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Robinhood is like hundreds of other companies with arbitration clauses in their customer contracts.
Last week, the stock market had its worst week since October, but if you had GameStop stock, you were feeling pretty good. It grew 400 percent, fueled by the Reddit page r/WallStreetBets, where members bought stocks of companies that appeared on the way down, inflating their prices and putting the hedge fund managers who had shorted the stock in a bad position.
Robinhood stopped the trading on some of these stocks last week while it raised enough capital to cover certain clearing requirements associated with the trades. But users saw the move as an effort to curb the gains made in stocks like GameStop and AMC, allowing hedge funds a way out of their positions. There were even allegations that Robinhood was closing out positions on behalf of its retail investors, essentially forcing them to sell their stock. On Monday, the company allowed trading to resume.
In the aftermath, angry Robinhood users brought a class action suit in Manhattan, arguing that the firm’s actions to limit trading were an unlawful effort to manipulate the market. There’s now a new Reddit forum, r/ClassActionRobinHood.
It’s difficult to decipher whether or not Robinhood was just meeting its requirements as a stock brokerage or actively harming its clients. But it may be difficult to sue Robinhood to figure that out. Included in every customer contract with Robinhood is an arbitration clause, which requires disputes to be settled outside of court, with arbitrators who are typically picked by the company and the users. (Since companies go to arbitration regularly, their arbitrators are experienced negotiators, whereas consumers may find it difficult to find someone who works in their interest.)
Usually, arbitration clauses prevent any kind of litigation, protecting the company. After all, a scorned Redditor might not be able to afford a lawyer to prosecute a case individually to win back the few hundred dollars he lost due to Robinhood’s alleged chicanery. The lawyer might cost more than the damages she could win. But Robinhood is also a member of the Financial Industry Regulatory Authority (FINRA), a self-regulatory body, and this fact may allow the class action suit to proceed. Deepak Gupta, a consumer protection attorney, explained that FINRA’s own rules allow for class action suits under certain circumstances, even when there is an arbitration clause such as Robinhood’s. Other attorneys weren’t sure the class action would be allowed; ultimately, it will be up to the judge in the case.
Yet regardless of that specific outcome, Robinhood is like hundreds of other companies with arbitration clauses in their customer contracts. Arbitration clauses are in all the fine print that consumers, and in some cases even employees, don’t bother to read. Even if they did, the clauses are so ubiquitous that they’re essentially inescapable if you want to use a cellphone, get cable TV service, obtain a bank account, trade stocks on an app, or do virtually anything else.
Over the last two decades, the Supreme Court has ruled in several cases to allow companies expansive use and application of arbitration clauses. This changed landscape has meant that consumer protection laws, labor laws, and more are virtually unenforceable. Even though Congress hasn’t changed the legislation, the Supreme Court has ruled in such a way that the laws don’t mean as much anymore.
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The backstory of all this is two decades of a corporate-friendly Supreme Court, and companies exploiting arbitration rulings to make legislation meant to protect consumers and employees unenforceable.
The Federal Arbitration Act (FAA) of 1925 was created for equal sides to settle a dispute outside of court. For example, two oil companies might appoint a panel of oil experts to determine some arcane leasing issue, avoiding expensive and drawn-out litigation. But with the rise of the forced arbitration clause, rather than equal parties battling it out, it became larger corporations forcing consumers or employees to wage battle on an uneven playing field. “Under the guise of interpreting a law from the 1920s, the Supreme Court has created almost a kind of corporate immunity regime,” said Gupta.
In one case, AT&T Mobility v. Concepcion (2010), the Supreme Court overruled California’s Ninth Circuit, arguing that the FAA preempts state laws that prohibit contracts from disallowing class-wide arbitration. Since Robinhood is based in California, the state’s law on arbitration would have definitively allowed the class action suit. But the Supreme Court preempted that California law. It went further, too, arguing that no state had the authority to write such a law. Gupta represented AT&T customers in the case, and he said Concepcion was a “watershed moment, because the Supreme Court said you can use arbitration cases to stop people from bringing class action cases.”
Over the last two decades, the Supreme Court has ruled in several cases to allow companies expansive use and application of arbitration clauses.
However, the Supreme Court doesn’t have to be the last word on the subject. The Concepcion case was based on the Court’s statutory interpretation of the FAA. Congress can clarify that interpretation, and override the Supreme Court. In doing so, Congress would restore the ability of states to allow their citizens access to courts, ending the corporate immunity.
Congress could also overrule American Express v. Italian Colors (2013), which reaffirmed that arbitration clauses could nullify class action suits, even if that were the only way to prosecute the claim. Epic Systems Corp. v. Lewis (2018), typically thought of as a labor case, is fundamentally about arbitration. Congress could overrule it to clarify that activities for the purpose of collective bargaining under the National Labor Relations Act trump the FAA. This would be an intuitive solution, since the NLRA passed in 1935, almost a decade after the FAA. A fourth case, Rent-A-Center v. Jackson (2010), could be overruled so that questions of arbitrability are determined by a court, not by the arbitrators or the companies themselves.
The newly Democratic-controlled Congress can either pass these statutory overrides as stand-alone legislation, or attach them as legislative riders to larger omnibus packages, updating the statute and clarifying their intention that arbitration is meant for equal players—not for big companies to force consumers or employees out of a courtroom.
Arbitration clauses affect things like civil rights, environmental protection, and consumer fraud, and they just might mean that no claims are ever brought and the company is able to carry on without consequences. Arbitration also prohibits public disclosure; it’s common for the arbitrators to not even bother writing a final ruling, unlike in judicial proceedings. By contrast, in class action suits, not only are consumers more likely to receive some kind of relief, but companies are often forced to change their business practices.
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“I think really it’s the trilogy of Concepcion, Amex, and Epic Systems that really delivers the most powerful punch,” said Gupta. “Concepcion says it’s OK to ban class action suits and Amex says that’s true even if it means you can’t enforce your federal statutory rights, and Epic Systems says that’s true even for employees, even when federal law says employees are supposed to have rights to collective action.”
These cases, without any new legislation, have transformed the landscape of how consumers and employees get justice. In 2015, the Consumer Financial Protection Bureau conducted a study on how many people received relief through arbitration as compared to through class action. The results were eye-opening. A multidistrict class action suit against 23 banks resulted in millions of consumers seeing money in their bank accounts. But of those consumers forced into arbitration, just three consumers were able to bring claims.
The CFPB also found that vast numbers of financial products and services now include forced arbitration clauses in their contracts with consumers, including 44 percent of checking accounts, 83 percent of prepaid cards, 86 percent of private student loans, 88 percent of mobile wireless contracts, and 99 percent of storefront payday loans.
Congress could restore the ability of states to allow their citizens access to courts, ending the corporate immunity.
Sen. Elizabeth Warren (D-MA) has been an outspoken critic of mandatory arbitration clauses, and she spoke out last week about Robinhood’s arbitration clause. A Warren aide told the Prospect that the senator favors another solution to the problem of arbitration clauses—one that uses the executive branch’s existing authority. Warren believes that the Securities and Exchange Commission can and should use its authority under the Dodd-Frank Act to bar broker-dealers like Robinhood from mandating arbitration in their contracts.
Executive action is certainly an option. At the tail end of the Obama administration, arbitration clauses were becoming a clear issue in all kinds of areas. But without Democratic control of Congress, the Obama administration resorted to regulation, promulgating rules restricting the availability of arbitration in areas ranging from poultry farming and air travel to higher education and elder care.
But with Congress under Democratic control, some advocates believe that Congress should take action. “These rulings have been statutory interpretations of the Federal Arbitration Act,” Brian Highsmith, a researcher and consumer lawyer, wrote in a statement to the Prospect. “We can expect our judiciary to remain hostile to vulnerable people’s interests until it is reformed, but Congress could amend the FAA tomorrow—and in an instant restore the ability of consumers and workers and others to have their day in court.”
