## Facts

- PayPal provided an online service enabling users to send and receive payments and earned revenue from transaction fees and interest on funds held in user accounts.
- Plaintiffs filed related putative nationwide class actions alleging PayPal mishandled customer accounts and complaints, including freezing accounts during investigations while continuing to accept deposits and providing inadequate dispute-resolution channels.
- To open an account, users accepted a lengthy online clickwrap User Agreement accessible by hyperlink.
- The User Agreement included an arbitration clause requiring arbitration under AAA commercial rules, with all arbitrations in Santa Clara County, California.
- The clause prohibited consolidated or class-wide proceedings, requiring users to arbitrate individually.
- The agreement permitted PayPal to modify terms unilaterally without notice and granted PayPal broad discretion to freeze accounts and hold funds until disputes were resolved.
- Typical disputes involved small sums (average transaction about $55; no claim in the actions exceeded $310), while AAA commercial arbitration entailed substantial fees and cost exposure.

## Issues

1. Whether PayPal’s arbitration clause was unenforceable under California unconscionability doctrine as applied through the Federal Arbitration Act.
2. Whether the clause was procedurally unconscionable due to adhesive, nonnegotiable clickwrap formation and related surprise.
3. Whether the clause was substantively unconscionable due to prohibitive costs, mandatory distant forum, class/consolidation ban, unilateral amendment authority, and lack of mutuality.
4. Whether any unconscionable provisions could be severed to enforce arbitration.

## Decision

- The court denied PayPal’s motions to compel individual arbitration.
- The court held the arbitration clause unconscionable under California law and therefore unenforceable.
- The court declined to sever provisions, finding the unconscionability permeated the arbitration scheme.

## Legal Principles

- The FAA favors arbitration, but arbitration agreements remain subject to generally applicable state-law contract defenses, including unconscionability.
- Procedural unconscionability may be shown by adhesion contracting and unfair surprise in a nonnegotiable consumer clickwrap agreement, particularly where terms are buried in a lengthy form and subject to unilateral modification.
- Substantive unconscionability may be shown where arbitration terms are overly one-sided, including:
  - Cost structures that make pursuing small-value claims economically infeasible.
  - Forum requirements imposing disproportionate travel and inconvenience on consumers.
  - Restrictions barring consolidation or class treatment that, in practice, deter enforcement of widespread low-dollar harms.
  - Terms reflecting lack of mutuality and allocating practical advantages to the drafting party.
- When unconscionable provisions are integral and pervasive, a court may refuse to enforce the arbitration clause rather than rewrite it through severance.

## Conclusion

The court held that PayPal’s consumer clickwrap arbitration arrangement—combining adhesive formation with prohibitive cost exposure, a mandatory Santa Clara forum, and a ban on class or consolidated proceedings, alongside unilateral amendment power—was unconscionable and could not be salvaged by severance, so arbitration could not be compelled.


Comb v. PayPal, Inc., 218 F. Supp. 2d 1165 (N.D. Cal. 2002)