Filed Wednesday in California Superior Court in Santa Clara County, the suit charges PayPal with illegitimately restricting customers' access to their money. The suit asks for an unspecified amount of damages.
PayPal frequently locks customers' accounts if it suspects that fraud played a part in a transaction, even if the amount in doubt is a fraction of the total amount in an account, said Gail Koff, an attorney and founding partner of Jacoby & Meyers, which filed the lawsuit.
The result is that customers can't accept any more payments via PayPal, pay anyone through the service, or withdraw any of their money until PayPal clears the transaction. That can often take days or even weeks, customers charge.
"Under the guise of needing to protect consumers from fraud, they themselves are guilty of fraudulent abuse of their customers," Koff said.
A PayPal representative declined to comment, citing the company's post-IPO quiet period.
The suit is only the latest legal trouble to befall the online payments company. A lawsuit alleging patent infringementearlier this month forced PayPal to delay its by more than a week. The company is also involved in a patent dispute with Tumbleweed Communications, although that has not gone to the courts.
Meanwhile, Louisiana hasPayPal to cease offering its service to the state's residents until the company receives a license to transmit money from the state. And state banking regulators in New York, California and Idaho have raised questions about whether PayPal operates an unauthorized banking service.
PayPal customers have repeatedly complained about how the company handles cases of suspected fraud. Several Web sites, including PaypalWarning.com, have been set up to give voice to disaffected PayPal users.
In regulatory documents filed with the Securities and Exchange Commission, PayPal warned that while it had taken steps to reduce fraud, it still incurred "substantial losses" due to merchant and consumer fraud.
During the nine months ended Sept. 30, 2001, for instance, $5.8 million was charged back to PayPal due to customers who disputed purchases with their credit card companies. During that period, the company lost $9.7 million, or about 0.42 percent of the total amount of transactions through its service, due to fraud-related transactions.
PayPal raised more than $70 million in its IPO. The company, which has never posted a profit, lost $18.54 million on sales of $40.4 million in the fourth quarter last year.