If you’re a PayPal user, you've probably received the online payment company’s recent email alert about “updates” to its user agreements. Usually I ignore notices like these or just scan them before hitting the delete key; odds are you do, too. But this PayPal alert matters — and it’s something of a stinker.
As of Nov. 1, the alert said, PayPal will take away users’ right to sue the company in court. So if you have a dispute with PayPal, you’ll need to resolve it through arbitration and you won’t be able to participate in a class-action suit.
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The only way you can avoid agreeing to these terms is by sending PayPal a letter by snailmail (really!) before December 1 saying you want to opt out of the company’s agreement to arbitrate and its prohibition on class actions.
Now this all may sound like legal gobbledygook, but it’s not.
A Disturbing Consumer Trend
Consumer activists say PayPal’s move reflects an escalating and disturbing trend by U.S. businesses to avoid legal liability in cases of wrongdoing. (PayPal’s parent, eBay, sent out an almost identical notice to its customers in August.) A growing number of companies, from banks to nursing homes to pest control firms, have already gone PayPal’s route and are requiring arbitration for customer disputes, partly because the Supreme Court validated the use of arbitration in consumer contracts in a 2011 ruling.
“Mandatory arbitration, along with a restriction on bringing class-action lawsuits, represents an attempt by companies to win a free ‘get-out-of jail free’ card because companies can’t be held accountable for cheating you,” says Ira Rheingold, executive director of the National Association of Consumer Advocates. “Unlike going to court, arbitration is secret and has no appeals process.”
Many businesses and their lawyers argue that arbitration is a more efficient way to resolve customer problems. “Consumers have an opportunity to get a dispute resolved a lot quicker and receive full redress through arbitration — unlike the courts, where a consumer could be part of a class action that goes on years and years and years, and by the end of the day, pays them nothing anyway,” says Alan Kaplinsky, a Philadelphia attorney who has helped hundreds of companies write arbitration clauses into their consumer contracts.
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Arbitration can be a fine system if both parties are on an equal footing. The problem is, that’s often not the case in a consumer-business arbitration.
The Drawbacks of Arbitration
Companies usually have deeper pockets than their customers. They also typically have long-term relationships with the arbitrators handling their cases, who then may be reluctant to rule against the hand that feeds them.
A class-action ban also means you can’t join forces with other customers to pursue claims that you probably couldn’t afford to fight on your own.
“If a company added a small fee or tax costing $50 to $500 that wasn’t allowed, it could get away with this under a class-action ban,” says Paul Bland, a senior attorney with the public-interest law firm Public Justice. “That’s because it’s not worth an individual’s time and expense to go to arbitration over that amount. But if an individual could be part of a class action against the company, that challenge becomes doable.”
Until its recent notice, PayPal offered arbitration as an option; customers could choose instead to take the company to court. The catch? You could file suit only in Santa Clara County, Calif. (PayPal’s headquarters) or Omaha, Neb. (its operations center location).
Why PayPal Changed Its Rules
A PayPal spokesman explains the company’s new mandatory arbitration policy this way: “We added this clause to make it easier on our customers to resolve disputes outside of direct contact with our customer service team. Unlike going to court, arbitration can be filed in the location where the customer resides, can be conducted through exchange of documents without an in-person hearing if the customer agrees and we are agreeing to pay the customer’s filing fees for matters of $10,000 or less.”
If you choose to opt out, you’ll still be able to use PayPal’s services, but you’ll be able to file a suit only in Santa Clara County or Omaha, which isn’t practical for most people.
PayPal notes that even if you don’t opt out, you can still file a claim in your local small claims court. But Christine Hines, consumer and civil justice counsel at Public Citizen, the public-interest group, points out that small claims cases, by their very nature, limit the dollar amount you can seek and prevent you from joining with other consumers to share legal costs.
How to Opt Out of PayPal’s Rules
If you want to opt out of PayPal’s new rules, send the downloadable form created by The Consumerist website, postmarked no later than Dec. 1, to: Litigation Department, 2211 North First St., San Jose, Calif. 95131. Include your name, address, phone number and the email address you use to log in to PayPal. Be sure to sign the letter or it won’t be valid.
New PayPal users will have 30 days to opt out of arbitration after signing up for the service and should follow the same procedure.
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If you want to opt out of eBay’s arbitration rules, you’ll need to send a similar letter postmarked by Nov. 9, to: eBay Inc., c/o National Registered Agents, Inc., 2778 W. Shady Bend Lane, Lehi, Utah 84043.
4 Ways To Protect Yourself
Here are my four tips to protect your dispute rights with other companies:
1. Opt out whenever you’re offered the opportunity. Just make sure you follow the company’s instructions to the letter (literally, in the case of PayPal and eBay) if you want your opt-out to be acceptable.
2. If the company won’t let you opt out, look into taking your business to a competitor that doesn’t mandate arbitration. For example, a new Pew Charitable Trust study found that many large credit unions don’t require mandatory arbitration for their checking accounts the way nearly half of America’s 100 biggest banks do.
3. Before agreeing to mandatory arbitration, research the company’s customer complaint history online. Find out whether the firm has a record of consumer beefs, lawsuits or potential problems that could be a sign of future trouble for you.
Several class-action suits have been filed against PayPal, charging the company with illegally placing restrictions on customer’s accounts; one was settled in 2004, but others have been filed since then. Last week, Forbes blogger Adrian Kingsley-Hughes wrote that some security experts are warning that PayPal’s security token kit may not be secure.
4. Squawk on social media about your unhappiness with a company’s mandatory arbitration policy. Twitter is a good way to do this.
So is the new website, ConsumersCount.org, created by Washington class-action attorney Philip Friedman to fight mandatory arbitration and let consumers file arbitration claims en masse through what Friedman calls "crowdcasing.”
“If enough people come forward and press their case, we believe corporations will be forced to disavow arbitration,” Friedman says.