In re Robinhood Outage Litigation

Background

The court had related and consolidated several actions against Robinhood Financial LLC, Robinhood Markets, Inc., and Robinhood Securities, LLC concerning Robinhood’s March 2 and 3, 2020 systems crash. The crash prevented users from accessing their accounts to buy or sell securities, and the consolidated cases sought damages.

Stanley Withouski originally filed this proposed class action in the California Superior Court for the County of San Mateo. He asserted California state-law claims on behalf of a proposed class of Robinhood users in California, including claims under the California Unfair Competition Law and Consumer Legal Remedies Act, negligence, breach of contract, and unjust enrichment. The complaint alleged that Robinhood promoted its technology as exceptionally engineered, low-latency, and capable of providing the best possible trade execution, but actually had defective and unstable infrastructure with coding bugs that caused the crash.

Robinhood removed the case to federal court under the Securities Litigation Uniform Standards Act of 1998, or SLUSA. Robinhood argued that Withouski’s state-law claims were effectively claims for violations of federal securities laws and therefore could not proceed as a state-law class action.

Legal standard

SLUSA allows removal of certain state-law class actions and precludes those actions when they allege untruth or manipulation in connection with the purchase or sale of a covered security. The opinion explains that a covered class action seeks damages for more than 50 people, and a covered security is generally a security traded on a national exchange or issued by an investment company.

The court emphasized that federal removal and jurisdiction under SLUSA are limited to cases that SLUSA precludes. If the action is precluded, the proper course is dismissal. If it is not precluded, the federal court has no jurisdiction to decide the merits, and the proper course is remand to state court.

Court’s analysis

The court concluded that Withouski’s claims were not precluded by SLUSA. Although the complaint alleged fraud and contract-related misconduct involving a brokerage company, the court stated that not every breach of contract or misleading statement by a broker is a securities-law violation.

The court explained that SLUSA applies only when the defendant’s deceptive conduct made a significant difference to someone’s decision to purchase or sell a covered security. The alleged fraud must relate to the nature of the securities, the risks associated with buying or selling them, or another factor similarly connected to the securities themselves. Examples of the types of conduct directly connected to the securities markets include insider trading, manipulation of share prices, diversion of investment opportunities, and fraudulent overvaluation.

The court found that Withouski alleged none of those concerns. His complaint was based entirely on the allegation that Robinhood promised users robust, best-in-class technology but failed to provide it. The court concluded that this conduct fell outside the claims Congress intended SLUSA to preclude. It also noted that the Ninth Circuit had expressed doubt in a similar context that a trading-systems crash would be covered by SLUSA.

Disposition

The court held that Robinhood’s removal was erroneous because the claims were not precluded by SLUSA. Judge James Donato ordered that the case be remanded to the California Superior Court. The opinion states that the case was removed improvidently and without jurisdiction and ends with: “IT IS SO ORDERED.”