Robinhood and Reddit protected from lawsuits by user agreement,

By Tom Hals

(Reuters) – Robinhood Markets Inc’s user agreement is likely to protect the brokerage app from a barrage of lawsuits filed by customers after it blocked a frenzied trading rally in companies such as GameStop Corp (NYSE:) that was fueled on social media forums.

The owners of internet platforms where much of the discussion took place are likewise shielded from liability for users’ activity under a 25-year-old law known as Section 230.

At least a dozen proposed class action lawsuits accuse Robinhood of breaching its contract with customers when it restricted trading on Thursday.

Robinhood’s users were at the center of this week’s wild rally in a handful of stocks that had been heavily shorted by hedge funds and championed by individual investors in online chatrooms including Reddit’s WallStreetBets.

The lawsuits, brought in federal court, allege that the Menlo Park, California-based company breached its contractual obligation as a regulated broker to execute orders promptly and effectively.

However, Robinhood is not legally bound to carry out every trade and the lawsuits will not succeed without evidence the company restricted trading for an improper reason, such as to favor certain investors, according to several legal experts.

The user agreement on Robinhood’s website says it “may at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities.”

Adam Pritchard, a professor at the University of Michigan Law School, said the lawsuits are very unlikely to gain traction.

“The contract says they can do it,” Pritchard said of the company’s decision to restrict trading. “That seems to be a big stumbling block to the breach of contract claim.”

Robinhood did not immediately respond to a request for comment.

The popular commission-free trading platform had branded itself as an app to empower retail investors to take on Wall Street and democratize finance, and the trade restrictions sparked an uproar and claims of betrayal on social media.

Robinhood said the restrictions were necessary to comply with regulatory capital requirements and clearinghouse deposits, which it said fluctuate with volatility.

SUITS AGAINST BROKERS

The lawsuits allege the restrictions benefited large funds that were allegedly invested in or allied with Robinhood.

But the customers are unlikely to clear preliminary court hurdles to get to the point where they can demand documents and depositions to investigate Robinhood’s actions, said Ann Lipton, a professor at Tulane University Law School.

She said attempts to sue brokers for mishandling customer accounts have generally been unsuccessful due to limits that federal securities law places on the filing of class actions. For example, a…