Should one sue PayPal for account suspension?

Some time ago, I reported on a lawsuit, which we filed on behalf of a client in Germany (Landgericht Stuttgart) against PayPal. Since then, I receive almost daily calls from PayPal customers – overwhelmingly online merchants of all sizes – who tell me about their suffering with PayPal. It is always about account restrictions, ranging from some percentage restrictions to complete account suspension.

The customer is never approached beforehand, never is a reason for the anyway questionable measures provided. For many of these callers, therefore, the question arises whether they should not simply sue PayPal in order to at least get their money back. The answer to this question depends on knowledge of the PayPal system and on the personal circumstances.

The PayPal system

PayPal is a bank based in Luxembourg that exclusively handles money transfers similar to wire transfers between two individuals/companies around the world. But that is already all the similarities it has with a normal retail bank. Unlike such banks, PayPal does treat customers with substantial balances and regular incoming payments on their account with various restrictions. There is often speculation that PayPal generates interest income from the retained funds, which would be part of the business model. Of course, that is nonsense, because the fees collected from transactions are roughly as high as the interest income from investing the same amount for one year. So that cannot be the reason for PayPal's sometimes grotesque behaviour.

The actual reason for the mass suspension of accounts of harmless online merchants is PayPal's buyer protection programme. This grand promise once made PayPal big and today harbours incalculable (fraud) risks. It contains the promise to buyers who pay for their online purchases with PayPal that in the event of non-delivery or defective delivery of the ordered goods they will have their money refunded. That this opens the door to abuse is obvious. Successful buyer protection claims bring with them the problem that someone has to refund the purchase price – PayPal itself, however, naturally has no desire to do so. The love for buyers does not go that far. Of course, PayPal only passes through the refund and takes the amount back from the seller.

The fact that the seller is virtually never asked for his version of events – at least not before the account suspension – is a grave deficiency of the PayPal system. The decision whether the buyer can reclaim his money would normally be made by a court. The seller may thereby end up in the absurd situation that he no longer has the goods and must claim the purchase price from the buyer for the delivered goods despite agreed advance payment – and possibly not in his home country but somewhere in the world. The fact that this often makes no sense is obvious. Actually, it should be the other way around: the buyer who believes he can reclaim the advance-paid purchase price must assert this, if necessary, before a court. Perhaps that is not better in many cases, but at least it corresponds to what the parties agreed to or engaged in with full knowledge of the circumstances (advance payment obligation).

However, the matter is not without risk for PayPal, because the refunded amounts are advanced and subsequently debited without question from the seller's account. But this only works if there is something to debit – and that is where you as an online merchant come in. Your money serves PayPal in the event of account suspension as collateral for its own risks from the buyer protection programme. And so that you do not remove the balance in time, you may be presented with accomplished facts in the form of account suspension. And PayPal pursues this securing almost panic-stricken, which may be due to the strict regulations for the risk management of banks. However, one must certainly ask why PayPal demands such high fees and whether there can be any justification for such behaviour at all.

The whole thing works so well, of course, only because eBay merchants are required under certain circumstances to offer PayPal as a payment method. It is therefore the market power of the PayPal/eBay duo that makes this absurdity possible. Just imagine if the house bank were to suspend a well-stocked business account in order to first obtain the customer's comprehensive business documents. The thought is so far-fetched that one can safely forget about it.

As a result, PayPal's position with regard to the buyer protection programme can be compared to that of an insurance company where the sellers pay both the premiums and the insured damages, the buyer claims the insurance benefit and the insurer has no risks. That is brilliant!Is a lawsuit against PayPal worthwhile?

This brings me to the actual question of whether a lawsuit against account suspension/restriction imposed by PayPal is worthwhile. This depends not least on what is the presumed reason for the restriction – presumed because PayPal generally does not justify its decisions. From numerous conversations with affected parties, I was able to identify four main causes for PayPal's panic reactions:

• Strong revenue increases or high (seasonal) revenue fluctuations
• Violations of the terms of use (e.g. sale of items that PayPal does not like)
• Negative reports from Creditreform
• Accumulation of buyer complaints

That the first three circumstances cannot justify account suspension and retention of account balance is obvious. PayPal can write almost anything in its T&Cs almost anywhere in the world. And in the case of an accumulation of buyer complaints, no suspension should be justified – at least not before the substance of the complaints has been examined. Full access restriction is not even provided for under PayPal's T&Cs, but is repeatedly practised, although there is only talk of a "security reserve". The fact that the other side – the seller – is never asked before account suspension is also easy to explain. In the meantime, he would have the opportunity to bring his balance to "safety", so that PayPal would be forced to subject any claims to judicial review. The chances of success of such an attempt may reasonably be doubted, which is why PayPal does not place particular value on it and tries by all means to prevent such a situation.

In any case, in the event of a full access restriction, I believe there is in every case an unlawful interference with the customer's business operations, as a result of which PayPal is obligated to release the balance. Since this is a tortious claim for damages, the jurisdiction for this is at the seat of the injured customer, for a German businessman that is in Germany. That is good because PayPal then has to come to Germany to defend itself and not the customer to Luxembourg in order to defend itself against potentially unlawful behaviour by its bank (!). PayPal had imagined this differently, as can be concluded from the behaviour in the first proceedings we conducted. In any case, it became clear that ultimately PayPal does not want to risk it in any case. In any event, it is clear to me why.

Whether one should make use of this option depends on the individual circumstances of the affected party. With near certainty, it must be assumed that the business relationship will be permanently ruined in the event of legal action and there will no longer be any possibility for the merchant to do business with PayPal later. That is the punishment for complaining as a PayPal customer (rightly). So if you are urgently dependent on your PayPal account, you should – as sad as that is – seriously consider playing along, providing the requested documents and hoping for the balance to be released soon. Incidentally, the fact that this balance will be released at some point is self-evident – the question is only when. To date, I have not heard of a single case in which the balance was permanently retained. That would sooner or later mean the certain end of PayPal – even in Luxembourg.

All others, for whom it is only a matter of releasing the balance and/or seeking revenge, or those whose account has already been terminated, can, however, consider taking legal action. Even though in the latter matter no judgment was reached due to PayPal's change of course including assumption of all costs, the chances of obtaining a favourable judgment are quite good. Presumably, PayPal will, however, also attempt to prevent a judgment in Germany in other cases.

In recent times, however, experience has shown that even out-of-court legal demands with threat of legal action have had an effect and have moved PayPal to at least partially back down. The regular pattern is that full restrictions are converted into partial restrictions in the low single-digit percentage range. That too is still questionable, but for many merchants just barely tolerable. That is also unsatisfactory, but nowhere near as threatening to their existence.