Georgetown Law
Technology Review

The popular financial services app Robinhood ended 2020 on a high note. Armed with an influx of investor funding, Robinhood lifted its valuation to nearly $12 billion while simultaneously attracting millions of new and often young users to the platform. The company touts a mission to democratize finance for everyday people by providing financial literacy materials and commission-free stock trading on its free mobile app.

Two months later, Robinhood now faces more than ninety lawsuits after it abruptly restricted the trading of stocks popularized on a Reddit forum. The lawsuits echo a common outcry from Robinhood users, alleging the controversial trading halts amounted to “market manipulation” in breach of the company’s legal duties to its customers. The fintech company’s unpopular response to the now infamous GameStop stock frenzy has exposed it to Congressional scrutiny not only for the trading debacle, but also for terms included in its adhesion contract that limit legal recourse for app users.

Robinhood’s sudden trading restrictions followed a stock bubble that began online. A popular Reddit forum entitled “r/wallstreetbets” ignited Robinhood’s wild 2021 when many of its eight million users decided to purchase GameStop stock (NYSE:GME) en masse via the Robinhood platform. In early December 2020, GameStop reported dismal third quarter earnings that motivated some professional hedge funds to “short” its stock over the following weeks, or bet that the antiquated video game store would continue to spiral toward financial ruin. A group of vocal investors on r/wallstreetbets took notice of the hedge funds’ behavior and responded by contending that GameStop still possessed more underlying value than the hedge funds believed. After GameStop appointed three new directors to its board on January 11, 2021, its stock value quickly jumped fifty percent. This announcement became the catalyst for a strife between hedge funds—which had bet heavily on GameStop continuing to lose value—and thousands of r/wallstreetbets investors who were pushing the stock price up through repeated trades on the Robinhood platform. As the movement quickly grew, many Robinhood users began investing in GameStop as part of a campaign against sophisticated hedge funds rather than because of the stock’s inherent value. The individual investors won out: GameStop stock traded at $42.59 per share on January 22, $96.73 per share on January 25, and a whopping $354.83 per share on January 27.

On January 28, Robinhood attempted to mitigate GameStop’s massively inflated share price by restricting its users from most transactions involving GameStop stock. Although Robinhood’s official statement explained that the restrictions were implemented only “where necessary” and “in light of recent volatility,” its decision to restrict trading was widely denounced. Lawmakers and the public criticized Robinhood’s motivations, accusing the company of protecting Wall Street hedge funds at the expense of individual investors. Robinhood lifted most trading restrictions the next day, yet GameStop’s share price still plummeted nearly ninety percent by February 4.

Robinhood may have imposed the trading restrictions in a genuine attempt to preserve stock market stability, but it did so at a substantial legal cost. Now faced with dozens of lawsuits, Robinhood may have to defend against claims that it breached its contractual and fiduciary duty to customers. One putative class action complaint filed in the Southern District of New York alleges that Robinhood blocked its users’ GameStop trades “purposely and knowingly to manipulate the market for the benefit of… financial institutions who were not Robinhood’s customers.”

However legitimate, the long-term outlook for these legal claims is anything but clear. Robinhood, like many major corporations, includes a mandatory arbitration clause in its adhesion contract requiring that users bring claims arising from the contract outside of court. Mandatory arbitration clauses deter consumers from raising claims because they cannot combine efforts with other similarly situated consumers to share the costs of litigation or even know which claims other consumers are raising.

The U.S. Supreme Court upheld the legality of mandatory arbitration clauses under the Federal Arbitration Act—even in the context of class action lawsuits—in AT&T v. Concepcion.

Despite an uncertain outcome for these litigants, the news is not all bad for future investors. The Robinhood saga has motivated some Democratic members of Congress, including Rep. Hank Johnson (D-GA-4) and Sen. Richard Blumenthal (D-CT), to consider reintroducing the Forced Arbitration Injustice Repeal (FAIR) Act in both houses of Congress. The Act, which would ban businesses from employing mandatory arbitration clauses in contracts with employees and consumers, passed a vote in the House of Representatives in 2019 but was not passed by the Senate. Sen. Elizabeth Warren (D-MA) also condemned Robinhood’s mandatory arbitration clause in her February 2 letter to Robinhood CEO Vladimir Tenev. In the five-page letter, Sen. Warren sharply criticized Robinhood’s pattern of insufficiently protecting its customer base of relatively inexperienced investors. She also alleged the mandatory arbitration clause “den[ies] customers a fair hearing, undermine[s] public accountability, and hamper[s] efforts to assemble a thorough and complete understanding of events.” Robinhood replied to Sen. Warren on February 17, penning a 195-page letter that in part indicated the company is willing to review its use of arbitration.

It remains too early to predict the legal ramifications of Robinhood’s trading fiasco. Stricter financial institution oversights have been proposed in the academic community and in Congress, but these efforts are not likely to move quickly. The widespread publicity and notoriety of Robinhood’s trading restrictions, however,  may provide the necessary spark for structural change, whether through new regulations protecting investors from short-selling and stock manipulation, legislation ending the practice of mandatory arbitration, or both.