Financial news aggregator Theflyonthewall.com Inc. cannot be held liable for "hot news" misappropriation because the New York state law is preempted by the federal Copyright Act, the U.S. Court of Appeals in New York City (2nd Cir.) held Monday in Barclays Capital Inc. v. Theflyonthewall.com, Inc.
Theflyonthewall.com collects and summarizes financial reports and then distributes the reports to subscribers through a news feed that is updated throughout the day. The plaintiffs — financial firms Barclays, Merrill Lynch, Pierce, Fenner & Smith Inc. and Morgan Stanley & Co. Inc. — sued the aggregator for copyright infringement and hot news misappropriation for its use of recommendations the firms make in daily reports distributed to customers. The reports advise which stocks to buy or sell. The firms distribute the reports to their own, paid subscribers, as well as a number of aggregators they directly contract with, including Thomson Reuters.
Theflyonthewall.com gets the information it reports on often directly from the firms, but received the recommendations issued by the plaintiff firms through a number of outlets, including emails from employees and Internet postings by recipients of the reports.
The website then summarizes the reports for its news feed and, sometimes, even takes the one or two sentence recommendations and puts them in its feed verbatim. In regards to the latter behavior, Theflyonthewall.com conceded to the copyright infringement accusations.
The firms sued because their recommendations are often issued before the stock market opens for the day, and the reports bring business to their firms and influence the market, they claim. By redistributing the recommendations through its feed, Theflyonthewall.com costs the firms business, they claim.
A federal district court found for the firms and issued a permanent injunction against the website, requiring it to wait at least 30 minutes after the market opened or two hours after the information was published in the initial reports before it could redistribute the information in its news feed.
"Hot news" misappropriation, generally first recognized in a 1918 U.S. Supreme Court case, is when a party takes "material that has been acquired by complainant as the result of organization and the expenditure of labor, skill, and money, and which is salable by complainant for money, and . . . appropriation of it and selling it as [the defendant's] own."
The 1918 case was initiated by The Associated Press against a competitor, International News Service, which was taking east coast AP stories and passing them off as its own to its west coast subscribers. Thus, AP and INS west coast papers carried the same stories.
The Supreme Court case is no longer good law because it was based on federal common law that was abolished by a later Supreme Court decision. However, "hot news" claims survive through local statutes, such as the New York law at issue in this case, and the Second Circuit has recognized that the legislative history of the Copyright Act implies that a "hot news" claim could exist.
Theflyonthewall.com, which was sued under the New York statute, challenged the law as preempted by the federal Copyright Act. A law is preempted by the Copyright Act when it "seeks to vindicate" the same "legal or equitable rights" as protected by the act and "if the work in question is of the type of works protected by the Copyright Act."
The "hot news" misappropriation statute in New York overlaps with the Copyright Act because it applies to copyrightable works and seeks to promote the same legal rights as the act. However, in 1997, the Second Circuit recognized a class of cases where the statute would not necessarily be preempted by the federal law. The court determined that if specific, extra elements were present, then preemption would not apply. Those additional elements include: if the works in question contained facts of a time sensitive nature, if the defendant was "free-riding" on the work of the plaintiff, and if the defendants actions put the original work's existence at risk due to financial loss.
Theflyonthewall.com's actions did not meet the standard of the extra elements to avoid preemption by the Copyright Act, the appeals court determined. There was no "free-riding," the court said. Not only was Theflyonthewall.com not selling the information "as its own," but it was fully attributing the source of the recommendations. In addition, the site was exerting its own energy and costs to find the information, summarize it and then publish it, the court found.
"Firms are making the news; Fly, despite the Firms' understandable desire to protect their business model, is breaking it," the court held.
Without the additional elements of "free riding" and passing the work off as its own, plaintiffs would present the same exact evidence for both the federal and state claims. Thus, the federal law preempts the state law.
The court remanded the case to the district court with instructions that the misappropriation claims be dismissed. The "ability to make news . . . does not give rise to a right for [a firm] to control who breaks that news and how." Dismissing the misappropriation claims does not mean Theflyonthewall.com could not still be found liable for copyright infringement, it merely means that it cannot face both copyright and misappropriation claims.