In a landmark decision, a U.S. judge has mandated Robinhood Financial LLC to pay a $9 million settlement over allegations that its referral program violated consumer protection laws. The lawsuit, spearheaded by plaintiffs Andrew Gillette and Cooper Moore, accused the trading platform of enabling users to send unsolicited advertising messages to their contacts. Despite denying the allegations, Robinhood now faces significant financial repercussions. This ruling underscores the importance of adhering to consumer protection regulations, even as companies innovate and expand their user base.

Introduction

A U.S. judge has approved a settlement of about $9 million in a lawsuit against Robinhood, alleging that the firm’s referral program enabled users to send unsolicited advertising messages to their contacts. Robinhood Financial LLC denied the allegations. A U.S. judge, Barbara Rothstein, has ordered Robinhood, a website for trading stocks and cryptocurrencies, to pay a $9 million settlement. The company faced a lawsuit over its referral program, which encouraged users to invite friends to join the platform. The judge ruled that Robinhood’s program violated the Consumer Protection Act.

Background of the Lawsuit

The lawsuit against Robinhood Financial LLC centered on its “refer-a-friend” program, which allegedly violated consumer protection laws. Plaintiffs Cooper Moore and Andrew Gillette filed the lawsuit on behalf of individuals who received unsolicited text messages from Robinhood’s program. These messages were sent between August 2017 and February 2024 to residents of Washington State. The lawsuit specifically targeted individuals who did not consent to receive these referral messages. However, Robinhood disputed these claims.

Robinhood’s referral program allowed users to send text messages to their contacts through the trading app, inviting them to join the platform. The lawsuit, filed in 2021, argued that these unsolicited messages violated Washington State’s Consumer Protection Act and the Commercial Electronic Mail Act.

Court Ruling and Settlement Details

Judge Barbara Rothstein clarified that the lawsuit centered on Robinhood’s “refer-a-friend” program, which allowed unsolicited messages to be sent to individuals in Washington State. This violated consumer protection laws, prompting the legal action. Senior Judge Rothstein deemed the $9 million settlement fair, emphasizing its reasonableness and adequacy given the complexity and costs of litigation. She affirmed that all parties involved had effectively represented the interests of the settlement class throughout the legal process.

The lawsuit, settled as a class-action, required Robinhood to compensate affected parties. Andrew Gillette and Cooper Moore’s legal team received $2.2 million in attorney fees and approximately $142.4k in litigation costs from the settlement fund. Each plaintiff was also granted $10,000 for legal services from the settlement.

Impact on Robinhood

Following the approval of the $9 million settlement on July 18, 2024, Robinhood’s stock (HOOD) experienced a decline of 1.8%. This immediate market reaction reflects investor concerns over the financial and reputational impact of the settlement. Robinhood has stated that it will review and modify its referral program to ensure compliance with consumer protection laws in the future. The company aims to rebuild trust with its user base and the broader market.

Broader Implications

This ruling highlights the critical importance of consumer protection in the digital age. As companies increasingly rely on digital marketing strategies, including referral programs, they must ensure that these strategies comply with existing laws and regulations. The Robinhood case serves as a cautionary tale for other companies that use similar marketing tactics. It underscores the need for transparency and consent in all forms of digital communication.

Potential changes in referral programs and marketing strategies for similar companies may include more stringent consent requirements and clearer communication about how referral messages will be used. Companies may also need to invest in compliance training and legal reviews to avoid similar legal challenges.

Summary

In summary, the $9 million settlement against Robinhood for its referral program violations serves as a significant reminder of the importance of consumer protection laws. The ruling not only impacts Robinhood but also sets a precedent for other companies in the financial and tech industries. As digital marketing continues to evolve, companies must prioritize compliance and transparency to maintain consumer trust and avoid legal repercussions. This case underscores the delicate balance between innovation and regulation in the digital age.

The author does not own or have any interest in the securities discussed in the article.