PayPal fails to compel arbitration in Honey affiliate commission lawsuit

PayPal suffered a legal setback on November 7, 2025, when the United States District Court for the Northern District of California denied the company's motion to compel arbitration in a class action lawsuit filed by content creators over alleged affiliate commission theft through the Honey browser extension.

According to the court order, Judge Beth Labson Freeman ruled that PayPal's user agreements with individual account holders do not extend to claims involving the company's broader business practices with the Honey extension. The decision allows the lawsuit filed by Wendover Productions LLC and Businessing LLC to proceed in federal court rather than private arbitration.

PayPal attempted to force the dispute into arbitration by arguing that plaintiffs who owned PayPal or Venmo accounts had agreed to binding arbitration clauses when they created those accounts. The company asserted that its user agreement language—covering "your use of your PayPal account and the PayPal services"—applied broadly to any dispute involving PayPal services, including Honey's affiliate marketing practices.

The court rejected this interpretation. "PayPal's reading strains credulity and is simply at odds with how possessive pronouns in the English language function," Judge Freeman wrote in the six-page order. The court explained that PayPal's argument would require the phrase "your use of" to apply only to "PayPal account" but not to "PayPal services," creating an interpretation inconsistent with basic English grammar.

Judge Freeman emphasized that the user agreements explicitly govern individual users' personal use of their accounts and services, not broader commercial disputes. The court referenced virtually every provision in the agreements as expressly focused on regulating how consumers use PayPal to make purchases and manage finances, from account statements to rewards programs to payment holds.

The decision relied heavily on the Ninth Circuit's 2023 ruling in Johnson v. Walmart Inc., where the appellate court found that arbitration agreements limited to online platform usage did not extend to separate in-store service disputes. PayPal attempted to distinguish Johnson by arguing that case involved separate independent contracts, whereas PayPal claimed a single unified agreement with plaintiffs.

Judge Freeman dismissed this distinction. The court noted that Johnson addressed the threshold question of whether parties formed an agreement to arbitrate specific claims, not the scope of existing arbitration agreements. "Because [Plaintiffs] and [Defendant] never formed an agreement to arbitrate [their] claims via the [User Agreements]," the court concluded, those agreements cannot compel arbitration.

The underlying lawsuit, filed December 29, 2024, alleges that Honey systematically replaced content creators' affiliate tracking cookies with PayPal's own affiliate identifiers during online checkout processes. This practice allegedly diverted commissions that would have otherwise compensated creators for driving traffic and sales to merchant websites.

According to the complaint, Wendover Productions operates multiple YouTube channels with millions of subscribers and regularly partners with businesses to promote products through affiliate links. When viewers click these links and make purchases, merchants track the sales and compensate the creators. The lawsuit claims Honey disrupted this tracking by inserting itself as the final touchpoint before purchase, exploiting the affiliate marketing industry's "last click attribution" model.

The complaint describes three mechanisms through which Honey allegedly diverts commissions: direct replacement of affiliate tracking cookies, incentivized diversion through the "Honey Gold" rewards program, and commission capture through interface elements. The lawsuit seeks class action status for all content creators affected by these practices from December 29, 2022, through class certification, with damages exceeding $5 million.

PayPal acquired Honey for $4 billion in 2020. The lawsuit emerged following a December 22, 2024 investigation by tech journalist MegaLag that analyzed hundreds of documents and communications between Honey and merchants. The investigation documented that Honey sponsored approximately 5,000 videos across 1,000 YouTube channels, accumulating 7.8 billion views.

The arbitration ruling represents a procedural victory for content creators but does not address the merits of their substantive claims. PayPal had also filed a separate motion to dismiss the complaint, which remains pending before the court. The denial of arbitration means discovery proceedings can advance, potentially providing plaintiffs access to internal PayPal documents and data about Honey's affiliate practices.

The decision carries implications for technology companies seeking to use consumer-facing terms of service to avoid litigation over separate business practices. The court's emphasis on plain language interpretation and the limited scope of user agreements may restrict companies' ability to broadly apply arbitration clauses beyond their original consumer context.

For affiliate marketers and content creators, the ruling allows the case to proceed in federal court where class action mechanisms enable collective litigation. Individual arbitration proceedings would likely prove cost-prohibitive for most content creators claiming relatively modest commission losses, potentially leaving alleged systematic practices unchallenged.

The lawsuit names plaintiffs including Wendover Productions, which operates channels focused on logistics and geography content, and Businessing LLC, which manages fitness and creative content channels. Both plaintiffs regularly use affiliate marketing agreements with technology companies, educational platforms, and consumer service providers to monetize their content.

Judge Freeman's order noted that PayPal's user agreements uniformly focus on regulating individual account usage rather than the company's broader service operations. The court examined provisions governing account statements, rewards programs, payment holds, and other features, finding each explicitly directed toward individual consumer transactions rather than merchant relationships or affiliate networks.

The November 7 ruling allows the litigation to proceed through normal civil discovery, where plaintiffs can request documents, data, and testimony regarding Honey's affiliate practices. This access to internal information could prove critical for establishing whether PayPal knowingly designed Honey to divert affiliate commissions or merely failed to prevent such diversions.

PayPal's attempted arbitration strategy followed similar approaches by technology companies facing consumer class actions. Arbitration clauses typically require individual dispute resolution rather than class proceedings, significantly reducing companies' litigation exposure. The denial of this motion requires PayPal to defend the case in federal court under class action procedures.

The court's rejection of PayPal's grammatical argument—that possessive pronouns modify only the nearest noun—demonstrates judicial skepticism toward strained interpretations of consumer agreements. Judge Freeman's comparison to the phrase "your pen and papers" illustrated how PayPal's reading violated ordinary language conventions.

Chrome Web Store data shows Honey has declined from over 20 million users before the December 2024 investigation to 14 million users as of July 2025. The extension faces ongoing scrutiny from content creators, regulators, and consumers following revelations about its affiliate practices and coupon code limitations.

The lawsuit seeks injunctive relief prohibiting Honey from replacing affiliate cookies alongside monetary damages for affected content creators. The complaint alleges intentional interference with contractual relations, intentional interference with prospective economic relations, and requests injunctive relief to prevent ongoing practices.

Timeline

• April 18, 2025: PayPal announces Mark Grether as SVP of PayPal Ads to build new advertising platform
• April 29, 2025: PayPal launches Offsite Ads using transaction data for web advertising
• June 16, 2025: PayPal debuts Storefront Ads enabling direct purchases in display advertising
• July 2025: Honey drops to 14 million Chrome users following affiliate commission controversy
• September 10, 2025: PayPal Ads partners with PubMatic for programmatic advertising delivery
• December 22, 2024: MegaLag investigation reveals Honey's affiliate practices
• December 29, 2024: Content creators file class action lawsuit against PayPal over Honey
• August 11, 2025: PayPal files motion to compel arbitration
• November 7, 2025: Federal court denies PayPal's arbitration motion

Summary

Who: United States District Judge Beth Labson Freeman ruled on a motion filed by PayPal Inc. in a class action lawsuit brought by content creators Wendover Productions LLC and Businessing LLC.

What: The court denied PayPal's motion to compel arbitration, rejecting the company's argument that user agreements for PayPal and Venmo accounts required plaintiffs to arbitrate claims about Honey browser extension's alleged affiliate commission diversion practices.

When: Judge Freeman issued the order on November 7, 2025, approximately ten months after content creators filed the initial lawsuit on December 29, 2024, and roughly three months after PayPal filed its arbitration motion on August 11, 2025.

Where: The ruling came from the United States District Court for the Northern District of California, San Jose Division, where PayPal maintains its principal place of business at 2211 North First Street, San Jose, California.

Why: The court determined that PayPal's user agreements explicitly govern individual users' personal account usage and cannot extend to broader business disputes about Honey's affiliate marketing practices, following the precedent established in Johnson v. Walmart Inc. regarding the limited scope of arbitration agreements.