On March 18, 2010, the U.S. District Court, Southern District of New York, ruled that theflyonthewall.com (“Fly”), a New Jersey corporation that collects and publishes financial news and other information from Wall Street via its online subscription news service, was liable for “hot news” misappropriation under the New York common law of unfair competition for the daily dissemination of several financial service firms’ equity research trading recommendations prior to the market opening at 9:30 am each day. Barclays Capital Inc., v. Theflyonthewall.com, 1:06-cv-04908-DLC(S.D.N.Y., March 18, 2010.

The plaintiffs in this case – several major Wall Street financial firms: Barclays Capital Inc.; Merrill Lynch; Pierce Fenner & Smith Incorporated; and Morgan Stanley Co. Incorporated – expend a substantial amount of money and time researching and developing equity research reports that contain trading recommendations for clients. The purpose of the reports and subsequent recommendations are to generate trading commissions for the plaintiffs and should be protected as “hot news,” the plaintiffs argued. As a result, Fly, which obtained these recommendations without authorization by plaintiffs, should be enjoined from disseminating them.

The cause of action for “hot news” misappropriation was first developed in a 1918 Supreme Court decision, International News Service v. Associated Press, 248 U.S. 215 to protect the “sweat-of-the-brow” theory of property. In this case, the Associated Press expended a substantial amount of manpower, time, and resources reporting on the events of World War I, which reports were copied by International News Service from bulletin boards and early editions of the newspapers printed by Associated Press affiliates on the East Coast, and International New Service transmitted paraphrased versions of the stories to the West Coast as its own. International News Service was permanently enjoined from this activity with the Court carving out a niche misappropriation doctrine to protect the instances where time and money have been expended to develop commercially valuable, time-sensitive information that would not otherwise be protected under the law.

Since 1918, the law surrounding the “hot news” misappropriation doctrine remained unsettled, most notably due to arguments that federal copyright laws preempt this cause of action. The issue of federal preemption and “hot news” misappropriation was mostly recently addressed in National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2nd Cir. 1997), which construed the holding in International News Service very narrowly and set forth five elements that must be established by the plaintiff for a “hot news” misappropriation claim to survive federal preemption:

• A plaintiff generates or gathers information at cost;

• The information is time-sensitive;

• A defendant’s use of the information constitutes free-riding on the plaintiff’s efforts;

• The defendant is in direct competition with a product or service offered by the plaintiffs; and

• The ability of the 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.

Fly did not dispute that the plaintiffs activities satisfied the first two prongs of the test, e.g. that the reports are generated at a cost and the recommendations are time-sensitive. Fly, however, vigorously argued that it did not “free-ride” on third-party efforts rather it used its own time and effort to gather, edit and disseminate the recommendations. Further, Fly argued that where other third parties also publish the recommendations that the recommendations are “public” and not eligible for protection. The court was not persuaded and rejected this latter argument noting that these other third parties are also likely engaging in unauthorized activities and, as such, that does not excuse Fly’s actions.

Regarding the fourth prong, the court determined that the plaintiffs and Fly are in direct competition in disseminating the recommendations to investors for the purposes of making financial decisions because the recommendations is one of the primary businesses for both parties, the parties are in the same channels of trade and Fly has aligned itself with online discount brokers. Finally, court noted that the plaintiffs provided ample evidence to show that its incentive to produce this product was reduced due to Fly and other similar entities’ activities. The court pointed out in its opinion that this final element does not require a showing of actual damage to the business due to the defendant, but rather that the actions by the defendant, if allowed to continue, would “substantially threaten plaintiffs’ ability to continue to participate in the market.”

As a result, the court held Fly liable for “hot news” misappropriation and issued a permanent injunction on the release of the information within a limited time-frame, e.g. one half-hour after the opening of the New York Stock Exchange for information based on reports released when the Exchange is closed and two hours after release for those reports released during the time the Exchange is open. In its opinion, the court also made a special note that the recommendations are subjective judgments and not objective facts, which likely played a role in the court’s decision that the recommendations should qualify as protectable “hot news.” Fly has appealed the decision.

Although courts apply the “hot news” misappropriation doctrine very narrowly it is nevertheless a valuable and important cause of action for clients to consider, especially in today’s online environment where information may be gathered and widely disseminated in seconds with the click of a button. To find out more information about this case, as well as Arent Fox’s counseling services in the field of copyright and misappropriation please contact Anthony V. Lupo.