PayPal Headed Toward $4 Million Settlement

OAKLAND, Calif. (CN) - After two rejections, a federal judge Thursday preliminarily approved a $4 million settlement between PayPal and its users over unexplained account closures.

PayPal must pay $4 million, modify the disclosure of its reserve and hold practices, and clarify its dispute resolution process.

Lead plaintiff Moises Zepeda claimed in his 2010 lawsuit that he logged onto his PayPal account, which he used for business, and found a notification that 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 said PayPal also held onto his money and the interest from it.

PayPal and eBay faced a similar lawsuit from Devinda Fernando, who claimed the two companies improperly restricted and closed customer accounts without notice because of suspicious activity. Fernando sought damages for conversion, unjust enrichment and violations of a 2004 settlement stemming from the 2002 Comb v. PayPal case.

The Comb settlement called for PayPal to pay $9.25 million into a settlement fund to pay class members with valid claims.

In 2011, the Zepeda and Fernando litigants participated in mediation, resulting in a global settlement of both cases. But things broke down when an attorney for the Fernando plaintiffs asked to negotiate individual settlements with PayPal and eBay.

The Zepeda class renewed their motion for preliminary approval of their proposed settlement, which called for PayPal to implement certain business practices, including disclosing the reason for a hold, reserve or limitation to the extent that it is not inconsistent with PayPal's security requirements.

The settlement did not provide for any monetary relief to class members.

Class members were 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."

U.S. District Court Judge Saundra Brown Armstrong rejected the first settlement in early 2014 after finding that the settlement release was overbroad and would have effectively immunized PayPal from liability for claims predicated on violations of the Comb settlement.

She also said that the settlement lacked any tangible benefits to the class, since the only people receiving money would be the class representatives and their counsel.

The parties went back into mediation and added a $3.2 million settlement fund, of which at least $1.84 million would be available to pay class members who had holds or reserves placed on their accounts and lost interest income.

The settlement also created an $800,000 fund for alternate claims from which class members could pursue individual claims for business damages.

Although she found the monetary relief sufficient, Armstrong rejected the settlement in March because of "two obvious deficiencies."

The judge questioned whether it was appropriate to settle claims "based on alleged violations of the Comb settlement since the judgment in that action specified that any disputes concerning the agreement must be litigated in that action."

Armstrong also pointed out that the agreement still included people who had been accountholders since 2006, though the practices at issue began two years later.

In response, the parties omitted any claims based on the alleged breach of the Comb settlement and provided new allegations to justify beginning the class period in 2006.

"They contend that this class period is appropriate because plaintiffs' claims include allegations based on the closing or suspending of accounts and claims arising from PayPal's handling of buyers' accounts, and those activities occurred both before and after 2008," Armstrong explained in her ruling.

Because the two issues "have been addressed by the parties" and the settlement benefits to the class remain the same, Armstrong found that the parties "made a sufficient showing to warrant preliminary approval."

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