
revenues from transaction fees and the interest it derives from holding funds
until they are sent.
As of January 1, 2001, approximately 10,000
account holders had registered with PayPal.
PayPal thereafter experienced a sudden and dramatic increase in its
popularity, attracting one million customers over the next five months and 10.6
million accounts (of which 8.5 million were held by private individuals) by
September 30, 2001. Currently, PayPal
provides services to twelve million accounts,
and approximately 18,000 new accounts are opened each day. Plaintiffs allege
that while PayPal has experienced a seven-fold increase in revenues and a
thirteen-fold increase in users, it only has doubled the number of service
representatives available to address customer concerns.
Plaintiffs contend that because PayPal's
customer base has exceeded its operational capacity, PayPal has been and
continues to be unable to maintain and manage accounts in the manner required
by applicable state and federal legislation.
Plaintiffs allege in particular that when PayPal investigates a
customer's complaint of fraud, it freezes the customer's access to his or her
account until the investigation is completed, but at the same time keeps the
account open for deposits, a practice which *1167 allows PayPal to
derive economic benefit from the deposits while preventing customers from
accessing even undisputed funds while the investigation is pending. Plaintiffs further allege that PayPal does
not provide a toll-free customer service telephone number, does not effectively
publish the customer service telephone number it does provide, requires
customers to report erroneous transactions by e-mail while not providing a
specific e-mail address for that purpose, requires customers to provide
numerous and burdensome personal documents before it undertakes an investigation,
responds to e-mail inquiries with form letters, refuses to provide details or
explanations with respect to its investigations, and provides no procedure by
which a customer can appeal the results of an investigation. Plaintiffs also allege that when customers are
able to contact PayPal representatives, the representatives are combative and
rude, refuse to answer specific questions, hang up in the middle of phone
calls, provide "canned" responses to individualized problems, require
customers to fax information while providing inoperative fax numbers, and
refuse to allow customers to speak to managers.
Newspaper articles have reported that
disgruntled customers who have been unable to contact anyone at PayPal to
resolve their disputes have created their own website providing consumers with
difficult-to-find customer service numbers and reporting their own frustrations
with PayPal's service. According to
these accounts, PayPal has a backlog of over 100,000 unanswered customer
complaints, a fact that has led the Better Business Bureau to revoke its seal
of approval. Plaintiffs allege that
PayPal profits from its alleged acts and omissions because customers either
abandon their efforts to recover their money or, in cases in which funds
actually are returned, because it retains the interest collected on the funds
it has held during the investigation process. [FN2]
FN2. PayPal objects
to portions of the declarations and supporting exhibits submitted by Plaintiffs
Toher and Resnick as vague and ambiguous, irrelevant, improper opinion or
conclusion, lacking foundation, and violating
the Best Evidence Rule. These objections are overruled.
1. Craig Comb
Plaintiff Craig Comb ("Comb"), who
is not a PayPal customer, alleges the following: On February 15, 2002, without his knowledge,
consent or authorization, PayPal removed the sums of $110.00 and $450.00 from
his bank account. Comb allegedly had
difficulty contacting PayPal with respect to the erroneous transfer and finally
reached a PayPal representative on February 18, 2002 to report the alleged
error. PayPal acknowledged the error and
returned the entire $560.00 to Comb's account on February 25, 2002.
PayPal's transfers, however, caused Comb's
bank account to have insufficient funds, and the bank charged Comb $208.50 for
failing to maintain his required balance.
Comb contacted PayPal and requested reimbursement for the insufficient
fund penalty and any interest his funds accrued while in PayPal's possession. PayPal allegedly refused to pay either
amount, disputing Comb's figures but failing to provide Comb its own figures or
documentation of its investigation.
2. Roberta Toher
Plaintiff Roberta Toher ("Toher")
alleges the following: Toher opened a
PayPal *1168 account sometime in 2000.
PayPal failed to provide her with the name, address, and telephone
number of a person she should notify in the event
of an unauthorized electronic transfer.
On February 24, 2002, Toher discovered that PayPal had transferred funds
from her checking account to four individuals without her knowledge, consent or
authorization. Toher had difficulty
locating any telephone number for contacting PayPal. Once she found a telephone number, which was
not toll-free, she was placed on hold for a lengthy period of time, and no one
answered her call. Toher then located
PayPal's e-mail address and reported the error by e-mail.
On or about February 25, 2002, PayPal
responded to Toher by e-mail and instructed her to report the erroneous
transaction by sending her complaint to either of two e-mail addresses it
provided. Toher sent her complaint to
one e-mail address, from which it was returned undeliverable, and then to the
other address. She also attempted again
to contact PayPal by telephone. After
Toher again was placed on hold for a lengthy period of time, a PayPal
representative instructed her to change her password and report the error by
telephone to a different department.
Toher called that department's telephone number and spoke with a service
representative who informed her that he had verified that the transaction had
not been initiated by Toher and that PayPal would send Toher a letter
explaining how to report the transaction in writing. During this time, the recipients who
erroneously had received the funds e-mailed Toher and inquired as to the reason
for the payment.
On or about February 27, 2002, before her
complaint had been investigated or resolved,
PayPal informed Toher that it intended to take money from her checking account
because her bank had declined a different, unrelated transaction. Toher called PayPal and explained that she had
filed a claim with respect to the erroneous withdrawal and instructed PayPal to
stop removing funds from the checking account.
PayPal explained that there was nothing it could do to stop the latter
transaction, and Toher was forced to pay a $27.00 fee to her bank to decline
all subsequent electronic transactions related to PayPal. Toher contacted PayPal to request for a
second time the letter explaining how to report her original claim. PayPal subsequently informed Toher that it
would begin processing her claim once she completed and returned a notarized
affidavit by mail.
On March 6, 2002, PayPal sent Toher a series
of e-mails explaining that because her bank had declined its attempted
transfers, PayPal intended to transfer funds from her credit card account. Toher in turn closed and reopened her credit
card account to prevent PayPal from accessing her funds. As of the date the instant suit was filed,
PayPal had not acknowledged that Toher had reported an erroneous withdrawal or
that an error had occurred, nor had it undertaken any investigation with
respect to Toher's complaint. [FN3]
FN3. Although she
does not so allege in her complaint, Toher claims in her responding papers that
PayPal still holds $136.48 of her money and refuses
to return it on the basis that she failed to cooperate with PayPal's
investigation. PayPal disputes Toher's
allegations and provides the results of its investigation, asserting that
Toher's only legitimate claim could be for the return of the $27.00 she elected
to pay to her bank to prevent further electronic transfers.
3. Jeffrey Resnick
Plaintiff Jeffrey Resnick
("Resnick") alleges the following:
Resnick registered an *1169 account with PayPal and linked his
e-mail address [email protected] (with two "f"s) to that
account. He used the account to sell
comic books on eBay, an Internet auction service. On January 29, 2002, a third party
appropriated Resnick's PayPal user name and password and linked an e-mail
account [email protected] (with three "f"s) to
Resnick's PayPal account. The third
party sold two Apple Computers on eBay, and the buyers deposited their payment
into the fraudulent account. When the
buyers did not receive their product, they filed a complaint with PayPal, which
without notice or explanation then restricted Resnick's legitimate account.
In late January or early February 2002,
Resnick learned that his account had been restricted and contacted PayPal to
inquire as to the reason. Once informed
of the circumstances, Resnick explained that he had not sold the computers and
stated that because the fraudulent account's e-mail address contained three "f"s rather than two,
someone must have appropriated his account information. At the time he filed the instant suit,
although more than forty-five days had elapsed since he informed PayPal of its
error, he had not received any information or documentation with respect to the
status of PayPal's investigation, and PayPal had not unrestricted or credited
his account. [FN4]
FN4. In its moving
papers, PayPal rebuts Resnick's allegations of innocence and provides the
results of its investigation.
B. User Agreement
PayPal customers open an account by completing
an online application for a personal, premier, or business account. A prospective customer clicks a box at the
bottom of the application page that reads, "[you] have read and agree to
the User Agreement and [PayPal's] privacy policy." A link to the text of the User Agreement is
located at the bottom of the application.
The link need not be opened for the application to be processed. The User Agreement is lengthy, consisting of
twenty-five printed pages and eleven sections, each containing a number of
subparagraphs enumerating the parties' respective obligations and duties. [FN5]
FN5. For purposes of the present motions and unless otherwise
noted, all references are to the June 27, 2002 version of the User Agreement
submitted with PayPal's moving papers.
PayPal admonishes every customer to read the
User Agreement carefully, informs him or her that the Agreement forms a binding
contract, and advises the customer to retain a copy of the User Agreement. [FN6] The User Agreement is a "clickwrap
contract," formed when the customer "click[s] 'I Agree,' 'I Accept,'
or by submitting payment information through the Service...." User
Agreement, ¶ 2. [FN7]
FN6. The User
Agreement begins with the following statement:
This User Agreement ("Agreement" or "User
Agreement") is a contract between you and PayPal, Inc. and applies to your
use of the PayPal TM payment service and any related products and services
(collectively the "Service").
This Agreement affects your rights and you should read it carefully. We encourage you to print the Agreement or
copy it to your computer's hard drive for your reference.
FN7. ¶ 2 provides that:
[Y]ou agree to the terms and conditions of this Agreement,
the PayPal Privacy Policy, and any documents
incorporated by reference. You further
agree that this User Agreement forms a legally binding contract between you and
PayPal, and that this Agreement constitutes "a writing signed by You"
under any applicable law or regulation.
The User Agreement contains the following
arbitration clause:
*1170
Arbitration. Any controversy or claim arising out of or relating to this
Agreement or the provision of Services shall be settled by binding arbitration
in accordance with the commercial arbitration rules of the American Arbitration
Association. Any such controversy or
claim shall be arbitrated on an individual basis, and shall not be consolidated
in any arbitration with any claim or controversy of any other party. The arbitration shall be conducted in Santa
Clara County, California, and judgment on the arbitration award may be entered
in any court having jurisdiction thereof.
Either you or PayPal may seek any interim or preliminary relief from a
court of competent jurisdiction in Santa Clara County, California necessary to
protect the rights or property of you or PayPal, Inc. (or its agents,
suppliers, and subcontractors) pending the completion of arbitration.
User Agreement, Section II(19).
II. DISCUSSION
The FAA was enacted to overcome longstanding
judicial reluctance to enforce agreements to
arbitrate. Bradley
v. Harris Research, Inc.,
275 F.3d 884, 888 (9th Cir.2001). It applies to all written contracts involving
interstate or foreign commerce and provides in relevant part that arbitration
agreements contained within such contracts "shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract." 9
U.S.C. § 2.
"The FAA creates a body of federal substantive law of arbitrability,
enforceable in both state and federal courts and pre-empting any state laws or
policies to the contrary." Ticknor
v. Choice Hotels Int'l, Inc.,
265 F.3d 931, 936 (9th Cir.2001) (citations and
internal quotation omitted). As a
result, state laws hostile to arbitration agreements have been held invalid on
the ground that such laws frustrate congressional intent to place arbitration
agreements on the same footing as other contracts. Bradley,
275 F.3d at 889.
State law is not entirely displaced from FAA
analysis, however. It is undisputed that
"generally applicable contract defenses, such as fraud, duress, or
unconscionability, may be applied to invalidate arbitration agreements without
contravening § 2." Doctor's
Assocs., Inc. v. Casarotto,
517 U.S. 681, 686, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996). Here, the User
Agreement is "governed by and interpreted under the laws of the state of
California ... [as] applied to agreements entered into and to be performed
entirely within California by California residents." User Agreement, Section II(18). Because there
is no dispute that the contract at issue in this case involves interstate
commerce, this Court's role thus is limited to determining whether under
California law (1) a valid agreement to arbitrate exists and, if so, (2)
whether the agreement encompasses the dispute at issue. See Chiron
Corp. v. Ortho Diagnostic Sys., Inc.,
207 F.3d 1126, 1130 (9th Cir.2000). If both of these requirements are satisfied,
the FAA requires this Court to enforce the subject arbitration clause in
accordance with the terms of the User Agreement. Id.
A. Agreement to Arbitrate
Even though California has a strong policy
favoring arbitration, "[i]t is beyond cavil that arbitration is a matter
of contract and a party cannot be required to submit *1171 to
arbitration any dispute which he has not agreed so to submit." Ajida
Tech., Inc. v. Roos Instruments, Inc.,
87 Cal.App.4th 534, 541, 104 Cal.Rptr.2d 686 (2001)
(citations and internal quotation omitted).
The Court must interpret the parties' written agreement so as to give
effect to the parties' mutual intention.
Ben-Zvi
v. Edmar Co.,
40 Cal.App.4th 468, 473, 47 Cal.Rptr.2d 12 (1995); Floystrup
v. City of Berkeley Rent Stabilization Bd.,
219 Cal.App.3d 1309, 1317, 268 Cal.Rptr. 898 (1990). If possible, the Court will determine the
parties' intention solely from the language of the agreement itself. Ben-Zvi,
40 Cal.App.4th at 473, 47 Cal.Rptr.2d 12. Extrinsic evidence is admissible, however, if
the offered evidence is relevant to prove
the meaning of ambiguous language and such interpretation is reasonable in
light of all the facts, circumstances, and conditions surrounding the execution
of the agreement. Oakland-Alameda
County Coliseum v. Oakland Raiders, Ltd.,
197 Cal.App.3d 1049, 1057-58, 243 Cal.Rptr. 300 (1988). "Because the
existence of the agreement is a statutory prerequisite to granting the
petition, the petitioner bears the burden of proving its existence by a
preponderance of the evidence." Rosenthal
v. Great W. Fin. Securities Corp.,
14 Cal.4th 394, 413, 58 Cal.Rptr.2d 875, 926 P.2d 1061 (1996).
It is undisputed that Comb's claims are not
subject to arbitration. With respect to
Toher and Resnick, PayPal failed to submit with its original moving papers
copies of the agreements into which Toher and Resnick allegedly entered, arguing
that circumstantial evidence sufficiently demonstrates assent by these
Plaintiffs to the User Agreement PayPal currently offers its new
customers. At oral argument, PayPal
reiterated its claim that Resnick entered into an agreement containing the exact
arbitration clause found in Section II(19) of the current User Agreement, but
it conceded that the version of the User Agreement entered into by Toher did
not contain the subject arbitration clause.
PayPal nonetheless argued that Toher is bound to the current User
Agreement, including the arbitration clause, because the version of the User
Agreement Toher did accept binds her to any subsequent revisions to the User Agreement.
After the hearing, PayPal submitted supplemental declarations and
exhibits ("the Supplemental Material") from PayPal's Senior Manager
for Online Communications and Marketing Damon Billian. [FN8] The Supplemental Material provides an
electronic record of the dates Toher and Resnick opened their respective
accounts, a copy of the version of the User Agreement PayPal claims was in
effect at the time the respective accounts were opened, and copies of five
subsequent versions of the User Agreement.
FN8. Plaintiffs
object strenuously to the Court's consideration of the Supplemental
Material. They argue that PayPal filed
these documents in violation of this Court's Local Rules, and that the
documents demonstrate that PayPal's original claim that Toher agreed to
arbitration was false. The Court agrees that the filing did not comply with the
Local Rules, and one reasonably may 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.
Although an electronic record constitutes
sufficient evidence that the parties have entered into a binding agreement, the
*1172 applicable statutes require production of a record that the
parties have entered into an agreement and evidence of the terms and conditions
contained in such agreement. Plaintiffs
argue that the Supplemental Material contains no evidence of any electronic or
actual record of Plaintiffs' assent to the purported agreements. The Court agrees that PayPal has made a weak
showing, but for purposes of the instant motion, it will assume without
deciding that the circumstantial evidence is sufficient to demonstrate that
Toher and Resnick entered into agreements with PayPal. [FN9]
FN9. PayPal argues
that because the User Agreement entered into by Toher provides that "this
Agreement is subject to change at any time without notice," she assented
to the arbitration clause that PayPal inserted into a subsequent version of the
User Agreement. In light of the
disposition of the motion, the Court need not decide whether such a provision
ever could result in a binding agreement to arbitrate. As discussed below, however, PayPal's
unilateral and apparently unfettered right to revise the User Agreement does
bear on the question of whether the User Agreement is substantively
unconscionable.
[1] Plaintiffs argue that even if they did enter into a
version of the User Agreement, the User Agreement and in particular its
arbitration clause are unconscionable.
Unconscionability is a defense applicable to contracts generally and
thus may be raised in defense to an arbitration provision. Blake
v. Ecker,
93 Cal.App.4th 728, 741, 113 Cal.Rptr.2d 422 (2001).
Unconscionability has both procedural and substantive components. Id.
at 742, 113 Cal.Rptr.2d 422. The procedural component is satisfied by the
existence of unequal bargaining positions and hidden terms common in the
context of adhesion contracts. Id.
The substantive component is satisfied by overly harsh or one-sided results
that "shock the conscience." Id.
The two elements operate on a sliding scale such that the more significant one
is, the less significant the other need be.
Id.
at 743, 113 Cal.Rptr.2d 422. A claim of unconscionability cannot be
determined merely by examining the face of the contract; there must be an inquiry into the
circumstances under which the contract was executed, its purpose, and
effect. Id.
1. Procedural Unconscionability
A contract or clause is procedurally
unconscionable if it is a contract of adhesion.
Flores
v. Transamerica HomeFirst, Inc.,
93 Cal.App.4th 846, 853, 113 Cal.Rptr.2d 376 (2001). A contract of adhesion, in turn, is a "standardized contract, which, imposed and
drafted by the party of superior bargaining strength, relegates to the
subscribing party only the opportunity to adhere to the contract or reject
it." Armendariz
v. Foundation Health Psychcare Serv.,
24 Cal.4th 83, 113, 99 Cal.Rptr.2d 745, 6 P.3d 669 (2000) (citations and internal quotation omitted). Although PayPal does not dispute that the
agreement and arbitration clause at issue here meet this definition, it asserts
that the instant contract is not procedurally unconscionable because it does
not concern essential items such as food or clothing and because Plaintiffs had
meaningful alternative sources for the subject services.
Relying upon Dean
Witter Reynolds, Inc. v. Superior Court,
211 Cal.App.3d 758, 769, 259 Cal.Rptr. 789 (1989),
PayPal argues that the availability of alternative sources is enough to defeat
a showing of procedural unconscionability.
In Dean Witter, however, the California Court of Appeal noted
that the party asserting unconscionability was "a sophisticated
investor" *1173 and that "[t]he record establishe[d] without
conflict that other financial institutions offered competing IRA's which lacked
the challenged provision." Id.
at 771, 259 Cal.Rptr. 789. In this case, the amount of the average
transaction is $55.00, the vast majority of PayPal customers are private
individuals who are not "sophisticated," and there is at least a
factual dispute as to whether PayPal's competitors offer their services without requiring customers to enter into
arbitration agreements. [FN10] The Dean
Witter court explicitly limited its holding, indicating that a claim of
procedural unconscionability cannot be defeated merely by "any
showing of competition in the marketplace as to the desired goods and
services...." Id.
at 772, 259 Cal.Rptr. 789 (emphasis in
original). PayPal cites no authority
extending Dean Witter to circumstances analogous to those presented
here. Cf. Armendariz,
24 Cal.4th at 113, 99 Cal.Rptr.2d 745, 6 P.3d 669
(rejecting argument that contract between employer and employee was not
adhesive because employer demonstrated existence of alternative sources of
employment that were not conditioned on the acceptance of an arbitration
clause). See also, Szetela
v. Discover Bank,
97 Cal.App.4th 1094, 1100, 118 Cal.Rptr.2d 862 (2002) (finding availability of substitute goods not "the
relevant test for unconscionability" in dispute between unsophisticated
consumer and large financial institution).
The Court concludes that the User Agreement at issue here satisfies the
criteria for procedural unconscionability under California law.
FN10. The record
also demonstrates that individuals who are not account holders must register
with the service as a precondition to accessing funds that an account holder
sends to them. Although none of the
named Plaintiffs opened an account by such means, the Court notes that such individuals would not have any meaningful
alternatives available to them.
2. Substantive Unconscionability
[2] Even if instant agreement is procedurally unconscionable,
it may nonetheless be enforceable if the substantive terms are reasonable. See Craig
v. Brown & Root, Inc.,
84 Cal.App.4th 416, 422-23, 100 Cal.Rptr.2d 818 (2000) (finding contract of adhesion to arbitrate disputes
enforceable). The Court's principal substantive concerns in the present case
are a lack of mutuality in the User Agreement and the practical effects of the
arbitration clause with respect to consolidation of claims, the costs of
arbitration, and venue.
a. Mutuality
[3] Substantive unconscionability has been found in many cases
based upon arbitration provisions requiring arbitration of the weaker party's
claims but permitting a choice of forums for the stronger party. See, e.g., Ticknor,
265 F.3d at 940-41; Mercuro
v. Superior Court,
96 Cal.App.4th 167, 176, 116 Cal.Rptr.2d 671 (2002). Considered in isolation, the arbitration
clause at issue here appears to permit a mutuality of remedies, providing that
"[e]ither you or PayPal may seek any interim or preliminary relief from a
court of competent jurisdiction in Santa Clara County, California necessary to
protect the rights or property of you or PayPal, Inc. (or its agents,
suppliers, and subcontractors) pending the
completion of arbitration." User Agreement, Section II(19). Section V(3) of the User Agreement, however,
provides that in the event of a dispute, 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 unless and until the customer is "later
determined to be entitled *1174 to the funds in dispute." PayPal alone makes the final decision with
respect to a dispute. [FN11] Finally, as noted earlier, the User Agreement
"is subject to change by PayPal without prior notice (unless prior notice
is required by law), by posting of the revised Agreement on the PayPal
website." [FN12]
FN11. Section V(3)
provides:
PayPal, at its sole discretion, reserves the right to close
an account at any time for any reason, including but not limited to a violation
of this Agreement, upon notice to the User and payment to the User of any
unrestricted funds held in custody.
PayPal, at its sole discretion, also reserves the right to periodically
retrieve and review a business and / or consumer credit report for any account,
and reserves the right to close an account based on information obtained during
this credit review process.
PayPal, at its sole discretion, also reserves the right to
restrict withdrawals from an account for any one of the events listed
below. If the dispute covers only a specific transaction, we
will only restrict funds related to that particular transaction. If your account is restricted, you will be
notified by e-mail and requested to provide information relevant to your
account. PayPal will investigate the
matter promptly. If the investigation is
in your favor, we will unrestrict your account.
If the investigation is not in your favor, PayPal may return funds to
the sender and unrestrict the remainder of your account, continue the
restriction for up to 180 days as to funds necessary to protect PayPal against
the risk of reversals, or may close your account by giving you notice and
mailing a check for any funds in your account (minus funds that are in dispute)
to the address that you have provided.
If you are later determined to be entitled to the funds in dispute,
PayPal will make an additional payment of those funds to you. Any of the following events may lead to a
restriction of your account ....[omitting list of nineteen provisions that
include "Receipt of potentially fraudulent funds," "Refusal to
cooperate in an investigation," "Opening multiple Personal
accounts," and "Logging in from a country not included on PayPal's
permitted countries list."]....[¶ ] PayPal will use reasonable efforts to
investigate accounts that are subject to a restriction and to reach a final
decision promptly.
FN12. ¶ 2 provides: This
Agreement is subject to change by PayPal without prior notice (unless prior
notice is required by law), by posting of the revised Agreement on the PayPal
website. Descriptions of material amendments
to this Agreement will be posted in advance on the PayPal website in the
"Policy Updates" section that is displayed to you when you log in to
your account. You can also set your
Preferences to receive e-mail notification of all policy updates. You may review the current Agreement prior to
initiating a transaction at any time at our User Agreement page.
A contract may provide a "margin of
safety" that provides the party with superior bargaining strength
protection for which it has a legitimate commercial need. "However, unless the 'business
realities' that create the special need for such an advantage are explained in
the contract itself, ... it must be factually established." Stirlen
v. Supercuts, Inc.,
51 Cal.App.4th 1519, 1536, 60 Cal.Rptr.2d 138 (1997). When a contract is alleged to
be unconscionable, "the parties shall be afforded a reasonable opportunity
to present evidence as to its commercial setting, purpose, and effect to aid
the court in making the determination."
Cal.
Civ.Code § 1670.5. The statutory scheme reflects "legislative
recognition that a claim of unconscionability often cannot be determined merely
by examining the face of the contract, but will require inquiry into its
setting, purpose, and effect." Stirlen,
51 Cal.App.4th
at 1536, 60 Cal.Rptr.2d 138 (citations and internal
quotations omitted).
PayPal argues that the User Agreement does not
lack mutuality because nothing in the agreement precludes a customer from using
the court system to seek any relief related to a restricted account pending the
*1175 outcome of an arbitration proceeding. However, Plaintiffs present evidence that
PayPal has frozen customer accounts and retained funds that it alone determined
were subject to dispute without notice to the named Plaintiffs. The User Agreement expressly authorizes
PayPal to engage in such conduct unilaterally.
While in theory a customer may seek provisional relief in the courts,
including presumably an order to unfreeze an account, the cost of doing so
would be prohibitive in relation to the amounts typically in dispute. For all practical purposes, 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 for the duration of the
customer's relationship with PayPal.
PayPal has not shown that "business realities" justify such
one-sidedness. See, e.g., Flores,
93 Cal.App.4th at 854, 113 Cal.Rptr.2d 376
(finding lack of mutuality when debtor must arbitrate any controversy arising
out of a loan whereas the lender may proceed by judicial or nonjudicial
foreclosure, by self-help remedies such as setoff, and by injunctive relief to obtain appointment of a receiver); Stirlen,
51 Cal.App.4th at 1540, 60 Cal.Rptr.2d 138
(finding that a mandatory arbitration requirement realistically applies
"primarily if not exclusively" to claims filed by the employer in
light of employer's failure to identify any provision of the contract or
statute likely to give rise to a claim to which it would be compelled to submit
to arbitration).
b. Prohibition against Consolidation of
Claims
The subject arbitration clause expressly
prohibits PayPal customers from consolidating their claims. Relying upon Vernon
v. Drexel Burnham & Co.,
52 Cal.App.3d 706, 716, 125 Cal.Rptr. 147 (1975),
PayPal argues that such a prohibition cannot render an agreement to arbitrate
substantively unconscionable. The
arbitration clause in Vernon, however, did not preclude consolidation of
claims per se, and whatever relevance Vernon may have in this
case is overshadowed by the much more recent decision of the California Court
of Appeal in Szetela
v. Discover Bank,
97 Cal.App.4th at 1094, 118 Cal.Rptr.2d 862. As is this case here, the arbitration
agreement at issue in Szetela categorically prohibited individual
customers from joining or consolidating claims in arbitration. The court determined that a large credit card
company could not enforce the prohibition with respect to consumer claims
against it because in practice most claims likely would involve consumers
seeking the return of small amounts of money, and any remedy obtained by the few consumers who would not be dissuaded from
pursuing their rights would pertain only to those consumers without collateral
estoppel effect. Id.
at 1101, 118 Cal.Rptr.2d 862. The court concluded that such circumstances
raise "[t]he potential for millions of customers to be overcharged small
amounts without an effective method of redress...." Id.
PayPal argues that because federal cases
applying the FAA have enforced arbitration clauses containing such prohibitions
on collective actions, [FN13] Szetela
is irrelevant to the present proceedings.
In the Ninth Circuit, however, while the FAA preempts any legislation
"specifically aimed at arbitration agreements," "[i]n all
situations where arbitration provisions are placed on the same footing as other
contracts, *1176 state law applies." Ticknor,
265 F.3d at 941 (citation and internal quotation
omitted). Thus, while California's
consumer protection statutes cannot prevent enforcement under the FAA of a
prohibition on collective actions as such, a federal court properly may
consider whether such a prohibition in combination with other provisions and
circumstances renders an agreement substantively unconscionable as a matter of
state law.
FN13. See, e.g., Champ
v. Siegel Trading Co.,
55 F.3d 269, 274-75 (7th Cir.1995); Gilmer
v. Interstate/Johnson Lane Corp.,
500 U.S. 20, 32, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991).
Plaintiffs claim that the cost of an
individual arbitration under the User Agreement is likely to exceed $5,000 and
submit declarations stating that such arbitration would be cost-prohibitive for
them. [FN14] PayPal disputes Plaintiffs' calculation of
costs, contending that because any arbitration in practice would proceed under
the consumer rules of the American Arbitration Association ("AAA"), a
customer's only expense would be a filing fee of approximately $125.00.
FN14. PayPal objects
to the declaration of Ann Saponora as exceeding the page limitations applicable
to Plaintiffs' opposing papers and object to various portions of the
declaration as vague and ambiguous, irrelevant, lacking foundation, hearsay,
improper opinion, conclusion, speculation, violating the Best Evidence Rule,
and improper use of case law and argument in a declaration. The objections are overruled. See also, supra, n. 2.
The arbitration clause itself expressly
undercuts PayPal's assertion. It states
in pertinent part that "[a]ny controversy or claim arising out of or
relating to this Agreement or the provision of Services shall be settled by
binding arbitration in accordance with the commercial arbitration rules
of the American Arbitration
Association." (emphasis added). [FN15] Further, because
the clause is silent as to who bears the cost of arbitration, under California
law each party is required to pay a pro rata share of the "expenses
and fees of the neutral arbitrator, together with other expenses of the
arbitration incurred or approved by the neutral arbitrator, not including
counsel fees or witness fees or other expenses incurred by a party for his own
benefit." Cal.Code
Civ. P. § 1284.2.
FN15. The AAA rules,
offered in evidence by PayPal at oral argument, plainly contain distinct
procedures for "commercial" and "consumer" arbitrations.
Unlike the plaintiff in Green
Tree Fin. Corp.-Ala. v. Randolph,
531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000)
who claimed that the unknown and unidentified risk of excessive fees should be
sufficient to defeat a valid arbitration clause, the named Plaintiffs here,
none of whose individual claims exceeds $310.00, have shown that the costs each
of them is likely to incur in commercial arbitration likely would exceed those
involved in bringing a collective action.
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. See,
e.g., Armendariz,
24 Cal.4th at 113, 99 Cal.Rptr.2d 745, 6 P.3d 669.
d. Venue
The User Agreement requires that any
arbitration take place in Santa Clara County, California. PayPal argues that this venue provision is
not unconscionable *1177 because forum selection clauses in general are prima
facie valid, courts have found similar forum selection clauses in
arbitration clauses reasonable, and the named Plaintiffs themselves elected to
litigate in this Court, thereby undercutting any claim that the contractual
forum is burdensome or inconvenient for them.
Although it is true that forum selection
clauses generally are presumed prima facie 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."
Bolter
v. Superior Court,
87 Cal.App.4th 900, 909, 104 Cal.Rptr.2d 888 (2001). 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. Although PayPal cites to unpublished or
out-of-state authority holding that such facts do not warrant a finding of
unconscionability, PayPal cites no California authority
holding that it is reasonable for individual consumers 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. [FN16] See, e.g., Bolter,
87 Cal.App.4th at 909, 104 Cal.Rptr.2d 888
(finding that enforcement of forum selection clause providing that claims are
arbitrated exclusively in Utah would be cost prohibitive in light of fact that
the potential claimants located around the country would be required to retain
counsel familiar with Utah law). [FN17]
FN16. As it does
with respect to the costs of arbitration, PayPal contends that the AAA consumer
rules mitigate any unfairness by permitting telephonic participation in
arbitration hearings. As already
discussed, however, the User Agreement on its face provides that the AAA
commercial rules apply.
FN17. Plaintiffs
also contend that the subject arbitration clause is unconscionable because it
requires them to waive statutory rights.
The Court does not find this contention persuasive, and in any event it
need not reach it.
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.
218 F.Supp.2d 1165
END OF
DOCUMENT