Robinhood challenges traders’ appeal in lawsuit about trading restrictions
Robinhood has filed its response in opposition to the appeal by a group of traders who claim to have been negatively affected by the trading restrictions the company implemented during the January 2021 short squeeze.
In January 2021, securities markets entered a period of increased volatility. Retail investors, banding together through forums like WallStreetBets on Reddit, drove a massive short squeeze involving certain stocks they perceived to be the target of short selling by hedge funds (“meme stocks”). Their activity resulted in extreme market volatility, with dramatic increases in trading prices.
Before dawn on January 28th, Robinhood received notice that its NSCC deposit requirements had jumped to more than $3 billion. Faced with an unprecedented capital call, Robinhood Securities made the decision to set the small number of Suspended Stocks to a “position close only” (“PCO”), which would restrict new purchases of the Suspended Stocks, while allowing Robinhood customers to exit their positions if they so chose. Shortly thereafter, the NSCC reduced Robinhood Securities’ deposit requirements.
Various lawsuits against Robinhood and other retail brokerages and securities market participants were filed around the country and consolidated for pretrial purposes in a multidistrict litigation captioned In re January 2021 Short Squeeze Trading Litigation (“MDL”). The District Court organized the claims into four “tranches,” appointed interim lead plaintiffs and counsel for each tranche and ordered lead plaintiffs to file superseding complaints.
The plaintiffs in this particular case represent the “Robinhood Tranche” and brought state-law claims against Robinhood.
On January 27, 2022, the District Court granted Robinhood’s Motion in its entirety with prejudice, reasoning that “both California and Florida law require courts to respect and enforce the terms of valid contracts” and the “terms permitted Defendants to do precisely what they did.” Plaintiffs appealed.
On August 29, 2022, Robinhood filed its response to the appeal in the Eleventh Circuit U.S. Court of Appeals.
The company argues that the plaintiffs cannot recast a losing contract claim into viable tort and quasi-contractual claims. Plaintiffs – like all Robinhood customers – accepted the Agreement’s terms, which expressly permitted Robinhood to decline to accept and execute customer trade orders.
Robinhood argues that the plaintiffs’ fiduciary duty claim (Count III) fails because no Robinhood entity owed Plaintiffs a general fiduciary duty. Under both Florida and California law, nondiscretionary brokers do not owe customers general fiduciary duties unless they provide investment advice. Robinhood did not decide on trades on Plaintiffs’ behalf, nor did it provide investment advice to Plaintiffs. Therefore, rather than owe general fiduciary duties, Robinhood was an agent with limited duties that arose only in the execution of any transaction that it chose to accept.
Because the Agreement granted Robinhood discretion to decline to accept or execute customer trade orders, Robinhood acted within the scope of its authority, and none of the alleged conduct violated the limited duties that existed by virtue of contract and common law. Robinhood Securities, as a clearing broker, also did not owe any fiduciary duties to Plaintiffs.
Further, according to Robinhood, the plaintiffs’ negligence claims (Counts I and II) fail because Robinhood did not owe Plaintiffs any duty to avoid inflicting economic harm. Both Florida and California law decline to expand a duty in negligence claims to cover economic loss particularly where, as here, the claims arise from a valid contract. Plaintiffs fail to plead any exception to these common-law negligence principles, and dismissal of their claims should be affirmed.
Robinhood also says that the plaintiffs’ good faith and fair dealing (Count V) and implied duty of care (Count IV) claims fail because the express terms of the Agreement permitted the conduct at issue. California law does not permit such claims to override the express terms of the contract.
In addition, Robinhood says that the plaintiffs’ tortious interference claim against Robinhood Markets (Count VI) fails both because it is derivative of the quasi-contractual claims, which fail for the reasons just described, and because Plaintiffs fail to allege any intentional conduct by Robinhood Markets to breach or disrupt any contractual relationship between the other Robinhood entities and Plaintiffs.
Finally, Robinhood notes that the District Court appropriately granted the Motion to dismiss with prejudice and denied Plaintiffs leave to amend. No further factual allegations can bolster Plaintiffs’ inability to plead cognizable tort duties or permit Plaintiffs to circumvent the express language of the Agreement, the company states, concluding that the Court should affirm the District Court’s dismissal with prejudice.