A Lawyer's Interpretation
A lawyer emailed me recently to ask some questions about how payment services (Paypal in particular) operate and to discuss whether they were in violation of any laws. I specifically asked him about the following items:
-taking money out of an account holder's bank account to cover charge backs
-restricting an account but allowing money to continue being received to cover previous charge backs. In short, taking money from innocent third parties to cover other debts.
-taking money from account C, because C got paid by B and B received money from A who was suspected of fraud. In sort, taking money from someone who was neither a victim or perpetrator of fraud but an innocent third party and who received the equivalent of cash. (In my eyes, this is the most serious. Imagine cashing a check at your bank, receiving cash and spending this cash at a local store. Then it turns out the check was bad. You tell your bank you can't repay them since you spent the money at a local store. The bank decides that since the local store also has an account with them, they will simply take it from them. The store was not a party to any questionable transaction. The store received cash. By what law can the bank decide to take back cash? How can a store even know that they should be investigating the source of cash payments they receive? But Paypal has decided that they can do this and victims have no way to protect themselves. All of Paypal's so-called protection is of no use here.)
Here is the lawyer's response:
It is not so much that it is “illegal”-- that would mean there would have to have been a specific law enacted against it-- but that it is subject to disallowance by a Court in the course of a civil lawsuit. The burden would certainly be on the customer to prove that he had not agreed to allow his bank account to be debited unilaterally by PayPal in the event of disputes. And if he had to force PayPal to cough up a copy of his original User Agreement (the one in effect when he joined), legal fees would start to mount significantly. So it’s not “illegal” but you’re entitled to prove at your expense you never agreed to it. In some states you could get a multiple of your actual damages plus attorneys’ fees. If you live in such a state, you might try to get a lawyer to get after them for you on a contingent-fee basis. Might be a tough job unless a fair amount of money were at stake or you found a nonbusy lawyer.
Then, I can see subsidiary issues of whether their disclaimer of responsibility under the Seller Protection Policy (i.e. you accept the risk of chargeback if you don’t ship to a confirmed address) is a binding modification of your (even pre-October 11) User Agreement. Probably, it is. Then there’s the issue of whether there is any effective method by which they can undo their (pre-Oct. 11) promise never to debit your bank account without express permission (for instance, does failing to close your account after they announce that they ARE undoing that promise constitute “express permission”)? It very well might.
I agree the user agreement is craftily written to look more benign than it is. Failure to warn consumers about their vulnerability in case of nonconforming goods protests is unconscionable. It is also useful to PayPal in that they avoid frightening off new customers / new business.
It comes down to this: they will do what they will do and unless you have the money to sue them or the time and patience to get a state Attorney General involved, you have almost no power. YES-- if C’s money is usurped by PayPal to make a chargeback to A based on a complaint by B, C has standing to sue and would likely win. But he would have to sue, and that’s not cheap.
This whole mess cries out for regulatory enforcement-- but neither the FDIC or the FSLIC or any other regulatory agency is in place to help since PayPal is not a bank, but a new, largely unregulated, type of entity. So who should make rules? If not the state Attorney General, then it has to be the legislature or a Court handling a certified class action for some definable group of consumers. Bottom line, getting rules and enforcement powers in place can and probably will happen, but it will be slow going and way too late for most folks with PayPal problems NOW.
If you’re willing to give up using PayPal now (and lots of folks will be), your best protection is NOT to close your account (then they can freeze your funds for up to 120 days to “protect” themselves against chargebacks), but rather to stop accepting PayPal payments, withdraw all payments that arrive, and then close your bank account and open a new one. This will work REAL WELL. Then if there were a chargeback it would be PayPal who’d have to sue; and in fairness the burden *ought* to be on them. Plus they’d lose most of their cases.
That's his response and what I get out of it is this:
Possession is nine tenths of the law: If you are holding the money, Paypal will have to sue you. It will cost them too much and they will probably lose. If they are holding the money, you will have to sue them. It will cost you too much and even if you win, you will probably not recover all your costs plus time and effort. So the bottom line is: use paypal in a way that puts the burden on them. Don't accept credit cards. When you get a "You have money" email, always go into your Paypal account and withdraw the funds before sending the item. If your account is restricted or funds frozen, just tell your customer that Paypal is holding the money and let the customer deal with Paypal. You just stop using it. If Paypal tries to access your bank account, you can go to the bank and file an affidavit stating that Paypal does not have the right to access your account. If they try to charge your credit card, (this has not happened yet since Paypal knows it wouldn't work) do a charge back. It then becomes Paypal's problem to sue you for the money. It will cost them more than the amount and they will probably lose, so it won't happen.