Electronic technologies have greatly reduced the costs of distributing information, but for content owners, that’s been a mixed blessing. Just as their costs of content distribution have shrunk and their ease of distribution has increased, the same is true for parties who obtain and redistribute that content unlawfully, to the competitive disadvantage of the content owners. That equation has been repeated over and over, reflected in numerous litigation battles fought over the last several decades. One of those battles has been fought by major financial firms that have sought to regain control over the dissemination of the stock analysts’ research reports that are central to their business model.
The financial firms have won a big victory with the opinion of Judge Denise Cote in the Southern District of New York in Barclays Capital, Inc., v. Theflyonthewall.com (S.D.N.Y. Mar. 18, 2010). The defendant ("Fly") is an Internet subscription news service that aggregates and republishes the equity research reports issued by firms such as plaintiffs Barclays Capital, Merrill Lynch (now BofA Merrill Lynch) and Morgan Stanley. (Lehman Brothers, since acquired by Barclays, was a named plaintiff when the litigation commenced in 2006). The court enjoined Fly’s redistribution of the information in the firms’ proprietary reports, relying on the "hot news misappropriation" tort under New York law.
The court’s findings of fact and conclusions of law following a bench trial describe in detail the role played by the firms’ equity research reports, certain of which contain "actionable" recommendations (i.e., buy, sell or hold) with respect to specific stocks. Large staffs of analysts, at considerable cost, prepare the recommendations that are then disseminated to certain clients of the firms on a subscription basis. The value of this content to the financial firms is the timely dissemination of it (for the most part, prior to each morning’s Wall Street opening bell) to solicit trades on which the firms earn commissions.
Fly, the court found, was one of the first parties to engage in the practice of systematically aggregating the recommendations that the financial firms have sought to closely control. At the time the lawsuit was instituted in 2006, Fly was in some cases obtaining the entire reports containing these recommendations from employees of the financial firms and other parties who were licensees of the reports. As the firms became aware of many of the sources of these leaks, they made efforts both technical and otherwise to tighten up on the unauthorized dissemination. But through various means, Fly was still able to obtain, and redistribute, the bottom line recommendations in the reports even if it was not able to obtain the reports themselves. (Fly (belatedly) conceded that at certain periods it engaged in copyright infringement with respect to the underlying reports, and the relief was granted on those claims as well.)
The tort of "hot news misappropriation" has a long history in the New York courts, and although its continued viability has sometimes been questioned, it has nevertheless been applied by the U.S. Court of Appeals for the Second Circuit as recently as 1997, in National Basketball Association v. Motorola, Inc. (dissemination of basketball scores ultimately held not actionable), and by a judge in the Southern District of New York just last year, in Associated Press v. All Headline News Corp. (S.D.N.Y. 2009) (redistribution of news stories held actionable). In the NBA case, the court defined the elements of a hot news misappropriation 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.
NBA v. Motorola, Inc., 105 F.3d 841, 845 (2d Cir. 1997).
Fly did not dispute that the first two elements were established. As to the third element, the court had no difficulty concluding that Fly was "free riding" on the effortsof the financial firms, considering the "sustained, costly efforts" by the firms to generate the recommendations, which are "highly valued by investors." What Fly sold to its subscribers, the court said, was the opportunity to obtain the recommendations of the financial firms at a cut-rate price, not any added value by Fly: "In contrast, there is no evidence that a Recommendation by Fly itself to buy, sell or hold a particular stock would be given any weight whatsoever by any investor."
On the fourth element, the court found that Fly was in direct competition with the financial firms with respect to the dissemination of the recommendations to investors, even though Fly is not in competition with the firms with respect to their functions as brokers. However, the court noted, Fly was taking steps to compete more directly with the brokers by aligning itself with discount brokerage firms through which Fly’s subscribers could effectuate trades.
On the final element, reduced economic incentives, the court concluded that the conduct of Fly (and its competitors in the financial news aggregation business), if permitted to continue, "would be likely substantially to threaten plaintiffs’ ability to continue to participate in the market." Although the court recognized that there were other factors that had cut into the profitability of the financial firms’ business (the present recession among them), the court found that the activities of Fly and its competitors had already reduced the resources that the firms devoted to equity research, which the court deemed to be a "valuable social good" that played a "vital role in modern capital markets by helping to disclose information material to the market, to price stocks more fairly and, as a result, to produce a more efficient allocation of capital." At the same time, the court recognized as well the public interest in the free flow of information, and the importance of striking a balance between that interest and the proprietary interests of the financial firms and the preservation of incentives to the creation of the subject information.
Under the court’s order, Fly is enjoined from disseminating the firms’ pre-opening recommendations in most cases before one-half hour after the opening bell. The court also provided for a re-evaluation of the injunction after a one-year period, to determine whether the financial firms have taken action against other news aggregators. It would be inequitable, the court found, to enjoin Fly from publication of the firms’ recommendations if the firms fail to take action against others engaged in the same conduct.