PayPal, eBay, Bill Me Later: Three’s a Crowd
Last November, Mr. Guffey listed his laptop on eBay and sold it for $611. The buyer paid via PayPal. In April, Mr. Guffey saw that PayPal had taken the $611 out of his account. He contacted the company and learned that the laptop purchaser had asked to reverse the charge, via a chargeback. This surprised Mr. Guffey since the buyer had never made any complaints about the laptop, and presumably had been using it for nearly six months.
Mr. Guffey decided to play Inspector Gadget and contacted the buyer, Larry Andrick. But it turned out that Mr. Andrick wasn’t the buyer at all. As he explained to Mr. Guffey, his identity had been stolen. The laptop purchase was made by the thief, and PayPal had funded a buying spree by extending the thief a credit line under Bill Me Later, a PayPal service that is instant credit minus the plastic.
The Haggler lined up four candidates that could have potentially been stuck with the $611 bill –Mr. Andrick, the woman who allegedly signed for the laptop upon delivery, Mr. Guffey, and PayPal — but didn’t provide a legal analysis.
The Haggler also wrote that he sensed something was wrong with “the reality that PayPal, Bill Me Later and eBay operate under one corporate umbrella,” but couldn’t quite put his finger on what that something was.
LASIS to the rescue.
First in line for liability for the $611 was Mr. Andrick, the fellow whose identity was stolen. The Fair and Accurate Credit Transaction Act sets forth a procedure for identity theft victims to follow. We’ll assume that Mr. Andrick followed directions. If so, his financial institution, not Mr. Andrick, would foot the bill.
Next in line is Carol Vickery, the person who signed for receipt of the laptop delivered to an address in Charleston, South Carolina. Actually, the local police opened an investigation, but it is unclear if Ms. Vickery actually signed for the package or if someone forged her name. More information is needed before we can stick her with this bill, and getting that information won’t be easy; Ms. Vickery is no longer living in the area.
Contractually speaking, our third candidate, Shawn Guffey, could have been stuck with the $611 bill. Provision 4.4 of PayPal’s user agreement covers risks of reversals and chargebacks. It clearly states that sellers risk liability for payments later invalidated for any reason.
PayPal’s user agreement is commonly known as a clickwrap agreement. With this agreement, terms and conditions are posted on a provider’s site and the user must click “I Accept.” Numerous courts have held clickwrap agreements to be enforceable so long as the user is presented with and agrees to the terms and conditions before being given access to the service.
For example, in this 2007 Eastern District of Pennsylvania case, the court analyzed the enforceability of the forum selection clause in Google’s clickwrap agreement for its AdWord program. The plaintiff advertiser alleged a lack of notice. But the court found the agreement to be enforceable because the advertiser had been presented with all the terms urged to read them before clicking “I accept.” Failure to read the agreement, said the court, would not excuse compliance.
If PayPal’s clickwrap agreement process follows the above requirements, it most likely would be considered enforceable and Mr. Guffey could have been stuck with the bill. Lucky for him, then, that The Haggler stepped in and haggled, getting the fourth and final contender for liability, PayPal, to agree to reimburse Mr. Guffey and cover the loss.
And that’s the just result, because PayPal’s user agreement could be considered unconscionable.
PayPal is no stranger to allegations of unconscionability. In a 2002 Northern District of California case, the court examined PayPal’s arbitration clause and found it to be (tsk tsk!) unconscionable because: users lacked the opportunity to negotiate; there was a dispute about whether PayPal’s competitors offered similar services without requiring arbitration; and the arbitration clause lacked mutuality since PayPal could unilaterally make all determinations relating to disputes, such as freezing or closing accounts, while users in return had no rights at all.
For similar reasons, PayPal’s current chargeback and reversal clause could be considered unconscionable. Mr. Guffey was likely unable to negotiate this agreement. PayPal’s competitors may offer similar services without such a broad chargeback provision. And there was a lack of mutuality in the transaction because PayPal makes all the determinations regarding chargebacks and reversals, while the users have no rights in return.
Moving on to The Haggler’s feeling that something was fishy because the three players deciding what would happen in this instance, eBay, PayPal, and Bill Me Later, all operate under one corporate umbrella. Hey, Mr. Haggler. We get it. It sure does sound fishy. But let’s examine whether there was actually something illegal going on.
Corporate umbrellas are formed so that credibility and brand value can be transferred to new products and services. Limited liability is also a benefit.
Courts allow corporate umbrellas so long as each entity adheres to simple formalities of creating and maintaining its own corporate identity. A 1982 D.C. Court of Appeals case listed a few factors to help determine whether the niceties of corporate umbrella-ship were violated, such as the nature of ownership and control, failure to maintain adequate corporate records, or commingling of funds.
There are some red flags with the eBay/PayPal/Bill Me Later structure that make some aspects separate ownership and control rather blurry. For instance, when The Haggler asked the eBay spokesman, John Pluhowski, for the names of the other companies’ spokespersons, he was told that, in an uncanny coincidence, the other companies’ spokesperson was — John Pluhowski.
The chargeback provision states clearly that there’s no monkey business going on: “If a sender of a payment files a chargeback, the credit card issuer, not PayPal, will determine who wins the chargeback.” Yes, but PayPal owns Bill Me Later, which was, in effect, the credit card company. Coincidence that until The Haggler stepped in, PayPal and Bill Me Later made money on Shawn Duffey’s transaction and he was left holding the bill? LASIS doesn’t think so.
Despite all this, we think it’s unlikely that a court would find the tripartite corporate structure illegal. We expect that corporate lawyers make sure that the companies maintain separate corporate records, don’t commingle funds, and have separate corporate offices (even if they do share a spokesperson and play fast and loose with the rules).
So if you happen to find yourself as the Seller in an online transaction, you may want to skip the Pay Pal payment option; in case a dispute arises, you’d be better off taking credit cards. Or you can roll the dice, use Pay Pal, and write to The Haggler.