This story is going to need more detail because one of the biggest complaints merchants have is how PayPal will pretty much always side with the customer.
Agree here - That has always been one of the thorns in accepting PayPal on any decent scale. At least with chargebacks, you can fight them and win about 50% of the time with the right docs. PayPal barely entertains dialogue.
What happened is that I wanted to register a domain using www.mediaon.com, but that failed because someone else registered the same domain in the meantime using another company. When I asked for my money back because they failed to register the domain, they refused, saying that firstly it wasn't there fault (which is technically true) and secondly that I would be free to use the paid money to register another domain. That's in direct contradiction to their "money-back guarantee". Anyway, Paypal sided with them. It seemed to me that they exactly knew what to tell PayPal and PayPal does not seem to be very consumer-friendly when it comes to digital products (the policy for physical products differs).