It is likely that the Robinhood Markets Inc. user agreement. protect the brokerage app from a barrage of customer lawsuits after blocking a frantic trade rally at companies like GameStop Corp that fed into social media forums.
Owners of Internet platforms where much of the debate took place are also protected from liability for user activity under a 25-year law known as Article 230.
At least a dozen proposed class action lawsuits accuse Robinhood of breaching its contract with customers when it restricted negotiations on Thursday.
Robinhood users were at the center of this week’s wild rally in a handful of stocks that had been sharply reduced by hedge funds and defended by individual investors in online chat rooms, including Reddit’s WallStreetBets.
The lawsuits, filed in federal court, allege that the Menlo Park-based company, California, breached its contractual obligation as a regulated broker to execute orders quickly and effectively.
However, Robinhood is not legally required to conduct all business and the lawsuits will not be successful if there is no evidence that the company is restricting trade for an improper reason, such as favoring certain investors, according to several legal experts.
The Robinhood website user agreement states that “you may at any time, in your sole discretion and without notice, prohibit or restrict my ability to trade securities.”
Adam Pritchard, a professor at the University of Michigan Law School, said the lawsuits are unlikely to gain strength.
“The contract says they can do it,” Pritchard said of the company’s decision to restrict trade. “It looks like this is a big stumbling block to breaching the contract claim.”
Robinhood did not immediately respond to a request for comment.
The popular commission-free trading platform had been branded as an app that allowed retail investors to take over Wall Street and democratize finances, and trade restrictions sparked a uproar and allegations of betrayal on social media.
Robinhood said the restrictions were necessary to meet regulatory capital requirements and clearing house deposits, which accordingly fluctuated with volatility.
The lawsuits allege that the restrictions benefited large funds that were allegedly invested or allied with Robinhood.
But clients are unlikely to remove preliminary judicial hurdles to get to the point where they can demand documents and depositions to investigate Robinhood’s actions, said Ann Lipton, a professor at Tulane University School of Law.
He said attempts to sue brokers for mismanaging clients ’accounts have generally been unsuccessful because of the limitations the federal securities law places on filing 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 did not show that the company broke promises or acted unfairly or in bad faith.
Lawsuits against Robinhood seek unspecified damages, including punitive damages, which constitute another obstacle to clients ’chances in court, according to experts.
It will be difficult to show that users have suffered as a result of Robinhood measures because GameStop and other sidewalk-covered actions fell sharply 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 harmed because they were unable to reduce GameStop or speculate that the shares would fall.
But some investment firms were hugely successful and corporate stocks rebounded largely after Robinhood and other online brokers said they planned to lift most of the restrictions on Friday.
Melvin Capital Management and Citron Capital had made big bets GameStop would go down in price and suffer big losses as stocks increased.
Although Reddit users caused the rally, the messaging platform is isolated from mutual fund claims.
Social media companies are not usually responsible for user activity under a statute commonly known as Article 230, a 1996 law that aimed to encourage new forms of communication at the beginning of the online era.
In the early days of the Internet, there were several high-profile cases in which companies tried to crack down on criticism by suing platform owners.
One involved a lawsuit against Stratton Oakmont’s first Prodigy online service, the brokerage firm depicted in Leonardo DiCaprio’s film “The Wolf of Wall Street.” The court held that Prodigy was responsible for a user’s allegedly defamatory comments because he was an editor who moderated the content of the service.
The fledgling Internet industry was concerned that this responsibility would make a number of new services impossible. Ultimately, Congress accepted and included section 230 in the Communications Decency Act.
“The goal of Article 230 is to enable sites like Reddit to allow conversations to take place,” said Eric Goldman, a professor at the University of Santa Clara Law School.
“Knowing that some conversations will be antisocial and in some cases illegal, Article 230 says it is not the responsibility of the service that creates the site of the conversations.”
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