Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—N.D. Cal.: Preliminary approval of settlement in PayPal unfair business practices action denied, (Feb 26, 2014)

By Linda O’Brien, J.D., LL.M.

The federal district court in Oakland has refused to give preliminary approval to a proposed settlement against PayPal for allegedly placing reserve holds on accounts of on-line sellers of goods and services without justification and failing to adequately notify users of such holds (Zepeda v. Paypal, Inc., February 24, 2014, Armstrong, S.).

PayPal, Inc. operates an on-line payment processing services that acts as a third party intermediary to facilitate payments between buyers and sellers of goods and services sold on-line. Once a purchase is made using PayPal, funds are debited from the buyer’s account and credited to the seller’s account. Sellers may opt to transfer funds to their bank account or maintain funds in their PayPal account. PayPal subscribers agree to a user agreement that provides, if the user engages in any restricted activities or violates terms of service, PayPal may hold funds in a seller’s account by placing reserves on accounts or limiting seller’s accounts.

Users of PayPal filed a putative class action, alleging that the company placed reserve holds on sellers’ accounts without justification and failed to provide notice of such holds to its users in violation of California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA). The plaintiffs moved for preliminary approval of the proposed settlement agreement and several proposed class members filed objections to the motion for preliminary approval.

The court found that the breath of the release relative to the claims alleged and the lack of any monetary benefit to the class weighed against preliminary approval of the settlement. Preliminary approval is appropriate if the proposed settlement (1) appears to be the result of informed, non-collusive negotiations; (2) has no obvious deficiencies; (3) does not improperly grant preferential treatment to class representatives or segments of the class; and (4) falls within the range of possible approval. The proposed settlement required the implementation of certain business practices by PayPal, the revision of the user agreement, enhanced disclosures on its website, and disclosures of the reason for account holds in response to customer service calls. The settlement, which was intended to be binding on the settlement class, provided for prospective injunctive relief and no monetary payment to class members; however, the settlement required the establishment of a settlement fund from which attorney fees, incentive awards, and administrative costs would be paid and a release of PayPal from liability by the settlement class.

The settlement agreement definition of the settlement class as any person who has used PayPal since 2006, regardless of whether the user was affected by the reserve practice, and the provision to release any claims against PayPal from class members was overly broad, according to the court. Moreover, the only persons receiving funds under the settlement are persons other than class. In rejecting the plaintiffs’ argument that damages were not the predominate focus of the action, the court noted that the complaint alleged that PayPal wrongfully retained interest accrued on the improperly withheld funds. Finally, the parties failed to explain why the proposed settlement releases the defendants from liability from all PayPal users even if the conduct was not related to the alleged reserve hold or notification practices, the court concluded.

The case is No. C 10-2500 SBA.

Attorneys: Michael Vincent Storti (Kabateck Brown Kellner, LLP) for Moises Zepeda. Lisa Marie Simonetti (Stroock & Stroock & Lavan LLP) for Paypal, Inc.

Companies: Paypal, Inc.; E-Bay Inc.

Cases: StateUnfairTradePractices CaliforniaNews