The Future of the Hot News Misappropriation Tort After Barclays Capital Inc. v. TheFlyontheWall.com

DWT Media Law September 16, 2011 Comments Off
The Future of the Hot News Misappropriation Tort After Barclays Capital Inc. v. TheFlyontheWall.com

By Camille Calman and Robert D. Balin

The Internet, because it can transmit information widely, cheaply, and instantly, has created economic conflict between traditional news outlets and other content creators, on one hand, and independent, web-based “news aggregators,” on the other.  On a daily basis, breaking stories from virtually every major news provider promptly find their way onto a host of aggregator sites – typically with attribution (and links) to the originating news site, but without any authorization or payment for the use.  Except where an aggregator has engaged in blatantly infringing word-for-word copying of significant amounts of expression from a news story, the appropriation of facts and information does not generally constitute copyright infringement.  News organizations and content creators nonetheless want some measure of protection from online aggregators – whom they may view as free-riding on their work and siphoning off their rightful profits.  By contrast, aggregator sites staunchly maintain that, under settled copyright principles, they have the unfettered right to freely use and widely disseminate mere information and that the courts should not protect business models rendered obsolete by technology. 

Into this economic tug-of-war enter the “hot news” misappropriation doctrine – a state law unfair competition tort (at least in some states) that some news organizations have considered (and occasionally used) as a potentially potent legal tool against unauthorized web-aggregators of their news content.[1]  Recently, however, on June 20, 2011, a three-judge panel of the Second Circuit Court of Appeals issued an important decision which, while ostensibly limited to the facts of that case, nonetheless strongly indicates that hot news misappropriation claims are generally preempted by the Copyright Act, except perhaps in the most egregious cases of free riding where an aggregator passes off a direct competitor’s breaking news story as its own.  Barclays Capital Inc. v. TheFlyontheWall.com, Inc., No. 10-cv-1372, 2011 WL 2437554 (2d Cir. June 20, 2011).  This article looks at the state of the law prior to the TheFlyontheWall.com decision, summarizes the decision, and explores the viability of the hot-news tort in its wake.

The Hot News Misappropriation Tort

International News Service v. Associated Press

The U.S. Supreme Court created the hot news tort in International News Service v. Associated Press, 248 U.S. 215 (1918).  The International News Service (“INS”) was a wire service that found itself barred from using Allied telegraph lines to report breaking World War I news from Europe.[2]  INS’s less-than-savory solution was to access news stories published by its direct wire service competitor, the Associated Press (“AP”), rewrite them, and publish the news as its own without attribution to the AP. 

The AP, unable to sue for copyright infringement because INS had taken uncopyrightable facts rather than copyrightable expression, sought an equitable injunction on an unfair competition theory.  The Supreme Court held that, given the substantial resources AP had invested in gathering news, it held a quasi-property right in the news while it was still timely (at least as against direct competitors), and that a direct competitor could not “reap where it has not sown” by appropriating the hot news and selling it as its own.  Id. at 239.  The decision is pervaded with the majority’s disapproval of what it saw as INS’s commercially immoral business practices.

State Hot News Claims

International News Service v. Associated Press is no longer precedential law because it relied on the concept of federal common law, which the Supreme Court determined in 1938 federal courts had no power to create.  Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).  Nonetheless, over the years, courts in New York and elsewhere have relied on the reasoning of INS to fashion state law “hot news” torts under their states’ unfair competition laws. 

In 1976, Congress revised the Copyright Act.  The Copyright Act’s preemption provision, Section 301, provides that where a work falls under the Copyright Act, federal copyright law preempts any state law claim that involves “legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright,” such as reproduction, distribution, performance, or display of the work.  17 U.S.C. §§ 106, 301.  Courts have held, however, that if the state law cause of action requires an “extra element” that makes it “qualitatively different” from a copyright infringement claim, then the cause of action is not preempted.  Computer Assocs. Int’l, Inc. v. Altai, Inc., 982 F.2d 693, 716 (2d Cir.1992) (emphasis in original).

The legislative history of the Copyright Act of 1976 specifically mentions the “hot news” tort as a state law claim that potentially survives preemption:

“Misappropriation” is not necessarily synonymous with copyright infringement, and thus a cause of action labeled as “misappropriation” is not pre-empted if it is in fact based neither on a right within the general scope of copyright as specified by section 106 nor on a right equivalent thereto.  For example, state law should have the flexibility to afford a remedy (under traditional principles of equity) against a consistent pattern of unauthorized appropriation by a competitor of the facts (i.e., not the literary expression) constituting “hot” news, whether in the traditional mold of International News Service v. Associated Press, 248 U.S. 215 [39 S. Ct. 68, 63 L .Ed. 211] (1918), or in the newer form of data updates from scientific, business, or financial data bases.

H.R. No. 94-1476 at 132, reprinted in 1976 U.S.C.C.A.N. at 5748.  But the Second Circuit has cautioned that “only a narrow ‘hot-news’ misappropriation claim survives preemption for actions concerning material within the realm of copyright.”  National Basketball Association v. Motorola, Inc., 105 F.3d 841, 852 (2d Cir. 1997). 

NBA v. Motorola

The Second Circuit last examined the hot news tort in NBA v. Motorola, a case involving updates of NBA basketball games delivered by defendant Motorola to its subscribers via pager.  Motorola’s reporters monitored games on television or radio, keying scores and other factual information into a computer for transmission to pagers.  The NBA had a competing, but not yet launched, pager service.  

The NBA court enumerated five factors that must exist for a hot news claim to avoid preemption: 

(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 produce the product or service that its existence or quality would be substantially threatened.

NBA v. Motorola, 105 F.3d at 845.  The court found that, under this test, the NBA’s claim did not survive preemption because Motorola did not free-ride on the NBA’s competing pager service to obtain the scores; instead, it obtained the purely factual information elsewhere and used its own efforts to assemble and transmit it.  Id. at 854.  The fact that Motorola obtained the information from NBA-licensed broadcasts did not constitute free-riding, since those broadcasts did not directly compete with Motorola’s pager service.  Id. at 853-54.

While the NBA’s own claim was thus found preempted, the NBA decision laid out a preemption survival test for future hot news claims – or so it was thought until TheFlyontheWall.

Barclays Capital Inc. v. TheFlyonWall.com

TheFlyontheWall.com (“Fly”) is an “aggregator” web site that publishes financial news.  At issue in this case were recommendations made by leading financial firms about whether their clients should buy or sell a particular stock and at what target price.  Financial firms provide research reports containing these recommendations to their institutional and individual clients.  The firms profit from these reports primarily by collecting commissions when clients trade based on the recommendations, generally the day the reports are released.  Because the recommendations in themselves can (and often do) move markets, they are time-sensitive, and clients can profit by trading before the broader market learns of the recommendations.  The firms therefore take precautions to ensure the reports go only to their clients.

Initially, Fly obtained these research reports via unauthorized disclosures by the firms’ employees, and published the recommendations as headlines on its web site, sometimes adding lengthy verbatim passages from the reports.  After several firms threatened litigation, Fly began to obtain the reports from other sources[3], and stopped publishing verbatim excerpts.  Fly published the recommendations on the day they were released, before or immediately after the market opened, to subscribers including individual and institutional investors, brokers, and day traders.

In June 2006, three financial firms (the “Firms” – Barclays Capital, Merrill Lynch, and Morgan Stanley) sued Fly for copyright infringement (based on Fly’s publication of verbatim excerpts) and hot news misappropriation (based on Fly’s publication of their recommendations).  Fly conceded liability on the copyright claims and the case proceeded to trial on whether Fly had committed hot news misappropriation by publishing the recommendations.  The District Court concluded that, under the five-factor NBA test, Fly had misappropriated time-sensitive recommendations generated by the Firms at substantial expense, thus free-riding on the Firms’ efforts; that the Firms and Fly were direct competitors for financial information; and that the reports were a valuable social good whose production would be threatened if the Firms could not reap the rewards.  The District Court therefore concluded that plaintiffs had established a non-preempted hot news claim.  The court enjoined Fly from disseminating the Firms’ recommendations until a specified period of time after the report was issued and/or the market opened.

The District Court’s decision attracted wide attention because it was the first in the Internet age to find liability under the hot news doctrine.  Fly appealed to the Second Circuit.  Numerous organizations submitted amici briefs: online news aggregators such as Google and Twitter urged the Second Circuit to repudiate the hot news tort outright.  By contrast, news organizations argued that the tort was an important protection for the press, but that financial firms did not qualify as press.  Organizations representing financial professionals and investors argued that the Firms’ research reports served an important public interest and should receive protection under the hot news doctrine.

Writing for the Second Circuit majority, Judge Robert Sack wrestled with the same question addressed in NBA: when should a hot news claim survive preemption?  The Court reached the same conclusion as the NBA Court: that the hot news claim at issue was preempted by federal copyright law.  But on its way to that conclusion, the Court jettisoned the NBA five-factor test – something neither party had suggested.  While explaining that it could not abolish the hot news tort itself, as some amici had urged, because it was bound by NBA, the majority declined to endorse NBA’s definition of a non-preempted hot news claim.

The majority found that the Firms’ hot news claim involved (1) rights falling under the general scope of copyright and (2) the types of works protected by copyright, so that the claim would be preempted unless it fell into the “extra element” exception to preemption.  In explaining why any carve-out for hot news claims should be narrow, the majority emphasized the importance of legal uniformity nationwide where Congress has acted nationally, as with the Copyright Act.

The Court then examined the NBA five-factor test, concluding that it was not bound to apply it because the test was dictum rather than a holding – the NBA court had adopted the non-preemption test to apply to a hypothetical set of future circumstances, not to the facts before it.  Judge Sack also pointed out that the NBA court had not even described the test consistently within its decision, listing two slightly different five-part tests, and also listing three of the factors as “extra elements” that would prevent preemption.  He concluded that these various iterations were “sophisticated observations in aid of the Court’s analysis” rather than a multi-factor test that future courts were bound to apply in determining the exact contours of a non-preempted hot news claim.

Having disposed of the NBA test, Judge Sack looked back at the origins of hot news misappropriation in the INS case to guide his preemption inquiry, because the legislative history of the Copyright Act indicates that some form of an “INS-like” hot news tort survives preemption.  Judge Sack described INS as “a ghostly presence” that – having died as federal common law – continued on only as “a description of a tort theory, not as precedential establishment of a tort cause of action.”  The majority concluded that Fly’s conduct was not the type of “free riding” that the hot news tort described in INS was designed to prevent.  Unlike INS, which passed off as its own the news that the AP had acquired through its own efforts, Fly used its own efforts to report on news that Firms were creating, attributing that news to the Firms.  For the majority, the Firms’ role in “making the news” by creating their market-moving recommendations and Fly’s different role of “breaking the news” were the central facts in negating free-riding.  Passing off another’s information as one’s own – not present in the Fly case – was the overriding factor in the majority’s free-riding analysis.

Judge Sack specifically rejected the idea that Fly should be enjoined for moral reasons from “reap[ing] where it ha[d] not sown.”  He pointed out that the NBA Court had found that “the perceived unethical nature of a defendant’s ostensibly piratical acts” was not by itself sufficient to prevent preemption because those acts were exactly the kind of conduct prohibited by the Copyright Act.  Nonetheless, Judge Sack did seem interested in the moral dimension of the Firms’ conduct, noting several times the marketplace advantage that the Firms’ clients have over those without access to their recommendations.  He had little sympathy for the Firms’ attempt to protect their business model, writing, “The adoption of new technology that injures or destroys present business models is commonplace.  Whether fair or not, that cannot, without more, be prevented by application of the misappropriation tort.”

Judge Sack devoted some attention to the fact that the Firms and Fly do not directly compete, since the Firms make their money on commissions from their clients’ trades in response to the reports, and those profits are not diverted by Fly in any meaningful sense.  But even if the parties were direct competitors, Judge Sack wrote, that fact would not be determinative in the absence of free-riding.

By contrast, Judge Raggi’s concurrence focused squarely on direct competition.  Judge Raggi was unconvinced by the majority’s ruling that the NBA five-factor test was dictum.  She would have preserved the test and found preemption based on the Firms’ failure to prove that Fly sold a directly competing product or service.  The fact that both parties disseminated recommendations was too broad a similarity to support a finding of direct competition. 

The moral issue of Fly reaping where it had not sown had more resonance for Judge Raggi than for the majority.  She agreed with the District Court that Fly’s conduct was “strong evidence of free-riding, or worse” because Fly “usurp[ed] the substantial efforts and expenses of the firms” to make a profit without conducting its own research.  Nevertheless, she agreed with the majority that the “apparent unfairness” of the Fly business model did not control the preemption analysis.

On August 8, 2011, the Second Circuit denied the Firms’ petition for rehearing.

The Aftermath: What Remains of the Hot News Tort?

There seems little doubt that the hot news doctrine has suffered a serious blow in the Second Circuit.  It is clear that the Second Circuit will find a non-preempted misappropriation claim only in the narrowest of circumstances, perhaps only where the defendant attempts to pass off a competitor’s work as its own.  The NBA five-factor test has been influential in other jurisdictions,[4] and the TheFlyontheWall court’s rejection of that test as binding precedent may have similar influence. 

In the meantime, though, the decision has left many readers puzzling over what claimants actually must show to establish non-preempted claims for hot news misappropriationIn the decision and concurrence, Judge Sack and Judge Raggi offered some hypothetical situations where a hot news claim might survive the preemption analysis.  Judge Sack suggested that if a Firm created a Fly-like news service– reporting other Firms’ recommendations, perhaps along with its own – then Fly might face liability for copying facts from that competing service.  Judge Raggi agreed, and also suggested that, if Fly had a service promoting only one Firm’s recommendations , that service might compete more directly with the Firm.  Neither hypothetical, however, offers much practical guidance about real-world situations.  All we can be sure of is that an aggregator using minimal effort to appropriate material from a direct competitor and passing it off as its own –INS for the digital age – is the one scenario that all judges on the panel indicated might pass hot news preemption muster.  This is not, however, the way most aggregators actually do business – most credit (and link to) the originating news service. 

Also unclear is how useful Judge Sack’s distinction between “making” and “breaking” news will be in analyzing future fact patterns.  Many potential hot news plaintiffs, such as traditional media companies, are far more likely to be newsgatherers than newsmakers.  Judge Sack’s opinion suggests that those who misappropriate “acquired” rather than “created” factual information may be liable, but only if they fail to ascribe the news to the original acquirer – so making use of hot news with proper attribution likely will not trigger liability.

Content creators can take some comfort from the fact that the hot news tort is not entirely dead, but they should consider other methods to protect hot-news content, because it is now much harder for a hot news claim to survive preemption in the Second Circuit, and perhaps elsewhere.  Aggregators, meanwhile, can take comfort from the diminishment of the parameters of the tort.  With the legal threat reduced, their business model seems somewhat more secure.  Nonetheless, they could suffer if content creators succeed in locking more content behind technological and contractual walls.

 

©2011 Bloomberg Finance L.P. Reprinted with permission. The opinions expressed are those of the authors.


[1] See, e.g., Associated Press v. All Headline News Corp., 608 F. Supp. 2d 454, 457-61 (S.D.N.Y. 2009) (concluding  that AP had adequately pled “hot news” misappropriation claim under New York law where aggregator web site had copied facts from AP stories without attribution and presented the stories as its own).

[2] Sources differ as to whether this withholding of telegraph lines was because the Allies were angry that INS’s owner, William Randolph Hearst, had supported Germany at the war’s outset or because INS reported unfavorable information about British losses.  Compare Richard A. Posner, Misappropriation: A Dirge, 40 Hous. L. Rev. 621, 627 (2003) with News Pirating Case in Supreme Court, New York Times, May 3, 1918.

[3] According to the decision, these other sources included news outlets, chat rooms, and conversations with sources in the financial industry. 

[4] See, e.g., Scranton Times, L.P. v. Wilkes-Barre Pub. Co., No. 3:08-cv-2135, 2009 WL 3100963, at *3-6 (M.D. Pa. Sept. 23, 2009); X17, Inc. v. Lavandeira, 563 F.Supp.2d 1102, 1105-06 (C.D. Cal. 2007); Fred Wehrenberg Circuit of Theatres, Inc. v. Moviefone, Inc., 73 F.Supp.2d 1044, 1050 (E.D. Mo.1999 ).

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