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PayPal to Pay Up on Class Action Suit

In 2002, PayPal customers sued, saying the company messed up their accounts. Now, it's payback time.

Three unhappy customers filed a class action suit against San Jose, Calif.-based PayPal, an eBay company, claiming their accounts were frozen or drained in error. Six-year-old PayPal claims more than 45 million accounts in 45 countries.

On Monday, PayPal said it had reached a preliminary settlement agreement, without acknowledging that any of the allegations in the case are true.

"We're very happy to put this case behind us, which is why we settled," said PayPal spokesperson Amanda Pires. "We do not acknowledge the truth of the allegations, but we decided to settle so we could focus on more productive areas of our business."

As part of the settlement, all claims of the class will be dismissed, as will all claims brought in a similar case that's pending in California State Court. According to the company, parent eBay had already prepared for the settlement agreement amount in its consolidated financial statements.

Under the terms of the settlement, most of which were not disclosed, some PayPal account holders will be eligible to receive payments from a settlement fund that will total $9.25 million, less attorneys' fees. The attorneys requested $3.3 million in fees plus $135,000 in administrative costs, according to Pires. Anyone who opened a PayPal account between October 1, 1999 and January 31, 2004 is eligible for a share of the settlement, as long as they didn't reside in a country in the European Union.

The settlement must be approved by the Federal District Court in San Jose, Calif. Following approval, expected in a few weeks, customers will be notified. Those who send e-mail to settlement@paypal.com will receive automatic updates on the settlement. PayPal also is required to post a link to the settlement on its corporate Web site by mid-August.