PayPal Pays a Price

It was the online payment service that could. It took on eBay (Nasdaq: EBAY) at its own game and won. It launched a successful IPO, only to be bought out by eBay a year later. It has some 45 million accounts around the world. And it was a Motley Fool Stock Advisor pick.

Yet it's not too often you can take on plaintiff's attorneys and win.

PayPal, the online payment service that is now a part of eBay, recently announced the settlement of a class action lawsuit filed against it. On Friday, the company sent out emails to users of the service (I got mine!) detailing how you could line up at the trough and get a piece of the $9.25 million fund the lawyers have created. Oh yeah, the lawyers. Make that $5.85 million since the lawyers -- Jacoby & Meyers -- will take their customary one-third cut, or $3.4 million, plus expenses (actually, it's 37% of the pie).

Throughout the email, PayPal adamantly denies it did anything wrong. The lawsuit charged that PayPal abused customers by freezing accounts if it thought that fraud played a part in the transaction. The result was that customers could not accept or make payments through the service or withdraw money until PayPal cleared the transaction, a process that could take days or even weeks sometimes. At the time, which was pre-IPO, the company noted it had incurred "substantial losses" because of fraud, about $9.7 million. Its actions were part of its effort to stem those losses, though it has since changed its policies.

Lawsuits and IPOs seem to go hand in hand these days. Google was slapped with a trademark infringement lawsuit recently just as it prepares to launch its IPO, and Barnes & Noble (NYSE: BKS) had filed one against Amazon.com (Nasdaq: AMZN) prior to its public debut, questioning whether the latter was truly "the world's biggest bookstore." Overture, now owned by Yahoo! (Nasdaq: YHOO), also hit Google -- and FindWhat.com (Nasdaq: FWHT) -- with a lawsuit over ad placements for search engines.

Lawsuits are filed for many reasons -- sometimes valid ones, sometimes for apparently frivolous ones. Mostly it's just easier (and cheaper) to settle, and the plaintiff's attorneys know this. The only ones "winning" here are the lawyers.

To cash in on the PayPal lawsuit (and not be a lawyer), you have to file one of two forms. The first is for customers who have previously gone through PayPal's dispute resolution process, while the second is for those who haven't had a problem with the service but want to take money from the company anyway. This latter group will divvy up $1 million, with the amount received depending upon how many "aggrieved" people file claims.

Somehow, I think I'll pass on my check for $0.29.

PayPal was an early Motley Fool Stock Advisor recommendation. Now, it sits among David Gardner's companies as eBay, following eBay's purchase of PayPal. Amazon.com is also one of David's picks. To learn more, subscribe today for six months, risk-free.

Fool contributor Rich Duprey has an account with PayPal. He does not own any of the stocks mentioned in this article.