Second Circuit Reverses Bench Verdict on "Hot News" Misappropriation

By Theresa M. House – December 5, 2011

In a decision marking the latest round in an ongoing battle between online news aggregators and media content providers, the United States Court of Appeals for the Second Circuit overturned a district court ruling in favor of content providers and held that their claims under New York's long-recognized "hot news" misappropriation tort were preempted by the United States Copyright Act of 1976. In Barclays Capital Inc. v. TheFlyOnTheWall.com, Inc., No. 10-1372-CV (2d Cir. June 20, 2011), financial giants Barclays Capital Inc., Merrill Lynch, and Morgan Stanley brought claims for copyright infringement and "hot news" misappropriation against news aggregator TheFlyOnTheWall.com, Inc., based on allegations that the company had republished plaintiffs’ financial reports and recommendations. After a bench trial, the district court awarded damages and a favorable injunction to the finance companies on the copyright claims and permanently enjoined the news aggregator from disseminating non-copyrightable information from the reports on the hot news claim. The defendant appealed the hot news ruling, and on appeal, the Second Circuit reversed, holding that the claim could not stand because it was preempted by federal copyright law.

The appellate decision in Barclays pitted section 301 of the Copyright Act—which sets forth a two-part test for determining when state law claims are preempted by federal copyright law—against New York's long-standing "hot news" misappropriation tort. Under section 301, a state law claim will be preempted if it seeks to vindicate "legal or equitable rights that are equivalent" to one of the bundle of rights already protected by copyright law under 17 U.S.C. § 106, known as the "general scope requirement" and if the work in question is one of the types of works protected under 17 U.S.C. §§ 102 and 103, the "subject matter requirement." The "hot news" tort, which antedates the 1976 Copyright Act, was recognized even before the Supreme Court's 1918 "hot news" decision in International News Service v. Associated Press INS), 248 U.S. 215 (1918). There, the Court observed that a competing wire service's republication of un-copyrightable facts lifted from the AP's news stories could qualify as a tortious misappropriation of AP's property.

The Second Circuit previously addressed how the preemption doctrine could apply to hot news claims, most notably in National Basketball Association v. Motorola, Inc. (NBA), 105 F.3d 841 (2d Cir. 1997). In NBA, defendant Motorola produced and sold a telephonic pager called SportsTrax. Its codefendant, STATS, supplied statistical information about professional basketball games, which it obtained by having its employees observe the games on television or radio; Motorola then transmitted the statistical information to SportsTrax pagers roughly simultaneously with the playing of the games. The NBA, which also distributed similar and arguably competitive information about game performance to its customers, brought a claim for hot news misappropriation, alleging that the defendants had taken, redistributed, and profited from facts generated by the NBA as the NBA games were being played. To determine whether the NBA's hot news claim was preempted by the Copyright Act, the Second Circuit applied section 301's two-part preemption test, but the court also held that certain forms of misappropriation that were otherwise within the general scope requirement would survive preemption if the plaintiff could satisfy a further "extra elements" exception. This exception provided that a state law claim would not be preempted where an "extra element" is "required instead of or in addition to the acts of reproduction, performance, distribution or display, in order to constitute a state-created cause of action." The court noted that if such an extra element existed, then the state law right would not be preempted—even if section 301's general scope and subject matter requirements were otherwise met. Applying these rules, the NBA court held that a "hot news" claim could survive preemption if certain "extra elements" could be shown, such as that the plaintiff generates or gathers information at a cost; the time-sensitive value of the information at issue; free-riding by the defendant; direct competition between the parties; and a threat to the very existence of the product or service being provided by the plaintiff. After evaluating these principles, the NBA court found that because section 301's requirements were satisfied and because the plaintiff could not show the existence of these extra elements, the NBA's hot news claim was preempted by the Copyright Act.

The plaintiffs in Barclays would ultimately attempt to apply the rule set forth in NBA with the hope of reaching a different result. The works at issue in Barclays were financial reports the plaintiff financial firms published each morning before the principal U.S. securities markets opened. The reports contained both copyrightable expression, such as the precise wording of the reports, and un-copyrightable facts and ideas, such as information about the business and prospects of publicly traded companies, the securities of those companies, and the industries in which they were engaged. The reports also contained recommendations from the firms, which were often no more than a sentence long, advising their clients and prospective clients of what they should do—buy, sell, or hold various securities—based on the information in the reports.

The reports were the product of in-depth research conducted by highly specialized financial analysts, and they cost the companies millions of dollars annually to produce. Although the firms did not charge a subscription fee for customers to access the reports, they used the reports to entice their clients and prospective clients to patronize their brokerage services. The idea was that a client who decided to buy or sell a security based on a firm's report would most likely enlist the company that provided the report to make the trade. Thus, even though the reports were sometimes provided without charge, the companies profited from their distribution by earning commissions on trades by customers who read them. The firms reported that 60 percent of all market trades resulted from firm solicitations such as these published reports.

The reports, and the firm recommendations they included, were highly influential. Customers with access to the reports could trade based on recommendations that were not yet widely known. The mere fact of the recommendations often led to changes in the market value of the securities they concerned. Over the course of a trading day, the price of securities that were recommended for sale would go down, and the price of securities that the firms recommended to buy would go up. As a result, consumers who received the reports early in the trading day gained an "informational advantage" over those who did not. They knew both the content of the reports, which provided them with factual information about a company's performance that they could use to make their own evaluation of that company’s stock, as well as the firms' recommendations.

Enter news aggregator TheFlyOnTheWall.com. The company was a proprietor of a news service distributed electronically—for a price—to subscribers. It marketed itself as posting "breaking analyst comments as they are being disseminated by Wall Street trading desks, consistently beating the news wires." Initially, TheFlyOnTheWall published verbatim excerpts from the firms' reports, which provided the basis for the ultimately uncontested copyright judgment. Apparently in response to litigation, however, TheFlyOnTheWall began to limit its publication to the mere the fact that the firms had made recommendations on various securities without actually copying any of the firms' copyrightable expression. Because the recommendations were so valuable, however, TheFlyOnTheWall subscribers were more than willing to pay the company's fees to access this information.

The firms were not pleased. They argued that the recommendations were extremely costly to produce and that TheFlyOnTheWall's republication of them constituted free-riding. They also argued that the value of the recommendations was time sensitive because they provided an informational and trading advantage to the firms' current and prospective clients. The firms argued that TheFlyOnTheWall's unauthorized distribution of the recommendations harmed their business models because their ability to profit depended on their clients' relying on the firms as the source of this valuable market information. The firms contended that if their clients obtained the information from another source, like TheFlyOnTheWall, there was no reason for them to place trades using the firms' brokerage services.

After a failed motion for summary judgment, TheFlyOnTheWall conceded liability on the copyright claim, and the parties proceeded to a bench trial on the hot news claim and damages. The district court awarded statutory damages and an injunction against further infringement on the copyright claim, as well as a broader injunction on the hot news claim that prohibited the aggregator from reporting firm recommendations for a period ranging from 30 minutes to several hours after they were released. The district court did not explicitly consider whether the hot news claim was preempted by federal copyright law. Instead, it adopted as determinative the ruling in NBA that a narrow form of the "hot news" tort survives preemption.

The aggregator appealed the lower court’s ruling on the hot news claim only. On appeal, the Second Circuit found that section 301's two-part test was satisfied. Applying rules set forth in its NBA decision, the court held again that the first element of the preemption test, the subject matter requirement, could be satisfied even if only un-copyrightable facts and ideas were being copied, so long as the work that was at issue was of a type that was copyrightable, that is, a work of authorship in a fixed and tangible medium (such as a book or video recording).

For the second element, the general scope requirement, the court again followed NBA to rule that section 301 prohibited only state law claims that were based on conduct that would infringe one of the exclusive rights provided by federal copyright law—such as copying, distributing, performing, or displaying works of authorship.

Applying these rules to the Barclays plaintiffs' claim, the court held that the hot news tort doctrine provided rights in the general scope of copyright protection, because the right provided by state law—protection from dissemination of hot news—had been allegedly abridged by TheFlyOnTheWall based exclusively on acts of reproduction, performance, distribution, or display. The court also held that the recommendations, even though they were facts not subject to copyright protection, nevertheless fell within the subject matter of copyright because they were part of reports that were works of a type covered by section 102 of the Copyright Act—that is, they were original works of authorship fixed in a tangible medium of expression.

The Barclays court, however, had some difficulty in applying the so-called "extra elements" exception set forth in the NBA decision. The problem was that the NBA court described these "extra elements" in a series of different, and at times inconsistent, "tests" at various parts of its opinion. As a result, the Second Circuit faced some awkwardness in applying NBA to the financial institutions' claims in Barclays and ultimately held that the various iterations of the NBA "test" were only dicta that should be used to illustrate the kinds of factors a court may evaluate to determine whether a "hot news" misappropriation claim actually sought relief different from that provided by the Copyright Act.

Freed from the constraints of the multipart tests set forth in NBA, the Barclays court found that the firms' hot news claim could not stand under federal copyright law because the facts presented here did not satisfy the "extra element"” exception. It found that TheFlyOnTheWall was not, as the plaintiffs claimed, merely free-riding on the firms' efforts to gather news because the aggregator itself was independently gathering the news of what the firms were recommending. In other words, the court concluded, in making the recommendations, the firms were making the news, and in reporting the fact that the recommendations had been made, TheFlyOnTheWall was breaking the news, not claiming it as its own content. The court also concluded that the aggregator's publication of the recommendations did not directly threaten the firms' products, because the firms did not sell their reports but provided them to their clients and prospective clients with the expectation that having access to the reports would lead to sales commissions. For that reason, as costly as it was to produce the reports, disseminating the content of their recommendations did not threaten the existence of the firms' business model.

Although the Second Circuit emphasized in its Barclays opinion that the scope of available hot news claims that could survive preemption is extremely narrow, it did, nevertheless, very carefully leave open the door to certain kinds of claims. In contrast to the firms at issue in Barclays, which distributed financial content in the hope that customers would use that information to purchase stocks through the firms' agents, traditional media companies like newspapers or wire services sell news as news. Thus, like the AP in the INS case, they face appropriation of news content by competitor news aggregators directly at the point where the profit for their business venture is to be reaped. Such traditional media companies that may wish to bring hot news claims also benefit in the preemption analysis because—unlike publication of the firms' recommendations, which were themselves news—publication of articles on issues of public concern is not making the news but breaking it—a distinction that factored heavily into the Barclays court's analysis.

In sum, although the "hot news" tort has a storied history and an uncertain future, the Second Circuit made clear in Barclays that its death knell has not yet started to toll and that, in fact, it may be an important tool in protecting the legal rights available to traditional media companies to protect their ability to report high-quality news content and still maintain a profitable business.

Keywords: Barclays Capital, TheFlyOnTheWall, Second Circuit, misappropriation, NBA

Theresa M. House is an associate in the media law group at Hogan Lovells US LLP in New York City, New York, and serves as vice chair of the ABA Section of Litigation Trial Practice Committee.

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