ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Wednesday, February 24, 2021

More on Robinhood's Customer Agreement

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.

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I enjoy digging, so I dusted off my shovel and unearthed some nuggets. They consist of the following iterations of the agreement:

As you can see, there are agreements with various dates and versions floating around. But AFAICT, going back to at least around Summer 2016, they all contained some kind of arbitration clause.

I haven't compared the details of the different clauses or attempted to analyze how they might apply in this case. But I've looked at the docket (see link below) and don't see where RH has sought to raise the arbitration issue.

Finally, while I'm a big fan of Sen. Warren, and certainly no RH booster, that part of her recent statement is a bit misleading. Technically it's true that the arbitration clause *itself* can only be found by going to page 29 of the current version of the agreement—so that's easily 2 dozen pages and a few to spare. But—as RH even noted in its response—the very first page features a prominent notice informing the customer of the clause's existence and identifying its precise location. So I'm not really sure the clause is properly described as "hidden".

Posted by: hardreaders | Feb 24, 2021 8:23:04 AM

Thank you hardreaders, for doing the hard work of finding these older versions. This is interesting and makes me think that Robinhood's lawyers maybe didn't raise the issue? (And if not, I wonder why not). I think regarding the "hidden" statement - it is hidden in that it is in the Customer Agreement which I doubt any of its customers actually read because you have to dig around for it. It wasn't plastered on the front page of its website like it has plastered the words "Investing for everyone" and it's much harder to find than the bold "Sign up" button.

Posted by: Nancy | Feb 24, 2021 12:02:03 PM

Happy to do it!

Regarding the arbitration issue, I agree it does seem like refraining from raising it was deliberate. Or maybe it's more accurate to say RH was precluded from doing so. That's because of this text I found in the arbitration clause (of the currently operative agreement):

"No person shall ... seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; or who is a member of a putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: [specified events occur]."

That language seems like it would prevent RH from seeking to compel arbitration in the present circumstances. I was curious why RH would include such a thing, and it turns out that FINRA actually requires it:

Given the language above—and the recent actual example where RH has been seemingly unable to arbitrate—I'm a little puzzled as to why Sen. Warren is complaining. While RH's underlying conduct certainly appears to be reprehensible, it doesn't seem like arbitration will be any obstacle to customers obtaining redress—when proceeding as a class at least, but that's usually how it happens. Maybe RH doesn't go even one iota beyond what FINRA mandates, but in that case Sen. Warren's grievance should be with FINRA's requirements, not RH's adherence to them. And again, the current standard appears to be fairly generous.

I might be missing something though. Also, while Sen. Warren was a law prof, now she's a politician, so I can understand if she has a different perspective. It's possible she's just latching on to the commotion around GameStop to push her existing proposals for cracking down on arbitration. That's something I fully support by the way.

PS: I'm old enough that I actually have fond youthful memories of making purchases there when it was still called Babbage's!

Posted by: hardreaders | Feb 24, 2021 7:49:06 PM

Interesting! I did not read the clause as carefully as you did and was not aware of the FINRA requirement. All very informative - thanks, hardreaders!

Posted by: Nancy | Feb 26, 2021 4:52:10 PM

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