Can Robinhood’s Terms of Service Stop A Class Action Lawsuit?
Earlier this year, a number of Wall Street hedge funds took out short positions on adrift retail stocks like GameStop. Enterprising reddit users on a subreddit called r/WallStreetBets discovered the short positioned through required public disclosures, and then banded together to drive the hedge funds into underwater positions by buying up the stock’s price. This worked, perhaps too well, because then companies like Robinhood halted trading on Gamestop and other stocks. And as a result, a class of consumers brought a lawsuit against Robinhood. But will Robinhood’s Terms of Service be enough to stop a class action lawsuit?
At one point, Gamestop was trading at around a whopping $469 per share, up from the $17 ticker price from the start of the year. This despite no real positive news about the company’s fundamentals to drive it. (Watch this full explainer video from Vox.)
Apps like Robinhood have frozen Gamestop, Blackberry, AMC Theaters, and a handful of other stocks from further buys. Users can still hold & sell the stock, but they’re unable to buy more, temporarily locking-up the online monolith attempting to drive up the stock’s value even further. It means the run of fun is over for many, and with many individuals that bought into the GameStop craze over the first 24-48 hours could hold massive losses as the stock falls back to earth.
That means, as you can imagine, angry people asking a common question: Was this even legal? Do Robinhood’s Terms of Service even allow for this?
Robinhood’s Terms of Service don’t reserve a right to freeze trading, but their customer agreement does
Any time a tech company or app comes under scrutiny, the default reaction is to look to the Terms of Service to note if an action was allowable. But, keep in mind Robinhood is effectively acting as a tech-enabled broker. The Services themselves often just refer to the app. Here, with a stock being frozen, we need to look to the actual Customer Agreement between you and Robinhood Financial & Robinhood Securities.
This agreement has most of the language you’d typically expect in one of these agreements — typical warranties and liability limitations that limit Robinhood’s liability, as well as language and disclaimers on market volatility. But we’ll point to Section 16 of the customer agreement for the provision that likely allows Robinhood to freeze trading:
“I understand that Robinhood may, in its discretion, prohibit or restrict the trading of securities, or the substitution of securities, in any of My Accounts. I understand that Robinhood may execute all orders by Me on any exchange or market, unless I specifically instruct Robinhood to the contrary. In the event of a breach or default by Me under this Agreement, Robinhood shall have all rights and remedies available to a secured creditor under all applicable laws and in addition to the rights and remedies provided herein. I understand that Robinhood may at any time, at its sole discretion and without prior notice to Me: (i) prohibit or restrict My access to the use of the App or the Website or related services and My ability to trade, (ii) refuse to accept any of My transactions, (iii) refuse to execute any of My transactions, or (iv) terminate My Account”
Okay, that’s pretty clear. Robinhood’s customer agreement – which was updated at the beginning of the year – provides them the ability to basically not accept any trade request from you, at their sole discretion. This is actually relatively common language for any sort of brokerage service you might be using — and why services like TD Ameritrade took the same action as Robinhood.
Still, in light of Robinhood’s decision to restrict GameStop trading on the platform, a class of consumers filed a lawsuit against the app. If you’re curious about the class action lawsuit, how Robinhood may respond, and what will happen with all of that, we’ve broken it down for you below.
Class action lawsuit against Robinhood
The 9 page complaint filed by Brendon Nelson on behalf of a class of consumers alleges that Robinhood intentionally restricted trading of Gamestop stock to deprive investors of the ability to invest and manipulate the open-market. At the time of this writing, Robinhood had not yet filed any sort of response, but cases like this usually follow a similar path.
Companies like Robinhood attempt to shield themselves from liability and/or dictate how any disputes against the company will be handled in their user terms. Most companies require users to agree to the terms during the sign-up process, or upon logging into the app via clickwrap or sign-in-wrap agreements.
Breaking down Robinhood’s Terms of Service
Simply put, Robinhood’s terms state that
- Robinhood may restrict trading at their discretion, and
- Any dispute against the company must be resolved in arbitration, rather than a court of law.
If the Customer Agreement is enforceable, Robinhood should be able to get the lawsuit dismissed because users consented to Robinhood restricting trades, including GME stock, or the lawsuit should at least be dismissed and sent to arbitration.
So the big question: Is Robinhood’s Customer Agreement enforceable?
Screen design of Robinhood's Customer Agreement
When evaluating the enforceability of online terms, like Robinhood’s Customer Agreement, courts routinely look at the design of the screen to decide if users were required to explicitly agree to the terms or were otherwise reasonably put on notice of the terms.
Robinhood’s screen includes a sign-in-wrap agreement, notifying the user that “BY TAPPING OR CLICKING ON THE ‘SUBMIT APPLICATION’ OR ‘ACCEPT’ BUTTON BELOW, I: (1) ACKNOWLEDGE THAT I HAVE READ THIS INSTANT AGREEMENT AND ALL INCORPORATED DISCLOSURES, TERMS, AND AGREEMENTS CAREFULLY…” One of the “incorporated disclosures” is the Customer Agreement, containing the aforementioned provisions concerning arbitration and consent to restrict trading. Below that disclaimer, Robinhood includes another disclaimer, “By tapping the ‘Submit Application’ button below, I agree to this Application Agreement.”
There are several issues with this screen that may hurt Robinhood’s ability to enforce their terms in court.
The light gray font color does not contrast well against a white background: The only feature of the screen that really stands out, drawing the user’s attention, is the “Submit Application” button.
The hyperlinks to the terms do not resemble traditional hyperlinks – blue and underlined: Though they are colored differently than the rest of the text on the screen.
Users are not required to expressly manifest assent to the terms by clicking a separate button or checkbox. Instead they are presented with two confusingly similar disclaimers alerting them that clicking the “Submit Application” button also indicates the user’s acceptance to either the Application Agreement, or a number of terms and conditions referenced via hyperlink.
The name of the Customer Agreement is inconsistent. The agreement is referred to as the RHF-RHS Customer Account Agreement on the screen with the “Submit Application” button, but named the Robinhood Financial LLC & Robinhood Securities, LLC Customer Agreement within the document itself. Seems nitpicky, but companies like Unikrn have lost on similar grounds.
Will the class Action against Robinhood succeed?
As a result, whether Robinhood will succeed at enforcing their terms in court is up in the air. Many courts have declined to enforce terms presented to users on similar screens, and many have enforced terms in similar cases.
It’s worth noting that the screenshot above depicts the screen users would see if they created an account today, and the provisions on arbitration and consent to restrict trading appear in the latest version of Robinhood’s terms.
Robinhood will need to be able to show what the screen looked like to users who signed up when the plaintiffs signed up. If the design of the screen hasn’t changed over the years, they will have to provide evidence of that. They will also need to show the exact versions of the terms plaintiffs agreed to, and whether those same provisions were in earlier versions. If the provisions at issue were not originally in the terms, then Robinhood will have to bring evidence showing that plaintiffs agreed to the modified terms later on.
Only time will tell how this case will play out!