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PayPal Settles $4 Million Class Action Over Account Holds

The third time was a charm for PayPal's most recent class action settlement over the company's account closure procedures. After having twice rejected settlements in the class action litigation, Judge Saundra Brown Armstrong was finally satisfied, approving a $4 million deal last Thursday.

The settlement ends long-running litigation over PayPal's practice of putting accounts on hold or reserve without notice, hanging on to users' money but not compensating them for any interest earned during those periods. Under the settlement, PayPal will turn over just under $2 million to affected users and improve disclosures for its reserve, hold, and dispute resolution process.

PayPal's Unexplained Holds

Imagine: one day you're generating easy money with an online Beanie Babies trading business. Collectors bid up Tabasco the Bull and Brownie the Bear on your eBay site, then hand over payment via PayPal. Then you log in and -- poof! -- your business is gone. PayPal has, without notice or explanation, put a hold on your account, locking you out for up to 180 days.

That's just what Moises Zepeda and other named plaintiffs claimed happened to them -- minus the Beanie Babies. They filed a putative class action suit in 2010, alleging that "PayPal improperly handled disputed transactions relating to their user accounts by unilaterally placing holds and reserves thereon." PayPal still earned interest on the money in those accounts while the plaintiffs were locked out. That, plaintiffs argued, was good, old-fashioned conversion and unjust enrichment, as well as a violation of California Consumer Legal Remedies Act and California's Unfair Competition Law.

Third Settlement's a Charm

After a few years of legal wrangling, PayPal agreed to settle. The court, however, was unconvinced. Judge Armstrong refused to sign off on the first deal, which provided no monetary relief to class members. Armstrong criticized the deal as too beneficial to PayPal, while providing almost nothing for class members. Only the class representatives and their counsel would have been compensated. A second settlement also fell short of the mark, since it sought to settle claims related to PayPal's alleged violation of an early settlement. In response, those settlement-based claims were dropped.

The current settlement, approved last Thursday, goes a bit further than earlier attempts. It creates a $3.2 million settlement fund, with at least $1.84 million of that going to class members who lost interest on money in frozen accounts. Another $800,000 would be available for other complaints, bringing PayPal's total payout to $4 million.

While that's a significant payout, it pales in comparison to the $25 million settlement with the Consumer Financial Protection Bureau that PayPal agreed to this last May. That settlement came after PayPal was accused of illegally signing up tens of thousands of customers for unwanted credit.

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