Investors have been subject to terrifying gyrations in the stock market on a daily basis since the beginning of the coronavirus outbreak. For some investors, they need to make transactions either because they want an entry point into the market or to trim the risk in their portfolio. However, for customers of the online brokerage Robinhood, they were unable to access the market for entire days during the market turmoil, leading them to either miss out on potential profits or to be stuck in positions that they could not exit as they decreased in value. As a result, Robinhood's customers have filed a class-action lawsuit against the broker because its system went down for an extended period during the market day.

The question is whether this class-action lawsuit has a likelihood of success. Robinhood already offered some small financial compensation to customers in the form of a free service. They also indicated that they would consider doing something more for exceptional cases. However, the plaintiffs are now operating in an area where there is limited legal precedent which could be used to find online brokers liable for the failures with their systems.
 

This Is Not the First Lawsuit for an Online System Outage

Online trading has come a long way since the early days of the internet in the late 1990s. Back then, reputable brokers like Charles Schwab and T.D. Ameritrade would experience occasional outages. Some of these were brief but others lasted for a prolonged period of time. There were some attempts to file lawsuits against those brokers back then. However, none of them led to a recovery for the plaintiffs. Thus, there is no one case that the plaintiffs could point to now that would support the idea that an online broker could be liable for losses suffered by customers during system outages.

There would be two primary hurdles that the plaintiffs need to overcome if the case goes to court and there is a decision on the merits. The first is the language of the brokerage agreement that the customers signed when they opened their account with Robinhood. This agreement contains an explicit clause that releases Robinhood from responsibility when their system experiences an outage. Courts will usually enforce the plain language of these agreements unless there is a sound reason to find the clause unenforceable. This would occur if there was some sort of fraud or duress, both of which are missing here.

The other major problem is measuring the damages if this were to be a sound legal theory. It is speculative to point to the price where a customer would have bought a security had the system accepted the order and executed it. The plaintiffs can point to what they would have done, but that might not be sufficient enough to plead as damages in a lawsuit. It would be a herculean task, and a speculative one indeed, for a court to try to measure damages in a hypothetical situation. Courts also cannot know how much money someone would have made, and they will struggle to grant damages based on that.
 

Was There Negligence by Robinhodd

Where Robinhood could have an issue is if there was some sort of negligence on their part that caused the system outage. In order to reach this decision, there will need to be an extensive analysis of what went wrong. If the system simply overloaded and collapsed because of all of the volume and message traffic, it may not be enough to hold Robinhood liable for anything.

If anything, where Robinhood may have an issue is in the regulatory arena instead of the civil courts. The SEC and the Financial Industry Regulatory Authority are likely investigating what happened at the current time. If it turns out that the online broker did not take adequate precautions to ensure that its system did not go down, they could face some sort of fine or disciplinary action by the regulators. However, even that would not be enough to make the brokers liable in court given the language of the brokerage agreement.

From Robinhood's standpoint, the biggest losses that they will suffer are most likely financial and reputational. Other brokers now also offer commission-free trading so customers may end up closing their accounts and moving their money. Leaving customers without a way to access their account during some of the most volatile days in history can be a reputational death knell.