When the online trading app Robinhood halted trading for their clients on January 28, 2021, the customer backlash was furious. Their clients launched more than 180 multidistrict cases against the company. Robinhood’s Customer Agreement is at the heart of the matter. In this episode of the Contract Teardown show, DoNotPay.com’s founder Joshua Browder explains how this customer agreement is harmful to consumers and highlights the damaging clauses from arbitration to pricing to selling your real-time trading data to hedge funds.
Questions in this episode:
- Why are customer agreements more important now than ever?
- How does Robinhood make money with no commission charge?
- Why could Robinhood sell private real-time trading data?
- Does arbitration prevent a class-action lawsuit?
- How can contract drafting prevent these mistakes?
Why Customer Agreements Are So Important Now
Robinhood is an online app that markets to newcomer investors who trade stocks, bonds, gold, and other investments. Once the playground for sophisticated investors, Robinhood and other brokers opened up mass marketing financial trading to everyone.
The customer agreement explains Robinhood’s terms and conditions to these mostly younger and new-to-the-market investors.
But investing in financial markets is complicated. The Robinhood client agrees to a lengthy and complex 33-page legal document where clients are unknowingly giving away many of their rights. Unfortunately, most clients just click through the document without reading it.
The GameStop Eye Opener
In January 2021, many Robinhood clients in Reddit groups decided to buy Gamestop stock and run up the price. This was in direct opposition to the hedge funds, who bet that Gamestop stock would go down.
This is when many Robinhood clients discovered Robinhood could, and did, suspend their trading accounts, explains Browder. Clients also learned that Robinhood had been selling their real-time trading data to hedge funds.
Market Volatility, Market Orders, and More
Buried deep down in Section 13 are the rights that Robinhood has during “periods of high volume, illiquidity, fast movement or volatility in the marketplace,” Browder explains.
Clients learned that the price of their market order or limit order may not be the price they get. Robinhood may fill the order at a price up to 5% higher. Browder explains that in a world where the S&P may be between 5-20%, a 5% difference in a stock price is enormous. “This gives them a lot of wiggle room to give you a bad trade,” says Browder.
Average consumers are used to getting the price they are quoted, explains Browder. If you go to Starbucks and order a coffee, you will get the price you are quoted. This is not true with Robinhood.
So, How Does Robinhood Make Money?
There are no commissions when buying or selling stock through Robinhood, which seems great, says Browder.
So the question everyone asks is, “ How does Robinhood make money?” They sell your data– but not just any data.
Under Section 23 Equity Orders and Payment For Order Flow, they can, and do, sell your real-time trading order information before your order is executed.
| 23. |
Equity Orders and Payment For Order Flow |
| SEC rules require all registered broker-dealers to disclose their policies regarding any “payment for order flow’ arrangement in connection with the routing of customer orders. “Payment for order flow” includes, among other things, any monetary payment, service, property, or other benefit that results in remuneration, compensation, or consideration to a broker-dealer from any broker-dealer in return for directing orders. I understand that Robinhood transmits customer orders for execution to various exchanges or market centers based on a number of factors. |
Robinhood calls this data the “payment for order flow.”
Say you use your Robinhood app to order a $100 share of Gamestop. A few seconds before your trade is executed, the details are transmitted to a hedge fund, in this case, the $35 billion Citadel fund.
Citadel then decides to bet with you, or against you, and places their order which is executed before yours is.
And, since Robinhood does not have to meet your exact price, Citadel might buy it at $100, and then you might buy it at $101.
This is not very consumer-friendly. Hedge funds are getting the better deal than you...they get their market information right before you place the trade, Browder says about Robinhood's Customer Agreement. #ContractTeardown Click To Tweet
If you get upset about that, you can always sue. Can’t you?
Does Arbitration Keep you from Suing?
The arbitration clause, buried at Section 38, has a pre-dispute arbitration clause where you give up your right to sue, the right to a trial by jury, and other rights. “This is one of the least friendly things a company can do,” says Browder. He explains there are some excellent reasons for arbitration clauses.
But Robinhood is different. Here you have people investing tens of thousands or hundreds of thousands of dollars. Browder explains that if they agree to arbitrations, they can’t take action against Robinhood in court if something goes wrong.
And you are giving up other valuable rights by agreeing to arbitration, Browder continues. You are giving up the right to sue, the right to depose witnesses, the right to discovery, the right to question Robinhood executives, and more. But does this arbitration clause really keep you from suing or joining a class action suit?
Class Action
Paragraph D of the Arbitration section clearly states that no person shall bring a class action suit. Giving up the right to bring or join a class action suit is dangerous for the consumer, states Browder.
And even though companies have arbitration clauses prohibiting class action lawsuits, “all is not lost,” says Browder. Many companies with arbitration clauses have been sued and forced to settle class-action suits. Because of their behavior, more than 50 class actions suits were filed against Robinhood this year.
Drafting Better Customer Agreements
Browder believes it is acceptable to have pro-business clauses and new and innovative business models. However, he says these clauses should be clear, conspicuous, and easy to read and understood by the consumer and not be buried in a 30-page document. He suggests using checkboxes where the consumer can read, understand, and acknowledge their acceptance of the clauses.
With mass marketing of online financial, legal, and businesses apps, easy-to-understand customer agreements are more important than ever. Whether you are drafting or reviewing a customer agreement, here are a few takeaways from Joshua Browder’s review.
Keep it Simple: Be aware that most online users will not read a 30-page customer agreement. This is an important document that should be read by every client, so keep it brief and easy to understand.
Keep it Noticeable: Important clauses should be conspicuous and not complicated. Avoid using complex legalistic language and burying important clauses at Section 23 toward the end of the document.
Explain Their Rights: Clients should know what rights they are giving up and how it will affect them. As an example in this customer agreement, clients should know their real-time order data is sold to the Citadel fund. They should know and understand how their prices can be bumped 5% by Robinhood after the order is entered.
Arbitration Clauses Have Limits: As a contract drafter, you should be aware that many arbitration clauses are ineffective in preventing class-action suits in today’s climate. When thousands of consumers have been wronged, class-action lawsuits are likely to follow.
Update
As of September 7, 2021:
The multitude of lawsuits against Robinhood are now represented by 55 lawsuits centralized in May 2021 into multidistrict legislation in the Southern District of Florida. They continue to make their way through the court system.
Just recently, the SEC is considering a total ban on the “payment for order flow.” This is the selling of your real-time trading data before your trade is executed and accounts for about 80% of Robinhood’s revenue.
SEC Chairman Gary Gensler recently said this practice created an “inherent conflict of interest.”
Show Notes
THE CONTRACT: Robinhood’s Customer Agreement
THE GUEST: Joshua Browder is a British-American entrepreneur. He is the CEO of DoNotPay, the first chatbot that allows motorists to appeal their parking tickets automatically. In 2018, Browder launched a new version of DoNotPay that allowed users to “swipe” on court settlements and sue.
THE HOST: Mike Whelan is the author of Lawyer Forward: Finding Your Place in the Future of Law and host of the Lawyer Forward community. Learn more about his work for attorneys at www.lawyerforward.com.
If you are interested in being a guest on Contract Teardown, please email us at community@lawinsider.com.
Transcript
Joshua Browder [00:00:00] Great in technology with which if you’re not paying for the product, you are the product of a few seconds before they are before they pay the price for you. That should give your data to a hedge fund. That’s the Dow, which is condemned back alongside you or against you with the information that you’ll be trading in a few seconds.
Intro Voice [00:00:22] Welcome to the Contract Teardown Show from Law Insider, where legal experts tear down contracts from some of the most well-known companies and high profile executives around the world.
Mike Whelan [00:00:35] In this episode, the founder of DoNotPAy.Com, Joshua Browder, argues that Robinhood financial customer agreement is harmful to consumers. He goes point by point, from pricing changes to data selling to arbitration clauses and invites consumers to join class actions against Robinhood and similar companies. It’s an interesting time, with Reddit users driving huge trade volume and contracts are at the center of it. So let’s tear it down.
[00:01:03] Hey, everybody. Welcome back to the Contract Teardown show from Law Insider. I am Mike Whalen. On this show, we do exactly what the name sounds like. We take contracts, documents, we beat them up. We say what we hate. We say what we love with smart people like Joshua over here. Joshua Browder, how are you tonight?
Joshua Browder [00:01:23] I’m really good, thank you for having me.
Mike Whelan [00:01:25] Absolutely, and it is night today is the is it the 2nd of February where we’re now in the post- GameStop went crazy Reddit went nuts. Now let’s talk about it world. So we’ve got a special episode here where we’re talking to Joshua about some of these things and what happened with Robinhood specifically. We’re going to talk about this document. Let me share my screen with you guys real quick. This is the Robinhood Securities Customer Agreement. It is quite long. It’s 33 pages. It’s one of those things that people are just clicking through. We’ve talked about these documents before, but in this case, these people agreed to some things. So we’re going to talk about what that means for the users. Joshua, when are we going to see this document? Why? Why does this thing matter in this moment? Why are you and I having this chat right now?
Joshua Browder [00:02:13] So we’re in an interesting era in the world where every consumer is becoming an investor. People are pouring their life savings into the stock market, their paychecks and the stock market and DoNotPay, my company helps fight for consumer rights. And some of these brokerages like Robin Hood are including some very anti consumer items in the agreement. And given that is now a mass market issue, consumers should know what they’re signing up for, especially with all that money is tied up in the stock market these days.
Mike Whelan [00:02:44] Well, especially in this case, because this is Robinhood. Like the point the the raison d’être of this company is to be for the consumers, to be for the everyman. So thinking about how they use it. Tell me more about do not pay your background a little bit. You and I have talked for years about what do not pay is doing on the consumer level law thing. You know, we’ve talked about family law, we’ve talked about states issues, but now we’re talking about financial markets. What’s do not pay his relationship with this issue?
Joshua Browder [00:03:13] Do not pay as a consumer advocate, and we spent the past five years fighting back against large companies, and this can be things like getting a refund from Comcast, beating parking tickets and issue that affect ordinary people. And over the weekend and last week, everyone was trading GameStop and other stock. And unfortunately, these brokerages got in the way. They are limited by orders. People are having trouble withdrawing their money. All of these very anti consumer things started happening. And the financial system is stacked against the average person. You see hedge funds making all the money and the average person getting left out. The legal system is stacked against the average person because it costs hundreds of dollars an hour to hire a lawyer and get justice and therefore do not pay this case. Combine both the legal and the financial system. And it was so important for us to help people fight back.
Mike Whelan [00:04:12] Yeah, and I appreciate that. And without you know, I’m going to assume most of the people are reviewing this. This show is targeted to contract nerds, you know, people who read this stuff all the time. So I’m going to assume most of you have followed this story. If you haven’t. There’s a delightful Twitter video created by a comedian named Avalon Penrhos. Her explanation, nearly in tears over what a hedge fund is, is beautiful. And you should go watch it. But the short version of this thing is and just what you tell me if you’re with me on this, the short version, as I understand it, is the people who run these hedge funds who have all the money, they took a bet. They shorted these stocks. They were like, well, of course, GameStop is going to go down. Kids can buy games on their Xbox. Why are they going to go into a physical store during this time? They said this is probably going to go bad. And then Reddit who Penrhos referred to as an online reading club, went and just decided to shoot that stock up. And so the the volume just sort of went crazy. Right. So here’s Robinhood, who is a consumer level. You know, if you’re a Redditor and you’re investing, you’re probably using Robinhood. Robinhood had this huge amount of volume of just trade volume on those couple of days of trading. I think I heard somebody said it was like seven to eight percent of the trade volume on these couple of days, which is insane. So does that sound right in terms of background, in terms of story that the volume is the big question?
Joshua Browder [00:05:38] Yes, and in the past, people would know what they’re doing now would be professional investors, but now we’ve had people who work at McDonald’s, they put their entire paycheck into Robinhood and they expect to make money. And when they lose it, it’s devastating for that.
Mike Whelan [00:05:54] Hey, everybody, I’m Mike Whalen, I hope you’re enjoying this episode of the Contract Teardown Show real quick. I want to ask you to do me you really a quick favor. Look down below. You’ll see a discount code to join the Law Insider premium subscription. When you do that, you get access to more content like this. You’ll see webinars, daily tips on contract drafting, not to mention access to the world’s largest database of sample contracts and clauses. It will help you write better contracts faster if you want to do it. Right now, there’s a code below. So get there. Also, if you’re part of a larger team, if you’re in-house or in a law firm, just email us where it’s sales@lawinsider.com will make sure you get a deal as well. Come join us in the community. The code is below. Let’s get back to the show.
Mike Whelan [00:06:40] Right. And especially, you know, we’ll get into the contract language because this is so important. This is the thing, as we talked about on this show over and over again, there’s this sort of dual thing where you’re using the contract language to nudge people to try to get them to do certain behaviors. But you’re also sort of recognizing that most people are not going to read through this 33 pages, even for something that you think is obviously important. So the question for contract lawyers, I think, is how do we draft and create knowing that social dynamics in the background? So we’re going to go at it that way. Joshua, we’re going to start by going through the contract. Language will go down to 13. This section talks about market volatility, market orders, their ability to limit orders, they say, particularly during periods of high volume illiquidity, fast movement, volatility, volatility in the marketplace. The execution price received may differ from the quote, provided they’re trying to create this. We know things can go crazy. I’m guessing they didn’t know it could go this crazy, but we knew, you know, they knew it could go crazy. What about this contract? Language sort of sets off your radar for the consumer.
Joshua Browder [00:07:50] So buried in the tens of thousands, what they’re saying is the price that they show you when you’re buying the stock might differ from the price you actually have to pay. So if you go into Starbucks and order a coffee and they say a few dollars and you’re charged a few dollars, but what Robinhood is saying is they can quote your price in dollars for any stock and what they charge, you can actually be different and they can actually be five percent different. And that might not seem like a lot, but the S&P 500, which is an index of all the stocks, typically grows between five and 20 percent a year. And so a five percent difference in the price is actually a lot. And it gives them a lot of wiggle room to give you a bad trade. And what they say is they don’t support traditional market orders. So what that means is some other brokerages, you can say I’ll take the real price of the stock, but Robinhood actually just placed a limit order above the price within five percent. And so you’re getting a bad deal when you buy through Robinhood and they’re saying that they could do that right at the top of the Sabbath, which no one reads.
Mike Whelan [00:08:56] Right. And I mean, like you said, five percent is a retirement plan. That’s literally a number that you’re after in making a retirement plan. And and to be clear, they’re talking about fast movement, volatility volume. They have since last Thursday or whenever this started happening, they’ve had to go get billions of dollars of liquidity just to protect from this volume. So they’ve definitely hit volume, go into a second section down to twenty three where it talks about equity orders and payment for order flow. Talk to me about the SEC rules. This is what the CEO has said over and over of Robinhood, is that it’s not their fault, right. That that they had to go stop the trading on. It was GameStop, it was BlackBerry. I think Bed, Bath and Beyond was on the list. You know, all these these Reddit bumped stocks, Robinhood stopped the deal flow right on on these particular stocks. They keep saying it’s the SEC’s fault. Do you buy that? What’s in this language in 2003 that you think gives them maybe that power?
Joshua Browder [00:09:59] So just to give some background about Robinhood, the business model, there are no commissions when you buy and sell stock. And so that seems great. You can trade for free, which is what they advertise. But the question that everyone has is how does Robinhood make money? And that’s a great phrase. And technology, which is if you’re not paying for the product, you are the product. And this is what this twenty three clause is getting at. And the way Robin Hood makes money is they sell your data. And this is not some conspiracy theory. This is actually what they do. And the way they sell it is they a few seconds before that, before they pay the price for you. That should give your data to a hedge fund citadel, which is then backed alongside you or against you with the information that you’ll be trading in a few seconds. So, for example, they are trying to buy GameStop stock. One hundred dollars. They’ll sell that sell the fact that you’re trying to buy that one hundred dollars to sit it out and just before you place the trade, one hundred dollars says that I will buy one hundred dollars. And so you’re forced to pay one hundred one dollars, because if we remember earlier they said that they can price it within five percent. And so this is really not very consumer friendly because the hedge funds are getting a better deal than you because they get the market information just before you place the trade.
Mike Whelan [00:11:28] Hmm, yeah, I’m thinking about Senator Warren has called for all kinds of investigation into this and other others, and frankly, it’s a bipartisan it’s shown bipartisan legs. Both sides of the aisle here in the U.S. have pushed back against what Robinhood did in this case. And it sounds like, according to this clause, it’s because they they are, like you said, in these terms, giving an advantage to somebody other than the purchaser. Right. But if people get upset about that, you know, it’s the United States and we sue people. Right. But that’s not quite right. If I jump down to 38 to the arbitration clause, we’ve talked about arbitration clauses, a lot of, you know, lawyers, we’re sort of put in a box where we’re supposed to like these things because our clients do. But they’re not always great for the consumer and not easy to write because there’s so many rules around him. In 2008, it says this agreement contains a pre dispute arbitration clause, all bold type. By signing the arbitration agreement, you’re agreeing that you give up the right to sue each other in court, including the right to a trial by jury accepted as except as provided by the rules of the arbitration forum. I’m seeing suits already in the news. What do you think about this arbitration clause?
Joshua Browder [00:12:44] I think it’s one of the least friendly things a company can do because you’re giving up your right to sue Robinhood and court, and I’m the reason that some companies do this is maybe you’re playing a game and you don’t want to have to sue a company for a company, doesn’t want to be sued for a million dollars because you lose your genes in the game. And so there is some reason behind that. But the reason Robin Hood, including this bothers you have tens of thousands of dollars. People have tens or even hundreds of thousands of dollars with Robinhood. And so what they’re saying is you can’t take any action against them in the court. If things go wrong and you lose a lot of rights, you lose the right to discovery. These arbitration hearing, you don’t have the same rights to depose Robinhood executives. You can’t get documents as much as in a regular courtroom. You lose the right to interrogate witnesses. And arbitration is not guarantee that a lawsuit. So that means that the companies can behave badly because they have lost this incentive of a lawsuit.
Mike Whelan [00:13:50] Yeah, and I was listening to a session on clubhouse recently where they were talking about the speed. Right. That a lot of these these alternative dispute procedures are meant for speed, which sounds good in the abstract. But a lot of times the slowing down is what gives the inexperienced litigator, you know, a chance. Right, that that they get to pool their resources, slow down, think it you know, speed really advantages the people who are used to speed on that point. I’m going down to D and the arbitration clause. It talks about class actions. Again, class actions are there faster, but it’s also just like pooled power among all these small users. But it says no person shall bring a punitive or certified class action to arbitration, nor seek to enforce any pre dispute arbitration agreement against any person who was initiated in court, a punitive class action. What what you guys are doing, as I understand it, with do not pay is facilitating people getting on to class actions. Are we tipping at windmills, windmills? Does this clause make it so you can’t do that?
Joshua Browder [00:14:56] So we also help people do the arbitration. But I would say this this clause is very dangerous for consumers because the number one thing a company is scared of is a class action. They might be able to brush away an individual lawsuit. If you have thousands of people coming together, it’s much more scary. And these settlements can go up into the tens or hundreds of millions of dollars. But one thing I would say is this is not a done deal. There are lots of examples. There are currently around 50 class action being filed against Robinhood because of their behavior in the past two weeks. And the question I’m sure you are having is, why are they doing that at this close? And it’s not a done deal because there are plenty of examples of companies in the past having this clause, but still being liable for class action and doing settlement. So one example recently was that was a bank online bank called Chime and the debit cards just stopped walking one day and it caused a lot of problems. People couldn’t people in restaurants, they couldn’t pay for their meal. And so sometimes the police were called and all of this dramatic stuff and a class action was filed against time. And they also have this clause. But it didn’t stop time from settling for millions of dollars. And so although this is a very consumer unfriendly clause, I don’t think people should give up hope. If there are enough wrong, if there’s enough wrong on the wall upon this, that this is not a get out of jail free card for a company. And so I think that’s where we should leave on a positive note, where although these clauses exist and consumers should be aware of that and there is still hope.
Mike Whelan [00:16:35] Yeah, and I think the political pressure is going to be huge. If nothing else, there’s already movement there. I want to lead people to do not pay who are watching this, who are consumers. And so we’ll talk about that in the end. But before we get to that, I want to talk about a principle you have you know, you have not been called a friend to the attorney world, right? You have very explicitly said you’re trying to get rid of the need for these these intermediaries on all these transactions that that consumers are dealing with. I’m thinking about this document related to what you believe is true about the accessibility of the law and also what Robinhood does. Right. Robinhood, in their branding, in everything they say is we’re here for the little guy, we’re here for the little girl. And then they put a 33 page contract, terms of service in front of people as if any of those people are going to read it and understand what any of it said. Tell me your view on the responsibility of these companies to draft in an accessible way, particularly if they’re going to say they’re the accessible option.
Joshua Browder [00:17:41] I think that being up front is the most important thing. It’s it’s perhaps very innovative to have this new business model where you can sell the data rather than charging people commissions on that trade. But you have to tell people that should be a checkbox when you sign up. I’m OK with Robinhood selling my data at the hedge fund and then consumers could have the choice. But the fact is buried in the 33 page document with all this jargon is not right. I think a lot of people feel misled.
Mike Whelan [00:18:16] Yeah, I think there’s a you know, with a lot of these technology companies and sort of the move to empower the consumer, there’s this Essiac right. This site, this ethos in Silicon Valley that we’re here for these people. But if we as lawyers then undermine that branding and make it so that it’s just in name only, I think we have some responsibility to think through that. So at minimum, even if you’ve got to write these kind of 33 documents, I would encourage you lawyers to be really closely tied to the marketing and branding departments and talk to them about how can we communicate this as part of the product in a way that people are, you know, conscious of, of what they’re getting into for those people who signed up for this didn’t quite get it. Now we’re in a position where they have to regain some power. What’s the best way for them to get on some of these class actions, maybe get in touch with with you and do not pay? What’s the best way to get to you?
Joshua Browder [00:19:08] So DoNotPay.com or email me at Joshua@donotpay.com and we have a lot of actions against all the brokerages because it’s not just Robinhood. Other brokerages have similar codes that some are more consumer friendly, some less. And so it’s an interesting time, but I think they all need to be taught a lesson.
Mike Whelan [00:19:30] I appreciate you, Joshua. Hopefully you don’t totally succeed in your mission to get rid of all lawyers, because I want to still hang out with you. I thank you for joining us. For all of you who are watching will have links to what’s good, what Joshua is doing to this document from Robinhood and other resources. Just go to lawinsider.com/resources. Also, if you want to be a guest on the contract, tear down show, just email us at Community at law insider dot com. Thanks, Joshua. We’ll see you guys next time. Thank you.