Friday, Sep 7, 2012    Text size: 

SAN JOSE, Calif. — A suit targeting PayPal's acceptable-use policy has survived a round in court after a federal judge ruled that the alternative payment processor can't dismiss claims over its refusal to work with a pair of dating websites.

InfoStream, which operates SeekingArrangement.com and WhatsYourPrice.com, claimed in a suit filed at federal court in San Jose, Calif., that PayPal suspended their accounts for "sexual nature" but continued to service competing dating services AshleyMadison.com and ArrangementSeekers.com.

SeekingArrangement.com caters to  members seeking dates who refer to themselves as either "sugar daddy, sugary mommy or sugar baby users." WhatsYourPrice.com, meanwhile, is a "marketplace" site that "allows members to buy and sell the opportunity of going out on a first date."

The suit has roots back to 2007 when PayPal suspended the sites' accounts after it said that they incorporate options such as "Dating — Casual/Intimate Encounter" and "Married Dating/Discreet Affair (meeting for purposes of having sex)."

But last year InfoStream and its CEO, Lead Way, said they learned that not only has PayPal passively accepted a continued relationship with identical, competing websites such as Ashley Madison.com and ArrangementFinders.com, and that PayPal actively has for years “pre-approved” them, finding the sites to be in compliance with the AUP.

As a result, InfoStream sued PayPal — despite claims outside the statute of limitations — alleging breach of contract, bad faith and unfair business practices, as well as antitrust claims.

Infostream in the suit alleged that “PayPal manipulates the downstream markets for its own benefit” by “choosing market winners in downstream markets with the intent to benefit itself by increasing revenue and in maintenance of its market power in the confidential payment services market.”

U.S. District Judge Susan Illston last week agreed with Infostream, ruling that PayPal's can't dismiss claims of breach of contract, breach of the implied covenant of good faith and fair dealing and unfair competition law under California Business and Professions Code § 17200.

Illston said PayPal's argument to dismiss claims in the case "is further complicated by the fact that the AUP prohibits use of PayPal for 'activities that relate to sales of ... certain sexually oriented materials or services.' ”

"The AUP does not prohibit activities related to the sale of all sexually oriented services," she ruled. "If a contract is capable of more than one reasonable interpretation, it is ambiguous."

Illston also ruled that the state's statute of limitations is validated in the case because of the "inherently secretive nature of PayPal's conduct."

"[I]t is reasonable that plaintiffs could not have discovered PayPal's 'motivations' until plaintiffs were explicitly informed of PayPal's 'pre-approval' of identical competitor websites," Illston said.

The federal judge, however, dismissed Infostream's antitrust and fraud claims against PayPal.

Infostream claimed in antitrust allegations that the result of PayPal’s activities is that competitors in the downstream market have been driven out, leaving the specialty online dating services market with fewer choices, diminished pricing competition and inferior products.

Illston granted the plaintiffs leave to amend the Sherman Act and fraud claims, and ordered an amended complaint to be filed by today.