In the contemporary digital world, information is disseminated in an instant. How then, can researchers and publishers who produce highly valuable, time-sensitive information protect themselves and slow the speed at which their work product can be misused or misappropriated by others? The U.S. District Court’s decision in Barclays Capital applies the “hot-news” misappropriation doctrine arising from International News Service v. Associated Press, 248 U.S. 215 (1918), and may have major implications for both creators of time-sensitive information and Web sites that aggregate such information.
In her 89-page decision in Barclays Capital Inc. et al v. Theflyonthewall.com, 06 Civ. 4908 (S.D.N.Y., March 18, 2010), Judge Denise Cote tailored her decision to the facts of the case, which were set forth in detail. The Court found that the plaintiff companies (Firms) expended “substantial resources” in preparing equity research reports on publicly traded companies. The most significant “actionable” reports for investors are those that upgrade or downgrade the firm’s rating of a security (Recommendations). Most Recommendations are issued between midnight and 7:00 a.m., and may move the price of a stock significantly during early trading hours on the same day.
The Firms distribute these reports on a restricted basis to their clients. In addition — in what the Court called “the heart of the case” — each of the Firms follows up its Recommendations with personal outreach to a targeted subset of its client base, recommending a trading strategy and inviting the client to place an order through the Firm. According to the Court, this is where the Firms primarily realize the revenue payoff for the work and expense involved in creating the equity research reports.
The defendant collects and publishes financial news, information, and rumors through an online subscription news feed. It typically posted Recommendations before 9:30 a.m. each day and boasted of delivering Recommendations to its customers as a “one-stop solution for accessing analyst comments … on a real time basis.” While substantial text of some Recommendations was copied, thereby giving rise to copyright infringement claims,1 the principal issue in the case was the defendant’s systematic posting of headlines and very brief summaries of the Recommendations, in which Firms did not seek to enforce copyright.
On the hot-news misappropriation claim, the Firms were able to draw on a history of favorable application of the doctrine by the Second Circuit under New York unfair competition law. Invoking the doctrine in a 1986 case involving misappropriation of timely financial news, the Court had held that “the ‘hot’ news doctrine is concerned with the copying and publication of information gathered by another before he has been able to utilize his competitive edge.” Fin. Info., Inc. v. Moody’s Investors Serv., Inc., 808 F.2d 204, 209 (2d Cir. 1986). In National Basketball Association v. Motorola, Inc., 105 F.3d 841, 845 (2d Cir. 1997), the Second Circuit held that the hot-news misappropriation claim is not preempted under the Copyright Act if the following five elements are present:
(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 product the product or service that its existence or quality would be substantially threatened.
In applying these five factors, Barclays Capital left little doubt that rights in hot-news turn very much on the labor cost (or “sweat of the brow”) in generating such reports, yet the Court also noted that much of the research had a subjective judgmental quality that imparted the sort of value that is sometimes protected under copyright. Barclays Capital devoted particular attention to the value such research plays in the efficient operation of modern capital markets, balancing the social value of the research against the importance of “unrestrained access to information.” The Court found it was not necessary for the Firms to show a direct causal link between the defendant’s conduct and lost profits or other quantifiable damage, but rather that “the conduct of Fly and other similar parties, if permitted to continue, would be likely substantially to threaten plaintiffs’ ability to continue in the market.”
Leaving little doubt that the hot-news misappropriation doctrine is decidedly unlike the copyright laws, Barclays Capital made no secret that “it is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it.” Indeed, the fact that numerous other aggregators similarly trade on time-sensitive financial reports generated by the plaintiffs did not excuse the defendant’s “free riding.” However, it did affect the scope of the injunction.
As a distinctly equitable doctrine, hot-news misappropriation in Barclays Capital merited only highly circumscribed injunctive relief, specifically tailored to protecting the time-sensitive value of the information and balancing against it the societal value of allowing the free flow of information. Balancing the parties’ competing proposals, the Court allowed the ephemeral right to survive for only (approximately) 90 minutes from 8:00 a.m. until 30 minutes after the opening of the New York Stock Exchange or, for Recommendations made during the trading day, for two hours after the release by the Firms. Moreover, the Court explicitly noted that nothing in the injunction limited the defendant’s ability to engage in independent analytical reporting on market developments, even if this entailed occasional references to the plaintiffs’ Recommendations. Further limiting the scope of equitable relief, Barclays Capital requires a reevaluation of the market one year hence to ensure that if plaintiffs are unable to restrain third parties from engaging in similar conduct, Theflyonthewall.com is not placed at a competitive disadvantage.
Barclays Capital demonstrates that the very ease and speed with which digital information can be disseminated has created a need for new tools (or updating of old tools) to protect the enormous value of information and news gathering in the digital age. The “quasi-property” right Justice Pitney created 92 years ago has been successfully used in only a handful of cases in the past 50 years — always controversially. How well this tool will work in the contemporary digital world remains to be seen. However, Barclays Capital makes clear it is a tool that will be tested and used.
1 The Court rejected Flyonthewall’s fair use defense and found liability for copyright infringement arising from the verbatim copying of 17 research reports. It awarded minimum statutory damages of $750 for each infringement.
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