November 2011 Archives

"Hot-News" Misappropriation Liability Cools Off

November 28, 2011

With the proliferation of websites that aggregate news and promise instant information, it is to be expected that one site or service will end up stepping on the toes of another. Investment advice in today's fast-moving markets is the setting for the most recent dustup.

Before discussing the particulars of this case, a brief and simplistic discussion of some legal dynamics in play here is necessary.

One of the ways that a plaintiff can bring a case in Federal Court is to assert a claim involving a Federal law or rule. If a plaintiff successfully does that, related State-based claims that concern the same facts can also be asserted in that Federal case. This allows a party to seek relief under both Federal and State laws in one case. However, there are certain Federal laws that provide that they are the exclusive basis upon which one can complain and seek relief, to the exclusion of any State laws that cover the same complaint. If that is the case, the State-based claim will be preempted by the Federal law and a Court will not consider the State-based claim, which will be dismissed. One example of this is a claim of copyright infringement. The Copyright Act, under which a copyright infringement claim is brought, provides that any complaint that resembles a copyright infringement can only be brought under the Copyright Act, to the exclusion of any claim that can be based on a State law. This convergence of a State-based claim and a claim brought under a Federal statute, sets up this situation where the Copyright Act will preempt any State-based claim alleging similar facts.

Turning now to the facts in our case. Flyonthewall.com ("Fly") learned the investing recommendations of major financial services firms before they were issued to their clients and sought to capitalize on that information. Fly would notify its own subscribers of those recommendations around the same time as when the firms did. Concerned that Fly was undermining their usefulness to their clients, Barclays Capital, Merrill Lynch and Morgan Stanley for Federal copyright infringement. Because a copyright infringement claim would not provide the banks with complete relief, which was to put Fly out of business, the banks also included in their Federal case a claim under the State common law tort of "hot-news" misappropriation, otherwise stated as reaping the benefits of what one has not sown (in the words of an earlier United States Supreme Court Decision). If that claim worked, the banks would have put Fly out of business.

The Federal district court considered prior appellate precedent, National Basketball Assoc. v. Motorola, Inc. ("NBA"), in making its decision. In that case, the NBA asserted claims against Motorola for its use of a pager system that reported real-time game scores and statistical information to its users. Because the scores were merely facts and not eligible for copyright protection, the NBA recognized that it couldn't stop Motorola with a copyright infringement claim. Therefore, the NBA resorted to arguing that Motorola was misappropriating the NBA's hot-news scores and asked the court to stop Motorola. The court considered the hot-news claim and determined that for the NBA to make it, it had to establish five elements. The NBA would have to allege that (i) it provided its information at some cost, (ii) the information had a value because it was time-sensitive, (iii) the defendant was piggybacking or free-riding off the plaintiff's information, (iv) the parties competed directly, and (v) allowing the republication to continue would substantially undermine the viability of the business or service in question. The hot-news claim was not made and dismissed, because the court found that Motorola did not compete with the NBA. Notwithstanding that dismissal, the NBA court considered the issue of Federal preemption of the hot-news claim under the Copyright Act. The NBA court determined that for a State hot-news claim to survive preemption, it had to contain something extra not found in a copyright claim. Applying the elements of the hot-news claim listed above, the NBA court found the second, third and fifth elements to be extra, as none of them were required to show copyright infringement. Thus, had the NBA satisfied the elements of a hot-news claim, it would not have been preempted by the Copyright Act.

With that, the Fly district court, in its 90 page decision, found that the banks had made out a copyright claim for Fly's reproduction of their entire reports. But that did not help the banks when it came to Fly's republication of just the stock recommendation or price target, as that information was fact and ineligible for copyright protection. To force Fly to stop entirely, required enforcement of the banks' second claim for hot-news misappropriation of the recommendations and price targets.

The Fly district court examined the NBA factors and found that each of the five enumerated elements were met. It also determined that the banks had established that the hot news claim was outside the claim for copyright infringement and was therefore not preempted by the Copyright Act. The Fly court discussed the banks' incentive to issue their reports, which were very expensive to produce and done to prompt their customers to execute trades, generating commissions to the banks. The banks maintained that these recommendations remained "hot" for a few hours after they were issued. The district court therefore issued an injunction preventing Fly from republishing any of the banks' recommendations for 30 minutes after trading had begun for the day. Fly appealed, arguing that the Copyright Act preempted the hot-news claim. In its own long and detailed opinion, the appeals court agreed.

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Owner of Valuable Sports Car Recovers for Depreciation Caused by Accident

November 21, 2011

The owner of a parked 2000 Ford GT, described as "a rare collector's sports car rapidly appreciating in value" sued a drunk driver that wrecked it. The trial judge refused to allow an award based on the depreciation of the car, some $50,000, only the actual damage incurred in its repair, approximately $3,500. On appeal, the owner argued that once damaged, the car lost its "original condition" premium value, and that it was entitled to recover that difference. The appeals court agreed, finding that when evaluating the plaintiff's claims of damages, the proper measure of those damages is the amount necessary to make it whole, including the depreciation caused by the damage.

Court Allows Landlord's Nuisance Case Against Tenants to Continue in New York County Supreme Court

November 15, 2011

An appeals court recently reversed a New York County judge who dismissed a lawsuit brought by a landlord, claiming that its tenants were maliciously harassing it to prevent the landlord from collecting rent and managing the property.

In Chelsea 18 Partners, L.P. v. Sheck Yee Mak, the landlord of a 26 unit walk-up filed a 43 page complaint seeking damages from the tenants of two rent controlled apartments. Prior to this lawsuit, the landlord had served the tenants with notices of termination. The tenants refused to vacate. Instead of seeking their eviction in landlord-tenant court, the landlord commenced an action in supreme court alleging nuisance, and seeking possession and monetary damages. The tenants moved for dismissal, arguing that the case belonged in landlord-tenant court. The lower court agreed. Upon appeal, the court disagreed with the determination that the lawsuit was based on non-payment and more appropriately brought in landlord-tenant court. The appeals court found that the landlord had amply alleged details of nuisance by claiming that:

The tenants illegally altered plumbing in both apartments, switching the position of the sink and the bathtub, and added outlets, switches and fixtures creating a hazardous electrical condition with exposed wiring. They then complained to the New York City Department of Buildings (hereinafter referred to as "DOB") that the plumbing and electric in the apartments were defective, and the DOB and Environmental Control Board issued violations against the landlord requiring it to repair the tenants' handiwork. The tenants thwarted the landlord's attempts to cure the violations by refusing access to the apartment, and then applied for rent reductions based on the very same conditions that they refused to allow the landlord to repair. Over a period of three years, the tenants procured 76 Housing and Preservation Department violations against the landlord. No violations were lodged concerning other tenancies in the building.

The complaint further alleges that the tenants not only unjustifiably denied or failed to arrange access, but also, knowing of the agency and court-imposed deadlines, attempted to extort extra work from the landlord in return for access, such as a new linoleum floor and bathtub of the tenants' choosing; and that tenant Michael Mak attempted to coerce the building superintendent to agree to a $50,000 penalty if the workers were late or the work was not completed to code.

The harassment by the Mak tenants allegedly extended to the landlord and its staff: the tenants allegedly physically obstructed work, videotaped, and threatened and intimidated the landlord's workers by yelling and screaming at them. As a result, the building manager and superintendent were forced to remain in the apartments during the repairs to prevent altercations and to keep workers from walking off the job.

* * *

Michael Mak also allegedly accosted, harassed, and threatened the owner and operator of a café, the only commercial enterprise in the building, and filed meritless complaints with the New York Department of Environmental Protection for excessive noise. The tenants also threatened and intimidated the landlord's attorney, including following him out of court hissing and muttering. On another occasion, the tenants refused to leave the building manager's office after the landlord's attorney declined to renegotiate a stipulation, and the police were summoned.
The complaint also chronicles the tenants' unjustified withholding of rent, forcing the landlord to bring three nonpayment proceedings in Housing Court in 2007, 2008 and 2010. Additionally, the allegations of objectionable conduct include the tenants' multiple, duplicative applications to the New York State Division of Housing and Community Renewal for rent and fuel cost reductions.
Given this conduct, the appellate court found that the case adequately addressed the nuisance and bad faith of the tenants and one that may be commenced in supreme court.