“Hot News” Has Gone Cold

Anyone distributing news online can rest easier tonight. The Second Circuit held last week that Flyonthewall.com (“Fly”) is not guilty of “hot news” misappropriation for reporting leaked stock recommendations—finding the claim preempted by the Copyright Act. Barclays Capital Inc. v. Theflyonthewall.com Inc., No. 10-1372-cv (2nd Cir. June 20, 2011).

The Court based its decision on a lack of “free-riding,” which was missing in large part because Fly attributed the recommendations to their sources and expended a substantial amount of its own resources in gathering and reporting the fact-based financial recommendations.

The Second Circuit appears to “get it”–that “hot news” has very little place in today’s digital age, setting precedent that makes it exponentially more difficult to bring such a claim in the future. This is a step in the right direction. Anyone nowadays can re-distribute news and information in nanoseconds with an Internet connection or cell phone. The realities of the Internet turn “hot news” cold within seconds of publication–twitter explodes with tweets, bloggers take to their keyboards, and content is shared with millions via countless social media platforms.

Practical Implications:
What situations may still constitute “hot news” misappropriation? Trade secrets of direct competitors come to mind. Assuming preemption can be overcome (discussed below), two additional factors become crucial–(1) direct competition and (2)  free-riding that “would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.” While the Second Circuit did not base it’s decision on these factors, it did discuss their application in a strict and narrow sense, showing that if another “hot news” case came before it, meeting these factors would be a difficult task.  The Second Circuit’s explanations are likely to be persuasive analysis for any court hearing a “hot news” case.

Trade secrets are typically most valuable to direct competitors and if revealed are most likely to threaten the existence or quality of the product or service. Breaking such news without attribution to it’s source (free-riding, for “preemption” purposes) has a chance of overcoming preemption and creating liability for “hot news” misappropriation.

For the majority of people distributing news online. Most can rest easier, knowing that breaking news is not likely to result in “hot news” misappropriation liability. Attributing the news to it’s source makes “free-riding” less likely; many individuals/entities distributing news online are not in direct competition with the source of the news; and the likelihood of breaking news that would substantially threaten its existence or quality is slim.

But be awareeven if a “hot news” claim fails, a copyright infringement claim may be possible.

The Decision:
The decision came on appeal from the District Court ruling, which found “hot news” misappropriation and barred Fly from reporting stock recommendations of Barclays Capital, Merrill Lynch, and Morgan Stanley (the “Firms”) until 10 a.m. E.S.T for those issued when the market is closed and wait two hours before publishing recommendations issued while the market is open.

Much of the discussion on appeal centered on the interpretation of prior cases—namely NBA v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997) and Int’l News Serv. v. Associated Press, 248 U.S. 215 (1918), with the latter representing the origin of the “hot news” doctrine, and the former a well known Second Circuit “hot news” precedent.

In NBA, the court set out three multi-factor tests, which the Second Circuit in Fly found to be inconsistent. The Second Circuit determined that the District Court applied the wrong test from NBA and noted that while the “law” from NBA regarding “hot news” misappropriation is binding upon it, the various “explanations” for the tests in NBA are not determinative–finding much to be merely dicta. In determining whether a “hot news” claim survives preemption from copyright law, the Second Circuit (quoting NBA) said the proper test is:

(i) the time-sensitive value of factual information,
(ii) the free-riding by a defendant, and
(iii) the threat to the very existence of the product or service provided by the plaintiff.

To survive preemption, all three factors must be met. Focusing on the second factor, the Second Circuit found the Firms claim failed because Fly was not engaged in “free-riding.”

In NBA, the court said: “An indispensable element of a [non-preempted] INS ‘hot-news’ claim is free-riding by a defendant on a plaintiff’s product, enabling the defendant to produce a directly competitive product for less money because it has lower costs.” NBA, 105 F.3d at 854. Fly, however, dedicated substantial resources to collecting the data, using its own network and roughly half of its employees to assemble and transmit the data—which the court deemed similar to the SportsTrax service (held to not be a free-riding product) in NBA because both were bearing their own costs in collecting the factual information.

In her Concurrence, Judge Raggi said by distinguishing between those who make the news and those who break it, we “foreclose the possibility of a ‘hot news’ claim by a party who disseminates news it happens to create.” The Court responded by noting that issue was not before it, and would not speculate whether or not such a claim would be foreclosed.

Further, INS defined “hot news” to be, in part, “taking material . . . salable by complainant for money, and . . . appropriating it and selling it as [the defendant’s] own . . . .” INS, 248 U.S. at 239. Fly was distributing factual financial information and attributing that information to its source—it was not selling the recommendations “as its own” as contemplated by INS.

With “free-riding” lacking, the extra elements necessary to overcome preemption by copyright were absent. The Second Circuit reversed the District Court’s finding of “hot news” misappropriation, saying “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.” Barclays, No. 10-1372-cv at 71.