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Second Circuit Decision in Barclays v. Theflyonthewall.com Sheds Light on Conflict over ''Hot News'', Contributed by Anthony Corleto and Scott Smedresman, Wilson Elser Moskowitz Edelma

Tuesday, September 13, 2011

By Anthony Corleto and Scott Smedresman, Wilson Elser Moskowitz Edelman & Dicker LLP

The Second Circuit’s decision in Barclays v. Theflyonthewall.com,1 has spawned comment, much of it conflicting, from those who find themselves aligned with either side of that battle. On the one hand, the research and investment community views the outcome as abetting thieves; on the other, pundits and free speech advocates view the outcome as supporting their speech rights and the concept that information "wants to be free." Ultimately, the decision, and the resulting doctrine, charts a course between these views, holding that most "information republication claims" are preempted by the Copyright Act, but leaving a narrow type of "deceptive republication" subject to remedies under state misappropriation law.

In the wake of this decision, news outlets and content aggregators both should have a better understanding of where the lines are drawn in this area of the law. Further, industries that seek to protect the information they generate should look to complementary state laws, such as trade secret or contract law, to protect their information. The challenges to current business models created by advancing technologies, however, are unlikely to cease, and new and inventive business strategies may be preferable to relying on the glacial evolution of laws designed to protect older models.

Origins of "Hot News" Misappropriation Law
The basic premise of the "hot news" misappropriation tort is that an organization that invests resources in gathering news should be entitled to profit from that effort, safe from "free riders" who pilfer that effort for their own profit.

The modern cause of action for this type of misappropriation has its origin in International News Service v. Associated Press.2 There, the Supreme Court found that hot news is protectable as "quasi-property" under federal common law. The Associated Press ("AP") reported World War I events from Europe and distributed its news reports to member papers on the east coast of the United States for dissemination to the public.3 International News Service ("INS") obtained AP’s news by, among other means, copying AP’s stories from bulletin boards and early editions of newspapers printed by AP’s eastern affiliates. INS transmitted those stories to the west coast, where it sold its own paraphrased news stories based on the AP stories.

Affirming a permanent injunction in favor of AP, the Supreme Court identified the tort of misappropriation as addressing the rights of competitors in business between themselves, as opposed to rights stemming from the material sold by those businesses. The INS v. AP Court distinguished "the right of the purchaser of a single newspaper to spread knowledge of its contents gratuitously" from INS’s activity, which involved transmitting that news for commercial use in competition with its source. In this way, the Court sought to regulate the ethical conduct of businesses to ensure the fairness of competition. The Court observed:

Stripped of all disguises, the process amounts to an unauthorized interference with the normal operation of complainant’s legitimate business precisely at the point where the profit is to be reaped, in order to divert a material portion of the profit from those who have earned it to those who have not; with special advantage to defendant in the competition because of the fact that it is not burdened with any part of the expense of gathering the news. The transaction speaks for itself and a court of equity ought not to hesitate long in characterizing it as unfair competition in business.4

In reaching this conclusion, the INS v. AP majority was influenced by a "sweat-of-the-brow" or "labor" theory of property, which looked to notions of commercial morality and fair dealing as a basis to find a viable tort. Rebuking this view, Justice Brandeis dissented, observing that "the noblest of human productions – knowledge, truths ascertained, conceptions, and ideas – become, after voluntary communication to others, free as the air to common use."5

The Supreme Court’s elimination of Federal Common Law in Erie R.R. Co. v. Tompkins,6 effectively squelched the precedential value of INS v. AP. However, the case became the source of common law in several states.7 Many of these cases were based on the principle of commercial morality, and barred what was deemed actions "offensive to the ethics of society."8 New York courts continue to recognize a broad tort of misappropriation to this day as part of unfair competition law.9 These claims, however, generally involve some element of "passing off" another’s goods as one’s own.

Copyright Act Preemption Alters the Inquiry
Enactment of the 1976 Copyright Act sent the hot news misappropriation tort on another turn. Section 301 of the 1976 Act preempts state law claims that protect rights equivalent to the exclusive rights protected by the Act, most notably copying and distribution. Section 301 preemption applies even where the underlying copyrighted work mixes protectable and un- protectable elements.10 Thus, where a copyright-protected work contains both public-domain and unique creative elements, a cause of action for misappropriation of the public domain elements will generally be preempted by copyright law.

However, the Act carved out from preemption claims for misappropriation of works not within the scope of copyrightable material and claims that are not the equivalent of copyright claims, where a cause of action involves an "extra element" not implicated by copyright law.11

As observed by the Second Circuit, legislative history suggests that Congress did not intend for the Copyright Act to preempt the misappropriation of time-sensitive "hot news."12 The House Report took the position that misappropriation is not necessarily "synonymous with copyright infringement," and thus a cause of action labeled as "misappropriation" is not preempted if it is based neither on a right within the general scope of copyright nor on a right equivalent thereto. "For example, state law should have the flexibility to afford a remedy (under traditional principles of equity) against a consistent pattern of unauthorized appropriation by a competitor of the facts . . . constituting ‘hot’ news, whether in the traditional mold of [INS] or in the newer form of data updates from scientific, business, or financial data bases."13

Given the tension between the Act’s preemption of claims overlapping with copyright law and the statement that hot news misappropriation indeed survived, there was uncertainty as to the scope of the hot news misappropriation claim. Soon thereafter, the Restatement (Third) of Unfair Competition (the Restatement) recommended in its official commentary that the tort of misappropriation, as established by INS v. AP and adopted by many states, be formally abrogated.14However, the Restatement acknowledged that – despite its preference for Justice Brandeis’s dissent – "hot news" scenarios like those in INS v. AP constitute "unusual circumstances" that "present the most compelling case for protection against appropriation."15

Second Circuit Recognizes Hot News Post–Copyright Act
The question of whether a hot news misappropriation claim survives federal preemption, and the scope of what might survive, was squarely addressed in the Second Circuit decision National Basketball Association v. Motorola, Inc.16 There, the NBA sued Motorola over a pager marketed under the name "SportsTrax," which displayed real-time information about professional basketball games while they were in progress.17

Instead of the broad ethics-based misappropriation claims previously established in New York, the NBA Court held that only a narrow hot news claim could withstand preemption. To survive, the Court held, such a claim must involve the "extra elements" beyond those required to bring a copyright infringement claim. Articulating the elements of the tort, the Court stated that a hot news claim can only stand where (1) a plaintiff generates or gathers information at a cost; (2) the information is time-sensitive; (3) a defendant’s use of the information constitutes free riding on the plaintiff’s efforts; (4) the defendant is in direct competition with a product or service offered by the plaintiffs; and (5) 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.18

Applying this test, the Court found that the SportsTrax product did not compete with any NBA product and did not "free-ride" in any meaningful way. Thus, the Court found in favor of the defendant Motorola.

The contours of the tort were again tested in Associated Press v. All Headline News Corp.19 There, All Headline News was accused of having its employees scour the Internet for breaking news, rewriting it as their own and selling it under the All Headline News banner. Based on these allegations, the AP brought a variety of claims, including one for hot news misappropriation. Moving to dismiss, All Headline News stated that these claims were preempted by the Copyright Act.

In deciding the motion, the Court held that the AP’s allegations fell squarely within the NBA test. As All Headline News was alleged to be a competitor of the AP, the news being appropriated was allegedly time sensitive and, as in INS, the republication threatened the viability AP’s products, the Court held that a misappropriation claim had been adequately pled.

The Fly Rulings
These cases led to Barclays v. Theflyonthewall.com. Barclays addresses the publication of stock recommendations by brokerage houses, and the republication of those recommendations by others. Barclays and other brokerage houses provided stock recommendations to their clients with the expectation that the clients would trade through the brokerage house.20 The brokerage house recommendations were considered to be valuable, as they had the ability to move a stock’s price. Key to the value of this information was its timeliness, as early notice of the recommendation would allow the brokerage houses’ clients to trade on the news before it was absorbed by the broader market. Taking advantage of the value of this information, Fly collected and published the recommendations on its website as soon as they were released by the brokerage houses, providing Fly’s users with news of recommendations concurrently with, or even before, dissemination by the brokerage houses to all of their own customers.21

Before reaching the hot news issue, in an earlier phase of the litigation, the plaintiffs in Barclays prevailed on their copyright claim. At the district court, the brokerage houses showed proof of 17 instances where Fly republished substantial and key excerpts from their research reports. Eight of these reports were published by Morgan Stanley and nine by Lehman Brothers. For each of the 17 reports, the plaintiffs proffered registration certificates. Fly initially asserted that its copying was "fair use" under 17 U.S.C. § 107, and maintained this defense through summary judgment. At trial, however, Fly did not dispute that it infringed copyrights in these 17 reports. Therefore, judgment was entered for the brokerage houses on the copyright infringement claims.22

At some point, Fly modified its practice from directly copying the brokerage houses’ releases to reporting the fact of a brokerage house’s recommendation as news. Because information that a certain house issued a certain recommendation is a fact not protected by copyright, the brokerage houses included hot news misappropriation among their claims against Fly. The hot news claims were based on the time sensitivity of the recommendations, the parties’ positions as competitors, Fly’s "free riding" on the brokerage houses’ efforts and impairment of the recommendations’ value by unauthorized dissemination thereof, sometimes even before the brokerage houses could notify their customers. On their face, the facts seemed to fall within the narrow hot news misappropriation claim. Following a bench trial, the district court found that Fly was indeed liable for hot news misappropriation. It held that Fly met all the elements of the test laid out by the NBA Court, and thus enjoined Fly from continuing to engage in this practice.23

The case was appealed to the U.S. Court of Appeals for the Second Circuit. There, the Circuit Court reversed the ruling of the district court, finding that Fly was not in fact free riding on the brokerage houses’ investigation efforts, and the claims were otherwise preempted by the Copyright Act.24

In reaching this conclusion, the Second Circuit emphasized the "narrowness" of the hot news exception to copyright preemption, stressing that it should be found only in rare circumstances.25 Further, the court clarified that the "free riding" prong of hot news misappropriation is not, as other courts had held, a review of whether one’s efforts are exploited by another.26 Commercial morality is no longer the focus of the "free riding" inquiry, the court held. Rather, the central element involves the sale of the aggrieved party’s product as the defendant’s own, and that if the source is not misrepresented, "free riding" should not be found.27 Applying the analysis to the fact of the case, the court found that Fly was not misrepresenting the source of the recommendations – it was truthfully attributing the recommendations to the issuing brokerage house.28

An additional point of importance to the court was that Fly spent effort collecting recommendations from around the financial community and aggregating them in one location. This, the Court found, indicated that Fly was not like INS in the original INS v. AP case, as it did not simply rely on the efforts of others and publish those results as its own.29

In sum, the Appellate Court found that that Fly’s conduct was not a misappropriation.

Implications of the Fly Rulings and the Current State of the Doctrine


With the clarifications provided by the Fly ruling, the scope of the hot news appropriation tort appears to be narrow – limited to circumstances involving misrepresentations, not just misappropriations. Thus, the tort’s potential to reach content aggregators may be small – as long as the aggregators truthfully disclose the original source of collected material, they may avoid a claim.

Given the narrow focus of the tort, businesses seeking to protect valuable information that they generate, subject matter outside the scope of copyright law, should consider trade secret and contract models for their efforts.

Under state laws, information that derives its value from being a secret, and is subject to reasonable efforts to maintain its secrecy, is entitled to protection as a trade secret. Contract law, of course, can provide complementary coverage. For brokerage houses issuing recommendations, this could mean the use of password-protected websites where the information is disseminated to authorized subscribers, with an agreement or "click-through license" that the user not publicize the content until the brokerage house releases it to a broader audience.

Ultimately, however, as in many other fields, the speed of advancing technologies has proven a challenge to the brokerage houses’ business model. Similar to challenges faced by the recording and film industries, new technologies have created difficulties that cannot be easily addressed by prior case law and legal models. With the advancing pace of technology, this type of challenge is likely to impact a wider variety of business, requiring adjustments to business models where the law cannot keep up.

Anthony B. Corleto is a partner in Wilson Elser’s Connecticut and White Plains offices. His practice focuses on intellectual property, corporate disputes, construction matters, insurance coverage and bad faith disputes, environmental matters, employment practice liability and municipal liability. Mr. Corleto has worked as a commercial casualty underwriter and risk management consultant. He has tried a number of complex cases involving banking and lease finance, development rights and insurance coverage. His clients include consulting organizations practicing in the technology, environmental and market research sectors; municipalities; general and trade contractors; insurance companies and brokers; and software developers.

Scott M. Smedresman is an associate in Wilson Elser’s New York office, focusing on the practice of intellectual property law. He counsels public and private entities on an array of intellectual property issues, including dispute resolution and corporate matters. Mr. Smedresman engages in litigation relating to trademarks, false advertising, copyright and patent disputes, as well as associated claims. He has represented clients in numerous federal courts as well as before arbitration panels such as the World Intellectual Property Organization and the International Chamber of Commerce. Additionally, Mr. Smedresman advises companies regarding the protection, expansion and exploitation of their intellectual property portfolios.

© 2011 Wilson Elser Moskowitz Edelman & Dicker LLP

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