Wednesday, February 24, 2021
Former contracts prof and presidential candidate (note the order), Sen. Elizabeth Warren slammed Robinhood in a statement released February 17th for hiding its forced arbitration clause “behind dozens of pages of legalese.” The statement was in response to the trading app’s response to an earlier letter where Sen. Warren questioned the reason for abruptly halting trading of GameStop shares. In that letter, dated February 2, Sen. Warren raised concerns about the relationship that Robinhood had to “large hedge funds and other financial institutions” and questioned whether it was treating its investors "honestly and fairly."
As I noted in an earlier post, despite claiming to “democratize finance,” Robinhood’s fine print looks just like that of large brokerage and banking firms. Given the lawsuits that have been filed against the company, Sen. Warren is particularly concerned about the forced arbitration clauses. There are at least thirty class-action lawsuits that have been filed against Robinhood.
Interestingly, just last week, a California federal judge refused to dismiss a proposed class action alleging that Robinhood’s repeated service outages harmed investors. The litigation was filed last year before the Game Stop excitement. I’m not sure why the case didn't get shunted into arbitration, but did notice that Robinhood’s current Customer Agreement was updated December 30, 2020. Did the prior agreement not contain an arbitration clause? Robinhood doesn’t seem to post its prior agreements on its website so without doing more digging, I don’t know…
As noted in a previous post, in addition to forced arbitration, other clauses buried in the fine print will make it tough for plaintiffs. Of particular relevance, Paragraph 16 – Restrictions on Trading – on page 10 of its Customer Agreement, states that Robinhood “may, in its discretion, prohibit or restrict the trading of securities…in any of My Accounts.” Certainly, this provision is subject to the duty of good faith. Yet, even if, for the sake of argument, it did breach its duty of good faith (by halting trading to protect its hedge fund friends), there is an extensive limitation of liability clause that protects Robinhood from, well, pretty much anything. A court might find that this broad limitation of liability clause hidden in the fine print is unconscionable or against public policy but that would only be if the case actually made it before a court, which might be unlikely if the forced arbitration clause is upheld.