By: Natarajan Chakrapani & Kuldeep Kapade
Similar to the Reading (NBA vs Motorola Inc.) for the class , The case in question presents the claim of the plaintiffs (Barclays) of alleged hot news misappropriation of their financial recommendations by the defendant , Fly ,a financial news aggregator.
Background and Context
Wall Street Firms(“The Firms”) like Barclays, Morgan Stanley produce stock market recommendations for their clients (usually large institutional investors) in the form of paid reports , and aim to engage and advise them in Securities trading.Their expectation is that the said stock recommendations will encourage the client to purchase stocks through them. The commissions earned during such transactions makes the research behind the recommendation worthwhile for the Firms. It goes without saying that the publication of such reports covering stock recommendations impacts their value.
The release of the reports to the clients generally happens before the Stock market opens for business and is timed to give them an informational edge in making prudent financial decisions before the market catches up to trends suggested by the recommendations.
The Firms deal with their clients/partners in the dissemination of reports in secure ways with various non disclosure agreements disallowing them to share the recommendations with others. The Firms also prohibit employees from leaking out any information and have adequate surveillance mechanisms internally and externally to “plug” any such “leaks”. However, the success rate of such measures is not known.
The Defendant,FlyontheWall(“Fly”) is essentially a news aggregator who generates news feed regarding financial information including various recommendations from the Firms and earn their revenue from subscription services.They generate the news feeds , before the market opens for Subscribers to help them make early calls on the trades .
The raison d’etre of the given case revolves around the publication of such feeds , ostensibly containing the confidential recommendations as researched by the Firms , by Fly, before the opening of the Markets.
The Case
The Firms challenged Fly on Two grounds : one on copyrights infringements based on their verbatim copying of recommendations from reports , providing a one line digest of each recommendation to its subscribers in its news feed. The second claim is on the “hot news” misappropriation under New York State Law, where the Firms object to the publication of their recommendations by Fly ahead of the opening of markets. The Firms indicate that such practices by the defendant clearly hurt their financial interests that they have with their paid clients in being able to afford them the informational advantage. The Plaintiffs also claim that the loss in revenue impacts the incentives for the Research they conduct to glean such financial insights, dealing a direct blow to its primary business model.
The case of copyrights was easily proved , since Fly accepted that it “lifted” recommendations from various sources (not necessarily legally authorized, like leaked information from employees at the Firm) in order to generate its feed.
Also , the Firms were able to contend that they satisfied all 5 elements of the Tort as identified in NBA,, 105 F.3d at 845, although the Firms did not explicitly refer to that case.
Hence ,with this establishment of tort of “Hot News” (with the precedent as set in INS vs AP: 248 U.S. 215 (1918)) , in Mar/Apr 2005 , the court entered an injunction from reporting a recommendation until either (a) half an hour after the market opens, if the report containing the recommendation was released before 9:30 a.m EST., or (b) two hours after release, if the report was released after 9:30 a.m EST.This time period represented roughly the midpoint between what Fly and the Firms, respectively, requested.
This made Fly change their information gathering strategy, and they subsequently started relying on public sources(like Bloomberg , Blast IMs) to gather recommendations. They also tried contesting the Injunction by claiming it caused irreparable harm to its business due to the loss of subscriptions , but those were rejected on the grounds of lack of evidence.
Fly thereupon moved for a stay of the injunction and an expedited appeal.
On appeal, Fly argues principally that (1) the district court erred in finding that the plaintiffs established “hot news” misappropriation under New York law, specifically in that the plaintiffs failed to prove time-sensitivity, free-riding, direct competition, and reduced incentives; (2) that the district court’s injunction violates Fly’s free-speech rights under the First Amendment; (3) that the district court’s finding of “hot news” misappropriation violates the Copyright Clause of the Constitution and the Copyright Act; (4) that the district court failed to apply the proper standard in granting injunctive relief; and (5) that the injunction is unreasonably overbroad.
The court then analysed the eligibiity of the “hot news” misappropriation claim. It reasoned that the reports satisfy the “subject matter requirement”, being a tangible form of expression and coming under the ambit of the Copyright Act. It also fell under the general scope of copyright , which “affords a copyright owner the exclusive right to: (1) reproduce the copyrighted work; (2) prepare derivative works; (3) distribute copies of the work by sale or otherwise; and, with respect to certain artistic works, (4) perform the work publicly; and (5) display the work publicly.
The claim here being the Defendant was reproducing recommendations verbatim from such copyrightable reports.
However,Under NBA, the narrow version of hot news misappropriation that survives copyright preemption has the following elements:
(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.
In this case , the courts noted that the defendant was publishing recommendations from the various Firms and correctly citing them as their source; hence it was not misappropriating or passing them as its own idea.
Moreover , Fly does not produce any of its own recommendations. It merely aggregates recommendations from various firms and publishes it for anyone interested in them. Since recommendations are essentially opinions advocated by the Firms spurring on their client to make a trade , they are not copyrightable. They are subjective opinions , which have an objective impact on the trends on the stock market. Hence , their news-worthiness renders them credible to be reported and known to people.
Also, the aggregate subscription product endorsed by Fly is different and not in direct competition with the Firms business model which aims to promote only their own recommendations to clients . Since this is a failure of the direct competition test of NBA (test (iv) above) Subsequently, the “hot news” misappropriation tort was rejected and the decision regarding the permanent injunction was reversed.
The courts have to make sure that the hot news claims are narrowly defined so as to prevent its preemption by copyright Law and also to allow freedom of expression regarding news that needs to reach the citizens.
References:
NBA vs Motorola Inc: http://www.law.cornell.edu/copyright/cases/105_F3d_841.htm
Barclays vs Fly case notes: http://caselaw.findlaw.com/us-2nd-circuit/1571485.html
INS vs AP : http://supct.law.cornell.edu/cgi-bin/sup-choice.cgi?248+215