Learn About the Law
Get help with your legal needs
FindLaw’s Learn About the Law features thousands of informational articles to help you understand your options. And if you’re ready to hire an attorney, find one in your area who can help.
Gary NEZRI, an individual, Plaintiff, v. PAYPAL, INC., a Delaware corporation; and Does 1-25, inclusive, Defendants.
Order GRANTING Defendant's Motion to Compel Arbitration (Dkt. 8)
Defendant PayPal Inc. moves to compel arbitration of the claims brought by Plaintiff Gary Nezri. Dkt. 8 (Mot.) Nezri opposes. Dkt. 9 (Opp'n)1 . PayPal filed a reply. Dkt. 11 (Reply.) The Court deems this matter appropriate for decision without oral argument. See Fed. R. Civ. P. 78; Local Rule 7-15. For the reasons stated below, the motion is GRANTED.
On February 10, 2022, Nezri filed an action against PayPal in the Los Angeles Superior Court. Dkt. 1-1 (Compl.) Nezri alleges that on or around March 2021, PayPal seized funds located in his PayPal account without notice, claiming Nezri violated PayPal's User Agreement (UA) and Acceptable Use Policy (AUP). Compl. ¶ 5. Nezri asserts several causes of action, including violations of the Racketeer Influenced and Corrupt Organizations Act and the Electronic Funds Transfer Act, as well as state law claims for breach of contract, breach of fiduciary duty, and violations of California's Unfair Competition Law (UCL). PayPal removed the action and filed the instant Motion to Compel Arbitration. Dkt. 1, Dkt. 8.
PayPal's UA includes an agreement to arbitrate. Dkt 8-4 (Potter Decl.) ¶ 10, Ex. 1 at 49–54, Ex. 2 at 61–65, Ex. 4 at 55–59 (Arbitration Agreement). To create a PayPal account, a potential user must register; this includes accepting the terms of PayPal's UA. Potter Decl. ¶ 4; Compl. ¶¶ 13, 61. Potential users are given the option to review the UA's terms through a scroll box on the registration page or through a hyperlink contained in the acceptance prompt. Id. at ¶ 5. Potential users are prompted to check a box confirming consent to the UA and clicking a button stating, “Agree and Create Account.” Id. at ¶ 5. The terms of the UA are also made available on every page of PayPal's website under its “Legal” hyperlink. Id. at ¶ 7.
On or about July or August 2015, Nezri opened a PayPal account for his company Gn la transportation, LLC. Dkt. 9-1 (Nezri Decl.) ¶ 2; Compl. ¶¶ 2, 61. The UA's first two pages informs users of certain terms, including its dispute resolution provision. See Potter Decl. Ex. 1; Ex. 2; Ex. 4. On page two of the UA in effect in July 2015 under “Jump to section:” the phrase “Disputes with PayPal” is hyperlinked and in bold blue font. Id., Ex. 2. Just below there is also bolded language explaining that in Section 14 “Disputes with PayPal,” there is an Agreement to Arbitrate. Id. Nezri does not dispute that to open a PayPal account he had to agree to PayPal's UA. See generally Nezri Decl., Compl. ¶ 13. However, Nezri claims that he did not see the Arbitration Agreement. Nezri Decl. at ¶ 6.
The most recent UA's Arbitration Agreement states in pertinent part:
You and PayPal each agree to any and all disputes or claims that have arise or may arise between you and PayPal, including without limitation federal and state statutory claims, common law claims, and those based in contract, tort, fraud, misrepresentation or other legal theory, shall be resolved exclusively through final and binding arbitration, rather than in court, except that you may assert claims in small claims court, if your claims qualify so long as the matter remains in such court and advances only on an individual (non-class, non-representative) basis. This Agreement to Arbitrate is intended to be broadly interpreted. The Federal Arbitration Act governs the interpretation and enforcement of this Agreement to Arbitrate.
Potter Decl., ¶ 10. The Arbitration Agreement also includes an opt-out provision, allowing users who do not wish to arbitrate disputes the option to mail an opt-out notice to PayPal within thirty days after accepting the terms of the UA for the first time. Potter Decl., ¶ 11, Ex. 1 at 53; Ex. 2 at 64; Ex. 4 at 58–59. Nezri did not exercise this option. Id. at ¶ 15. PayPal regularly updates the UA's terms. Potter Decl. ¶ 9. The Arbitration Agreement included in the UA in effect when Nezri created his account, the UA in effect when his funds were seized, and the most recent UA remain “virtually identical.” Opp'n. at 13, Potter Decl., Ex. 1 at 49-54, Ex. 2 at 61–65, Ex. 4 at 55–59.
II. LEGAL STANDARD
“[T]he Federal Arbitration Act (FAA) makes agreements to arbitrate ‘valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.’ ” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 336, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011) (quoting 9 U.S.C. § 2). “By its terms, the [FAA] leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985); see also Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, 1012 (9th Cir. 2004) (If a valid arbitration agreement exists, “the court must order the parties to proceed to arbitration ․ in accordance with the terms of their agreement”). “[A]ny doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration.” Ferguson v. Corinthian Colleges, Inc., 733 F.3d 928, 938 (9th Cir. 2013) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)).
The interpretation and enforcement of the Arbitration Agreement is governed by the FAA. See Potter Decl., Ex. 1 at 49–50, Ex. 2 at 62, and Ex. 4 at 55. Under the FAA, this Court must determine two “gateway” issues when deciding a motion to compel arbitration: “(1) whether there is an agreement to arbitrate between the parties; and (2) whether the agreement covers the dispute.” Brennan v. Opus Bank, 796 F.3d 1125, 1130 (9th Cir. 2015). “In determining whether parties have agreed to arbitrate a dispute, [courts] apply general state-law principles of contract interpretation, while giving due regard to the federal policy in favor of arbitration by resolving ambiguities as to the scope of arbitration in favor of arbitration.” Mundi v. Union Sec. Life Ins. Co., 555 F.3d 1042, 1044 (9th Cir. 2009) (internal quotation marks omitted).
The parties dispute which state's contract law should apply. PayPal argues for Delaware law in accordance with the UA's choice-of-law provision. Mot. at 12; Reply at 7–9. Nezri claims California law applies. Opp'n at 1, 16–19. The Court will first address the choice-of-law issue 2 and then turn to whether there is an enforceable Arbitration Agreement between the parties.
Under the FAA the parties to an arbitration contract are afforded “considerable latitude to choose what law governs some or all of its provisions[.]” DIRECTV, Inc. v. Imburgia, 577 U.S. 47, 53–54, 136 S.Ct. 463, 193 L.Ed.2d 365 (2015) (upholding choice of law and class-arbitration waiver provision). Under California's choice-of-law analysis, “ ‘courts shall apply the principles set forth in Restatement [(Second) of Conflict of Laws] section 187, which reflects a strong policy favoring enforcement of [choice-of-law] provisions.’ ” ABF Cap. Corp., a Delaware Corp. v. Osley, 414 F.3d 1061, 1065 (9th Cir. 2005) (quoting Hambrecht & Quist Venture Partners v. Am. Med. Int'l, Inc., 38 Cal.App.4th 1532, 1544, 46 Cal.Rptr.2d 33 (1995)). This Court must first determine (1) whether Delaware has a substantial relationship to the parties or the transaction, or (2) whether there is any other reasonable basis for the parties’ choice of law. Osley, 414 F.3d at 1065. Thereafter, the Court must determine whether the chosen state's law is contrary to a fundamental policy of California. Id. at 1066 (citing Nedlloyd Lines B.V. v. Superior Court, 3 Cal.4th 459, 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148 (1992)). If so, the Court then addresses which state has a materially greater interest in deciding the issue. Nedlloyd, 3 Cal. 4th at 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148.
There is a substantial relationship between the parties and Delaware because PayPal was incorporated under the laws of Delaware. See Osley, 414 F.3d at 1065 (“A substantial relationship exists where one of the parties is domiciled or incorporated in the chosen state.” (citing Nedlloyd, 3 Cal.4th at 467, 11 Cal.Rptr.2d 330, 834 P.2d 1148)).
Nezri appears to argue that applying Delaware law would violate California's public policy against enforcing contracts that would waive a person's right to seek public injunctive relief under the so-called “McGill rule”3 . Opp'n. 2, 18–19. The Court disagrees. The Ninth Circuit clarified that
public injunctive relief within the meaning of McGill is limited to forward-looking injunctions that seek to prevent future violations of law for the benefit of the general public as a whole, as opposed to a particular class of persons, and that do so without the need to consider the individual claims of any non-party.
Hodges v. Comcast Cable Commc'ns, LLC, 21 F.4th 535, 542 (9th Cir. 2021). In Hodges, the Ninth Circuit reversed a district court's denial of Comcast's motion to compel arbitration. Id. at 549. After clarifying the standard for what constitutes public injunctive relief under the McGill rule, the Court analyzed the allegations in the plaintiff's complaint and held that the injunctive relief plaintiff sought would benefit only “cable subscribers” and was not relief that would “primarily benefit the general public as a more diffuse whole.” Id. (emphasis in original).
Hodges controls here. Nezri prays for “a preliminary and permanent injunction ordering [PayPal] to cease and desist from engaging in the unfair, unlawful and/or fraudulent business practices alleged” in his complaint. He alleges PayPal seized the money located in his account, claiming he violated PayPal's AUP. Compl. ¶¶ 13, 15. He further claims PayPal “use[d] th[e] [AUP] provision” against him and “other Users.” Compl. ¶ 15. Specific to his UCL claim, Nezri alleges PayPal's actions “defrauded consumers, who were led to believe that their funds were safely placed in Defendants’ [sic] trust.” Id. at ¶ 71. Nezri also alleges PayPal's conduct “caused Plaintiff and all others similarly situated to suffer injury in fact and to lose money or property.” Id. Clearly, the injunctive relief Nezri seeks would benefit him and potentially other PayPal account holders, but not the public generally. Under -Hodges, Nezri is not seeking public injunctive relief.
Nezri does not provide any other reasons why applying Delaware law to determine whether the Arbitration Agreement is enforceable would create a conflict with California law. See Nedlloyd, 3 Cal.4th at 466, 11 Cal.Rptr.2d 330, 834 P.2d 1148 (“If there is no such conflict, the court shall enforce the parties’ choice of law.”) Indeed, both Delaware law and California law favor enforcing choice-of-law provisions and arbitration agreements. See Washington Mut. Bank, FA v. Superior Ct., 24 Cal. 4th 906, 917 (2001) (observing that California “has no policy against the enforcement of choice-of-law provisions contained in contracts of adhesion where they are otherwise appropriate.”); Pinnacle Museum Tower Assn. v. Pinnacle Mkt. Dev. (US), LLC, 55 Cal. 4th 223, 245, 145 Cal.Rptr.3d 514, 282 P.3d 1217 (2012) (recognizing that California's “public policy strongly favors arbitration[.]”); Coface Collections N. Am. Inc. v. Newton, 430 F.App'x 162, 166 (3d Cir. 2011) (“it is only in rare circumstances that Delaware courts do not honor the choice-of-law provisions agreed by parties in a binding contract”); Graham v. State Farm Mut. Auto. Ins. Co., 565 A.2d 908, 913 (Del. 1989) (“[t]he public policy of Delaware favors the resolution of disputes through arbitration.”)
This Court will apply Delaware law to determine whether the Arbitration Agreement is enforceable.
B. The Arbitration Agreement is Valid and Enforceable
Nezri concedes that, assuming there is a valid agreement, it covers the parties’ dispute. Opp'n at 7. The Court agrees.
You and PayPal each agree to any and all disputes or claims that have arisen or may arise between you and PayPal, including without limitation federal and state statutory claims, common law claims, and those based in contract, tort, fraud, misrepresentation or other legal theory, shall be resolved exclusively through final and binding arbitration, rather than in court[.]
Potter Decl., ¶ 10. Additionally, Nezri does not challenge that he accepted the terms in PayPal's UA, despite not seeing the Arbitration Agreement. See Nezri Decl., ¶ 6; Compl. ¶13. Rather, Nezri's only argument is that the Arbitration Agreement should not be enforced because it is unconscionable. Opp'n at 7–20 4 .
As is the case in California, Delaware courts generally assess whether an agreement is unconscionable under two headings: procedural unconscionability and substantive unconscionability. See James v. Nat'l Fin., LLC, 132 A.3d 799, 815 (Del. Ch. 2016) (finding loan agreement unenforceable); see also Tompkins v. 23andMe, Inc., 840 F.3d 1016, 1023 (9th Cir. 2016) (recognizing unconscionability has both a procedural and a substantive element). “The analysis is unitary, and it is generally agreed that if more of one is present, then less of the other is required.” James, 132 A.3d at 815 (Del. Ct. Ch. 2016) (citation omitted). The burden is on the party asserting unconscionability. See Tulowitzki v. Atlantic Richfield Co., 396 A.2d 956, 960 (Del. 1978)
For the reasons below, the Court finds Nezri did not meet his burden to show unconscionability.
1. Procedural Unconscionability
Under Delaware law, when assessing procedural unconscionability “[c]ourts focus on the relative bargaining strength of the parties and whether the weaker party could make a meaningful choice.” James, 132 A.3d at 815. Delaware courts may look to certain factors in assessing procedural unconscionability, such as the inequality of bargaining power; exploitation of unsophisticated, uneducated, and illiterate individuals; boilerplate forms presented on a take-it-or-leave-it basis; and the circumstances surrounding execution. See James, 132 A.3d at 826.
Nezri argues that the Arbitration Agreement is procedurally unconscionable because it is a contract of adhesion, presented to him on a take-it-or-leave-it basis by one with superior bargaining power 5 . Opp'n. at 8-9. The Arbitration Agreement can be characterized as a contract of adhesion. It is located in the UA, which is lengthy and drafted by PayPal, which allegedly has superior bargaining power over Nezri, a consumer seeking PayPal's services. But the “mere disparity between the bargaining power of parties to a contract will not support a finding of unconscionability.” Graham v. State Farm. Mut. Auto. Ins. Co., 565 A.2d 908, 912 (Del. 1989). Rather, the party with superior bargaining power must have used it to take unfair advantage over the other party. Id. (finding inclusion of arbitration clause in insurance policy presented on take-it-or-leave-it basis did not unfairly favor insurance company).
Nezri argues that as a layman whose English is his second language, reading the UA's terms would be burdensome and impractical. Opp'n at 3. But the Court is unconvinced. Nezri did not say he could not understand the terms, only that it would be impractical and burdensome for him to “read every page of the UA.” Opp'n at 3. In Delaware, it is well settled that failure to read a contract is not a defense to its enforcement. Graham, 565 A.2d at 913.
Nezri also argues that because the Arbitration Agreement is “buried” in the UA, which was amended at least three times, it is procedurally unconscionable. Opp'n at 9-10. But Nezri concedes the Arbitration Agreement remained “virtually identical” despite the amendments to the UA. See Opp'n at 13. Also, Nezri wholly ignores the Arbitration Agreement's opt-out clause in his Opposition. With the option to opt out, Nezri did not lack a meaningful choice. See Mikkileneni v. PayPal, Inc., No. N19C-05-1243 PRW, 2021 WL 2763903, at * 12 (Del. Super. Ct. July 1. 2021) (finding ability to opt out made an arbitration agreement “neither compulsory nor a mandatory condition to contracting[.]”).
Finally, the Delaware Supreme court has observed that “[t]here is no deprivation of meaningful choice if a party can walk away from the contract.” Ketler v. PFPA, LLC, 132 A.3d 746, 748 (Del 2016) (enforcing release in contract for fitness membership); see also Graham, 565 A.2d at 913 (“if the Grahams had read their [insurance] policy after receiving it, they would have discovered the arbitration clause. If they then believed this clause to be sufficiently objectionable, they could have cancelled their policy and sought coverage with another insurer on more agreeable terms.”) Here, Nezri stated he opened a PayPal account because his own clients preferred paying him through PayPal. Nezri Decl. ¶ 3. The Court does not find Nezri was deprived of making a meaningful choice.
The Court concludes the Arbitration Agreement is minimally, if at all, procedurally unconscionable.
2. Substantive Unconscionability
Under Delaware law, “[t]he concept of substantive unconscionability tests the substance of the exchange.” James, 132 A.3d at 815. Courts look at the substantive terms of the agreement to determine if its terms are “ ‘so extreme as to appear unconscionable according to the mores and business practices of the time and place.’ ” Id. (internal citations omitted). Delaware courts look to certain factors in assessing substantive unconscionability, such as “significant cost-price disparity or excessive price”; the “denial of basic rights and remedies”; “penalty clauses”; the “placement of disadvantageous clauses in inconspicuous locations or among fine print trivia”; the “phrasing of disadvantageous clauses in confusing language”; and “an overall imbalance in the obligations and rights imposed by the bargain.” See James, 132 A.3d at 815–16.
Nezri puts forth several arguments as to why the Arbitration Agreement is substantively unconscionable.
a. Liquidated damages and choice-of-law provisions in UA
Nezri argues that the Arbitration Agreement is substantively unconscionable because PayPal has the ability under the UA to freeze consumer accounts. Opp'n. at 12–14. Nezri also argues that the Delaware choice-of-law provision is unconscionable and applying Delaware law renders the UA unconscionable. Opp'n. at 14–16, Opp'n. at 18–19.
The Court will not address whether the liquidated damages provision in the UA is unconscionable. The entire dispute between PayPal and Nezri arises from PayPal's alleged conduct related to its liquidated damage procedures. These procedures do not arise from the Arbitration Agreement itself. Therefore, this is an issue appropriately left to the arbitrator. See Buckeye, 546 U.S. at 445–46, 126 S.Ct. 1204.
b. Fee-shifting provision
Nezri next argues that the fee-shifting provision is unconscionable. Opp'n. at 17-18. The Court disagrees. Under its costs provisions, PayPal agrees to pay filing fees on request if the relief sought is $10,000 or less. Alternatively, if the relief sought is more than $10,000, and the party demonstrates that the cost of accessing arbitration would be prohibitive compared to accessing a court, PayPal will also pay “as much of the filing, administration, and arbitrator fees as the arbitrator(s) deems necessary to prevent the cost of accessing arbitration from being prohibitive[.]” Potter Decl., Ex. 1, at 52, Ex. 2 at 64–65, Ex. 4 at 58. This provision helps users with claims against PayPal and does not amount to a use of superior bargaining power to take unfair advantage of another party. See Cheng v. PayPal, Inc., No. 21-CV-03608-BLF, 2022 WL 126305, at *4 (N.D. Cal. Jan. 13, 2022); Evans v. PayPal, Inc., No. 22-CV-00248-BLF, 2022 WL 1813993, at *5 (N.D. Cal. June 2, 2022).
c. AAA discovery rules
Nezri argues that the AAA Consumer Arbitration rules do not provide for adequate discovery, Opp'n at 19–20 6 , but he fails to show how those rules would unfairly advantage PayPal. See Graham, 565 A.2d at 912–13 (“since both parties have equal input into the selection of the arbitrators and since both parties are bound by the result, we find no inherent unfairness in the clause.”)
d. Unilateral modification provision
Nezri argues that PayPal's ability to amend the Arbitration Agreement is “significant.” Opp'n at 14. This provision is not substantively unconscionable.
Delaware law permits banks to unilaterally amend credit card agreements to add arbitration provisions, if they provide notice and opt-out clauses. See Edelist v. MBNA Am. Bank, 790 A.2d 1249, 1257-58 (Del. 2001). The same protections provided in Edelist exist in PayPal's Arbitration Agreement. If PayPal amends the Arbitration Agreement, users are given notice by email of the amendment 30 days before it becomes effective and the amendment is posted on PayPal's website. Potter Decl., Ex. 1, at 54, Ex. 2 at 65, Ex. 4 at 59. PayPal users have 30 days to decide whether to cancel their account or continue with the amended Arbitration Agreement. Id. Any amendment to the Arbitration Agreement does not apply to any claim filed in a legal proceeding against PayPal prior to the effective date of the amendment. Id. The notice and grace period weighs against finding that the unilateral modification provision unfairly advantages PayPal.
This also does not deviate from Ninth Circuit and California caselaw. Wiseley v. Amazon.com, Inc., 709 Fed.App'x. 862, 864 (9th Cir. 2017) (holding unilateral modification clause in arbitration agreement was not procedurally unconscionable because Amazon is “limited by the implied covenant of good faith and fair dealing.”); see also Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 888 (2009) (recognizing in Delaware “implied covenant of good faith and fair dealing inheres in every contract”)
To summarize, Nezri has not met his burden to show that the Arbitration Agreement is unconscionable.
C. Dismiss or Stay
PayPal asks the Court to dismiss the action or alternatively to stay it pending the outcome of arbitration. Mot. at 16. The Ninth Circuit has held that “notwithstanding the language of [9 U.S.C.] § 3, a district court may either stay the action or dismiss it outright when ․ the court determines that all of the claims raised in the action are subject to arbitration.” Johnmohammadi v. Bloomingdale's Inc., 755 F.3d 1072, 1074 (9th Cir. 2014). Here, neither party disputes that Nezri's claims fall within the scope of the Arbitration Agreement and the Court agrees.
PayPal's Motion to Compel Arbitration is granted. This action is dismissed without prejudice.
IT IS SO ORDERED.
1. Nezri's Opposition violates Local Rule 11-3.1.1 which requires that proportionally spaced typeface be 14-point or larger. Future non-compliant briefs will be stricken and disregarded.
2. Nezri argues, in part, that California law applies because the 2021 and 2022 versions of the UA did not include a choice-of-law provision. Opp'n at 1, 14, 15. This is incorrect. Every version of the UA PayPal presented to the Court included a choice-of-law provision calling for Delaware law to be applied. See Potter Decl., Ex. 1 at 57–58, Ex. 2 at 61, and Ex. 4 at 63.
3. In McGill v. Citibank, N.A., 2 Cal.5th 945, 962, 216 Cal.Rptr.3d 627, 393 P.3d 85 (2017), the California Supreme Court held that “a provision in any contract—even a contract that has no arbitration provision—that purports to waive, in all fora, the statutory right to seek public injunctive relief under the UCL ․ is invalid and unenforceable under California law.” See also Blair v. Rent-A-Center, Inc., 928 F.3d 819, 830–31 (9th Cir. 2019) (holding the FAA does not preempt the McGill rule.)
4. Nezri also challenges the enforceability of the entire UA, but this Court's review is limited to whether the Arbitration Agreement is enforceable. See Rent-A-Car, West Inc. v. Jackson, 561 U.S. 63, 70, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010) (citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444–46, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006)).
5. Nezri's arguments rely on California law but can be addressed in the framework above outlining Delaware law.
6. Nezri refers to the AAA Commercial Rules. Opp'n at 20. The Arbitration Agreement calls for the AAA Consumer Rules. Potter Decl., Ex. 1, at 52, Ex. 2 at 64–65, Ex. 4 at 58.
Dale S. Fischer, United States District Judge
Response sent, thank you
A free source of state and federal court opinions, state laws, and the United States Code. For more information about the legal concepts addressed by these cases and statutes visit FindLaw's Learn About the Law.
Docket No: CV 22-2112 DSF (JPRx)
Decided: June 13, 2022
Court: United States District Court, C.D. California.
Search our directory by legal issue
Enter information in one or both fields (Required)
FindLaw for Legal Professionals
Search our directory by legal issue
Enter information in one or both fields (Required)