Robinhood’s decision Thursday to restrict trading on volatile, surging stocks including GameStop GME, +67.87% touched off a wave of fury from people using the popular trading app, as well several class-action lawsuits where users alleged the platform wrongly stood in their way.
But before these investors can have their day in court, Robinhood’s arbitration clause is potentially going to be standing in the way — just like the arbitration clauses that limit the legal avenues for all kinds of aggrieved consumers, from cell phone users to credit-card holders. Consumers often agree to these clauses after scrolling through a terms of service agreement, but that one quick mouse click or tap on your phone can have long-term implications.
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Arbitration is a controversial form of conflict resolution that happens outside of court, without publicly filed documents and without a jury of one’s peers. Some consumer advocates say the process favors business and management, but business advocates say it’s fair and efficient.
Back in 2018, there were more than 800 million consumer arbitration agreements in force, according to an analysis from one researcher.
Robinhood’s publicly-posted customer agreement has a full clause devoted to arbitration.
“This Agreement contains a pre-dispute arbitration clause,” the agreement says. “By signing an arbitration agreement, the parties agree as follows: (1) All parties to this Agreement are giving up the right to sue each other in court, including the right to a trial by jury, except as provided by the rules of the arbitration forum in which a claim is filed.”
See also: Lawsuits see conspiracy in Robinhood’s GameStop moves, but experts doubt narrative
When it comes to brokerage firms, Robinhood is far from alone in including such a clause, according to Samuel Edwards, a partner at Houston-based Shepherd Smith Edwards & Kantas, where he represents investors.
“I’ve never seen a firm that didn’t have one,” said Edwards, a past president of the Public Investors Advocate Bar Association.
Class-action lawsuits are a way to sidestep arbitration clauses and bring a large case into court, he said. But the plaintiffs’ lawyers need to convince judges to keep the cases in court, instead of going to an arbitrator’s panel, Edwards added.
“Class actions are incredibly difficult. Class-action laws have gotten to where it’s incredibly difficult to maintain a class action,” he noted.
A Robinhood spokeswoman declined to comment. The platform said it would allow limited purchases of the volatile stock, starting in Friday’s trading day. The volatility and wild swings for GameStop shares, AMC Entertainment AMC, +53.65% and other stocks is linked to support for the shorted-stocks in Reddit’s WallStreetBets forum.
By mid-day trading, GameStop shares were up more than 60% day-over-day. Year to date, shares in the video game retailer are up almost 1,575%.
But the damage was done, according to a class-action case filed Thursday in Manhattan federal court. “Robinhood has completely blocked retailer investors from purchasing GME for no legitimate reason, thereby depriving retailer investors from the benefits of Robinhood’s services,” the complaint said. A lawyer filing the case did not respond to a request for comment.
On Thursday afternoon, Sen. Elizabeth Warren, a Democrat from Massachusetts, took a swipe at the arbitration process that’s cooked into trading platforms that can seem like fun and games until the music stops.
She told CNBC it was “long past time” for regulators to step in and make sure retail investors didn’t end up getting hurt in the stock market mania. (On Friday, the Securities and Exchange Commission pledged to punish “abusive or manipulative trading activity” found to be artificially influencing share prices.)
With arbitration clauses intact, “if it turns out that we really did cheat you, it’ll never be made public, there’ll be very little that you can do about it. That doesn’t create a healthy market,” Warren told CNBC.
Edwards has a different view of the arbitration process and what it means for investors.
“I think arbitration works for most customer cases, not for all. …“It’s a trade off,” he said. On the one hand, arbitration cases don’t set precedent, so one decision and award can’t inform another, he noted. On the other side, the court process can be long and expensive, he said.
FINRA, a nonprofit organization overseen by the Securities and Exchange Commission, says it runs the country’s largest securities dispute resolution forum.
“I’m personally comfortable with FINRA arbitrators,” Edwards said.
Robinhood users might have to take another point into account as they weigh a case.
Edwards’ firm has received “dozens” of calls from angry Robinhood users since Thursday. These callers said they had lost or missed out on sums varying from $5,000 to $20,000.
It might not make financial sense for Edwards to take these one-off cases, because it wouldn’t make financial sense for the firm or the client. “Some cases are not economically viable. We would love to help everyone, but the reality is for some people with smaller losses, it could cost more to bring the case and prosecute it than you could receive out of the case.”
