"Hot News" Misappropriation: Implications for Bloggers? for Bloomberg News?

What happens when the interests of newsgatherers and news aggregators collide?  That was the issue before District Court Judge Denise Cote last month in Barclays Capital Inc. v. Theflyonthewall.com (S.D.N.Y., 3/18/10), and the opinion in the case arguably has negative (dare I say ominous?) implications for bloggers and for anyone who republishes truthful information about a matter of public concern, even if that information has already leaked into the public domain.

The plaintiffs in the case were the financial services firms Barclays Capital, Merrill Lynch, and Morgan Stanley.  They sued Theflyonthewall.com (Fly) for misappropriation and copyright infringement for redistributing their stock analysts' investment recommendations "through unauthorized channels of electronic distribution."  Fly is an Internet subscription service that aggregates and distributes "relevant, market-moving financial news and information."  Fly often obtained research reports and recommendations via leaks from plaintiffs' employees or clients.  Fly would then quickly distribute the recommendations before the New York Stock Exchange opened, thereby undercutting the plaintiffs' abilities to profit from their reports.

After a bench trial, District Judge Cote entered judgment against Fly for copyright infringement, and awarded statutory damages, a permanent injunction against direct copying and republication of the reports, and attorneys' fees for the portion of the litigation expenses associated with pursuing the copyright infringement claim.  She also held that Fly had engaged in "hot-news misappropriation" when it redistributed the recommendations from the plaintiffs firms' investment reports before the opening of the New York Stock Exchange and crafted a "time-delay" injunction requiring Fly to delay future distributions for a specified period after the firms released their reports to remedy the problem.[Full details below.]

The theory of "hot news" misappropriation stems from International News Service v. Associated Press, 248 U.S. 215 (1918), in which the Supreme Court held, under federal common law, that "hot" news is "quasi-property."  That case involved a claim by the Associated Press against a competing news service that was obtaining and then redistributing on the West Coast AP battlefront news releases during World War I.  The Court's decision reflects the notion that "time is property", or as my colleague Michael Wolf puts it, the decision protects the "money value of time" as opposed to the "time value of money."  It also protects the "labor value" that AP invested in newsgathering, at least for a limited time.  The "hot news" misappropriation doctrine was criticized by no lesser lights than Justice Brandeis and later Judge Learned Hand. In fact, Justice Brandeis wrote in dissent in INS v. AP that "the general rule of law is 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."  Despite the pedigree of its critics, the hot news misappropriation tort nonetheless caught on.

Indeed, Judge Cote relied on a Second Circuit decision, National Basketball Ass'n v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), to define the contours of the tort.  There, the NBA sued the maker of a hand-held pager that provided real-time information about basketball games.  The Second Circuit held that a "narrow" hot news misappropriation claim could survive preemption by the federal Copyright Act when "extra elements" were present.  The extra elements are:  "(i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendants use of the information constitutes free riding on 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."

Applying this test, Judge Cote held that Fly had misappropriated the research reports of the financial services firms when it distributed them to its subscribers before the opening of the New York Stock Exchange.  Judge Cote wrote:  "Fly's core business is its free-riding off the sustained, costly efforts by the Firms and other investment institutions to generate equity research that is highly valued by investors.  Fly does no equity research of its own, nor does it undertake any original reporting or analysis . . . [Fly's] only cost is the cost of locating and lifting the Recommendations and then entering a few keystrokes into its newsfeed software. Although Fly does attribute each of the Recommendations to its originating firm, if anything, the attributions underscore its pilfering." 

Alarmingly, Judge Cote absolutely rejected the argument that Fly had a right to redistribute truthful information that had already made its way into the public domain.  "[I]t is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it."  The judge found it of no moment that the "actors in the marketplace repeat news of Recommendations to their friends and colleagues, such that the word inevitably gets out.  Rather, it is that Fly is exploiting its self-described 'hefty relationships with people in the know' to gather information from the rumor mill and run a profitable business dedicated, in large part, to systematically gathering and selling the Firms' Recommendations to investors."  

Judge Cote also found that the plaintiffs were in direct competition with Fly even though they were not themselves in the news business.  As to the final factor of the NBA test--whether the plaintiffs would have a reduced incentive to invest in research--Judge Cote found that the plaintiffs' investments in research had diminished because Fly and other news services had published their leaked recommendations.  Significantly, and quite interestingly, Judge Cote found that the "unauthorized redistribution of [analyst] Recommendations"  was a "major contributor to the decline in resources that each Firm devotes to equity research."  (emphasis mine) To be fair, the judge did concede that there were other factors in play during this time that might have affected analyst staff and budgets.  She observes, for example, that "[s]ince 2008, the world has experienced an economic cataclysm."  Still, it is richly ironic that these firms are concerned about protecting the "integrity" of their equity research.

In crafting a remedy for Fly's misappropriation, Judge Cote took into account "public policy considerations" but made no mention of the First Amendment.  Specifically, she observed that the production of equity research "is a valuable social good" that will be "underproduced unless the Firms can achieve an economic return on their investment."  She also noted that there is an "important" public interest in "'unrestrained access to information', particularly when the information is heavily fact-based."  She therefore enjoined Fly from unauthorized redistribution of Plaintiffs' research recommendations released when the market is closed "until one half-hour after the opening of the New York Stock Exchange or 10 a.m., whichever is later."  She enjoined Fly from publishing recommendations issued when the market is open until two hours after their release by the Plaintiffs. 

From a media lawyer's perspective, there are compelling interests on both sides of the case.  On one hand,the newsgatherers and content generators wish to turn a profit (and stay in business), and their ability to do so is threatened by online news aggregators.  On the other, this case involves a prior restraint preventing republication of newsworthy information, even if that information has already entered the public domain.  It also involves the imposition of tort liability for the publication of lawfully obtained truthful information.  Given this conflict, surely the district judge should have at least considered how to reconcile her decision with First Amendment cases like Near v. Minnesota, Florida Star v BJF, and Bartnicki v. Vopper.  Fly evidently plans to appeal the district court decision, so perhaps the appellate court will do a better job of reconciling the conflicts present in this case.