Online dating services have been around for quite a while, and through them, members of just about any social subgroup can get help looking for that perfect match. But an online dating service may be promoting something more than just a social introduction.

Sexual Services in the Online World

Adult services such as prostitution have followed their customers online, closely followed by law enforcement authorities. In one case, authorities sought to charge the Craigslist site for promotion of prostitution, and sustained pressure from state attorneys general succeeded in getting the site to drop its adult services section. That kind of attention can be a concern not only for a dating site itself, but also for other online services that provide support to such sites, such as hosting companies and payment services.

So it’s not surprising that service providers seek to protect themselves contractually from the potential legal and business consequences of being associated with purveyors of shady, unsavory, or downright illegal services. PayPal, the preeminent online payment service, addresses the issue in its User Agreement and Acceptable Use Policy (AUP). The AUP prohibits the use of the service for activities that “encourage, promote, facilitate or instruct others to engage in illegal activity” or for “certain sexually oriented materials or services.”

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PayPal’s AUP includes a line about getting pre-approval for dating sites

Just what falls into these prohibited categories can be the subject of dispute, however. When PayPal invoked these sections in terminating the account of former user Infostream Group Inc., the company brought an action against PayPal alleging antitrust violations, breach of contract, fraud and unfair business practices claims.

Dating Site or Pay-for-Play?

Infostream is the operator of two sites that “cater to adults looking for a non-traditional dating experience.” For a fee, SeekingArrangement.com facilitates “mutually beneficial relationships” between members who refer to themselves as either a “sugar daddy,” “sugar mommy” or “sugar baby.” WhatsYourPrice.com charges a fee to allow members to “buy and sell the opportunity of going out on a first date.”

When PayPay moved to dismiss Infostream’s complaint, it was quick to point to media sources that have associated the Infostream sites with purveying sexual services (see PayPal memorandum in support of motion to dismiss, n. 2). One of the cited articles included alleged accounts of sex-for-pay encounters arranged through the SeekingArrangement.com site by graduates seeking to pay off student loans.

Is PayPal Being Unfair?

Infostream responded with the allegation that PayPal was invoking its AUP unfairly, because the company continues to provide services to competitor sites that are similar to its own, such as AshleyMadison.com, which urges users to “have an affair,” and ArrangementFinders.com, which promotes “mutually beneficial arrangements” between men and women.

In Infostream Group, Inc. v. Paypal, Inc. (N.D. Cal. Aug. 28, 2012), United States District Judge Susan Illston dismissed some, but not all, of Infostream’s legal claims. Sherman Act antitrust claims were dismissed (but with leave to file an amended complaint) because Infostream’s allegations that PayPal has an ownership interest in sites that compete with Infostream’s sites were deemed speculative. Claims of common law fraud were dismissed (also with leave to amend), because Infostream did not adequately allege that it had detrimentally relied upon PayPal’s representations to it during the parties’ negotiations prior to the account termination.

But the court allowed Infostream’s breach of contract, breached of the implied covenant of good and fair dealing, and California state unfair competition law claims to stand, at least at this early stage of the litigation. The court concluded that the PayPal terms could be found to be ambiguous, because the AUP referred to “certain sexually oriented materials or services,” and, therefore, did not prohibit all such services.

As to PayPal’s argument that it had reserved the right to terminate any account “at its sole discretion,” and “for any reason at any time,” the court found that the contract included, by implication, an implied covenant of good faith and fair dealing. Infostream had adequately alleged that obligation had been breached, the court said, if it could show that PayPal terminated the account in order to benefit Infostream’s competitors. Similarly, the court found that the allegations that PayPal used unpublished standards “to pick winners and losers in the market” adequately alleged a claim under the California unfair competition law.

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A promo on SeekingArrangement.com

Picking Your Friends – And Dumping Them

Whether a company — online or bricks-and-mortar — can choose with whom it will deal can be tricky business. In general, a company is free to pick its business partners. But as this case demonstrates, a company may be accused of antitrust violations if it is such a major player in the marketplace that it has the potential to use its monopoly power to injure competition. And, once a company has entered into an agreement with a customer, its ability to withdraw from that relationship may be challenged under contract principles and unfair competition laws.

Similar issues arose in 2010, when various providers terminated their business relationships with the WikiLeaks whistleblower site when it published secret U.S. documents. WikiLeaks threatened suit against PayPal, among others, which pointed to its Acceptable Use Policy when it refused to continue processing donations to the site. Although PayPal was not actually sued, WikiLeaks was recently successful in a lawsuit brought against a payment processor in Iceland.

First Base, Not Home Plate

The court’s ruling in favor of Infostream gets it one step on the way to making out a successful claim against PayPal. Whether it can successfully amend the dismissed claims remains to be seen. And it must back up its allegations with facts during the discovery stage, and survive a likely motion for summary judgment by PayPal, assuming that the parties do not “seek an arrangement” by settling the case.

Jeffrey D. Neuburger is a partner in the New York office of Proskauer Rose LLP, and co-chair of the Technology, Media and Communications Practice Group. His practice focuses on technology and media-related business transactions and counseling of clients in the utilization of new media. He is an adjunct professor at Fordham University School of Law teaching E-Commerce Law and the co-author of two books, “Doing Business on the Internet” and “Emerging Technologies and the Law.” He also co-writes the New Media & Technology Law Blog.

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