Arbitration Clause in the App Bars Individual Suits in Court
The investment app Robinhood is facing accusations of market manipulation by aggrieved traders, and despite the app’s fine print, the claims could manage to go before a judge and jury.
On the morning of January 28, 2021, Robinhood’s 13 million users logged on to find new restrictions on trades of certain stocks including GameStop Corp. (GME), and AMC Entertainment Holdings Inc. (AMC). In a statement posted on their website, Robinhood claimed the restrictions were to help its customers navigate market volatility.
The announcement of these restrictions was poorly received to say the least. Data from Robinhood shows that 56% of its users hold shares of GME and over 60% hold AMC, thanks in part to an ongoing social media-fueled buying frenzy. What began as a joke on a Reddit forum has morphed into a tug-of-war between an army of amateur retail investors and wealthy hedge funds that stand to lose billions as GME, AMC, and other stocks continue to skyrocket in value. In the eyes of social media, Robinhood restricting trade was an act of class warfare.
Immediately after the restriction was put in place, rumblings of class action proceedings against Robinhood began on social media. A complaint has since been filed in a New York district court, charging the app with “manipulating the open market,” and accusing it of breach of contract, breach of the implied covenant of good faith and fair dealing, negligence, and breach of fiduciary duty. Additionally, a class action law firm has announced it will be investigating claims on behalf of Robinhood users.
As negative sentiment against Robinhood continues to grow, with lawmakers from both sides of aisle calling for scrutiny into the restrictions, it’s possible that millions of infuriated investors will be able to see relief.
Buried in Robinhood’s 33-page customer contract is a forced arbitration clause that makes users sign away their legal right to sue if they want to use the app. Firms like Robinhood and countless others insert forced arbitration clauses in the fine print of their consumer contracts to kick lawsuits out of open court and into secretive, closed-door arbitration. In most cases, arbitration is rigged against consumers and allows corporations to evade accountability for any wrongdoing.
Notably, Robinhood users are still able to band together in a class action against the investment app. This is good news for those affected by the trade restrictions. Class actions allow harmed consumers to band together to seek justice as a group when they have suffered similar harm. As a group, consumers are much more powerful than they are as individuals.
Large corporations have repeatedly used forced arbitration and class action bans to wipe out claims against them, banking on the fact that individual consumers are unlikely to go to arbitration over relatively small harms because the process is too costly. In the case of Robinhood, a class action offers a way for users to seek redress, but unfortunately the arbitration clause still remains a barrier for users with individual claims.
Congress has the power to ensure individuals can have their claims heard by passing legislation to ban forced arbitration. In 2019, the U.S. House of Representatives voted to pass the Forced Arbitration Injustice Repeal Act which would prohibit forced arbitration and class action bans for consumer and worker claims. The new Congress should reopen the courthouse doors to ordinary people by passing this law.
