Craig Comb and Roberta Toher sued PayPal “on behalf of the
general public of the United States” following a dispute over
alleged account mismanagement.
PayPal argued that the court had no right to hear the case
because the users had accepted an arbitration-only clause, which
also prohibited class actions.
When users wish to open a PayPal account they must check a box
at the bottom of the application page next to the statement: “I
have read and agree to the User Agreement User Agreement and
Privacy Policy.”
There is then a “Sign Up” button which will only work when the
box has been checked. The User Agreement, to which a link is
provided, runs to twenty-five pages if printed.
The arbitration clause states that:
"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..."
Judge Jeremy Fogel noted that California has a strong policy
favouring arbitration. However, he also observed that PayPal’s
agreement was a contract of adhesion, the term for a standardised
contract which is imposed and drafted by a party of superior
bargaining strength, relegating the subscribing party only to the
opportunity to adhere to it or reject it.
Judge Fogel concluded that the User Agreement was “procedurally
unconscionable” because PayPal’s users are largely private
individuals who are not “sophisticated” and, even though there may
be alternative services, it was not clear to the court if these
services offered more favourable terms on dispute resolution. Also,
non-members of PayPal who receive funds from another PayPal user
have no alternative to opening an account with PayPal if they want
to access the funds.
The court went on to find the agreement’s terms unreasonable
because of 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.”
Judge Fogel concluded that PayPal’s attempt to compel individual
arbitration should be denied.
