By: Alec Carden ^*

On January 28, 2020, Robinhood placed trading restrictions on the stocks of several companies.^[1] Traders were prevented from buying stocks like GameStop, AMC, and Bed Bath & Beyond. ^[2] Robinhood justified its actions in a blog post stating that its “clearinghouse-mandated deposit requirements related to equities increased ten-fold. And that’s what led [it] to put temporary buying restrictions in place on a small number of securities that the clearinghouses had raised their deposit requirements on.”^[3] To put it simply, by restricting trading, Robinhood saved itself from collapse.^[4] Over the next few weeks, over ninety lawsuits were filed against Robinhood by users.^[5] And the question is whether any of these users will be able to recover damages for losses they incurred as a result of Robinhood’s actions.

Various members of the legal community have commented on the likelihood of Robinhood users being able to recover, and the consensus among legal professionals is no.^[6] Brokerages typically have board discretion to limit trades pursuant to their user agreements.^[7] And Robinhood’s user agreement clearly states it “may at any time, in its sole discretion and without prior notice to [users], prohibit or restrict [users] ability to trade securities.”^[8] While some users are likely to be mad as a result of the sudden restrictions, the user agreement clearly states that Robinhood was permitted to restrict trading.^[9] The user agreement is a contract; thus, the contract said it could do this.^[10]

Still, user agreements are not “always an absolute protection from aggrieved clients.”^[11] It depends on the particular situation that occurs.^[12] For example, there could be liability if a brokerage allowed trading by “some clients but not others.”^[13] Additionally, many lawsuits are also alleging negligence on the part of Robinhood, some are even alleging violations of various states’ laws, and a few are alleging securities law and antitrust law violations.^[14] While it is too early to know whether any of these lawsuits will actually be successful, it is troubling that a brokerage may be able to, by way of a simple user agreement, deprive retail investors of access to the open-market while hedge funds and institutional investors can still access it.^[15]

*J.D. Candidate, Class of 2022, Arizona State University Sandra Day O’Connor College of Law.

[1] Oscar Gonzalez & David Priest, Robinhood Backlash: Here’s What You Should Know About the GameStop Stock Controversy, CNET (Feb. 5, 2021, 5:00 AM), https://www.cnet.com/personal-finance/robinhood-backlash-heres-what-you-should-know-about-the-gamestop-stock-controversy/.

[2] Id.

[3] Robinhood, What Happened this Week, Robinhood: Under the Hood (January 20, 2021), https://blog.robinhood.com/news/2021/1/29/what-happened-this-week.

[4] Matt Egan, The ‘Enormous Catastrophe’ that Robinhood Only Narrowly Avoided, CNN (Feb. 18, 2021, 4:36 PM), https://www.cnn.com/business/live-news/robinhood-gamestop-reddit-hearing-congress/index.html.

[5] Megan Leonhardt, Robinhood Now Faces Roughly 90 Lawsuits After GameStop Trading Halt—Here’s How Customers Might Actually Get Their Day in Court, CNBC (Feb. 17, 2021, 3:04 PM), https://www.cnbc.com/2021/02/17/robinhood-faces-lawsuits-after-gamestop-trading-halt.html.

[6] Chris Dolmetsch, Christopher Yasiejko & Christian Berthelsen, Robinhood Users Suing Over Trade Limits Face High Legal Bar, Bloomberg (Jan. 28, 2021, 9:47 AM), https://www.bloomberg.com/news/articles/2021-01-28/robinhood-customers-sue-over-removal-of-gamestop.

[7] Egan, supra note 4.

[8] Tom Hals, Analysis: Robinhood and Reddit Protected from Lawsuits by User Agreement, Congress, Reuters (Jan. 30, 2021, 5:20 AM), https://www.reuters.com/article/us-retail-trading-robinhood-liability-an/analysis-robinhood-and-reddit-protected-from-lawsuits-by-user-agreement-congress-idUSKBN29Z0HI.

[9] Egan, supra note 4.

[10] Hals, supra note 8.

[11] Dolmetsch, supra note 6.

[12] Id.

[13] Id.

[14] Leonhardt, supra note 5.

[15] Gonzalez, supra note 1.