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

There has been an unfortunate boom in stories involving the politicization of financial services recently. The most recent example occurred this past weekend when PayPal caused quite the firestorm by announcing, and then retracting, a proposed change to their terms of service that many conservatives felt was targeted at them to help suppress their speech. This is part of a growing belief that PayPal is hostile to conservative causes and views. While it can be debated whether PayPal is uniquely anti-conservative, or acting improperly at all, there is nonetheless an emerging view that PayPal uses its discretion selectively in a way that targets constituencies that Republicans have sympathy for. As such, Republicans may feel it appropriate to take a more aggressive role in policing the activities of firms like PayPal.

But what might that look like? Is this the type of thing that could get conservatives to stop worrying and learn to love aggressive financial regulation, at least at the consumer level? This series of articles will look at what options may be pursued. Importantly, it isn’t an endorsement of any given policy. Rather, it just looks at some options that may be available, as well as some reasons for caution. One piece will look at the CFPB, the other will look at the states.

But first, let’s lay out the issue at hand. What did PayPal announce they would do, what do they currently do, and why is it controversial? To be clear, I am using this case not to single out PayPal but as an illustrative example of what might happen if the fissure between conservatives and financial services firms continues to expand.

Why are PayPal’s terms controversial?

PayPal’s proposed terms would have prohibited users from using the service “for activities that…involve the sending, posting, or publication of any messages, content, or materials that, in PayPal’s sole discretion … promote misinformation.” Perhaps most controversially, as part of the agreement PayPal would be able to charge certain users $2500 for violations as liquidated damages. This change was quickly walked back with PayPal saying that the notice was sent out “in error” and that the language was not meant to be inserted into the policy. While the rescinded policy document is no longer on the PayPal webpage it is still viewable here (h/t Liz Morton at Value Added Resource).

While the change has been abandoned there are still obvious questions, such as how that language got in there in the first place. Presumably PayPal’s lawyers at least looked at, and probably wrote the document, and lawyers are not known for their whimsy. Was this a draft for PayPal leadership to consider and was accidentally uploaded? Why did PayPal consider this? Was this really an error?

However, even if the misinformation provision has been stripped that doesn’t get PayPal out of hot water. As Prof. Eugene Volokh explains, under the current terms PayPal can still cancel or lock your account and in some cases claim significant liquidated damages if PayPal, in its sole discretion, determines you were using their service to engage in activities related to “the promotion of hate, violence, racial or other forms of intolerance that is discriminatory…”

A simplified schematic of the transaction would look like this:

1. Someone (“seller”) signs up for a PayPal account. As part of that process, they must agree to PayPal’s terms of service. Amongst these terms is an agreement that $2500 in liquidated damages for violating the PayPal terms of service is reasonable.

2. Seller receives money from someone else with a PayPal account (“buyer”) to support what the seller is doing. It need not be a tangible good, it could be something like supporting a writer or artist or politician.

3. PayPal determines, in their sole discretion, that what seller is doing violates their prohibition on the promotion of hate, violence, racial or other forms of intolerance that is discriminatory”

4. PayPal takes various steps against seller as outlined in the user agreement, such as suspending or canceling their account, freezing their funds, and possibly removing $2500 per occurrence from seller’s account in liquidated damages. (Technically it look like PayPal could also sue the user for $2500 if they don’t have enough in their PayPal account.)

It is worth noting that PayPal doesn’t need to, and may not always, seek liquidated damages, and that the liquidate damages provision only applies to a “seller” not the “buyer” (who may have to pay actual damages). It is also worth noting that PayPal’s terms are a “contract of adhesion” in that you don’t get to negotiate with PayPal, you take the terms or leave them.

As Prof. Volokh points out, this arrangement allows PayPal to impose its normative opinions on users, on controversial topics where there may not be consensus, ex post, with the ability to lock accounts and effectively fine some users $2500 per offense. There is no obligation that PayPal articulate its reasoning, that it apply a standard consistently, or that the user be given a right to an appeal.

Why might this be a problem?

There are at least two types of “harm” that critics of PayPal can argue exist. The first is that firms like PayPal exercising viewpoint discrimination is broadly harmful to society and/or democracy. If PayPal can use its market power as a payments provider that lots of people use to impede speech and advocacy it doesn’t like, it can hamper citizens’ ability to engage in core political activity like speech and organization, and as a result influence elections and broader social trends.

This has given rise to calls for prohibiting PayPal and similar firms from exercising viewpoint discrimination and offering its services to all legal customers. Such a proposal is obviously controversial. There is precedent for laws preventing economic coercion over political activity, including in financial services (133–136), and for treating financial services as so critical as to require something like common-carrier status (132).

However, such a law would also infringe on PayPal’s freedom of association, though with public companies it may be hard to determine whose associational preferences are relevant. Is it the shareholders or the firm’s management? (See P. 137 and notes) Further, such a law is arguably not necessary or appropriate if there are sufficient other options that PayPal can’t actually achieve its goal, though a counterargument grounded in protecting the rights of citizen to self-govern may be more compelling.

The second harm is less concerned with broader society and more concerned with how PayPal treats specific customers. One could support PayPal’s right to exclude certain activities from its platform and yet oppose PayPal treating customers arbitrarily or excessively harshly.

As discussed in more detail in the next article, there are at least two parts of this that both anger people and raise potential red flags legally.

The first is the unclear and unreviewable nature of what is prohibited. Yes, there are obvious cases where a potential user could reasonably predict that they violate the terms of service, but per Prof. Volokh, there are also lots of cases where reasonable people can disagree. PayPal being the sole arbiter, without clear guidelines, arguably leaves users at risk of crossing a line they didn’t and couldn’t reasonably know was there and being penalized.

The other issue is the liquidated damages provision. In order to use PayPal as a seller you have to agree that $2500 per violation is a reasonable estimate to compensate PayPal for the costs of remediating your violation. It is a factual question for any given violation how accurate this estimate is. If damages significantly exceed the actual harm to PayPal, especially if PayPal were to count multiple “violations” tied to the same event (e.g. multiple people donating to a controversial blog) it might look more like PayPal trying to fine conduct it doesn’t approve of, rather than trying to mitigate actual damages.

But is this a good idea?

As the next two articles will discuss in more detail, even if conservatives are legitimately upset about PayPal’s terms there are also reasons to be hesitant of embracing aggressive financial regulation. One reason is broadly philosophic. Conservatives generally oppose government direction or control of private actors, and the use of regulation to change PayPal’s behavior would be just that. To be sure, conservatives acknowledge that sometimes such things are necessary or appropriate, and this may be one of those times, but it would still go against the general presumption against regulation. Further, it might hamper conservative efforts to oppose subsequent progressive regulatory efforts on philosophical grounds.

The second broad reason is a question of competence. Would the regulators responsible for actually implementing the policy be able or willing to do so effectively, especially if they enjoy broad discretion or can act opaquely?

An answer to whether the costs of action outweigh the benefits is beyond the scope of this series, but it is important to at least consider the question.

Conclusion

The politicization of financial services is a serious issue, and good arguments can be made that at least some efforts at politicization cause sufficient harm to society that a response is needed. And financial services are highly regulated, so if conservatives want to pursue that avenue they will have ample authority, for good or for ill. The next two articles discuss some potential ways that might happen as well as some reasons for hesitancy.