Each firm has lost business in, and has reduced investment in and output of United States equity research as a result of the free riding by Fly and other services. This is a bread-and-butter case of hot-news appropriation.
The case of Barclays v. Theflyonthewall.com provides a recent test of the hot news doctrine in the investment research industry. Claims that Fly on the Wall was just reporting the news from the free marketplace of ideas would not protect them. Instead, Judge Denise Cote’s findings of facts and conclusions of law following the March 8-11 bench trial would institute an injunction that embargoed recent headlines and materials from the plaintiffs from publication by Fly on the Wall. The news of her decision has lathered the industry into froth over whether Thomson/Reuters and Bloomberg may be next. But its application may be greater than that. Though the opinion ruled in an industry that is traditionally seen as different than the news industry – investment research – can its application in the broader news industry be far behind?
Representing Morgan Stanley, BofA, Merrill Lynch, and Barclays, Marks invoked the hot news doctrine to block publication by TheFlyontheWall.com of analyst recommendations for four hours from release or until 12-noon. For its defense, Fly on the Wall argued two points. First, it claimed that its news derives from public sources, so they were not in any way misappropriating it. Second, it does not compete with the banks, so given that the hot news doctrine emerged from a question regarding fair competition, the doctrine should not apply. Ronald Etergino of Fly on the Wall said, “we’re just reporting news that’s been available in the public domain. We have a mini news organization.”
Though she chose a shorter period, Judge Cote would decide for the plaintiffs. She ruled that the embargo would be in effect until 10 am for those issued before the NY market-open and two hours for those issued after: “This time frame preserves incentives for the firms to create and disseminate research reports to their investor clients, while still recognizing the inevitable, fast-moving and widespread informal communication of recommendations on Wall Street.”
Judge Cote raised at least two considerations for further review. First, she said that it would not be fair for the decision to only apply to Fly on the Wall, suggesting that the door had been left open for similar injunctions to larger entities. Cote asked, “Why should an injunction issue against a small business, a start-up, a small entrepreneur, when Goliath is permitted to do the same thing. If an injunction issues against Fly, and one year from now Bloomberg or Thomson or Reuters is doing the same thing, why is that fair?” Second, though seemingly ruling with it, she seemed to question the underlying viability of the hot news doctrine: “can the plaintiffs really effectively prevent their headlines from emerging into the marketplace and being publicly widespread?”
The case of Barclays v. Theflyonthewall.com ruled on practices in the investment research industry, but it did so with the hot news doctrine. The doctrine was tested, and it supported the bank’s claims of unfair competition and what Marks called “the pervasive taking of our intellectual property.” Though the decision is not widely available, it is certain to begin circulating the tables of law firms, counsel, and then ultimately the managers of the media companies that they support. Given the doctrine’s origin in the news industry, can it be long before we see more litigation in this area as media companies struggle for solutions to what the internet is doing to their business?
Case: Barclays v. Theflyonthewall.com, 06-cv-04908, U.S. District Court, Southern District of New York (Manhattan)
[a] milestone in regaining control over the distribution of our proprietary research and preserving the value of our investment ideas for our clients.
—Bill Halldin, Merrill Lynch: via Rueters
While it may be true that Fly is a news aggregator and is in direct competition with other financial news aggregators, both large and small, each of these news aggregators is in direct competition with the firms when they report the firms’ recommendations in a timely and systematic manner such that the firms are deprived of the opportunity to communicate them first-hand to their clients….
A balance must be struck between establishing rewards to stimulate socially useful efforts on the one hand, and permitting maximum access to the fruits of those efforts to facilitate still further innovation and progress.
—Judge Cote: via Reuters
The Citizen Media Law Project @Berkman Center – Hot News Doctine Alive and Kicking
Hot News test, New York State, where it is applicable under New York law and not preempted by the federal Copyright Act – Nat’l Basketball Ass’n v. Motorola, Inc., 105 F.3d 841, 845 (2d Cir. 1997)
(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.
The opinion & order follow
Another recent test: Associated Press v All Headline News — 17 Feb 2009, Judge Kevin Castel, response to AHP’s motion to dismiss on all counts. AHP first made a jurisdictional claim to move the suit to Florida, which does not accept the doctrine, and they also claimed that the doctrine should be preempted by the federal Copyright Act. Both of these moves to dismiss were rejected by Judge Castel.