Customer Lawsuit Puts Robinhood In The News Again

February 15, 2022

Try as it might, wish as it might, Robinhood just can't seem to stay out of the press these days. In today's news, an unhappy Robinhood customer sued the brokerage firm in court despite the existence of a mandatory arbitration provision in the New Account Agreement. On top of that, with the ongoing COVID pandemic, it appeared that the customer was in no position to travel out of state, as would have been mandated by the arbitration provision.

Mandatory FINRA Arbitration in California

In a pro se capacity, customer Yvon Roustan filed a Complaint in Wisconsin state court against Robinhood Financial LLC and Robinhood Securities LLC; however, after the initiation of the lawsuit, Roustan became subject to a guardianship whereby his wife, Estela, became the guardian of his person and estate, and the lawsuit proceeded with her concurrence.
Yvon Roustan, Plaintiff/Appellant  v. Robinhood Financial LLC and Robinhood Securities LLC, Defendants/Respondents (Decision, Wisconsin Court of Appeals, 2021AP984 / February 10, 2022) 
As asserted in pertinent part in the Court of Appeals Decision [Ed: footnote omitted]:

¶5 In January 2020, Roustan opened an account with Robinhood. In the process of opening this account, Roustan entered into the Agreement with Robinhood in which Roustan acknowledged that he reviewed the Agreement and agreed to its terms and conditions. The Agreement took the form of a "clickwrap" agreement, a widely used format that requires a user to "affirmatively click a box on the website acknowledging awareness of and agreement to the terms of service before he or she is allowed to proceed with further utilization of the website." Berkson v. Gogo LLC, 97 F. Supp. 3d 359, 397 (E.D.N.Y. 2015).

¶6 Germane to this appeal, the terms and conditions of the Agreement contain an arbitration provision. This provision-which is written as a separately numbered paragraph, printed in bold text, and enclosed in a box-requires the parties to settle disputes by arbitration before "FINRA Dispute Resolution, Inc." in California according to FINRA rules. The full text of the arbitration provision is reproduced later in this opinion. The Agreement also contains the following severability clause: 

Severability. If any provisions or conditions of this Agreement are or become inconsistent with any present or future law, rule, or regulation of any applicable government, regulatory or self-regulatory agency or body, or are deemed invalid or unenforceable by any court of competent jurisdiction, such provisions shall be deemed rescinded or modified, to the extent permitted by applicable law, to make this Agreement in compliance with such law, rule or regulation, or to be valid and enforceable, but in all other respects, this Agreement shall continue in full force and effect. 

¶7 Roustan filed a complaint in the circuit court arising out of a restriction that Robinhood placed on his account. Robinhood asserts the following regarding that restriction. Roustan's account was restricted because a September 2020 transfer of funds from Roustan's bank to his Robinhood account was reversed. Such a reversal triggers a restriction on the account from Robinhood's compliance department until Robinhood can confirm the reason for the reversal by communicating with the customer. Roustan was told several times by Robinhood's customer service department that, in order to lift the restriction, Roustan was required to provide Robinhood with an explanation for the reversal. Roustan did not provide an explanation for the reversal until after the lawsuit was commenced and, at that point, he explained to counsel for Robinhood that he reversed the transfer because he was disappointed with Robinhood's fees and costs. The restriction was lifted from Roustan's account on approximately February 14, 2021. 

¶8 Roustan's complaint was filed during the events just described and alleges the following causes of action: (1) violation of the Wisconsin Uniform Securities Law; (2) breach of contract; (3) breach of implied warranty of merchantability; (4) negligent misrepresentation; and (5) breach of fiduciary duty.

A Deal is a Deal is a Deal Says Robinhood

Citing the mandatory arbitration provision in the Agreement, Robinhood filed a Motion to Compel FINRA Arbitration in response to Roustan's lawsuit in Wisconsin state court. In response to the Motion to Compel, Roustan asserted that the mandatory arbitrary provision was unconscionable, and, accordingly, unenforceable. The lower court granted Robinhood's motion and ordered that arbitration be commenced in Wisconsin because it would be "unreasonable to require Roustan to travel to California for arbitration during the COVID-19 pandemic. " at Page 5 of the Court of Appeals Decision.

Roustan Appeals to WI Court of Appeals

Roustan appealed the Wisconsin Circuit Court's arbitration order and cited that lower court's alleged  errors:

(1) the arbitration provision of the contract is unconscionable and, therefore, unenforceable; and (2) the circuit court did not have the authority to modify an individual term of the arbitration provision to require that arbitration occur in Wisconsin but, instead, the circuit court had the authority only to uphold or invalidate the arbitration provision as a whole. 

at Page 2 of the Court of Appeals Decision

Robinhood Arbitration Provision Not Found Unconscionable

In tackling the first prong of Roustan's appeal, the Court of Appeals clarified that:

[s]ubstantive unconscionability refers to whether the terms of a contract are unreasonably favorable to the more powerful party," and the analysis of substantive unconscionability "focuses on the one-sidedness, unfairness, unreasonableness, harshness, overreaching, or oppressiveness of the provision at issue.

at Page 8 of the Court of Appeals Decision

In rejecting the unconscionability portion of Roustan's appeal, the Court found in pertinent part that:

¶19 The arbitration provision is not substantively unconscionable because its terms are not "unreasonably favorable" to Robinhood. See id., ¶36. According to the arbitration provision, both Roustan and Robinhood are subject to the same terms of arbitration, including: both parties give up the right to sue each other in court; any claim brought by either party under the Agreement will be subject the same rules of FINRA Dispute Resolution, Inc.; and both parties agree that judicial remedies are limited after arbitration. The arbitration provision applies equally to Roustan and Robinhood.

The FINRA Arbitration Venue

As to Roustan's urging that there is no flexibility for any court to modify a mandatory arbitration provision's choice of venue -- the old ya-gotta-throw-out-the-baby-with-the-bathwater argument -- the appellate court found in part that:

¶29 In the present case, the circuit court concluded that the arbitration venue clause must be modified because it unreasonably requires travel to California during the COVID-19 pandemic. 5 Robinhood agrees with the circuit court's decision to change the arbitration venue and requests that we affirm the circuit court's decision in its entirety. 6 Because the arbitration provision does not identify an alternate arbitration venue, we "look to the parties' intent to determine 'whether a substituted term should be inserted or whether the agreement will fail altogether.' " See Riley, 345 Wis. 2d 804, ¶14 (quoting Madison Teachers, 285 Wis. 2d 737, ¶12). As noted earlier, "[t]he best indication of the parties' intent is the language of the contract itself, for that is the language the parties saw fit to use." Id., ¶13 (citing Town Bank, 330 Wis. 2d 340, ¶33). 

¶30 For the following reasons, the language of the Agreement demonstrates that the parties did not intend to litigate disputes in court if California is not available as a venue for arbitration. First, the arbitration provision provides that "[a]ll parties to this Agreement are giving up the right to sue each other in court." This statement indicates that the parties primarily intended to arbitrate any disputes instead of litigating those disputes in court. Also, like the agreement in Madison Teachers, there is no language specifically stating that the "parties prefer to take their disputes to the courthouse" if California is not available as an arbitration venue. See Madison Teachers, 285 Wis. 2d 737, ¶13. Second, the arbitration provision states: "Any controversy or claim arising out of or relating to this Agreement . . . shall be settled by arbitration in accordance with the rules of FINRA Dispute Resolution, Inc. ("FINRA DR"). I agree to arbitrate any controversy or claim before FINRA DR in the State of California." This statement indicates that a central focus of the arbitration provision is for FINRA to be the arbitrator of any disputes and for the FINRA rules to govern the resolution of those disputes. Even though this clause sets California as the venue for arbitration, the remainder of the arbitration provision's language demonstrates that the parties' primary intent is to resolve disputes through arbitration before FINRA. 

= = = = =

Footnote 5:  Specifically, the circuit court stated: "I don't know how arbitration works in the pandemic, but if it would require Mr. Roustan to travel to California personally, I would find that to be unreasonable under the circumstances." At several points in his briefing in this court, Roustan incorrectly claims that the circuit court found the entire arbitration provision unreasonable. The record shows that the circuit court did not conclude that the entire arbitration provision is unreasonable. 

Footnote 6:  In briefing in this court, Robinhood points out that the arbitration provision does not necessarily require Roustan to travel to California because "the rules of FINRA Dispute Resolution, Inc.," allow Roustan's claim to be decided by an arbitrator without a hearing. If Roustan requests a hearing, Robinhood asserts that the FINRA rules allow Roustan to proceed via a telephonic hearing if he so chooses. Robinhood did not mention these rules in the circuit court proceedings, and the circuit court did not reach a conclusion regarding the applicability of these rules to the facts of this case. Accordingly, we do not address the application of the FINRA rules as advanced by Robinhood. Townsend v. Massey, 2011 WI App 160, ¶25, 338 Wis. 2d 114, 808 N.W.2d 155 ("[T]he forfeiture rule requires that, to preserve its arguments, a party must 'make all of their arguments to the trial court.' " (citation omitted)).

Accordingly, the Circuit Court's Order was affirmed by the Court of Appeals.

Bill Singer's Comment

As Blog readers know, I detest and abhor FINRA's sanctioned mandatory customer arbitration. In my view, all such mandatory arbitration provisions are unconscionable and unenforceable and against sound public policy. I have no issue with voluntary, negotiated arbitration provisions. That being said, I grudgingly respect the current jurisprudence that upholds Robinhood's version of arbitration agreements. As such, the Wisconsin Court of Appeals penned a thoughtful rationale for its Decision and I find the effort compelling despite my animosity to the persistence of such a system of alternative dispute resolution. 

In keeping with my noted disagreements and reservations, I'm not quite sure that I concur with the state courts' conclusion that when a mandatory arbitration provision sets FINRA arbitration in the State of California that the imposition of that location is akin to a very, very strong suggestion rather than a non-severable aspect of the arbitration agreement. Without question, I agree with the courts that the COVID pandemic makes travel out of state somewhat prohibitive for many customers subject to a specific-state-jurisdiction requirement. Where I and the courts part ways is over their decisions to save the arbitration provision by proposing alternative locales. As the saying goes, the Law abhors a forfeiture, which is why judicial "savings" efforts are often invoked. 

When considering the issues of forfeiture, severability, and savings, I'm just not convinced that the Wisconsin courts fully understood the true, underlying nature of Wall Street's new-account agreements with their attendant mandatory arbitration provisions. As I see it, there is little (if anything) negotiated between the customer and any FINRA member firm such as Robinhood when it comes to most New Account Agreements and pointedly in reference to Mandatory Arbitration Provisions, which  I view as imposed by Robinhood upon its customers in what amounts to a take-it-or-leave-it process. Robinhood's arbitration provision could have stated that notwithstanding the selection of an arbitration forum based in California, in response to certain emergencies or acts of God, an alternative location may be designated by mutual agreement of the parties and/or the customer may request a telephonic hearing. In considering the Wisconsin courts' rationale for saving the FINRA arbitration provision and relocating the locus of the hearing, I'm just not convinced that proper weight was afforded to the fact that in the absence of its ability to enforce a FINRA arbitration upon its customers, that Robinhood would still be able to defend itself in the courts. Alas, I don't wear a robe and perhaps for good reason.

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