(Reuters) – Robinhood Markets Inc .:'s user agreement is likely to protect the brokerage app from a large number of lawsuits from clients after it blocked a frantic trading rally in companies like GameStop Corp. run on social media forums.
The owners of internet platforms where much of the discussion took place are also protected from liability for users' activities under a 25-year law called section 230.
At least a dozen proposed class action lawsuits accuse Robinhood of violating its agreement with customers when the limited trade on Thursday.
Robinhood's users were at the center of the wild rally in a handful of stocks that had been severely shorted by hedge funds and struggled by individual investors in online chat rooms including Reddit's WallStreetBets.
The lawsuit, filed in federal court, alleges that the company Menlo Park, California, violates its contractual obligation as a regulated broker to order quickly and efficiently.
However, Robinhood is not legally bound to carry out all transactions and the lawsuits will not succeed without evidence that the company restricted trading for the wrong reason, to the benefit of certain investors, according to several legal experts.
The User Agreement on Robinhood's website states that it "at any time, in its sole discretion and without prior notice to me, may prohibit or restrict my ability to trade securities."
Adam Pritchard, a professor at the University of Michigan Law School, said that lawsuits are very unlikely to gain traction.
"The agreement says they can do that," Pritchard said of the company's decision to restrict trade. "It seems to be a major obstacle to the breach of contract."
Robinhood did not immediately respond to a request for comment.
The popular non-trading platform had branded itself as an app to enable retail investors to take on Wall Street and democratize financing, and the trade restrictions sparked a stir and allegations of social media fraud.
Robinhood said the restrictions were necessary to meet statutory capital requirements and clearing house deposits, which it said fluctuated with volatility.
Suit against brokers
The lawsuits claim that the restrictions favored large funds allegedly invested in or allied with Robinhood. the point where they can demand documents and deposits to investigate Robinhood's actions, said Ann Lipton, a professor at Tulane University Law School.
She said Attempts to sue brokers for mismanagement of client accounts have generally failed due to restrictions imposed by the Federal Securities Act on filing class actions. For example, a federal judge in 201
The judge said that TD Ameritrade customers did not show that the company broke promises or acted unfairly or in disbelief.
The lawsuits against Robinhood are seeking unspecified damages, including punitive damages, which further impede customers' chances in court, according to experts. measures because GameStop and other stocks covered by curbs fell sharply on Thursday after the restrictions were announced, said James Cox, a professor at Duke Law School.
"No injury, no foul," Cox said.
Some of the lawsuits said investors were harmed because they could not shorten GameStop or speculate that the stock would fall.
But some investment firms took a big hit and the shares in the companies were largely banned 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 major investments GameStop would fall in price and suffered huge losses as the stock rose. Reddit users messed up the rally, the messaging platform is isolated from requirements from the investment funds.
Social media companies are generally not responsible for user activity under a charter commonly known as Section 230, a 1996 law that aimed to encourage new forms of communication in the early days of the online era.
In the beginning of the internet, there were several notable cases where companies tried to suppress criticism by suing the owners of platforms.
One involved a lawsuit against the early online service Prodigy by Stratton Oakmont, the brokerage firm depicted in the Leonardo DiCaprio film "The Wolf of Wall Street." The court found that Prodigy was responsible for alleged defamatory comments from a user because it was a publisher who moderated the content of the service.
The burgeoning Internet industry was concerned that such a responsibility would allow for a range of new services. Congress eventually agreed and included section 230 of the Communications Decency Act.
"The whole point of section 230 is to allow sites like Reddit to allow conversations to take place," said Eric Goldman, a professor at the Santa Clara University School of Law.
"Knowing that certain conversations will be antisocial and in some cases illegal, section 230 states that it is not the responsibility of the service that creates the place for those conversations."