Traditional print newspapers and magazines are experiencing upheaval thanks to the rise of the Internet, but they are not the only information providers facing serious challenges. Even before the tumult created by the recent recession, major financial firms were struggling with the effects of competition from online financial news aggregation services aimed at investors. In some cases, these online services have obtained and disseminated the firms’ most closely held, time-sensitive and valuable information product: The daily stock recommendations generated by their financial analysts.
The battles fought by several of those firms (Barclays Capital, Mogan Stanley and Merrill Lynch) are detailed in the recent federal district court ruling in Barclays Capital, Inc., v. Theflyonthewall.com (S.D.N.Y. Mar. 18, 2010). The firms won a big victory when federal judge Denise Cote, relying on the “hot news” misappropriation doctrine recognized under New York state law, issued an order limiting the republication of the firms’ stock recommendations by the defendant, financial news aggregator theflyonthewall.com (“Fly”).
Fly countered with a plea [PDF] to the the U.S. Court of Appeals for the Second Circuit that the enforcement of the injunction would force it out of business. In a dramatic turn, on May 19 the appeals court granted a stay [PDF] of the injunction and a rare expedited appeal, calling for briefs to be filed by July 26.
This case about the hot news doctrine has now itself become “hot news.”
The Hot News Doctrine
As previously written on MediaShift, the “hot news” misappropriation doctrine is a legal principle first recognized in the early twentieth century when the Associated Press news service sued a rival service for paying off AP employees to pass on early versions of stories that were intended for West Coast newspapers. The rival service rewrote the stories to avoid claims of copyright infringement, and then sold them to West Coast news outlets.
The U.S. Supreme Court ruled in 1918 in International News Service v. Associated Press, that the AP had a right in the news content that it gathered that was distinct from its rights under copyright law: “the peculiar value of news is in the spreading of it while it is fresh,” the Court famously commented.
With a bow to the First Amendment, the Court distinguished an individual’s right to disseminate information contained in a newspaper once published from a business competitor’s act of appropriation of material that had been acquired through expenditure of labor, skill and money. The Court concluded that the AP could sue on the theory that the rival’s conduct constituted “unfair competition in business.” Although the ruling was later criticized and challenged, the U.S. Court of Appeals for the Second Circuit reaffirmed its viability in 1997 in National Basketball Association v. Motorola, Inc., a case involving transmission of basketball scores.
The Barclays case is the first time that the Second Circuit has had an opportunity to consider the hot news doctrine in the context of the Internet age, which began picking up steam just after the ruling in NBA v. Motorola.
Current views on the viability of the hot news doctrine are mixed. The doctrine exists in tension with First Amendment values that protect the right to freely disseminate facts, and with the limits of copyright law, which do not extend to mere facts but only to the expression of facts. Nevertheless, the federalization of the hot news doctrine (which currently has been recognized only in a handful of states) has been proposed as a tool to support the efforts of traditional media to protect their content from online competition. That and other proposals to support traditional journalism made it into a recently released FTC Staff Discussion Draft [PDF] that summarized the discussions at the FTC workshops on the future of journalism.
The Value of Timely Financial Information
The Barclays opinion demonstrates the value of hot financial news, and the effects that unauthorized dissemination of that news can have on the financial firms that prepare and market it.
At issue in Barclays is the information contained in reports prepared by the financial firms for their largest and most lucrative customers and disseminated as “actionable recommendations” — recommendations to buy, sell or hold a stock. As the district court explained, the firms’ recommendations are not casually made; they are the product of the efforts of a large staff of analysts and related functionaries who acquire, sift and compile information on an ongoing basis, at great cost and expense.
The recommendations yield value for the financial firms primarily in the form of fees on the trades made by customers who frequently use the trading arm of the financial firm to make a trade on that recommendation. The value of the recommendations to the customers is the timeliness of the information: It is typically disseminated to them between midnight and 7 a.m., before the opening of the New York Stock Exchange. And it is significant as well that the reputation of the big firm analysts is such that their recommendations are themselves news and may move the market price of a stock significantly and in a very short period of time once widely known. Having those recommendations before market opening can provide the firms’ clients with “an early informational advantage,” as the court commented. The value of the recommendations derive not just from the quality of the information, but the “exclusivity and timeliness” of it.
To protect the value of this “informational advantage,” the firms have implemented elaborate systems aimed at limiting access to the recommendations, including the use of password-protected proprietary Internet platforms, and licensing provisions that narrowly limit the right to disseminate the reports and forbid their redistribution to unauthorized parties. The district court described other technologies that are used to control access and dissemination, including blocking access to the firms’ proprietary systems from certain websites and social networking platforms, and the use of personalized, encrypted URLs to deliver information to clients. (This makes it easier to track down the source of leaked reports.)
Despite these efforts, online financial news aggregators have been able to gain access to recommendations in advance of their public release. Fly, the district court found, was one of the first online financial news subscription services to engage in the practice of systematically obtaining and disseminating the actionable recommendations of traditional financial firms. Until the institution of the Barclays lawsuit in 2005, Fly’s source of these recommendations was employees of the financial firms, who provided them despite the fact that they were not authorized to do so. After the litigation commenced, Fly changed its tactics; but it was still able frequently to obtain those recommendations, often from licensees of the information, and disseminate the recommendations to its subscribers before the financial markets’ opening bell.
The Impact on Financial Firms
According to the district court opinion, the aggregators’ activities have had an impact on the financial firms’ business model and revenue generation, a finding critical to the analysis of one of the key elements of the hot news doctrine: Whether the “free riding” by Fly and the other online services on the financial firm’s efforts in generating their actionable recommendations “would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.” This element of the hot news doctrine, the court found, implicates the public interest in protecting “socially valuable products or services in danger of being under-produced.”
The court ruled resoundingly in the financial firms’ favor on this point, crediting the firms’ evidence that they had cut their analyst staff and budgets significantly because, in addition to other factors, the analysts’ reports were no longer the driving force behind the generation of commission revenue to the extent that they had been previously.
“With clients able to review the Firms’ recommendations and even research reports through other sources, the research department have been handicapped in their ability to argue for their historical share of the Firms’ overall budgets,” the court found, resulting in cuts of from 20 percent to half or more over the past decade.
The conduct of Fly and the other online news aggregators, the court concluded, threatens the ability of the firms’ to monetize their research and continue to produce it. In evaluating the appropriateness of an injunction, the court further commented that this activity “is a valuable social good,” and “plays 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.”
The injunction crafted by Judge Cote was carefully aimed at the time period that the financial firms identified as most critical to maintaining the value of its recommendations. Fly was enjoined from disseminating the firms’ pre-opening recommendations in most cases before one-half hour after the opening of the New York Stock Exchange. 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.
The result in Barclays v. Theflyonthewall.com is likely to be important not only for financial firms seeking to protect analysts’ recommendations, but for general news outlets as well. A reaffirmation of the viability of the “hot news” doctrine by the Second Circuit could spur additional lawsuits and would probably bolster the position of advocates for enacting the doctrine on a nationwide basis. If the ruling is overturned, the legal avenues available to content owners seeking to protect their content from aggregation services will have been further narrowed.
UPDATE**: The importance of this dispute is reflected in the filing of several amicus (friend of the court) briefs. The brief filed jointly by the Electronic Frontier Foundation, the Citizen Media Law Project of the Berkman Center for Internet and Society at Harvard University and Public Citizen asks the court to focus on the strong First Amendment interests at issue in the case. Google and Twitter have also filed a joint brief supporting Fly’s position, citing both First Amendment and copyright concerns. Both Dow Jones, Inc., singly, and a group of media companies including the Associated Press, Time, Inc., The New York Times Co. and the Washington Post have also filed amicus briefs.
Jeffrey D. Neuburger is a partner in the New York office of Proskauer Rose LLP, and co-chair of the Technology, Media and Communications Practice Group. His practice focuses on technology and media-related business transactions and counseling of clients in the utilization of new media. He is an adjunct professor at Fordham University School of Law teaching E-Commerce Law and the co-author of two books, “Doing Business on the Internet” and “Emerging Technologies and the Law.” He also co-writes the New Media & Technology Law Blog.