Robinhood, Reddit protected from lawsuits by user agreement, Congress

Robinhood Markets Inc.’s User Agreement is likely to protect the brokerage app from a barrage of customer lawsuits after it blocked a frenzied rally at companies like GameStop Corp that was fed on the forums. social media.

Owners of internet platforms where much of the discussion has taken place are also immune from liability for user activities under a 25-year-old law known as Section 230.

At least a dozen proposed class actions accuse Robinhood of violating its contract with its clients when it restricted trading on Thursday.

Robinhood users were at the center of this week’s wild rally in a handful of stocks that had been sold heavily by hedge funds and championed by individual investors in online discussion forums, including Reddit’s WallStreetBets.

The lawsuits, filed in federal court, allege the Menlo Park, Calif., Based company violated its contractual obligation as a regulated broker to fulfill orders quickly and efficiently.

However, Robinhood is not legally bound to conduct all trades and lawsuits will not succeed without proof that the company has restricted trade for an inappropriate reason, such as favoring certain investors, according to several legal experts.

The Robinhood Website User Agreement states that it “may at any time, in its sole discretion and without notice, prohibit or restrict my ability to trade in securities”.

Adam Pritchard, a professor at the University of Michigan Law School, said the lawsuits were very unlikely to gain traction.

“The contract says they can do it,” Pritchard said of the company’s decision to restrict trade. “This appears to be a big stumbling block to the breach of contract claim.”

Robinhood did not immediately respond to a request for comment.

The popular commission-free trading platform had billed itself as an app for retail investors to take on Wall Street and democratize finance, and trade restrictions sparked an uproar and allegations of betrayal on social media.

Robinhood said the restrictions were necessary to comply with regulatory capital requirements and clearing house deposits, which he said fluctuate with volatility.

The lawsuits allege the restrictions benefited significant funds that were believed to have been invested in or allied with Robinhood.

But clients are unlikely to cross the preliminary hurdles in court to get to the point where they can demand documents and depositions to investigate Robinhood’s actions, said Ann Lipton, a professor at the University of Law school. by Tulane.

She said attempts to prosecute brokers for mismanaging client accounts have generally failed because of the limits that federal securities law places on the filing of class actions. For example, a federal judge in 2019 dismissed a proposed class action lawsuit against TD Ameritrade Holding Corp for allegedly mismanaging a tax feature of certain accounts.

The judge said TD Ameritrade customers failed to demonstrate that the company broke its promises or acted unfairly or in bad faith.

The lawsuits against Robinhood seek unspecified damages, including punitive damages, which present another obstacle to clients’ chances in court, experts say.

It will be difficult to prove that users suffered from Robinhood’s measures, as GameStop and other curb-covered actions fell sharply on Thursday after the restrictions were announced, said James Cox, a professor at Duke Law School.

“No harm, no fault,” Cox said.

Some of the lawsuits said investors were wronged because they were unable to sell GameStop or speculate the stock would drop.

But some investment firms have been hit hard, and company shares have rebounded widely after Robinhood and other online brokerage firms announced plans to lift most restrictions on Friday.

Melvin Capital Management and Citron Capital had placed big bets that GameStop would lower the price and suffer huge losses as the stock rallied.

While Reddit users have stoked the rally, the message platform is isolated from claims from investment funds.

Social media companies are generally not responsible for user activity under a law commonly known as Section 230, a 1996 law that was intended to encourage new forms of communication at the start of the online age.

In the early days of the internet, there were several high-profile cases in which companies attempted to quell criticism by suing platform owners.

One involved a lawsuit against Stratton Oakmont’s first online Prodigy service, the brokerage firm depicted in Leonardo DiCaprio’s film “The Wolf of Wall Street”. The court found that Prodigy was responsible for a user’s allegedly defamatory comments because it was a publisher who moderated the content of the service.

The nascent Internet industry feared that such a liability would make a whole range of new services impossible. Congress eventually accepted and included Section 230 in the Communications Decency Act.

“The purpose of Section 230 is to allow sites like Reddit to allow conversations to take place,” said Eric Goldman, a professor at the University of Santa Clara School of Law.

“Knowing that some conversations will be anti-social and in some cases illegal, section 230 says that it is not the department’s responsibility that creates the locus for these conversations.”