Understanding the Robinhood Class Action Lawsuit

No Fluff- Just Facts

On Thursday (January 28, 2021) a class action lawsuit was filed against Robinhood, the stock-trading and investing firm, in a New York federal court.

On Wednesday (January 27, 2021) Robinhood unilaterally removed certain stocks from its trading platform, among them Gamestop (“GME”). The removal prevented Robinhood customers from buying, selling, or even searching for GME on the Robinhood app.

The lawsuit alleges that “Robinhood breached its Customer Agreement by…failing to disclose that its platform was going to randomly pull a profitable stock from its platform…” Also alleged is that Robinhood violated Financial Industry Regulatory Authority (“FINRA”) Rule 5310.01 by “failing to respond at all to customers’ placing timely trades — and outright blocking customers from trading a security.” Rule 5310.01 requires that investing firms “must make every effort to execute a marketable customer order that it receives promptly and fully.”

The class action Complaint is comprised of four “Causes of Action”: (I) Breach of Contract; (II) Breach of the Implied Covenant of Good Faith and Fair Dealing; (III) Negligence; and (IV) Breach of Fiduciary Duty and was lodged against Robinhood Financial LLC, Robinhood Securities, LLC, and Robinhood Markets, Inc. (collectively “Robinhood”). The “Relief” sought is also in four parts: (1) damages for class members’ ongoing losses incurred by their inability to sell GME on Robinhood’s platform; (2) attorney’s fees and costs; (3) punitive damages, and (4) an immediate injunction requiring Robinhood to reinstate GME on its trading platform.

The injunction request was mooted on Friday with GME’s reinstatement to Robinhood’s platform and resumption of customers’ unfettered ability to trade it.

Although Thursday’s lawsuit was filed in the United States District Court for the Southern District of New York by Attorney Alexander Cabeceiras, it was filed in the name of class member representative, Brendon Nelson, from Massachusetts. Alleged is that aggregate claims exceed five million dollars in damages, exclusive of attorney’s fees and costs, and that there are more than 100 putative members. A jury trial has been requested. The case has been assigned to United States District Judge Jesse M. Furman.

“DoNotPay,” an app previously marketed as a “streamlined” way for consumers to “get refunds and cancel subscriptions,” expanded its services on Thursday to add a feature allowing users to apply to join the New York lawsuit against Robinhood. DoNotPay charges an annual fee of $36.00 to access its app. DoNotPay is not the only way to join the New York class action.

Other lawsuits against Robinhood may follow, and a second class action lawsuit is currently being organized by the law firm ChapmanAlbin, LLC, based in Cleveland, Ohio.

The filing of multiple lawsuits – including multiple class actions – against the same defendant involving the same subject matter is not uncommon in the United States, and is neither prohibited nor illegal. Given the nationwide expanse of its customer base, Robinhood could be sued in any state or federal court (its exposure outside the U.S. is beyond the scope of this article). Multiple lawsuits by the same person against the same defendant over the same subject matter, however, are essentially prohibited, and would thus preclude Robinhood consumers from joining more than one lawsuit.

When substantially identical suits are filed in competing federal courts, the “first-to-file” or “first-filed” rule is often applied. The “rule” is not an actual, statutory rule, but a longstanding doctrine of comity whereby a federal court in which a substantially identical action is filed has discretion to stay, dismiss, or transfer the second-filed case in deference to the first-filed case. While the authority of a federal court to dictate what another federal court cannot due is unsettled, its authority over a state-filed action usually goes unchallenged.

If another lawsuit was initiated against Robinhood in any state court, the matter could (and would likely) be immediately removed (kicked up) by Robinhood to federal court.

Competing federal class actions presents a variety of challenges and options for Robinhood. There is no one-size-fits-all approach. One option is for Robinhood to separately defend each action, triggering res judicata (Latin for “thing decided”) and claim preclusion principles borne from the Full Faith and Credit Clause of the United States Constitution, and thus a race-to-the-finish scenario: the first action to reach judgment on the merits, whether that be by settlement or through litigation (i.e., disposal by way of a court’s ruling on a motion to dismiss or summary judgment, or by way of a jury trial), is generally conclusive as to all class members despite any competing litigation that is still pending. Whether the first judgment wholly precludes or halts another lawsuit depends on the overlap between the claims asserted and the classes (the more overlap between the two, the more impactful the judgment and vice versa).

Within the race-to-the-finish is the race-for-class-certification. Rule 23 of the Federal Rules of Civil Procedure dictates whether a federal class action may be “certified” and thus even permitted to go forward. Certification is not automatic nor is it “a given.” Rule 23 states that “[a]t an early practicable time after a person sues…as a class representative, the court must
determine by order whether to certify the action as a class action.” Proving that Rule 23’s requirements have been satisfied can be tedious, costly, and time-consuming. Consequently, “at an early practicable time” can mean the class certification ruling is stayed or held in abeyance while the court instead rules on a motion which is outcome determinative (dispositive) to the case substantively, such as a motion to dismiss or motion for summary judgment.

Robinhood’s response to any lawsuit, regardless of where that lawsuit is filed, will likely be a dispositive motion based upon the terms and conditions contained in its 33-page, singled-spaced “Customer Agreement” last updated June 2020. To use Robinhood’s free app and gain access to the Robinhood trading platform, customers must enter the Customer Agreement and agree to those terms and conditions.

Germane to the NY lawsuit allegations is Paragraph 16, “Restrictions on Trading,” which states: “I understand that Robinhood may at any time, at its sole discretion and without prior notice to Me: (i) prohibit or restrict My access to the use of the App or the Website or related services and My ability to trade, (ii) refuse to accept any of My transactions, (iii) refuse to execute any of My transactions, or (iv) terminate My Account.”

Also germane is Paragraph 38, “Arbitration,” which states: “This Agreement contains a pre-dispute arbitration clause…by signing…the parties agree [that] [a]ll parties to this Agreement are giving up the right to sue each other in court, including the right to trial by jury…“

The preclusive effect of a settlement creates an incentive among competing class counsel to be the first to reach a settlement. Authority to reach a settlement on behalf of class members depends on whether an order of class certification has been obtained. A defendant facing or potentially facing numerous class actions, such as Robinhood, has incentive and implied bargaining leverage with whichever counsel it chooses to negotiate as the first deal cut may be binding on all Robinhood consumers, yet leave counsel for the non-deal-making class out entirely.

About the Author:

Denese Venza, Esq. is an attorney and freelance writer licensed to practice in both state and federal courts in Florida and West Virginia. The information contained in this article is provided for informational purposes only, is not legal advice, and should not be construed as legal advice on any subject matter.

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