Paypal sent me a survey, asking for my feedback on this matter. One of the questions was along the lines of "What can Paypal do better?"
Below is the response I entered for that question.
Send the merchant a letter stating that Paypal is contesting the transaction. Don't hide behind my name, lie and claim I was the one contesting the bill.
Add a button to the site letting me cancel an investigation you morons initiated. The last time my credit card company suspected my card had been stolen, they put a hold on the card and cleared it up after a short phone call. They dind't make me wade through a useless web site for an hour, get sick of the USELESS interface and then use Google to hunt up a customer service number. Even then I had to spend 20 minutes on the phone to resolve Paypal's screw up.
The ONLY reason I didn't just mail the merchant a check was because of the customer service rep I spoke to. That person actually resolved the issue that baffled your web site. I appear to have been lucky and gotten the only competent Paypal employee.
In the future, I won't even use Paypal for ebay transactions. I'm going back to checks, or better yet, switch to an auction site that lets me use Google Checkout.