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Judge rejects PayPal arbitration

PayPal customers who sued the online payment company cannot be forced into arbitration to settle the dispute, a federal judge rules.

PayPal customers who sued the online billing company, charging that it illegally froze their accounts, cannot be forced into arbitration to settle the dispute, a federal judge has ruled.

In a ruling dated Aug. 30, the U.S. District Court for the Northern District of California denied PayPal's motion to have the claims asserted in two lawsuits resolved by individual arbitration, the company said in a regulatory filing on Thursday. Although PayPal's user agreement calls for the arbitration of disputes, U.S. District Judge Jeremy Fogel ruled that the arbitration clause in the agreement is unenforceable, PayPal said. Though the online billing company said it could appeal the decision, it did not say whether it would.

"PayPal will continue to defend these lawsuits vigorously, and believes that it has meritorious defenses," the company said in its filing.

PayPal representatives did not return calls seeking comment about the ruling and the lawsuits.

Disgruntled customers filed a class-action suit against PayPal in California Superior Court in February. Plaintiffs' attorneys have filed several other class-action claims against the billing company, including at least two that are pending before the Northern California U.S. District Court.

The claims charge PayPal with, among other things, illegally converting customer funds for its own use and with not responding promptly to error reports from customers, a violation of the Electronic Funds Transfer Act. The suits seek punitive damages and injunctions against PayPal.

The courts decision to deny PayPal's arbitration request is significant, said Steve Sidener, a plaintiffs' attorney with San Francisco law firm Gold, Bennett, Cera and Sidener. With corporations believing that arbitrators will be more favorable to them than juries, companies have been increasingly inserting arbitration clauses into user agreements and contacts, Sidener said. Courts have generally upheld those agreements, but the decision in the PayPal case may mark a turning point, he said.

"There's a question of whether it's fundamentally fair to force people into arbitration," Sidener said. "The problem here is that the pendulum has swung too far. Corporations have taken too much advantage of court rulings and have been trying to insert arbitration clauses in all aspects of corporate life."

PayPal has seen its share of legal disputes in recent months. Last week, First USA Bank filed suit against the online payments company charging that PayPal infringed its patents on "cardless payment" systems. In May, Tumbleweed Communications sued PayPal in separate patent case. And the company settled a third patent suit with online security company CertCo in April.

Meanwhile, at least five lawsuits have been filed on behalf of PayPal shareholders against the company and eBay seeking to derail the companies' proposed merger. The suits charged that the companies' violated fiduciary duty to shareholders and that the price that eBay is paying for PayPal is unfair and inadequate.

PayPal shareholders are scheduled to vote on the merger next month.