PayPal (Nasdaq: PYPL) has been hit with a class-action lawsuit by members who claim the online payment company froze their funds without their prior knowledge.
The suit, filed Tuesday in federal court in San Francisco, charges that PayPal violated the Electronic Fund Transfer Act as well as California state law. The complaint also stems in part from difficulties that some members had in contacting PayPal to straighten out allegedly false charges.
“PayPal fails to provide customers with necessary information, such as an address and telephone number, so that customers can easily report erroneous financial transactions,” law firm Girard Gibbs & De Bartolomeo, which filed the suit, said in a statement. The firm is involved in recent class-action suits against AOL as well.
The suit seeks unspecified monetary damages and calls for PayPal to change its policies.
Eric Gibbs, an attorney working on the suit, told the E-Commerce Times that the complaint alleges that federal law requires that a phonenumber be made available for customers to inquire about electronic fund transfers.
“When someone realizes that money has been transferred from their account erroneously, their immediate response is to want to call somebody and get it straightened out,” Gibbs said. “It seems like PayPal frustrated efforts to do just that.”
The suit also claims that the payment site “unlawfully freezes its customers’ accounts, and that PayPal fails to fully compensate customers damaged by erroneous financial transactions.”
The company did not immediately return calls seeking comment.
Back in Court
PayPal is no stranger to legal action. The company was forced to delay its IPO last month after New York-based CertCo filed a suit alleging patent infringement.
Despite that lawsuit and word that this class-action suit also would be filed, PayPal’s initial public offering was well received on Wall Street.
PayPal shares, which debuted at US$13, were trading at $20 early Wednesday. The company will make its first earnings report as a public company in late April.
PayPal did get some good news on Tuesday in the form of an opinion from the Federal Deposit Insurance Corporation (FDIC) stating that some of the company’s customer accounts qualify for FDIC insurance.
The FDIC said that funds handled by PayPal for deposit into accounts at FDIC-member banks qualify for insurance of up to $100,000, although a final decision will be made on a case-by-case basis.
PayPal CEO Peter Thiel said the insurance will “enhance the safety of customer funds as they move through our payment service.”
PayPal customers will have the option of placing funds into PayPal’s money market account or requesting immediate deposit into an FDIC-backed bank account of their own.
The FDIC refused to rule on a larger question related to PayPal funds, saying the company is not acting as a bank.
That identity question is at the heart of several states’ attempts to regulate the online payment service. PayPal noted that while the FDIC’s opinion does not extend to state laws, it “could be considered relevant” by some states.
Louisiana became the first state to require PayPal to obtain a banking license before doing business with its residents, and others are said to be contemplating similar action.