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PayPal has been sending out notices to its customers alerting them to a significant set of changes to its user agreement that will shield the company from class-action lawsuits, following close on the heels of a similar policy adopted by parent company eBay.

The changes, which take effect Nov. 1, would bar users from joining a class to pursue litigation against PayPal, instead limiting them to final and binding arbitration in the event of a dispute.

Under PayPal's revised terms, individuals can still pursue litigation in small claims court when the case is appropriate for that venue. eBay also included a provision in its updated agreement allowing aggrieved customers to file individual lawsuits, but that is small solace to Christine Hines, consumer and civil justice counsel at Public Citizen, a consumer advocacy group that earlier this month launched a petition campaign protesting eBay's forced-arbitration clause.

"I don't know if it makes that much of a difference to tell you the truth. It doesn't really affect the impact of a class-action ban," Hines said of the provision preserving the right to individual action. "It's really a red herring. It's okay for a company to, say, give up $2,000 in small claims court versus addressing wrongful action against thousands of consumers in one action."

PayPal customers can preserve their right to join in class-action lawsuit by opting out of the updated terms. To do so, they must notify PayPal by mail, an irony for a company that lives in the digital world that is not lost on Public Citizen and other critics. The group offers sample form letters on its website that users can print and mail to eBay and PayPal to retain the right to join a class-action lawsuit.

But irrespective of the somewhat inconvenient format the companies are requiring for a notice to opt out, introducing the new terms on an opt-out basis, rather than opt-in, seems to Hines a transparent effort to impose the forced-arbitration clause on as many users as possible.

"These opt outs are, again, another red herring," she said. "They know that most consumers are not going to read all of the fine print or even understand what they're giving up."

PayPal users' opt-out notices must be postmarked by Dec. 1.

At the core of the issue, Public Citizen sees an erosion of a valuable right for consumers, for whom class-action activity offers an important legal recourse. Most class-action cases concern small individual sums for which most consumers do not take the trouble to hire a lawyer and bring to court on their own.

"Arbitration is not a bad deal if they have a choice," Hines said. "It's taking away the choice in the fine print of a terms-of-service (agreement) or a contract that's really the problem."

But arbitration has its own problems, according to Hines. In a dispute between a corporation and an individual, the business commonly will dictate the terms of the arbitration proceeding, including venue and the arbiter that will hear the case.

"The problem is that it favors companies because they can write the rules for the arbitration and they are repeat players, in that they go back to the same arbitration provider," Hines said.

A PayPal spokesman defended the update to the terms of service in the context of the broader industry adoption of forced-arbitration policies, and noted the provisions offering an opt-out and allowing for legal action in small claims court.

"eBay Inc's policy (including PayPal's) is consistent with the practices of many leading consumer, technology and Internet companies," the spokesman said in an emailed statement. "We added this clause to ultimately make it easier on our customers to resolve disputes outside of direct contact with our customer service team. Unlike going to court, arbitration can be filed in the location where the customer resides and can be conducted through exchange of documents without an in-person hearing if the customer agrees. We also agree to pay the customer's filing fees for matters of $10,000 or less."

Public Citizen maintains a running list of the companies that have adopted forced-arbitration clauses, and continues to ask lawmakers and policymakers to address the issue.

Businesses, including ecommerce heavyweight Amazon, have felt emboldened to adopt forced-arbitration clauses following a 2011 U.S. Supreme Court ruling. In AT&T Mobility vs. Concepcion, the high court held that federal arbitration law supersedes state laws against contracts that bar class-action litigation.

An attorney with Public Citizen argued that case before the Supreme Court, and the issue remains on the group's litigation agenda.

Additionally, Public Citizen is asking the Consumer Financial Protection Bureau to ban forced-arbitration clauses in the user agreements of the financial firms that it oversees, and is calling on members of Congress to support legislation that would ban the practice.

In 2011, Sen. Al Franken (D-Minn.) and Rep. Hank Johnson (D-Ga.) introduced the Arbitration Fairness Act, a measure to preserve the rights of consumers and employees to seek relief in a court that Public Citizen supports, but the companion bills have not moved out of committee in either chamber.

Note: There was an outpouring of response from readers to the August blog post about eBay's arbitration clause, see the EcommerceBytes Blog.

About the Author
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects for more than four years, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here .

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About the author:

Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.

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