The ruling by U.S. District Judge Jeremy Fogel of San Jose allows customers to take their grievances to a jury rather than an arbitration panel. Fogel also refused to dismiss a lawsuit that seeks class-action status on behalf of thousands of PayPal customers nationwide.

The company, based in Mountain View, provides accounts for its customers to send and receive payments over the Internet. It has expanded rapidly since the start of 2001 and says it now has more than 17 million customers, with 28,000 new accounts added each day. EBay, the online auctioneer, said in July that it was acquiring PayPal for $1.5 billion in stock, a deal expected to close by the end of this year.

Customer complaints have also increased. Plaintiffs in the proposed class- action suit say PayPal has a backlog of more than 100,000 unanswered complaints. A common allegation is that the company brushes off or stalls customer grievances for months and meanwhile freezes the customer's account and pockets the interest.

Fogel's ruling, issued Aug. 30, struck down PayPal's requirement that customers submit disputes to private, binding arbitration in Santa Clara County, rather than suing in court. It is the latest of several business arbitration policies to be overturned since the state Supreme Court set standards in 2000 for determining when a company's rules were unfairly one- sided.

Fogel said PayPal reserved to itself the right to freeze a customer's account during a dispute; prohibited customers from combining their claims into a single arbitration case; and required customers to pay a share of arbitration fees, which would commonly exceed the amount of their claims.

"By allowing for prohibitive arbitration fees and precluding joinder of claims (which would make each individual customer's participation in arbitration more economical), PayPal appears to be attempting to insulate itself contractually from any meaningful challenge to its alleged practices," the judge wrote.

He said it was equally unfair to require customers from around the nation, whose average PayPal transaction was $55, to travel to Santa Clara County for arbitration. It wasn't clear that the customers could get any different terms from PayPal's competitors, Fogel said.

PayPal's lawyer said the company is considering an appeal.

E-mail Bob Egelko at begelko@sfchronicle.com.

This article appeared on page B - 2 of the San Francisco Chronicle