New York ‘Hot News' Misappropriation Claim Is Preempted by Federal Copyright Law

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A claim under the “hot news' misappropriation doctrine available under New York law was preempted by federal copyright law, the U.S. Court of Appeals for the Second Circuit ruled June 20 (Barclays Capital Inc. v. Inc.,2d Cir., No. 10-1372-cv, 6/20/11).

Reversing in part a judgment of infringement and misappropriation, the court determined that the claim was preempted because under a test for exceptions to preemption, a website that was summarizing the investment recommendations of major investment banks was not a free rider and was reporting the news, something that the banks were not doing.

Benjamin E. Marks of Weil, Gotshal & Manges, New York, which represented the plaintiff investment banks in this case told BNA that the plaintiffs were disappointed in the result and would be reviewing the decision in order to determine their next course of action.

“Each of the plaintiffs remains committed to protecting their equity research against unauthorized appropriation,” Marks said. “We note that the appellate court left undisturbed the trial court's determination that had infringed copyrights in equity research and left in place the injunction against further such infringement.”

Banks Issue Daily Recommendations

Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and Morgan Stanley & Co. are financial services companies and investment banks that produce research reports of varying lengths evaluating prospective securities and making recommendations regarding corporate securities for their securities brokerage clients. The reports are circulated every morning, between midnight and 7 a.m., before the markets open.

The firms' brokerage staffs use these recommendations to encourage current and prospective clients to use their brokerage services to trade in securities. Inc., a news aggregator, operates a website, “The Fly on the Wall,” associated with the domain name, which offers internet users information about the financial services industry.

Barclays and the other banks alleged that the Fly on the Wall website had obtained copies of their research reports before they had been distributed to the public and had taken the conclusory recommendation portions and distributed them in summary form to subscribers without authorization. Barclays sued, alleging that its dissemination of excerpts from the reports constituted copyright infringement under federal law and dissemination of the recommendations in summary form constituted “hot news” misappropriation under New York state tort law.

Following a bench trial, Judge Denise L. Cote of the U.S. District Court for the Southern District of New York ruled that was liable for 17 counts of copyright infringement. The district court awarded statutory damages, prejudgment interest, and attorneys' fees. The court also imposed on injunction barring the Fly on the Wall from infringing the banks' research reports. Regarding the hot news claim, the injunction barred the Fly on the Wall from “dissemination of the Firms' Recommendations until one half-hour after the opening of the New York Stock Exchange or 10:00 a.m., whichever is later.” Barclays Capital Inc. v. Inc., 700 F. Supp. 2d 310, 96 USPQ2d 1077 (S.D.N.Y. March 18, 2010) (53 PTD, 3/22/10).

The Fly on the Wall appealed with respect to the hot news misappropriation claim and injunction.

NBA Preserves Some INS-Type Claims

Judge Robert D. Sack ruled that the hot news misappropriation claim was within the general scope of copyright law and protected the same kinds of works as those protected under federal copyright law. According to the court, the hot news misappropriation claim was not excepted from preemption under National Basketball Association v. Motorola Inc.,105 F.3d 841, 41 USPQ2d 1585 (2d Cir. 1997).

The hot news doctrine began with International News Service v. Associated Press, 248 U.S. 215 (1918), which held that the Associated Press held property interest in its news bulletins—though the facts within them were not protected by copyright law—and that use of those bulletins by the International News Service constituted misappropriation. However, federal common law, including INS, was eliminated by Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).

In NBA, the National Basketball Association brought action to stop Motorola Inc., a provider of mobile pager services, from taking information from NBA-owned broadcasts of professional basketball games and transmitting updates and results to pager service subscribers. According to NBA, certain INS-like claims might survive federal preemption, if such claim incorporates an “extra element” not found in a federal copyright claim.

NBA set forth a five-part test for an exception to preemption:


We hold that the surviving “hot-news” INS-like claim is limited to cases where: (i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (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.

Later on in the same opinion, NBA restated the test, but with slightly different wording and some examples:


In our view, the elements central to an INS claim are: (i) the plaintiff generates or collects information at some cost or expense …; (ii) the value of the information is highly time-sensitive …; (iii) the defendant's use of the information constitutes free-riding on the plaintiff's costly efforts to generate or collect it …; (iv) the defendant's use of the information is in direct competition with a product or service offered by the plaintiff …; (v) the ability of other parties to free-ride on the efforts of the plaintiff would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened … (“[INS's conduct] would render [AP's] publication profitless, or so little profitable as in effect to cut off the service by rendering the cost prohibitive in comparison with the return.”).

Enduring ‘Ghostly Presence.'

“Some seventy-five years after its death under Erie, INS thus maintains a ghostly presence as a description of a tort theory, not as precedential establishment of a tort cause of action,” the court said.

The court rejected the argument that the New York hot news misappropriation doctrine was somehow necessary to preserve the moral rights of a party such as the Associated Press in INS. The court said:


No matter how “unfair” Motorola's use of NBA facts and statistics may have been to the NBA—or [Fly on the Wall]'s use of the fact of the Firms' Recommendations may be to the Firms—then, such unfairness alone is immaterial to a determination whether a cause of action for misappropriation has been preempted by the Copyright Act. The adoption of new technology that injures or destroys present business models is commonplace. Whether fair or not, that cannot, without more, be prevented by application of the misappropriation tort. Indeed, because the Copyright Act itself provides a remedy for wrongful copying, such unfairness may be seen as supporting a finding that the Act preempts the tort.

The court also noted that the existence of an exception to preemption under NBA operated to lessen the uniformity of law in this area.

Furthermore, the court noted that the two versions of NBA‘s five-part test were not entirely consistent with each other. For example, the court said, the quotation from INS included with the second iteration would make that factor “far more difficult to demonstrate.” And they were also not consistent with the same decision's three-part extra element test, which said:


We therefore find the extra elements—those in addition to the elements of copyright infringement—that allow a “hotnews” claim to survive preemption are: (i) the time-sensitive value of factual information, (ii) the free-riding by a defendant, and (iii) the threat to the very existence of the product or service provided by the plaintiff.

The court concluded that the five-part tests set forth in NBA were non-binding dicta, as they constituted an unnecessary discussion of hypothetical circumstances that were not present in the facts of that case. Rather than constituting binding tests, these were illustrations of the manner in which the preemption analysis should proceed, the court said.

No Free Riding

All these tests seemed to serve slightly different priorities, the court said. In any case, whatever these priorities might be, the banks' misappropriation action met the basic criteria for preemption.

First, the court said, the reports met the “subject matter,” criterion because they constituted material that was “of a type covered” by the Copyright Act. Next, the reports met the “general scope” criterion” because they were the kind of material in which whose rights “may be abridged by an act which, in and of itself, would infringe one of the exclusive rights' provided by federal copyright law,” the court said, quoting from Computer Associates International Inc. v. Altai Inc., 982 F.2d 693, 716, 23 USPQ2d 1241 (2d Cir. 1992).

Finally, applying the NBA test, Fly on the Wall was not a free rider, the court said:


It is collecting, collating and disseminating factual information—the facts that Firms 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. The Firms are making the news; [Fly on the Wall], despite the Firms' understandable desire to protect their business model, is breaking it.

The court thus reversed the judgment of misappropriation and remanded the matter to the district court with instructions to dismiss the “hot news” claim.

The court's opinion was joined by Judge Rosemary S. Pooler

Judge Reena Raggi filed a concurring opinion stating that rather than failing on the free-rider prong, that the banks had failed to demonstrate, under NBA, that Fly on the Wall was a direct competitor. Raggi disagreed with the majority that the five-part tests were dicta. was represented by Glenn F. Ostrager of Ostrager Chong Flaherty & Broitman, New York. The banks were represented by R. Bruce Rich of Weil Gotshal & Manges, New York.

By Anandashankar Mazumdar

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