PayPal looks to dismiss claims it froze accounts and turned a blind eye to scams

Hawaii levied unfair and deceptive practice claims against PayPal and Venmo in December, saying residents had their accounts locked without warning or were victimized by scams and couldn’t recover their money. 

Editor’s Note: PayPal is 6% owned by Civil Beat owner Pierre Omidyar.

by Candace Cheung, Court House News, July 12, 2023

HONOLULU (CN) — PayPal squared off with the state of Hawaii Wednesday morning over the state’s claims that it unfairly froze resident’s accounts and failed to protect them from scams.  

In a December 2022 complaint, the state said that the financial company “deprived Hawai‘i consumers of reliable access to their own money; rendered them vulnerable to, and in fact, the victims of, fraud; and undermined their ability to protect their own privacy and make informed decisions regarding the electronic payments services they wish to use.”

The state brought the claims on behalf of those who rely on alternative electronic payment systems — particularly, the unbanked and underbanked population that lack affordable access to traditional banking services, who, according to the complaint, make up 20% of the state’s residents. These individuals, the state said, found their funds, typically used for life necessities like rent and groceries, suddenly frozen. They had no options to appeal the freeze but were still allowed to deposit funds, according to the complaint.

Hawaii said that PayPal and its subsidiary Venmo offered no recourse for people who had been scammed through the platforms and wouldn’t reimburse funds after fraud reports. The state also claimed that Venmo violates user’s privacy by making personal information public without allowing people to opt out of displaying this information. 

Representatives for PayPal, who asked Oahu Circuit Court Judge Lisa Cataldo on Wednesday to dismiss the complaint, said the state’s accusations of unfair and deceptive acts were incomplete and ignored the full context of the payment platforms’ user agreements and policies. 

Cataldo questioned the parties on whether the case met standards for particularity. The state argued that, at the early stage of the case, it didn’t need to show actual falsity, though it did provide examples of misled Hawaii consumers. PayPal maintained that the complaint lacked definite statements that misled users. The state also noted that several cases within the last five years from the Hawaii Supreme Court indicated that the plausibility standard for unfair or deceptive acts or practices cases could apply differently in Hawaii. 

Daniel Kearney, attorney for Paypal with Washington, D.C.’s Kirkland & Ellis, said that all of the state’s alleged deceptive practices were disclosed in user agreements when PayPal and Venmo users signed up with the platforms. He pointed to the net impression of the disclosures, saying that deceptive practice cases typically consist of a defendant that makes a specific false statement that acts as a “gotcha” to lure in customers, which Hawaii didn’t claim. 

“Our issue is that they don’t allege a bold print claim,” Kearney said. 

Kearney identified several advertisements for PayPal and Venmo mentioned by the state in their complaint that describe how funds on the platforms can be easily deposited and transferred, which he said were generic ad declarations, and “not actionable statements.”  Without these “headline claims” associated with the deceptive act accusations, PayPal argues, there is no basis to bring the claims at all. 

The state provided examples in the complaint of PayPal and Venmo users having their accounts and funds frozen for unspecified violations of the user agreement. 

The state, represented locally by Honolulu law firm Cronin, Fried, Sekiya, Kekina & Fairbanks, countered that Paypal and Venmo’s disclosures are far from intuitive and inadequately explain the ins and outs of the accounts. It also accused PayPal of deliberately walking a “fine line” between what falls under covered fraud activity or user agreement violations. 

Attorney for the plaintiff, Emmy Levens, of New York’s Cohen, Milstein, Sellers & Toll, noted that the user agreements and privacy policies PayPal pointed to were thousands of words long and sometimes not even properly linked to when signing up for the platforms. 

Referencing user agreements submitted as exhibits by PayPal alongside their motion to dismiss, Levens said, “Defendants understood that even lawyers needed to be pointed toward them.”

Caltado indicated she would rule on the motion to dismiss by the end of the week.