PayPal Terms of Service or: How Conservatives Stopped Worrying and Learned to Love the CFPB?

Important caveat: I am not advocating for any policy direction. As discussed below, while there are arguments conservatives may find appealing in favor of using the CFPB, there are also arguments against. Rather, this is a discussion of what CFPB enforcement might look like and why that may or may not be a good idea.

As discussed in the previous article, a new controversy over the politicization of financial services erupted last weekend when PayPal announced, and then recanted, a change in their terms that would have prohibited using the service to support the spread of “misinformation.”

While that change withdrawn as being sent in error, there is still the fact that PayPal can penalize users who engage in conduct PayPal determines to be “the promotion of hate, violence, racial or other forms of intolerance that is discriminatory…” This can include freezing accounts and, in some cases, liquidated damages of $2500.

This coupled with other recent events makes me wonder if there isn’t a conspiracy to get conservatives to like the CFPB. If there was I’m not sure what they would be doing differently than what is going on right now. But would a newfound affection be justified? Wise? Or a cure worse than the disease?

For background: The CFPB has always been a controversial organization for conservatives and market-oriented folks (two circles on a Venn Diagram that significantly but by no means completely overlap). It has been viewed with suspicion both for its dubiously constitutional structure and aggressive use of power in arguably excessive and paternalistic ways. While enforcement of things like traditional anti-fraud laws in generally non-controversial, the CFPB has been accused of trying to replace markets with rule by bureaucrat.

During the Trump administration some tried to articulate a positive vision centered on preventing fraud and increasing competition, while others embraced a more “starve the beast” mentality. Either way, there was a feeling that the CFPB didn’t really need to exist and nobody was quite sure what to do with it.

I wonder if that is going to change given how financial services firms are increasingly being seen by conservatives as outright hostile to conservative consumers. Suddenly there may be a reason to view protecting consumers from the machinations of financial firms as not only legitimate but necessary, with the CFPB being a convenient tool.

Does the CFPB even have jurisdiction?

While the CFPB has jurisdiction over PayPal since PayPal provides financial services to consumers, an argument could potentially be made that the services in question here, at least with regard to the $2500 liquidated damages, are not consumer financial services as defined by statute (12 USC 5481(5)). The liquidated damages provision only applies to the “seller” (as opposed to the person providing the money) so PayPal could try to argue that those who are effected by the liquidated damages provision are not using PayPal’s consumer financial services but rather their commercial services.

However, that may not be enough to get them off the hook. First, PayPal explicitly allows people to receive money for the sale of goods and services from a personal account, though they do say that if the primary use of the account it to receive funds from sales the user should use a business account. It does not appear to matter what type of account is being used for the purposes of the restrictions and penalties however, only that the party was the “seller”. It would likely be hard for PayPal to argue that it was aiming at a commercial audience when it explicitly allows personal accounts to be used for sales.

Also, in these transactions there are three parties: The person “selling” the allegedly prohibited material, the person buying/supporting it, and PayPal facilitating the transfer. At least one district court has held that when a firm offers services that consumers use, even if the firm’s customer is a business, the offering can count as a consumer financial product or service.

PayPal can’t argue that they don’t offer their payments services to consumers, they clearly do, and presumably the other party in the transaction, in addition to the seller, will frequently be a “consumer” as defined by Dodd-Frank (12 USC 5481(4)). The CFPB is permitted to prevent covered persons from violating the law in transactions with a consumer for a consumer financial product or service, the statute does not appear to require that the consumer be the victim.

While the question of whether the CFPB could bring an enforcement action against PayPal to protect a “seller” in this case is an interesting one, there is a non-trivial chance that the CFPB can, which tees up the next question — what could that look like?

Is PayPal being Unfair or Abusive?

The CFPB’s power includes (12 USC 5531) the ability to bring an enforcement action against a firm if it engages in “an unfair, deceptive, or abusive act or practice.” (UDAAP for short.) Assuming for the sake of argument that the CFPB has jurisdiction, is this policy an example of UDAAP? Obviously, it depends on facts and circumstances, and I can’t predict how a court would rule, but it’s worth thinking about.

If we look at the definition of unfairness in the statute (12 USC 5531(c)(1)) the CFPB needs to show that an act does or is likely to cause harm to a consumer that is not reasonably avoidable and that there is no countervailing benefit to consumers or competition for it to be considered unfair.

For an act to be abusive (12 USC 5531(d)) the CFPB must show that an act or practice “materially interferes with the ability of a consumer to understand a term or condition” of the product or service or takes “unreasonable advantage of” the consumer’s lack of understanding of the conditions of the product or service, a consumer’s inability to protect their interest when choosing a product or services, or the “reasonable reliance” of the consumer that the firm will act in the consumer’s interest.

As mentioned in the previous article, there are at least two areas where PayPal may be vulnerable. The first area is that PayPal retains “sole discretion” to determine whether something violates their terms of service. The problem is that, as Prof. Volokh points out in the case of “hate, violence, racial or other forms of intolerance that is discriminatory” there is real subjectivity as to what might count.

Even if PayPal should be allowed to be a final and unreviewable arbiter, if it doesn’t provide more information about what it considers covered by that definition and what it doesn’t (especially if there is inconsistency) it could be very hard for their customer to predict ahead of time where the line is.

This inability to know ahead of time, before PayPal cries foul and penalizes the user, including potentially freezing the account and invoking its liquidated damages claim, may make these harms not reasonably avoidable by the consumer. Further, the vague language and lack of substantive guidance could arguably interfere with consumers ability to understand the terms they will be bound to and potentially penalized for violating.

The second area is the liquidated damages provision itself. In the agreement the customer acting as a “seller” is obliged to agree that $2500 is a reasonable estimate of PayPal’s minimum actual damages, including the costs PayPal faces to “monitor and track violations” and damages to PayPal’s brand.

Is this an actual realistic estimate? Should “monitoring and tracking violations” be considered damages of a violation, or simple overhead? If there are series of violations because someone receives payments from multiple buyers for the same product or service (e.g. a podcast) is $2500 a reasonable estimate for each separate violation or are there economies of scale? Who knows? But because it is a contract of adhesion users don’t get to negotiate such things.

Does this, coupled with the vague and uncertain nature of what may constitute a violation allow PayPal to take “unreasonable advantage” of consumers? Again, I’m not sure, but it doesn’t strike me as a frivolous argument.

Of course, the current CFPB might be interested in these issues. It might be worth asking them at the next oversight hearing. But if not, a Republican CFPB might be able to do something. But should it?

Should conservatives embrace the CFPB

Even if the CFPB could be used to rein in firms like PayPal, is that enough to cause conservatives to embrace it? Remember, conservatives have been hostile to the CFPB for important reasons relating to its constitutional structure and its use (and arguable abuse) of power. Would using the CFPB actively, in a politically charged matter, end up being a deal with the devil?

The conservative position in the past was that the CFPB shouldn’t have been created and ideally would be struck down as unconstitutional. So far that hasn’t happened, with the Supreme Court instead choosing to simply remove the problematic for-cause protection from the director instead of quashing the agency as a whole. There are also active legal challenges to the agency’s funding structure, but if past is prologue the most the Court would do is subject the CFPB to congressional appropriations. While a CFPB that relies on Congress for appropriations would be a different animal, it is unclear whether that effort will succeed.

Efforts to dissolve, or even reform the CFPB legislatively have also been unavailing and are likely to remain so for at least the foreseeable future. As such, conservatives are likely stuck with the CFPB, in at least some form. This arguably cuts both ways in terms of whether it should be embraced or not.

Proponents of embracing the CFPB could make the philosophical argument that PayPal’s terms are simply wrong. They are unfair, they are abusive and should be subject to sanction under the law. This is especially true if in fact there is an effort by PayPal to hamper or penalize Americans engaging in core political rights that undergird the legitimacy of our system of government. Protecting both individual customers and broader society is sufficiently important and necessary to overcome a presumption against regulation.

Supporters of this argument could rebut concerns about PayPal’s freedom of association by pointing out that penalizing vague terms or excessive liquidated damages does not require a firm to take all business, but only provide adequate notice of what is and is not permitted, so that consumers can make informed choices, and prohibit excessive punishment. While this still represents an intrusion into how a private actor does business, proponents could argue that the intrusion is a discreet, necessary, and appropriate intervention to protect consumers’ legitimate interests.

The second, more realpolitik argument, is that the CFPB exists and likely will for the foreseeable future. If it is going to be a tool of policy, it can become a tool for conservative policy, at least during conservative administrations. If Dodd-Frank can be repealed, great, but until then use the tools that are available.

However, there are also strong arguments against embracing the CFPB, even if conservatives are stuck with it for the long term. One such argument would be that in embracing the CFPB and the philosophy of regulation it represents the ability of conservatives to oppose it in the future could be diminished. Turning to a “big government” agency to intervene in the choices of a private actor in time of need could undercut opposition to expansive federal authority in the future, both within and outside the CFPB. What would it profit a movement if it gained some temporary regulatory power but lost its soul?

Another, more practical argument is concern about whether the CFPB would be competent to do the job. The CFPB has developed a reputation as a highly ideological and/or partisan agency. While many employees are no doubt diligent and professional the agency also saw a pope/antipope crisis over leadership and a minor staff insurrection during transition from Obama to Trump. How reasonable is it to believe that CFPB career managers and staff would prioritize enforcement of alleged abuses aimed at constituencies conservatives have sympathy for? Opponents can argue that embracing the power of the CFPB could merely result in conservatives feeding a beast that turns on them.

Finally, there is the argument it is unnecessary. The CFPB does not have exclusive authority over this question. The Federal Trade Commission retains its general authority under the Federal Trade Commission Act to prohibit unfair and deceptive acts and practices. To the extent PayPal is engaged in unfair practices the FTC could intervene. The FTC has a multi-member structure and is subject to congressional appropriations, so it lacks at least some of the features of the CFPB considered constitutionally problematic, though there have been recent challenges. The FTC has also, at least for a time, been viewed as less suspect and more conscientious in its use of power than the CFPB. Whether that attitude will persist in the future remains to be seen of course, but it is possible that the FTC is structurally and temperamentally less fraught than the CFPB.

There are also the states, where much of the backlash against “woke capitalism” has arisen. As discussed in the next article, states enjoy significant power to regulate PayPal and firms like it. In many states where conservatives already have the necessary political power to act, the question is how, or even if, it should be used. That is the topic of the next article.

Conclusion

To reiterate, I’m not making a definite claim as to whether PayPal’s policies violate the law or whether a CFPB that was so inclined could or should penalize PayPal. Rather, given the increasing skepticism among conservatives towards what they see as weaponized financial services providers, including but not limited to PayPal, it wouldn’t surprise me if the next Republican administration would be tempted to have the CFPB take a much more active role on such issues. Though whether that would be a good idea is a far more challenging question.