PayPal Named in Class Action Suit

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March 13, 2002
Paypal is named in a class action suit charging it illegally froze clients' funds without their knowledge and without providing a means for customers to contact the online payment service.

The suit alleges that PayPal violated the Electronic Fund Transfer Act, which provides that a phone number be made available to customers who want to inquire about their electronic fund transfers.

The suit, filed in federal district court in San Francisco, also claims that PayPal unlawfully freezes customers' accounts and fails to fully compensate customers who are damaged by erroneous financial transactions.

The suit was filed by Girard Gibbs & De Bartolomeo of San Francisco. Joining the action was Horwitz, Horwitz & Associates of Chicago, acting on the basis of complaints filed with ConsumerAffairs.com.

PayPal faces other problems as well. Several states are trying to require PayPal to be licensed; the company suspended service to Louisiana residents after the Bayou State threatened to fine PayPal for transferring money without a license. New York, California and Idaho have also notified PayPal that it may be operating an unlicensed banking business.

Although it concedes that most states regulate nonbank payment and money-transfer systems, PayPal has argued that it is only required to be licensed in its home state of California.

In what may turn out to be good news for PayPal, the Federal Deposit Insurance Corporation (FDIC) recently issued an opinion stating that at least some PayPal customer accounts may qualify for FDIC insurance. But the agency cautioned that the opinion would be applied on a case-by-case basis and would apply only to funds being handled by PayPal for deposit into accounts at FDIC-member banks.

PayPal customers have the option of placing their funds into their own bank accounts, which are presumably insured by the FDIC, or depositing them in a PayPal money market account which, like other money market accounts, is not insured.

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