Court Sends College Tutor’s Case Against PayPal Over Frozen Funds to Arbitration

Northern District of California Judge Beth Labson Freeman redirected a plaintiff’s allegations against PayPal Inc. that the company unlawfully froze his account balance of nearly $77,000. Last Thursday’s opinion said that the agreement to arbitrate is valid and enforceable, and in addition, that the plaintiff must pay some of the costs PayPal expended defending identical state court litigation.

The federal case arose when Tingyu Cheng accused PayPal of confiscating the funds in his account, reportedly collected from college tutoring service fees. The complaint said that PayPal accused Cheng of violating its “Acceptable Use Policy,” terminated his account, and confiscated the $76,994.40 balance as liquidated damages.

The plaintiff unsuccessfully attempted to get the funds back. He then filed suit in Santa Clara County Superior Court, dismissed the case after PayPal responded with a motion to compel arbitration, then refiled it in federal court alleging the same causes of action, including breach of contract, the covenant of good faith and fair dealing, and conversion.

PayPal once again moved to compel arbitration. In last week’s opinion, the court said the dispute fell well within the ambit of the arbitration agreement. In a longer analysis, Judge Freeman found that the agreement was not unconscionable either procedurally or substantively.

The opinion said that the user agreement’s (UA) arbitration provision was not invalid for being “buried” in a 54-page, multi-section document. In addition, the court upheld PayPal’s arbitration opt-out provision, finding that “the minimal steps necessary here— mailing a notice to PayPal within 30 days of agreeing to the UA—amounted to a true lack of a meaningful choice for Cheng, notwithstanding his international residence.”

The court also awarded PayPal some costs pursuant to Federal Rule of Civil Procedure 41(d), designed to discourage vexatious litigants and forum shopping. The plaintiff is represented by SAC Attorneys LLP and PayPal by Dentons.

The decision comes shortly after users hit PayPal with a class action concerning similar, frozen funds scenarios. That suit alleges that the company maintains an illegal practice of unilaterally seizing client funds with neither cause nor proper process.