Merchants File Class Action Against PayPal

In a federal class action, online merchants say PayPal is selling them out in favor of buyers and credit card companies. Appliance wholesaler The Weiler Group claims PayPal's "chronically understaffed" dispute resolution department sides with buyers without conducting legitimate investigations, leading to "chargebacks" and "reversals" against seller accounts.

Weiler claims that at least twice PayPal caused it to incur losses on disputed purchases of kitchen items through a chargeback, wherein a buyer files a complaint with a credit card company to invalidate a payment. Weiler says PayPal allowed the chargeback "without any real explanation."

Class attorney Kevin Ruf said PayPal usually resolves disputes in favor of buyers because of the close relationship with credit card companies and banks that PayPal considers essential to maintaining its business.

"That relationship is vital and they have to keep the avenues open," Ruf said. "The sellers are captive. PayPal thinks they will always be there regardless, whereas the credit card companies may not, so they try to bend over backwards to please them."

Ruf said Weiler complained to PayPal about the chargebacks, but was given the runaround.

"They felt like there was a lot of halfhearted interaction, suggesting that the merits of their response was being taken seriously, but when the credit card company got involved, PayPal's message was, 'Gee sorry, you lose,'" Ruf said.

Ruf said a federal judge already has ordered PayPal to change its dispute resolution policies. He said that in 2004, U.S. District Judge Jeremy Fogel ruled that PayPal be "required to have a much more efficient procedure and take dispute resolution concerns seriously."

The class demands punitive damages, restitution and declaratory relief for violation of the Electronic Funds Transfer Act. It is represented by Kevin Ruf and Dale MacDiarmid with Glancy, Binkow and Goldberg of Los Angeles.