ROBINHOOD’S USER AGREEMENTS TO PROTECT IT FROM CLASS ACTION LAWSUITS

Robinhood Markets who are the owners of internet platforms, restricted its stock purchases, such as that of GameStop Corp on January 28, 2021.This has caused problems and loss to various investors, and there has been as many as 34 class action lawsuits againstRobinhood piling up in the PACER court database ever since. These lawsuits allege that the restrictions caused a breach of the customers contracts[1].

The very first lawsuit filed the same day claims that the day-trading app “purposefully, willfully, and knowingly removing the stock ‘GME’ [GameStop] from its trading platform in the midst of an unprecedented stock rise thereby deprived retail investors of the ability to invest in the open-market and manipulating the open-market.” See Nelson v. Robinhood Financial, LLC, Civil Docket No.: 21-cv-777 (S.D.N.Y. Jan 28, 2021).[2] The lawsuits further point out that Robinhood users could only hold or sell off the affected stocks as the share price for GameStop began to fall, benefiting short-sellers. One of them reads “When everyone is only selling, the price cannot go up because no one can buy the shares.” See Diamond v. Robinhood Financial, LLC, Case No. _____ (M.D. Fla. Jan 29, 2021).[3] Another reads “Robinhood (and Apex Clearing Corporation) stole from the poor to give to the rich.” See Cheng v. Ally Financial Inc., Case No. _____ (N.D. Cal. Feb 1, 2021).[4]

Investment firms like Melvin Capital Management and Citron Capital had a large short position in the stocks which were restricted by Robinhood and thus, they had to bear the heaviest losses in the upward movement of the stocks. Also, the stocks of GameStop and others fell sharply after the restrictions were announced, making it harder for them to claim damages.

However, in order to claim damages for the same, the plaintiffs will have to demonstrate that Robinhood Markets had put the restrictions in place to favor certain investors or for some other similarly improper/illegal reason. The Robinhood Market is likely to be protected by its user agreements from potential lawsuits and shielded from the liability for users’ activity under Section 230. Section 230 is an internet legislation of the United States, passed as part of the Communications Decency Act (CDA) of 1996. The section provides immunity for website publishers from third-party content. Section 230(c)(1) provides immunity from liability to providers and users of establishing an interactive computer service who publish information provided by third-party users. The section clearly states that no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider. It is under this law that the  Robinhood Market is likely to be protected from potential lawsuits.

The lawsuits filed against Robinhood Markets seek for unspecified damages which also include punitive damages, presenting another hurdle to the customers in the court as it will become difficult for them to prove that the users suffered due to the measures of restriction taken by the Robinhood Markets.


[1] See Customer Contract at https://cdn.robinhood.com/assets/robinhood/legal/Robinhood%20Customer%20Agreement.pdf

[2] See Complaint at https://www.courtlistener.com/recap/gov.uscourts.nysd.553175/gov.uscourts.nysd.553175.1.0.pdf

[3] See Complaint at https://www.scribd.com/document/493084959/Diamond

[4] See Complaint at https://www.scribd.com/document/493083559/Shane-Cheng



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