TOS mean as much as the lawyer you have. PayPal can't get you to agree to things that are illegal, and improperly designating counterfeits would/should qualify. Especially when PayPal is a defacto monopoly.
tl;dr lawyer up.
tl;dr lawyer up.
They had a professional appraisal on the violin that said it was authentic. Paypal has its TOS saying they can call anything counterfeit and their TOS says they can't be held liable for it.
Sorry it's a judges job to say if you can or can't be held liable for your business terms and practices.
(Americans also make typos which look odd to Britons, for example "mute point".)