A federal judge said PayPal has a mandatory arbitration policy unfair to customers who complain their accounts are being mishandled, according to an article appearing in the September 7 issue of the San Francisco Chronicle. The ruling came August 30 by U.S. District Judge Jeremy Fogel, who will allow customers to take their grievances to a jury rather than go through the arbitration process. Judge Fogel also refused to dismiss a class-action lawsuit against PayPal by thousands of its customers.

PayPal is an online payment service with a history of customer service complaints. The Better Business Bureau labeled PayPal's customer service record "unsatisfactory" last year due to complaints that PayPal was too slow to respond to questions and too quick to freeze accounts if it believed fraud had taken place.

Unhappy customers have only one option for trying to fight PayPal, however. PayPal's User Agreement states any claims must be settled by binding arbitration in Santa Clara County in California.

Stoney McGerald has been speaking out against the arbitration process for over a year after finding out he could not sue PayPal over a dispute. He went through the arbitration process earlier this year and likens the process to a "Kangaroo court." "The arbitrator is not bound by the same rules as a judge would be in a real court," Stoney said.

In 2000, PayPal processed payments from Stoney's customers, then froze his account when they found out some of those payments were made using possibly stolen credit cards. They allegedly refused to release money to Stoney even as they continued to accept additional monies from Stoney's verified customers into his account. Stoney was forced to go through the arbitration process in California, even though he lives in Texas.

Stoney claims after travelling 2,000 miles to attend the arbitration hearing, PayPal CEO Peter Thiel, who Stoney had listed as a witness, failed to show up to testify and was allowed to testify by telephone.

The case is still unresolved. Stoney said, "We did get $5,000.00 taken of the $18,976.29 under the seller protection program, which means we only owe PayPal $13,976.29 + $784.97 interest and $312,213.50 in attorney fees and $26,703.91 in paralegal fees. Three months later, he [the arbitrator] claims he's not sure he can award the attorneys fees."

According to Stoney, PayPal's law firm was charging PayPal over $1,100 an hour, and the arbitrator charged $250 an hour plus expenses. "Consumers are led to believe that arbitration is less expensive than going to a court of law. In our case filing fees in court would have been less than a thousand dollars."

eBay, which announced it would acquire PayPal by year-end, also has an arbitration clause in its User Agreement. eBay has its own legal problems. It must appear in court November 12 in the U.S. District Court for the Eastern District of Virginia in a patent infringement lawsuit filed by Thomas Woolston (http://news.com.com/2100-1017-956638.html).