How Pay-Pal Squeezes Merchants with Unfair and Likely Illegal Business Practices
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She called PayPal’s toll-free number and “spoke to a very, very friendly customer service representative who was entirely unhelpful.” He “kept repeating what I already knew,” she said. Pflughoeft asked to speak to a supervisor and was told that no one could change anything or give her any information.
With standard channels proving fruitless, Pflughoeft turned to the Washington State Department of Financial Institutions, which forwarded her complaint to PayPal. Two months after implementing a rolling reserve with no apparent end date, days after receiving the complaint, PayPal gave Pflughoeft her money and ended the reserve. In October the same happened to Sauter, who retrieved his funds only after complaining through the state of Illinois. Neither was offered interest on the reserved funds.
But PayPal didn’t just give Sauter and Pflughoeft their money. While the reserves were in effect, every payment they received was accompanied by a line-item deduction showing the amount withheld from individual transactions and the date on which it would be released. After the reserves were withdrawn, each payment was suddenly presented as though it had been transferred in full at the time of posting.
Looking at their accounts now, it would be impossible to tell that there had been deductions or waiting periods, though both kept their own records of the reserves, including screenshots of account statements that back up their claims. As Pflughoeft put it, PayPal “wiped the slate clean.”
As far as anyone can tell, the reserves and holds are legal. PayPal has been sued numerous times for a variety of alleged infringements, and has typically settled and avoided adjudication in court.
Zepeda vs. PayPal, filed in California Northern District Court in June 2010, appears to be heading in the same direction. If the parties settle—as court documents and one litigant, who requested anonymity for fear of jeopardizing the plaintiffs’ position, suggest they will—PayPal’s business methods will once again escape legal scrutiny.
The lawsuit names eight plaintiffs with held and reserved accounts totaling around $92,000. They accuse PayPal of unjustly enriching itself by refusing to turn over interest on withheld funds and of deceptively marketing its services as fast and secure. The suit further asserts that, contrary to PayPal’s claim that it carefully assesses the risks associated with each account it holds or reserves, the company withholds payments arbitrarily.
Pattee, one of the named plaintiffs, believes there was no good reason to hold his account. He points out that even though his funds were released in February 2010—his account now shows “no record of the holds whatsoever”—he still doesn’t know why his entire balance was held for 180 days. “They pretty much said, ‘We’re not telling you,’” he explained, and was told, “If you want to know why, get a subpoena.”
In 10 years as an eBay seller, Pattee had faced only one complaint, and PayPal had ruled in his favor after he proved the customer’s grievance was without merit. The 180-day hold was doubly mystifying to Pattee given that PayPal allows buyers only a 45-day window in which to dispute a transaction.
In a brief responding to the class action, PayPal never denies that plaintiffs such as Pattee were harmed or attempts to justify that harm. It does not demonstrate diligence in holding only the riskiest transactions or show that it is withholding only funds it needs to cover chargeback liabilities.
Instead, the company’s lawyers point to PayPal’s user agreement, which authorizes PayPal to place holds and reserves at its sole discretion and does not require it to inform users of its reasons for doing so. Users also “agree that [they] will not receive interest” and that “[they] irrevocably transfer and assign to PayPal any ownership right that [they] may have in any interest that may accrue.”