Court Finds PayPal Settlement Needs Work

     SAN FRANCISCO (CN) - A proposed settlement to end claims PayPal wrongly closed accounts due to unfounded concerns of suspicious activity is overly broad and must be revised, a federal judge ruled.
     Lead plaintiff Moises Zepeda claimed that he logged onto his PayPal account, which he used for business purposes, and found a notification telling him his access had been limited. PayPal did not give him a specific reason for the subsequent account closure, only that there were issues with security, he said.
     Zepeda further stated that PayPal held his funds and retained the interest from these withheld amounts. The lawsuit went on to claim PayPal did not inform Zepeda or other sellers with similar issues how to have the hold released or how to avoid future holds being placed on their accounts.
     Zepeda's 2010 lawsuit, which came on the heels of two similar lawsuits that were voluntarily dismissed without prejudice, asserted breach of contract, breach of fiduciary duty, unjust enrichment, and violation of California's Consumers Legal Remedies Act and Unfair Competition Law.
     Meanwhile, another class action lawsuit was also filed in 2010 by Devinda Fernando and Vadim Tsigel against PayPal and eBay claiming that PayPal improperly restricted and closed customer accounts because of suspicious activity without notice. PayPal allegedly froze the accounts, preventing users from recovering their funds.
     Fernando's lawsuit alleged conversion, unjust enrichment, and violations of the Electronic Fund Transfer Act (EFTA) and the terms of a 2004 settlement stemming from the 2002 Comb vs. PayPal case.
     The Comb settlement called for PayPal to comply with certain procedures for limiting accounts and responding to and returning funds to customers whose accounts have been limited. PayPal also agreed to pay $9.25 million into a settlement fund used to pay class members with valid claims and pay attorney fees and costs.
     In 2011, both the Zepeda and Fernando litigants participated in separate mediation, resulting in a global settlement of both actions. However, things broke down when one of the attorneys for the Fernando plaintiffs, Marina Trubitsky, stated that two of the plaintiffs wanted to negotiate individual settlements and that the global settlement could not move forward.
     U.S. District Court Judge Saundra Brown Armstrong ordered all parties in both cases to participate in a mandatory settlement conference before Magistrate Judge Nathaniel Cousins, but Trubitsky did not show up, so the conference proceeded in only the Zepeda case.
     The Zepeda class, which added eBay as a defendant, renewed their motion for preliminary approval of their proposed settlement, which calls for PayPal to implement certain business practices, including: disclosing its use of fraud and risk modeling in the PayPal User Agreement; distinguishing how it uses the terms "holds," "reserves" and "limitations" in the agreement; and disclosing the reason for a hold, reserve or limitation to the extent that it is not inconsistent with PayPal's security requirements.
     The settlement does not provide for any monetary relief to class members. However, it does require PayPal to pay $1.425 million into a settlement fund to go toward $500,000 in attorney fees, $5,000 incentive awards for the class representatives, and a $250,000 cy pres award to Electronic Frontier Foundation.
     The settlement class is defined as "all current and former users of PayPal who had an active account between April 19, 2006 and the date of entry of the Preliminary Approval Order."
     Among other things, the agreement calls for the class to release PayPal and eBay from liability for any claims that were or could have been brought in the Zepeda or Fernando actions and for any claims that "in any respect" relate to PayPal's obligations under the EFTA or the Comb settlement.
     Objectors to the settlement - which include plaintiffs in the other actions - claimed that the settlement "is collusive and unfair on the grounds that it vitiates 'the force and effect' of the Comb settlement, essentially in exchange for a 'pay off' to plaintiffs' attorneys and the class representatives," according to the ruling.
     Armstrong called the objectors' argument "discursive and not expressed in a particularly cogent manner," but agreed that there were concerns regarding the fairness of the settlement. "Despite the relatively discrete nature of the business practices being targeted and users affected in this case, the Settlement Agreement broadly defines the Settlement Class as any person who has used PayPal at any time since April 9, 2006, irrespective of whether the user was affected by this reserve practice at issue," Armstrong wrote.
     Because the agreement also calls for the class to release any and all claims relating not only to PayPal's practice of placing reserves on certain accounts, but to any claims that "relate in any respect" to the company's obligations under the EFTA and the Comb settlement, it "effectively immunizes PayPal and eBay from any liability for any claims predicated on violations of the Comb settlement or EFTA," Armstrong said.
     Armstrong was also troubled by the fact that the only people receiving money will be the class representatives and their counsel.
     "The breadth of the release relative to the claims alleged, coupled with the lack of any monetary benefit to the class, militate against preliminarily approving the Settlement Agreement," Armstrong ruled.
     The class can resubmit an amended motion for preliminary approval with a revised settlement agreement or a thorough analysis of Armstrong's concerns.