“Hot-News” Misappropriation Liability Cools Off

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.

The appeals court discounted the extent that the elements laid out by the NBA court were controlling. The appeals court found those enumerated elements to be an outline of possible considerations, but not the only or required issues. (By doing this, the appeals court has struck a serious blow to the viability of a hot-news claim when asserted in this setting.) But even assuming that the NBA elements did control, the appeals court decided that Fly did not really piggy back on or compete with the banks, so that the NBA-enumerated elements for a hot news claim were not satisfied. The appeals court held that the banks created the recommendations and issued them to their select customers, while Fly merely reported those recommendations to its own membership. Notably, Fly did not misappropriate these recommendations as its own. Fly attributed the recommendation to its source. Had Fly passed off or modified the banks’ reports as its own, the outcome could have been different, because that would closely resemble the piggy-backing element described in NBA. The court also distinguished the parties’ business models by noting that Fly did not issue its reports to generate commissions and did not compete with the banks. The appeals court found Fly’s actions to be like Motorola’s–condensing and reporting facts (game scores or stock recommendations) for its customers.

The appeals court also raised the question of whether the concept of hot-news still exists in today’s “hyper-linked” world. While the appeals court did not answer that question definitively, the slant in its opinion seems to be a precursor for how the court would decide that issue in the future.

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