On January 28, 2020, Robinhood placed trading restrictions on the stocks of several companies. Traders were prevented from buying stocks like GameStop, AMC, and Bed Bath & Beyond.  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.” To put it simply, by restricting trading, Robinhood saved itself from collapse. Over the next few weeks, over ninety lawsuits were filed against Robinhood by users. 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. Brokerages typically have board discretion to limit trades pursuant to their user agreements. 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.” 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. The user agreement is a contract; thus, the contract said it could do this.
Still, user agreements are not “always an absolute protection from aggrieved clients.” It depends on the particular situation that occurs. For example, there could be liability if a brokerage allowed trading by “some clients but not others.” 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. 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.
*J.D. Candidate, Class of 2022, Arizona State University Sandra Day O’Connor College of Law.