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PayPal Slapped with $150K Fine

New York attorney general Eliot Spitzer has slapped a $150,000 fine on eBay-owned PayPal for misrepresenting the rights of account holders when an affiliated merchant fails to deliver merchandise.

Following an investigation, Spitzer's office found that PayPal's user agreement misrepresented the protections consumers enjoyed while using the Web-based payments platform.

PayPal's user agreement included a statement that it provided "the rights and privileges expected of a credit card transaction." But in practice, the New York AG found that "consumers were often denied these rights both by PayPal and by the credit issuers American Express and Discover."

In addition to the $150,000 penalty, PayPal must also tweak its user agreement to "clearly describe" account holder rights, including any conditions or limitations to those rights, and reversal or refund policies.

"Protecting consumers' rights in online transactions is the best way to establish and maintain confidence in electronic commerce," Spitzer said in a statement announcing the agreement. "As with any new industry, it is essential that consumers making e-payments receive full disclosure of their rights and liabilities."

Spitzer has been busy tackling complaints from consumers about denied billing credits or "chargebacks" when merchandise ordered through PayPal, and funding with American Express of Discover cards, where not received as promised.

In 2003, the New York attorney general also reached agreements with American Express and Discover to begin issuing "chargeback" credits to consumers who did not receive goods ordered through a PayPal merchant.

"The agreements, taken together, close a loophole that, if left uncorrected, would have effectively exempted credit card purchases made through e-payment systems from the rigorous protections of the federal Fair Credit Billing Act and similar state laws," Spitzer said, noting that PayPal is by far the largest such system in the U.S.