Flying High: how hot news is getting cooler in the United States

Posted by Nicholas Stewart and Lucy McGovern

In a country where capitalism is at its most pure, how do courts in the United States of America decide on the protection of property rights in time-sensitive information? Are there any property rights in strictly factual material?

In a recent decision from the US Court of Appeals for the Second Circuit, Barclays Capital Inc. v. Theflyonthewall.com, Inc., 10-1372-cv (2d Cir. May 19, 2010) (Barclays), the Court of Appeals has significantly narrowed the scope of the "hot news" misappropriation doctrine (Hot News Doctrine). The Court held that the news aggregator, theflyonthewall.com, Inc (Fly), should not be restrained from reproducing stock market recommendations of major financial institutions.

Readers should bear in mind that no Hot News Doctrine currently exists in Australia. The following commentary is based on cases decided pursuant to federal copyright law and state and common laws covering misappropriation and competition in the United States.

Where it all began

The Hot News Doctrine has developed as a limited exception to the operation of the United States Copyright Act 1976 (as an instance where federal law does not 'pre-empt' state law). The Hot News Doctrine essentially seeks to protect, for a limited time, an author's rights over a breaking news story.

The doctrine evolved from the 1918 Supreme Court decision, International News Service v. Associated Press, 248 U.S. 215 (1918) (INS) which held that a company who lifted factual news stories from Associated Press (AP) bulletins and retransmitted those factual stories to its members was engaging in conduct that amounted to common law misappropriation of AP's property under state law. The Court also confirmed that there could be no copyright in facts.

The Hot News Doctrine was then formulated in the New York Second Circuit decision National Basketball Association v. Motorola, 105 F.3d 841 (1997) (Motorola) in which the Second Circuit proffered a five point test to determine whether a plaintiff should be attributed property rights in certain information. The test is:

1. a plaintiff generates or collects information at some cost or expense;
2. the value of the information is highly time-sensitive;
3. the defendant's use of the information constitutes free-riding on the plaintiff's costly efforts to generate or collect the information;
4. the defendant's use is in direct competition with a product or service offered by the plaintiff; and
5. the ability of other parties to free-ride on the efforts of the plaintiff would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.

In Motorola, the Court did not grant injunctive relief against Motorola for selling a pager device called "SportsTrax" which broadcast details and statistical data of NBA basketball games on a near real-time basis. Although the Court recognised that INS itself is no longer good law, it accepted that an INS-like claim survives pre-emption.

The Barclays Decision

Major financial institutions, Barclays, Merrill Lynch and Morgan Stanley (Firms) sought to invoke both copyright law and the Hot News Doctrine to restrain Fly from reproducing recommendations contained in the Firms' investor reports. The Firms publish, on a daily basis, investor reports to their clients and potential clients containing extensive research about publically listed companies together with the Firms' recommendations based on that research (Recommendations).

The Firms claimed that these reports give investors an informational advantage in stock market trading and draw revenue by 'spurring investors into making an immediate trading decision' as investors place trades with the Firms. It is no wonder that the Firms objected to Fly's reproduction of the Recommendations on its subscriber-based website.

Although wholly succeeding on the copyright claims, the Firms continued to pursue their claim on the grounds of the Hot News Doctrine before the Court of Appeals. However, the Court rejected the claim, holding that the Hot News Doctrine did not apply. As the parties had agreed to the application of the five point test laid out in Motorola, the Court approached the case on this basis (even though it hinted at its temptation to do otherwise). It held that the Hot News Doctrine did not apply because:

• the Recommendations were not efforts akin to reporting (rather, the Firms were 'making the news' by publishing the Recommendations);

• Fly was not 'freeriding' as it was not selling the Recommendations 'as its own' but was attributing the Recommendations to their source; and

• there was insufficient evidence that Fly was diverting profits away from the Firms at the point where the profit was reaped (the Firms conceded that profit was derived when investors placed a trade).

The Court concluded that

'a Firm's ability to make news – by issuing a Recommendation that is likely to affect the market price of a security – does not give rise to a right for it to control who breaks that news and how'.

The Upshot

While the Barclays decision and the narrowing of the Hot News Doctrine might be good news for online news aggregators, who are seeking to reduce the obstacles to sourcing and publishing factual material, it will be of concern to newspaper publishers whose business models depend on cutting edge news reporting.

Partner: Charles Alexander