The company on Friday said it will pay a total of $9.25 million to settle the federal class-action suit, $3.4 million of which will pay lawyers' fees and costs.
PayPal admitted no wrongdoing in settling the claims, which wereas part of two federal class-action suits that also alleged other customer service deficiencies.
Those two cases were merged, and a third case, pending in California state court, will be dismissed if the settlement agreement is approved.
"In this agreement, PayPal does not acknowledge that any of the allegations in the case are true," PayPal said in an e-mail to customers. The unit "entered into the settlement agreement to avoid further costs of litigation and to devote resources to more productive areas of our business."
An attorney for PayPal customers called the settlement a win not only in securing a financial reward, but in changing the way PayPal does business.
"I think we got it right," said Daniel Girard, a partner with Girard Gibbs & De Bartolomeo in San Francisco. "The settlement provides for cash recovery and also for a series of changes to the operating procedures at PayPal."
Between June and September 2003, while the litigation was still pending, PayPal released $5.1 million in frozen customer funds, Girard said. As part of the settlement, PayPal agreed to change the way it handled dispute resolution.
PayPal acknowledged that the settlement included an injunction mandating certain changes to the company's procedures, but maintained that the modifications had come about independent of the litigation.
"PayPal has always been looking for ways to improve customer service," said company spokeswoman Amanda Pires. The litigation "didn't really change the way PayPal has been operating. We have improved our customer service as part of our normal course of business."
PayPal claims 45 million member accounts around the world.
The settlement was the product of mediation, begun early last fall, before a court-appointed special master. Within a week, the parties plan to file the preliminary settlement with the U.S. District Court in San Jose, Calif., for approval.
The case involves PayPal customers who used the service between Oct. 1, 1999 and Jan. 31, 2004. European Union residents are excluded.
PayPal said it will publish the allocation plan in July or August. Customers will be informed of settlement terms within two months of the court's preliminary approval.