In a decision last week that uproots long-standing precedent, the U.S. Court of Appeals for the Second Circuit dealt a blow to companies looking to rely on the “hot news” misappropriation doctrine to protect their valuable data and information. In Barclays Capital, Inc. et al. v. Theflyonthewall.com, Inc.,1 the court found that, on the facts before it, the hot news doctrine was preempted by the Copyright Act. More importantly, the court’s analysis of the doctrine suggests that it may be harder for companies to sustain a hot news claim in the Second Circuit.
Theflyonthewall.com (Fly) published stock recommendations issued by the plaintiffs shortly after they had issued and before the opening of the markets. After a four-day bench trial, the lower court found for the plaintiffs on their claims of copyright infringement and “hot news” misappropriation. The lower court issued a permanent injunction against Fly based, in part, on a finding that Fly was free-riding on the plaintiffs’ efforts. The Court also enjoined Fly from disseminating any of the plaintiffs’ stock recommendations until one-half hour after the opening of trading on the New York Stock Exchange.
The Second Circuit reversed, holding that based on the particular facts of the case, plaintiffs were not able to surmount federal copyright preemption of the state law misappropriation claim. The court did not rule that all New York “hot news” claims were preempted, but only that plaintiffs here had not established the additional elements beyond a copyright claim necessary to survive preemption. In a surprising turn, a majority of the panel also found that the oft-cited, five-factor “hot news” test that the Second Circuit identified in the 1997 decision NBA v. Motorola was dicta in that case. As a result, information and news providers are left without clear guidance as to the elements necessary to establish such a claim.
The plaintiffs, Barclays Capital Inc.; Merrill Lynch, Pierce Fenner & Smith Incorporated; and Morgan Stanley and Co. Incorporated, provide securities brokerage services and recommendations as a service to their clients and potential clients. The recommendations and underlying reports collectively are circulated to clients and prospective clients every morning before the U.S. securities markets open. The plaintiffs use these reports to market their brokering services under the view that customers who place a trade based on the recommendation are likely to do so with the recommending firm’s brokerage services.
The defendant, Fly, is a financial news aggregator that posts, through its online news feed, one-line summaries of the recommendations produced by 65 investment firm analysts, including those of the plaintiffs. Fly claimed that it culls and aggregates only summaries of the firms’ recommendations (i.e., rating and target price) and does so from a combination of public sources, including news outlets, chat rooms and sources in the securities markets. Like the plaintiffs, Fly distributes these summaries before the New York Stock Exchange opens each morning. Fly’s subscribers are principally individual investors and brokers, as compared to the institutional investors largely targeted by the firms. Although the recommendations published by Fly are attributed to the respective firms, according to the plaintiffs, the recipients of Fly’s newsfeed have no particular incentive to trade with the recommending firm.
The plaintiffs sued for both copyright infringement (for verbatim copying in 17 instances) and under New York State tort law for misappropriation of “hot news.” The United States District Court for the Southern District of New York (Cote, J.) found for plaintiffs on both the copyright claim (which Fly did not challenge) and the hot news misappropriation claim, at issue in the appeal to the Second Circuit.
The “Hot News” Doctrine
The Supreme Court first recognized a cause of action for “hot news” misappropriation in the 1918 case International News Service v. Associated Press.2 Associated Press (AP) claimed that the competing news service International News Service (INS) regularly was copying AP’s news reports on World War I from early East Coast editions and reselling those stories to its West Coast customers. The news stories and facts that INS republished were not deemed protected by copyright, but the Court determined that INS’ actions were nevertheless illegal, finding that INS was unfairly free-riding off of AP, and creating disincentives to news organizations to investigate and report the news. Doing so, the Court held, was an unlawful misappropriation of “hot news.”
The federal claim of “hot news” misappropriation met its demise with Erie Railroad Co. v. Tompkins’s3 abolishment of federal common law. The Second Circuit in The National Basketball Association v. Motorola, Inc.4 determined that the “hot news” misappropriation doctrine nevertheless survives under New York tort law, provided that certain additional factors not found in a copyright claim are present, such that the claim is not preempted by the Copyright Act. Under the Copyright Act of 1976 (Section 301), a plaintiff is precluded from pursuing a state-law claim if the claim (i) is based on the rights that are equivalent to the rights under copyright law (i.e., the rights to reproduce, distribute, perform, display and create derivative works) and (ii) falls within the subject matter protected under the Copyright Act (i.e., a work of authorship described in section 102 or 103 of the Copyright Act that is fixed in a tangible medium). In determining whether a particular claim is preempted, courts have looked to a third factor, as well—whether or not there is an “extra element” of the claim beyond the equivalent rights and subject matter.5
The Second Circuit in NBA v. Motorola was the first court to address the issue of whether “hot news” misappropriation is preempted under the 1976 Act and, specifically, whether an “additional element” was present so as to override the preemption defense. In that case, the defendant Motorola had hired employees to watch or listen to NBA games and report on scores and plays in real-time, sending updates to customers throughout the game via a pager called SportsTrax. Applying the preemption test, the Second Circuit held that the state law misappropriation claim related to the same rights as the rights of reproduction, distribution and display under copyright. Further, the court held that the protectable work at issue was the broadcast, rather than the mere facts (scores and plays) that were being transmitted. Although a game is not a fixed copyrightable work, the broadcasts were, which was sufficient for the Court to find that factor was met. The court then queried whether there was an extra element to the claim of “hot news” misappropriation that would allow such a claim to nevertheless survive preemption and reviewing the facts of INS v. AP, held that such additional element would be present only if certain additional factors were present in the particular case.
The Motorola court articulated a five-factor test to determine whether a particular “hot-news” claim would survive preemption: “(i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive [i.e., “hot”]; (iii) a defendant’s use of the information constitutes free riding on the plaintiff’s efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.”6 The lower court in Barclays applied the Motorola five-factor test, found that each of the five factors was present, and therefore held for the plaintiffs on the misappropriation claim.
The Second Circuit’s Reversal
In reversing the district court’s decision on the issue of copyright preemption, a majority of the Second Circuit panel in Barclays explained that the lower court had reached its conclusion that Fly was free-riding on the firms by relying on the five-factor test of Motorola. The Barclays majority, however, concluded that the five-factor Motorola test was mere dicta, stating that: (i) the Motorola court had articulated the test three different ways in its decision and thus could not have been creating law; and (ii) once the NBA failed to establish that Motorola was free riding—which the Barclays court viewed as the central holding in the Motorola case—the NBA could not sustain a “hot news” claim.7
The Second Circuit in Barclays concluded that Fly was not free-riding, but was instead “collecting, collating and disseminating factual information—the facts that plaintiffs and others in the securities business have made recommendations with respect to the value of and the wisdom of purchasing or selling securities—and attributing the information to its source.”8 The Court pointed out that, much like Motorola, Fly had its own team of employees who worked to compile the recommendations at issue. Moreover, the taking of the data did not occur at the point where the plaintiffs reaped their profit, according to the court. Each instead profited from their brokerage services. Although they hoped that the publication of the recommendations would promote the brokerage services, the court found that they did not directly “reap a profit” from the publication of their recommendations.
The Second Circuit concluded that the facts of the case before it were similar to those at issue in Motorola and not those in INS v. AP. “Here, analogous to the defendant’s [sic] in NBA, Fly’s employees are engaged in the financial-industry equivalent of observing and summarizing facts about basketball games and selling those packaged facts to consumers; it is simply the content of the facts at issue that is different.”9 In INS, the defendant had lifted stories from plaintiff’s East Coast papers wholesale and sent them by wire to be published on the West Coast. The Court found that the defendant had interfered with the operation of plaintiff’s business “precisely at the point where the profit [was] to be reaped, in order to divert a material portion of the profit from those who earned it to those who have not.”10 The Second Circuit pointed out that here, by contrast, there is no evidence that the profit made from trading on securities is being diverted to Fly. The plaintiffs’ lost commissions are instead likely “diverted to whatever broker happens to execute a trade placed by the recipient of news of the Recommendation from Fly.”11 In short, because the facts of Barclays did not rise to the level of free-riding in INS, the Court held the “hot news” misappropriation claim was preempted. “Here, like the defendants in NBA and unlike the defendant in INS, Fly ‘[has its] own network and assemble[s] and transmit[s] data [it]sel[f].’”12
Judge Raggi, in her concurrence, expressed reservations about the Motorola court’s five-factor test, but was unwilling to reject it as mere dicta. She nevertheless agreed with the majority’s conclusion that the misappropriation claim was preempted, but did so on the ground that the plaintiffs failed to establish the fourth factor in the Motorola test: that the plaintiffs and Fly were in direct competition.
Future of “Hot News” Doctrine?
In summary, in the Second Circuit at least, the “hot news” misappropriation claim survives copyright preemption, but only in what appears to be very narrow (and uncertain) circumstances. The Barclays decision would appear to eviscerate the ability of “hot” data and news providers to prevent aggregators from “scooping” or otherwise republishing content that is not protected by copyright (e.g., because it is pure fact or data), where the aggregator has put significant effort into collecting and compiling information and is not merely republishing the plaintiff’s “news.” In the Second Circuit’s view, the tort (and thus the preemption argument) appears to survive only where time-sensitive information is copied for the same purpose as the original publisher and without the additional effort of aggregating the information itself. For instance, the court hypothesized, such a case might exist if a firm were collecting and aggregating the recommendations throughout the brokerage industry themselves, and the defendant were to merely copy the information to its service rather than compile the data itself.13 Echoing the defendant’s and supporting amici’s arguments that the “hot news” doctrine competes with free speech rights, the court explained that the right to “make news” does not give rise to a right “to control who breaks that news and how.”14
The Barclays decision leaves open several, unanswered questions for information providers and news publishers alike. What exactly is the test for a “hot news” misappropriation claim? Exactly where should the line be drawn between free-riding and the gathering of information collected by others? How much effort is sufficient to rise above free-riding? How close to the plaintiff’s core business does the publication of the information have to be? Given the large and growing numbers of Internet sites and businesses devoted to republication of information, one can expect the courts in the Second Circuit and elsewhere to struggle with these issues as they attempt to define the boundaries of “hot news” misappropriation.
1 No. 10 1372 CV (2d Cir. June 20, 2011).
2 248 U.S. 215 (1918).
3 304 U.S. 64 (1938).
4 105 F.3d 841 (2d Cir. 1997) (finding the essential additional elements were not all present and that the claim was thus preempted by copyright law).
5 See, e.g., Computer Assoc. Int’l, Inc. v. Altai, Inc., 982 F.2d 693, 716 (2d Cir. 1992).
6 105 F.3d at 845 (emphasis added). The Second Circuit found that the NBA could not satisfy the five-factor test.
7 Barclays, No. 10-1372-CV, slip op. at 66.
8 Id. at 60.
9 Id. at 67.
10 248 U.S. at 240.
11 Barclays, No. 10-1372-CV, slip op. at 65.
12 Id. at 67 (citing NBA, 105 F.3d at 854).
13 Id. at 68.
14 Id. at 71.
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