PayPal Seizure Case With Gaming, DFS Implications Goes To Arbitration

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A federal court case in California involving PayPal could have implications for the gambling and fantasy sports markets.

Earlier this month, the U.S. District Court for the Northern District of California in San Jose granted a motion filed by PayPal attorneys to have a potential class-action lawsuit proceed as individual arbitrations.

Background on PayPal case

The case was filed in January 2022 by Lena Evans, Roni Shemtov, and Shbadan Akylbekov, who sought class certification and remedies for PayPal’s alleged “widespread business practice of seizing funds from its clients’ financial accounts, without cause and without any fair or due process.”

For those unfamiliar, PayPal allows for online payments between parties, but those payments must be for transactions that satisfy the company’s terms of service and Acceptable Use Policy.

Not surprisingly, the case was one that has potentially significant implications for those gambling and fantasy operators who are not proceeding with PayPal’s express approval.

What was the complaint about?

The plaintiffs sued PayPal on behalf of themselves and similarly positioned users who have had PayPal seize funds based on allegations that transactions had violated the company’s Acceptable Use Policy.

The plaintiffs alleged that PayPal’s policy was:

an unlawful and unenforceable liquidated damages clause, which is a contract of adhesion, without any causal connection to any damages PayPal actually suffered, as a justification for its wholesale seizure of the entire balance of Plaintiffs’ PayPal accounts, and transferring said balance to PayPal’s own account, for PayPal’s own use, is inequitable and unconscionable, amounting to nothing less than a conversion of funds which do not belong to PayPal.

The complaint argues that PayPal practices violate various contractual principles, as well as conversion, breach of fiduciary duty, unjust enrichment, violation of the Electronic Funds Transfer Act and the Federal Racketeer Influenced and Corrupt Organizations Act. It maintains the Class members were entitled to an accounting of the funds seized.

What happened to named plaintiffs?

Evans had been a PayPal user for 22 years operating a PayPal account to buy and sell clothing on Ebay. She also used her PayPal account for her non-profit organization “Poker League of Nations,” which reportedly raised money for women in need.

In November 2020, Evans’ PayPal account was frozen. In May 2021, she learned that PayPal had seized nearly $27,000 from her account. She alleges that PayPal never responded to her inquiries and never told her why her funds were seized.

Shemtov began using PayPal in 2014 to sell clothing on Ebay. In March 2017, PayPal allegedly froze her account. In September 2017, PayPal allegedly seized $10,000 from her account. In November 2019, the company is alleged to have seized an additional $32,000 from her account.

Shemtov allegedly sent a letter to PayPal’s lawyer and tried calling to find out what had happened. She eventually learned that PayPal believed she had violated the company’s Acceptable Use Policy by having more than one account, which she denies.

Slightly different circumstances

Akylbekov opened a an account in May 2016, and his wife opened a separate account in the name of her company in January 2020. Mr. Akylbekov began using his wife’s PayPal account to sell Hyaluron pens, a beauty product approved in Europe but not yet approved by the Food and Drug Administration.

In August 2020, PayPal allegedly seized more than $170,000 in funds from Mr. Akylbekov’s account. Mr. Akylbekov would subsequently learn from a letter from PayPal that his wife’s account had been found in violation of the Acceptable Use Policy.

Heading to arbitration

In March 2022, PayPal filed a motion to compel arbitration. Like many companies, it embeds an arbitration clause in their agreements that consumers agree to before using a product or service. The Plaintiffs opposed the motion to compel arbitration and instead sought to proceed with the case in the court system.

However, Federal Judge Beth Labson Freeman ruled that the matter was required to proceed before an arbitrator instead of the courts. Labson Freeman’s order cites PayPal’s various iterations of arbitration clauses that have been contained within the company’s user agreements.

The Judge also notes for good measure that PayPal’s user agreement includes a waiver of the right to bring a class action.

Not the first try

The Order also notes that this case was filed the same day that a Northern District of California court granted a motion to compel arbitration in a case titled Cheng v. PayPal.

PayPal’s arguments strongly relied on the Cheng case for their arguments for the motion to compel arbitration.

Two questions

There are two questions that must be asked by a court when a party seeks to compel arbitration under the Federal Arbitration Act.

  1. Is the dispute over something covered by the arbitration provision?
  2. Is the arbitration agreement is valid and enforceable?

Labson Freeman found that there was an affirmative answer to each inquiry.

What does PayPal case mean?

The motion to compel arbitration means that we might never know how this case turns out.

Arbitrations are typically favored by large companies for a number of reasons, but one of the important reasons is that they are private. Unlike court proceedings where decisions are published, most arbitration awards remain behind closed doors.

For PayPal’s sake, they now have an entire page devoted to what gambling activities are permitted to utilize its services, which are obviously extremely limited. Without a public decision, users will likely be left in the dark over how these cases are resolved, but one important takeaway is to read the terms and conditions of the services you use.