PayPal Terms of Service or: How Conservatives Stopped Worrying and Learned to Love Aggressive State…

Important caveat: As with the previous piece on the CFPB I am not advocating for any policy direction. As discussed below, while there are arguments for aggressive regulation, there are also arguments against. Rather, it is a discussion of what state enforcement might look like and why that may or may not be a good idea.

In the first piece of this series, I discussed the recent PayPal Terms of Service controversy, how it was emblematic of a dynamic that may further alienate conservatives from financial firms, why conservatives may become more comfortable with aggressive consumer financial regulation broadly, and possible countervailing concerns. In the second piece I discussed how this alienation might prompt conservatives to look more appreciatively on the CFPB, and why that might not be a good thing. But a CFPB that is aligned with conservative concerns may have to wait for a party switch in the White House, or the heat death of the universe, so what can be done now? That is the purpose of this piece, to discuss some options at the state level.

To quickly recap what was discussed in more detail here: PayPal’s terms of service prohibit using the service for things that, in PayPal’s sole discretion, promote “hate, violence, racial or other forms of intolerance that is discriminatory…” and allow them to freeze your account, and if you are considered a “seller” you could face a $2500 liquidated damages fee per occurrence. PayPal also briefly announced they intended to include spreading “misinformation” to the prohibited activities but backed off after a firestorm, claiming that the updated language was posted “in error.”

Still, as Prof Volokh explains, the current terms are problematic enough because they provide PayPal with a lot of discretion and ability to impose its moral views of contentious and disputed issues on its consumers without the consumers being able to predict ahead of time what may or may not violate the terms. There is a belief among conservatives that PayPal is more likely to target non-progressive organizations with this provision, which fits into the increasing skepticism conservatives feel towards financial firms seen as being weaponized in the culture war.

States have quite a bit of power over firms like PayPal. PayPal, as a money transmitter, is required to get licenses from each state it wishes to operate in and is also subject to state consumer protection laws, unless those laws are preempted by federal law. (And Dodd-Frank explicitly (12 USC 5551) creates a presumption against preemption of state law as well as serving as a floor rather than a ceiling for “protectiveness.”)

We are already seeing moves on this front at the state level. For example, Gov. Ron DeSantis of Florida has announced a legislative and regulatory plan to combat “woke” finance by preventing viewpoint discrimination for certain financial services firms, including money transmitters like PayPal. If the Florida legislature supports this package PayPal and other money transmitters would need to choose between complying with Florida’s laws (at least for Florida’s customers) or exiting the state. To be sure, there are some states where PayPal may decide it isn’t worth doing business, but it would be hard to picture Florida as one given the size of its economy.

As discussed in the first article, prohibiting viewpoint discrimination is aimed at the concern that PayPal (and similar firms) are seeking to prevent Americans from fully exercising their ability to self-govern. This would require a change in the law and, as discussed previously, would create a tension with PayPal’s freedom of association.

However, even if one were to believe that PayPal should be able to exclude customer based on viewpoint, PayPal’s current policies could still be unduly arbitrary, harsh, or punitive to customers. In that case existing laws may provide a cause of action a state could pursue. For example, Florida’s Deceptive and Unfair Trade Practices Act sweeps broadly, seeking to cover “unfair or deceptive acts or practices in the conduct of any trade or commerce…” (Emphasis added.) The law seeks to incorporate the definition of “Unfairness” and “Deception” established by the Federal Trade Commission (FTC) and federal courts. The standard is similar to the one in Dodd-Frank, that an act that causes or is likely to cause substantial injury to a consumer, that the consumer cannot reasonably avoid, and is not counterbalanced by benefits to consumers or competition is considered “unfair.”

As discussed in the CFPB piece, I think there is a non-trivial argument that PayPal’s policy could qualify as unfair to the extent its enforcement is unpredictable or the penalties are untethered to actual damages. This could be a way for Florida and other states who have similar prohibitions on “unfair” practices to begin investigations and enforcement actions today. Will they succeed? I have no idea, but the regulators incentives may encourage them to take the risk.

There are also the state Attorneys General who can play a role. Not only can state AGs enforce state laws, they can also sue PayPal and other state-licensed firms under Dodd-Frank to enforce the prohibition on unfair, deceptive, or abusive practices. As discussed previously, what constitutes “abusive” practices is somewhat different from “unfair” practices, so it is possible that power will provide more room for state AGs to maneuver.

Reasons for caution

As with the CFPB there are reasons to be hesitant in becoming too enchanted with aggressive regulation. While state regulation generally lacks the lingering constitutional questions surrounding the CFPB’s structure there is still the question of whether this would be a legitimate use of state power. This is perhaps most acute to the extent state AGs utilize their power to sue under Dodd-Frank. As with the CFPB, once the power is embraced, it becomes much harder, if not impossible, to delegitimize.

Additionally, there are concerns that state-by-state regulation, and regulation by enforcement, can interfere with an efficient market for services that will end up harming consumers more than helping them. This would represent a deeper intervention in the choices of a private actor than conservatives have historically been comfortable with, often for good reason. Further, it would get harder to complain when progressive states use aggressive state enforcement if conservative states have embraced the same tools.

Finally, as previously discussed, if states prohibit viewpoint discrimination there will be some harm to PayPal’ freedom of association. Whether that harm is sufficient to overcome the arguments in favor of prohibiting viewpoint discrimination is a valid question, but not a slam dunk.

None of this is to say whether state intervention is justified, while there are reasons for caution there are also arguments in favor. Which side has the stronger argument is beyond the scope of this post. However, if conservatives embrace aggressive financial regulation at the state level they need to figure in the potential costs as well as the benefits.