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.