A primary topic of the argument -- which, although scheduled for 40 minutes, went on for more than twice that length of time -- was the viability of the "hot news" doctrine, which the district court applied to find that Theflyonthewall improperly undercut market for the financial firms' reports. The district court also found that the site violated the firms' copyrights.
The question of the viability of the "hot news" doctrine has become an important one in the Internet era, when news and information is easily -- and frequently -- paraphrased, linked to, and outright copied from one site or service to another. In recent years lawsuits invoking the doctrine have been filed by Dow Jones against the financial news site Briefing.com; and by the Associated Press against All Headline News.
The lawsuit argued in the Second Circuit was brought by Barclays, Merrill Lynch and Morgan Stanley, which produce and distribute numerous reports on individual companies and sometimes entire industries. These reports, which often include recommendations on actions to take on individual financial instruments such as stocks, are mostly distributed in the early morning hours, before the financial markets open, and are used throughout the trading day by the firms' brokers, who often convey the reports' recommendations to their clients. The firms claimed that Theflyonthewall, which paraphrased the report recommendations and sometimes also summarized the reports, often within minutes of their release, violated their copyrights in the reports, and that the site's actions constituted unfair competition.
Flyonthewall eventually conceded on the copyright claim. As to the unfair competition / "hot news" claim, District Court Judge Denise Cote first discussed the history of the "hot news" tort, starting with its creation in International News Service v. Associated Press, 248 U.S. 215 (1918), through its application in National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), a case involving a service that sent updated basketball scores to pagers. In short, the court held that the tort continued to be viable under New York State law, and could be applied to Theflyonthewall. Barclays Capital Inc. v. TheFlyOnTheWall.com, Civil No. 06-4908 (S.D.N.Y. Mar. 18, 2010). (Detailed analysis of that decision here.)
The court defined the elements of the "hot news" claim as follows:
(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.
Id., slip op. at 55 (citing NBA, 105 F.3d at 845).
Applying these elements, Cote found that Theflyonthwall's activities met each of the elements.
The Firms have supplied ample evidence that the continued conduct of Fly, and others like Fly, would so reduce their incentive to invest the resources necessary to produce equity research reports that the continued viability of plaintiffs’ research business is and “would be substantially threatened.” Indeed, the conduct of Fly and others has, along with other unrelated factors, already reduced the resources devoted to the research aspect of the Firms’ business. The ability of the Firms to “monetize” their research is critical to its continued production. Thus, the factual scenario at the heart of the hot news misappropriation doctrine exists here.
Id., slip op. at 72.
Judge Cote then issued an injunction barring Theflyonthewall from continuing its previous practices. The court's injunction did not prohibit Theflyonthewall from publishing the financial firms' recommendations, but allowed it only a few hours after release of the relevant research report.
Theflyonthewall appealed to the Second Circuit, and the parties and amici argued the case on Aug. 6 before a panel of judges Rosemary S. Pooler; Reena Raggi; and Robert D. Sack. Google; StreetAccount.com; and Twitter appeared as amici for Theflyonthewall, while the Securities Industry and Financial Markets Association (SIFMA) appeared on the side of the financial companies. A coalition of media entities also appeared in the case as amici, but on neither side of the dispute.
Judge Raggi was the most active questioner, asking Glenn Ostrager of Ostrager Chong Flaherty & Broitman P.C., representing Theflyonthewall, about the site's marketing materials, which promised what she characterized a "cut rate price" for the same "inside information" that Wall Street professionals have. Ostrager responded that Theflyonthewall's activities were traditional newsgathering, collecting and synthesizing information from various sources.
Judge Sack stated that the appeals court was bound by its prior decision in the NBA case, which led Raggi to ask Ostrager how his client claimed that the district court misapplied that case. Ostrager responded that the district court erred by finding that Theflyonthewall and the financial companies are competitors.
Kathleen Sullivan of Quinn Emanuel Urquhart & Sullivan, representing Google, StreetAccount.com and Twitter, directly challenged the NBA decision, saying that it was erroneous under the U.S. Supreme Court's decision in Feist Publ’ns, Inc., v. Rural Tel. Serv. Co., 499 U.S. 340 (1991), which she argued held that the "hot news" doctrine created the the INS case was no longer viable. And even if the INS decision is still valid, she said, it should be limited to direct competitors, not applied to news aggregators like Theflyonthewall (and Google).
Sullivan further argued the NBA decision was wrong in holding that the hot news doctrine existed under New York law. "There's no such thing as 'hot news' anymore," she said. "'Hot news' becomes old in a nanosecond." Judge Pooler asked whether the appeals court should certify the question to the New York Court of Appeals. Sullivan agreed that that was a possibility, but urged the court to limit the NBA ruling to direct competitors.
Andrew Deutsch of DLA Piper LLP, representing the coalition of media companies, argued that "hot news hasn't gone away," and that Feist was a not a limit on individual states' "hot news" doctrines.
R. Bruce Rich of Weil Gotshal & Manges LLP, representing the financial firms, told the appeals panel that the parties had stipulated to the application of the five NBA factors at the district court, and should not be able to question their validity on appeal. When Judge Pooler asked if the appeals court should look at the continued viability of the NBA decision, Rich responded that the case here "should not be turned upside down."
In response to another question from Judge Sack, Rich said that federal copyright law and state "hot news" torts can co-exist, because they protect different interests.
Rich added that his clients have no problem with general financial news reporting on their reports and buy/sell recommendations, but that Theflyonthewall made disclosure of these reports and recommendations its entire business. Theflyonthewall's business model, he argued, was specifically designed to take away the advantage of subscribing to the financial firms' services.
In response to a comment by Judge Pooler that it would be difficult to create a standard that barred "free riding," while not impeding news aggregation in general, Rich expressed confidence that the court could create a fact-specific test that did so.
The final amicus, the Securities Industry and Financial Markets Association (SIFMA), was represented by Stephen Kinnaird of Paul, Hastings, Jankofsky & Walker. Kinnaird said that the position advocated by Google, StreetAccount.com and Twitter would eliminate the law of unfair competition.
When Judge Sack observed that "all news reporting in a sense is free riding," Kinnard said that while occasional reporting of financial firms' recommendations was not a problem, Theflyonthewall was widely free-riding on the financial firms' work and reputations. This lead Judge Raggi to observe that the financial firms' real problem was with employees or clients who provide the firms' reports the Theflyonthewall.
Theflyonthewall's counsel, Glenn Ostrager, got the last word in rebuttal, and reiterated his argument that while the Supreme Court's INS ruling involved head-to-head competing news services, Theflyonthewall was not in the same primary market as the financial firms. The financial firms presented no evidence that they lost clients because of the Theflyonthewall, he said, concluding that "the products are night and day."
The appellate panel took the case under advisement, and is likely to take several months to issue an opinion.
