A group of traders suffered a bitter defeat on August 10, 2023, as the Eleventh Circuit U.S. Court of Appeals nixed their appeal from a ruling in a “meme stock” lawsuit targeting Robinhood.

In January 2021, many customers of the online financial services company Robinhood were aggressively buying specific stocks known as “meme stocks” in a frenzy that generated widespread attention. This phenomenon brought Robinhood additional revenue and a huge number of new customers, but it also exposed the company to unprecedented regulatory compliance risk.

Robinhood then made a controversial decision: it suddenly restricted its customers’ ability to buy these meme stocks (but not their ability to sell them).

Some Robinhood customers who could not buy the restricted stocks brought a putative class action, seeking to represent both Robinhood customers and all other holders of the restricted meme stocks nationwide who sold the stocks during a certain period.

As Robinhood customers, they allege that they lost money because Robinhood stopped them from acquiring an asset that would have continued to increase in value. And as stockholders, they allege that Robinhood’s restriction on purchasing the meme stocks caused the price of their stocks to fall.

The Appeals Court ruled that the plaintiffs fail to state a claim—their contract with Robinhood gives the company the specific right to restrict its customers’ ability to trade securities and to refuse to accept any of their transactions. Because Robinhood had the right to do exactly what it did, the plaintiffs’ claims in agency and contract cannot stand. And under basic principles of tort law, Robinhood had no tort duty to avoid causing purely economic loss.

The Appeals Court affirmed the district court’s dismissal of the claims.

In particular, the plaintiffs argued that Robinhood owed its customers fiduciary duties, including to refrain from putting its own interests in front of those of its customers, plus a specific fiduciary duty to provide those customers with “an open trading platform free of self-imposed trading restrictions.” They said that Robinhood breached these duties by restricting their ability to buy shares of the meme stocks on Robinhood. The Appeals Court disagreed.

A fiduciary duty is the duty of one person to act in the best interest of another. Fiduciary relationships are generally between a principal and an agent.

The Court notes that the customer agreement shows that Robinhood did not assume a duty to act in its customers’ best interests in determining whether to accept their trade requests. The parties repeatedly contemplated that Robinhood had the right to decline to execute trade requests for any reason.

As customers, all of the named plaintiffs granted Robinhood independent authority in this area: (1) the right to “at any time, in its sole discretion and without prior notice to Me, prohibit or restrict My ability to trade securities”; (2) the right to “in its discretion, prohibit or restrict the trading of securities” in “any of My Accounts” and (3) the right to “at any time, at its sole discretion and without prior notice to Me: (i) prohibit or restrict . . . My ability to trade, (ii) refuse to accept any of My transactions,” and “(iii) refuse to execute any of My transactions.”

The Agreement narrowed the relationship: Robinhood retained discretion to decline the plaintiffs’ trade requests.

Nothing in the contract suggested that Robinhood would accept all trade requests. The Court failed to see how it could imply a fiduciary obligation to allow unfettered access to Robinhood’s trading platform from this relationship. So Robinhood did not agree to act as its customers’ agent when deciding whether to accept their trade requests, and the District Court correctly dismissed the plaintiffs’ claim for breach of fiduciary duty.

The claims for breach of the implied covenant of good faith and fair dealing and for breach of the implied duty of care fail for the same basic reason as the breach of fiduciary duty claim: Robinhood had the express contractual right to do exactly what it did.

The plaintiffs’ negligence claims fail because, under both California and Florida law, Robinhood had no duty not to cause economic loss to either the putative Robinhood class or the putative nationwide investor class.

The Appeals Court concludes:

“When Robinhood restricted its customers’ ability to buy meme stocks, it took a sizable—and perhaps justifiable—hit in the court of public opinion. But in this Court, Robinhood is only accountable for specific legal duties. Whether in agency, contract, or tort, the plaintiffs’ amended master complaint did not adequately allege that Robinhood breached a state common-law duty. We AFFIRM the judgment of dismissal”.