Barclays Capital, Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and Morgan Stanley & Co., Inc. v. THEFLYONTHEWALL.COM , 06 Civ. 4908 (S.D.N.Y. 2010)

Breathing some new life into the “hot news” doctrine, Judge Cote of the Southern District of New York recently issued a permanent injunction requiring the Internet-based financial news site TheFlyOnTheWall.com (Fly) to delay its reporting of stock recommendations from Wall Street research analysts.

It has long been a foundational element of U.S. copyright law that facts are in the public domain; in relatively rare instances, however, courts have granted protection to a party’s fact gathering efforts.  Courts have done so in circumstances where, in the absence of protection, the incentives to gather time-sensitive information (so-called “hot news”) could disappear.  In a decision with the potential to recast the way in which news and other information is disseminated on the internet, the court in TheFlyOnTheWall held that the plaintiff banks should be afforded an exclusive period of time in which to publish facts associated with analyst research.

The Facts:

Three Wall Street firms (the Firms) brought suit against Fly, alleging copyright infringement and hot news misappropriation, a violation of the New York common law tort of unfair competition.

The court found that the Firms invest a great deal of time and money in “equity research” – the “development and marketing of research about major publicly traded equity securities”[1] – and use this research to create equity research reports.  Among other things, the reports contain stock recommendations, i.e., conclusions about whether investors should buy, sell or hold stock in a given company.  Many of these recommendations are issued before the stock market opens and the Firms disseminate them to specific clients either directly or through third-party distributors (such as Bloomberg, Thomson Reuters, etc.).  The licensed distributors may only allow the Firm’s entitled clients to have access to the research reports on their site.  The court found that the Firm’s research is highly valuable, not just because of its quality, “but also from its exclusivity and timeliness.”[2]

The court found that, in recent years, the Firms have put much effort into tightening control over who may view their reports: clients are forbidden from redistributing reports they receive, “license agreements contain explicit contractual covenants against distribution to unauthorized parties,” and the Firms’ “media and communications policies have been tightened…”.[3]  Despite these efforts, their reports “leak from authorized channels and are then posted by online aggregators or reported as financial news in the mainstream media.”[4]

Fly was identified by the Firms as one of the “most systematic unauthorized publishers of [the Firms’] [r]ecommendations…”[5]  Fly’s online newsfeed contains a category called “recommendations” and “[i]t is to this category that Fly posts the [r]ecommendations by sixty-five investment firms’ research analysts, including the three plaintiff Firms.”[6] A majority of these recommendations are posted before the market opens each day.

The Firms sent demand letters to Fly and initiated their lawsuit against Fly in 2006.

Legal Conclusions:

In addition to finding Fly liable for the copying of the Firms’ research reports, the court granted the Firms the exclusive right (for a limited time) to disseminate non-copyrightable factual information regarding whether their research analysts recommend buying, selling or holding a particular stock.  The court based this protection on the “hot news” doctrine articulated by the Supreme Court in its 1918 decision, Int’l News Service v. Associated Press[7] (INS).

The Copyright Act specifically does not extend protection to facts or ideas, limiting its protection to expression.[8]  However, in INS, the Supreme Court recognized a limited property right in factual news content under a misappropriation theory – an exception to copyright law.  For many years, there was a debate as to whether the tort of “hot news” misappropriation was preempted by the Copyright Act because under the 1976 Copyright Act, with certain limited exceptions, all state causes of action that protect any right equivalent to those protected by the Act are explicitly preempted.[9]  This question was resolved (at least in the Second Circuit) in 1997 in Nat’l Basketball Association v. Motorola, Inc.[10]  There, the NBA sought to restrain Motorola from providing paying subscribers with information about NBA scores, game details, in near-real time.  The Second Circuit held that “a narrow ‘hot-news’ exception does survive preemption…”[11]  The NBA court then laid out the elements of this claim: (1) the plaintiff generates information at a cost; (2) the information is time sensitive; (3) the defendant’s use of the information constitutes free-riding on plaintiff’s efforts; (4) the defendant is in direct competition with a product or service being offered by the parties; and (5) the ability of other parties to free-ride on the plaintiff’s efforts would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.[12]

In TheFlyOnTheWall, the court applied the NBA factors and found them all satisfied.  Specifically, the court found that: (1) the Firms incur substantial expense in generating their research reports; (2) the Firms’ stock recommendations are time-sensitive; (3) Fly’s “core business is its free riding off the sustained, costly efforts by the Firms … to generate equity research that is highly valued by investors” [13] ; (4) Fly is in direct competition with the Firms because the dissemination of this information is their primary business and both the Firms and Fly use “similar, and in some instances identical, channels of distribution” [14] ; and (5) the Firms showed that the free riding, if left unrestrained, “would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.” [15]

Having determined that the Firms have, for a short period of time after dissemination, a protectable interest in the their analysts’ stock recommendations, the court next addressed the issue of how to protect that interest.  The court concluded that the Firms should be afforded “lead time” to disseminate their analysts’ stock recommendations before Fly could distribute information about those recommendations.  The court held that Fly must wait until 10 a.m. E.S.T. before publishing the facts associated with analyst research released before the market opens, and to postpone publication for at least two hours for research issued after the opening bell [16]   The court further held that if the Firms fail to adequately police those who misappropriate their recommendations, then Fly may apply to lift the injunction one year after it issues.

Looking Ahead

While the decision arose from, and naturally addressed, dissemination of proprietary stock recommendations, it is easy to envision circumstances in which news sources will seek to apply the decision more broadly.  It therefore opens up a new front in the evolving battle between traditional news sources and services which aggregate and disseminate content on the web.



[1] Id. at *6.

[2] Id. at *16.

[3] Id. at *18.

[4] Id. at *20.

[5] Id.

[6] Id. at *27.

[7] 248 U.S. 215 (1918).

[8] 17 U.S.C. § 102(b).  See Feist Publications, Inc. v. Rural Tel. Service Co., 499 U.S. 340 (1991).

[9] 17 U.S.C. § 301.

[10] 105 F.3d 841 (2d. Cir. 1997).

[11] Id. at 843.

[12] Id. at 845.

[13] TheFlyOnTheWall, 06 Civ. 4908 at *59.

[14] Id. at *67.

[15] Id. at *73 (internal citations omitted).

[16] Id. at *86.

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