Prof. Rodney A. Smolla, President, Furman University
August 16, 2011

It is one thing to make news, and yet another to break it.  The distinction between making and breaking news recently proved critical in a fascinating intellectual property case involving the rights of Internet news aggregators to scoop the stock trade recommendations of large financial firms regarding their intended advice on buying and selling stocks.

In Barclays Capital Inc. v., Inc.1. the U.S. Court of Appeals for the Second Circuit dealt with a copyright preemption issue arising from claims brought by three major financial firms, Barclays Capital, Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and Morgan Stanley & Co. Inc., against  (“Fly” for short.)

The claim by the three large financial institutions against the upstart Fly was that Fly was engaged in a form of “free-riding” that threatened the business models of Barclays, Merrill, and Morgan Stanley.  As the court explained, the three large firms engage in extensive research about the business and prospects of publicly traded companies and their stocks.  This work results in recommendations that are circulated to clients and prospective clients.  These recipients gain an informational advantage over non-recipients with respect to those recommendations.

Fly operates a news service distributed electronically, for a price, to subscribers.  Fly is a news “aggregator,” operating a website that collects headlines and snippets of news stories from other websites, as do many other aggregators, including Google News or the Huffington Post.  Fly’s subscription clients are largely individual investors, institutional investors, brokers, and day traders.  Fly also distributes through some third-party distributors and trading platforms such as Bloomberg and Thomson Reuters.  Fly touts itself as a source for breaking financial news, claiming to be the “fastest news feed on the web.”

Fly at times “scoops” the big firms by obtaining information about the recommendations those firms will make before the firms have actually published that information to their own clients.  This tends to even the playing field, by diluting or removing entirely the informational head start and attendant trading advantages of the clients and prospective clients of the big firms.  In an early stage in the litigation, Fly conceded that it had been guilty of copyright violations in situations in which it simply published verbatim the reports that the big firms had created.

The more interesting question decided by the Second Circuit, however, dealt with claims brought by the big firms for Fly’s mere distribution of the facts surrounding what Barclays, Merrill, or Morgan Stanley would be recommending.

The big firms argued that Fly’s scooping of their “hot news” was a tortious misappropriation of their property of the sort famously recognized by the U.S. Supreme Court in its landmark 1918 decision in International News Service v. Associated Press.2.   The INS case was a battle between the Associated Press and the International News Service, in which AP complained that INS ripped off its newsgathering efforts by taking factual stories from East Coast AP papers and wiring them to INS papers on the West Coast.  The Supreme Court held that INS was in fact guilty of common-law misappropriation of AP’s property.  INS was a free-rider, profiting from AP’s work.3.   It has generally been understood that cases for common-law misappropriation that are viable under a “hot news” INS-style claim are not preempted by federal copyright law.  Barclays, Merrill, and Morgan Stanley argued that Fly was indeed a free-rider ala INS, stealing the hot news that the firms created through their own research and hard work.

Fly, however, claimed that those aspects of the lawsuit against it that were based on an INS “hot news” misappropriation theory were in fact preempted by federal copyright law, because Fly was not really engaged in free-riding.  If such preemption did exist, then Fly would indeed fly free, for the mere repetition of the underlying facts contained in the recommendations of the three big firms did not constitute copyright infringement – since copyright protection does not extend to underlying facts, but only to the tangible expression of those facts.

The trial court found against Fly and in favor of the big firms, on the theory that Fly’s conduct was largely indistinguishable from the conduct found culpable in INS.  Fly reaped financial benefits from its own subscribers, the trial court reasoned, without doing the underlying financial work those subscribers were paying for.

The Second Circuit, however, disagreed, applying its own prior precedent on the copyright preemption issue from National Basketball Association v. Motorola, Inc.4.   In the NBA case the Second Circuit held that an INS-style misappropriation claim was not preempted when Motorola distributed breaking play-by-play accounts from NBA games.  Although game broadcasts are copyrightable, the underlying games are not.  Even so, the court in NBA held that the “Copyright Act should not be read to distinguish between the two when analyzing the preemption of a misappropriation claim based on copying or taking from the copyrightable work.”

The Second Circuit in Theflyonthewall held, however, that the INS “hot news” misappropriation claim against Fly was preempted.  Fly, the court held, was actually not engaged intrue “free-riding.”  It was not the wisdom of the underlying buy or sell recommendations that Fly was selling to its customers, the Court held, but the “news” that the large firms – major market players – would be making the recommendations.  Fly was simply reporting news, the court held, engaged in “collecting, collating and disseminating factual information – the facts that Firms and others in the securities business had made recommendations with respect to the value of and the wisdom of purchasing or selling securities – and attributing the information to its source.”

As the Second Circuit saw it, the big firms were themselves making news by their recommendations, and Fly was in turn breaking news by reporting on the fact of those recommendations.  The Second Circuit concluded that “a Firm’s ability to make news – by issuing a Recommendation that is likely to affect the market price of a security – does not give rise to a right for it to control who breaks that news and how.”