Robinhood's User Agreement Likely Protects It From Lawsuits: Reuters

Robinhood is likely protected by its user agreements from potential lawsuits in the wake of the actions the platform took this week.

What Happened: That's according to legal experts spoken to by Reuters. They pointed to language in the user agreement that says Robinhood “may at any time, in its sole discretion and without prior notice" prohibit or restrict users' trades.

Robinhood restricted purchases of stocks such as GameStop Corp. GME beginning on Thursday. Robinhood said Friday that the restrictions were necessary to comply with regulatory capital requirements and clearinghouse deposits, which it said fluctuate with volatility.

See also: Robinhood Alternatives

This angered many investors and led to an outcry that spread into the world of U.S. politics.

Why It Matters: There are now at least a dozen proposed class action lawsuits that say those restrictions were a breach of customers' contracts, according to Reuters.

CNBC reported that in one case filed in the Southern District of New York, investors are joining the class action by way of an online service called DoNotPay.com.

But plaintiffs would have to demonstrate that Robinhood put the restrictions in place to favor certain investors or for some other similarly improper reason, the legal experts said.

Melvin Capital Management and Citron Capital were among the investment firms with large short positions in the stocks that were restricted by Robinhood. Those with large short positions were the ones seeing the heaviest losses in the short-squeeze upward movement of the stocks.

Another problem is that GameStop and other stocks fell sharply on Thursday after the restrictions were announced, making it harder to claim damages.

According to experts, the lawsuits against Robinhood seek unspecified damages, including punitive damages, which presents another hurdle to the customers’ chances in court. It will be difficult to prove users suffered as a result of Robinhood’s measures because GameStop and other stocks fell sharply on Thursday after the restrictions were announced.

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