Contact Paypal again to see if you can still resolve this before seeking further action. It would be wise to speak to them over the phone if possible.

Make sure they understand that you did not, in fact, receive the goods you ordered. You ordered a Kingston 8gb memory card, and what you received was a fake knock off. You would gladly return the defective product (at seller's expense) but you have been unable to reach them to resolve the situation. Since you made the purchase through Paypal, you are disputing the merchandise you were sent and would like a full refund now.

If they cannot help you any further, get the name, id number, and some written reply (email or letter) stating your case and the resolution they reached. If they ask why, you can inform them it is for your records and so you can forward it to your attorney for review.

I know I would be interested in hearing Paypal's reasons for not only ignoring a valid complaint about a business partner using their services to conduct fraudulent activities, but also ignore state and federal laws against this type of blind acceptance.