IN THE UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF CALIFORNIASAN JOSE DIVISIONCase Number C-02-1227 JF (PVT)C-02-2777 JF (PVT)ORDER DENYING MOTIONS TOCOMPEL INDIVIDUAL ARBITRATION[Docket No. 23, 5]CRAIG COMB and ROBERTA TOHER, on behalfof themselves and all others similarly situated andon behalf of the general public of the United States,Plaintiffs,v.PAYPAL, INC.,Defendant.JEFFREY RESNICK, on behalf of himself and allother similarly situated and on behalf of thegeneral public of the United States,Plaintiffs,PAYPAL, INC.,Defendant.Plaintiffs seek injunctive relief and related remedies on behalf of a purported nationwide classfor alleged violations of state and federal law by Defendant PayPal, Inc. ("PayPal"). PayPal moves tocompel individual arbitration pursuant to the arbitration clause contained in its standard UserAgreement and the Federal Arbitration Act ("FAA"), 9 U.S.C. §1, et seq. The Court has read andconsidered the moving, responding and supplemental papers as well as the oral arguments presentedby counsel on August 12, 2002. For the reasons set forth below, the motions will be denied.1I. BACKGROUNDA. Customer ComplaintsPayPal is an online payment service that allows a business or private individual to send andreceive payments via the Internet. A PayPal account holder sends money by informing Paypal of theintended recipient's e-mail address and the amount to be sent and by designating a funding sourcesuch as a credit card, bank account or separate PayPal account. PayPal accesses the funds andimmediately makes them available to the intended recipient. If an intended recipient does not have aPage1of11Comb v. PayPal Inc.10/27/2007http://pub.bna.com/eclr/021227.htmPayPal account, the recipient must open an account to access the payment by following a linkthat is included in the payment notification e-mail. PayPal generates revenues from transaction feesand the interest it derives from holding funds until they are sent.As of January 1, 2001, approximately 10,000 account holders had registered with PayPal.PayPal thereafter experienced a sudden and dramatic increase in its popularity, attracting one millioncustomers over the next five months and 10.6 million accounts (of which 8.5 million were held byprivate individuals) by September 30, 2001. Currently, PayPal provides services to twelve millionaccounts, and approximately 18,000 new accounts are opened each day. Plaintiffs allege that whilePayPal has experienced a seven-fold increase in revenues and a thirteen-fold increase in users, it onlyhas doubled the number of service representatives available to address customer concerns.Plaintiffs contend that because PayPal's customer base has exceeded its operational capacity,PayPal has been and continues to be unable to maintain and manage accounts in the manner requiredby applicable state and federal legislation. Plaintiffs allege in particular that when PayPal investigates acustomer's complaint of fraud, it freezes the customer's access to his or her account until theinvestigation is completed, but at the same time keeps the account open for deposits, a practice whichallows PayPal to derive economic benefit from the deposits while preventing customers from accessingeven undisputed funds while the investigation is pending. Plaintiffs further allege that PayPal does notprovide a toll-free customer service telephone number, does not effectively publish the customerservice telephone number it does provide, requires customers to report erroneous transactions by e-mail while not providing a specific e-mail address for that purpose, requires customers to providenumerous and burdensome personal documents before it undertakes an investigation, responds to e-mail inquiries with form letters, refuses to provide details or explanations with respect to itsinvestigations, and provides no procedure by which a customer can appeal the results of aninvestigation. Plaintiffs also allege that when customers areable to contact PayPal representatives, therepresentatives are combative and rude, refuse to answer specific questions, hang up in the middle ofphone calls, provide "canned" responses to individualized problems, require customers to faxinformation while providing inoperative fax numbers, and refuse to allow customers to speak tomanagers.Newspaper articles have reported that disgruntled customers who have been unable to contactanyone at PayPal to resolve their disputes have created their own website providing consumers withdifficult-to-find customer service numbers and reporting their own frustrations with PayPal's service.According to these accounts, PayPal has a backlog of over 100,000 unanswered customer complaints,a fact that has led the Better Business Bureau to revoke its seal of approval. Plaintiffs allege thatPayPal profits from its alleged acts and omissions because customers either abandon their efforts torecover their money or, in cases in which funds actually are returned, because it retains the interestcollected on the funds it has held during the investigation process.21. Craig CombPlaintiff Craig Comb ("Comb"), who is not a PayPal customer, alleges the following: OnFebruary 15, 2002, without his knowledge, consent or authorization, PayPal removed the sums of$110.00 and $450.00 from his bank account. Comb allegedly had difficulty contacting PayPal withrespect to the erroneous transfer and finally reached a PayPal representative on February 18, 2002 toreport the alleged error. PayPal acknowledged the error and returned the entire $560.00 to Comb'saccount on February 25, 2002.PayPal's transfers, however, caused Comb's bank account to have insufficient funds, and thebank charged Comb $208.50 for failing to maintain his required balance. Comb contacted PayPal andrequested reimbursement for the insufficient fund penalty and any interest his funds accrued while inPayPal's possession. PayPal allegedly refused to pay either amount, disputing Comb's figures butfailing to provide Comb its own figures or documentation of its investigation.2. Roberta ToherPage2of11Comb v. PayPal Inc.10/27/2007http://pub.bna.com/eclr/021227.htmPlaintiff Roberta Toher ("Toher") alleges the following: Toher opened a PayPal accountsometime in 2000. PayPal failed to provide her with the name, address, and telephone number of aperson she should notify in the event of an unauthorized electronic transfer. On February 24, 2002,Toher discovered that PayPal had transferred funds from her checking account
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