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Barclays Capital Inc. v. Theflyonthewall.com, 2010 WL 1005160 (S.D.N.Y. 2010)

There was an order issued in the Southern District of New York (Cote, J.) in a case that merits very close watching. Theflyonthewall.com is a subscription based internet news service that aggregated and published investment recommendations and research from sixty-five investment firms along with investor orientated items. Brokerage firms created the research and recommendations, often at substantial cost, and distributed them to select investors as a means to drive trading.

Theflyonthewall obtained the stock recommendations of the investment management firms primarily via employee leaks. The President of Fly, however, testified that by 2009 “he was engaging in a ritualistic and labor-intensive process of “confirming” each Firm’s Recommendations from at least two and sometimes three independent sources before publishing them, still typically before the market opening.” Theflyonthewall.com had twenty-eight full time employees at the time of discovery and manually selected which stories to bring to the attention of its readers.

A group of four investment management firms brought suit (Lehman later dropped) for misappropriation of the time-sensitive recommendations contained in their equity research reports. The firms also brought a total of seventeen copyright infringement claims for the distribution, in each case, of a paragraph from the reports with attribution. In the action at bar, the investment firms moved for summary judgment on all claims. The copyright portion of the suit was resolved without a fight. The investment firms only pursued the minimum available statutory damages ($750 per work) along with attorneys’ fees, and Fly didn’t raise a fair use defense.

Misappropriation

The Court applied the five-factor test from National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d Cir.1997)  and determined that the misappropriation claim was not preempted by the Copyright Act. Fly did not dispute the plaintiffs’ arguments that they (1) incurred substantial expense in generating their research reports and recommendations, and (2) that the information gathered was time-sensitive.

(3) Free-Riding

The Court’s analysis of free-riding was particularly interesting. Fly “vigorously” argued that it expended substantial energy aggregating the news. The Court found that “[t]o the extent that Fly add[ed] value through its collection and aggregation of information, . . .  the value reflected in that act of aggregation d[id] not controvert the fact that Fly expend[ed] no effort to produce the Recommendations and d[id] not contribute to the underlying research and analysis process.”

Fly also argued that, because it no longer appropriated the recommendations from the investment firms’ research reports, but instead relied on third-parties, the recommendations were public knowledge. Fly pointed to the “frequent publication of the Recommendations by other news services, both mainstream and internet, in advance of Fly’s own publication of headlines and to the widespread discussion of the Recommendations in market chat rooms and “blast IMs,” among other sources.” The Court’s response:

The fact that others also engage in unlawful behavior does not excuse a party’s own illegal conduct. Although the practices of other potentially liable parties is highly relevant to the fashioning of equitable relief and will be considered below, the conduct of third parties is simply of no moment in finding Fly liable for hot-news misappropriation. Similarly, even if true, it is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it. In [ International News Service v. Associated Press, 248 U.S. 215 (1918)], for example, AP’s news was already widespread and publicly available on the East Coast and was obtained by the defendant from public sources, and yet, the Court granted an injunction against INS’s further dissemination of news gained through those means. INS, 248 U.S. at 245-46; see also Bond Buyer, 267 N.Y.S.2d at 946 (enjoining defendant’s misappropriation of plaintiff’s bond-market reports even though they were already in the public domain).

(4) Direct competition

The Court found that Fly was in direct competition with the plaintiffs because “the Recommendations from those reports, [were] one of the “primary” businesses for each of the Firms.”

(5) Reduced economic incentives

The continued activities of Fly and similar actors, according to the Court, “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’”; and that the “ability of the Firms to ‘monetize’ their research is critical to its continued production.”

Injunction

The Court enjoined Fly from distributing information from the research reports released when the market is closed for the later of either one half-hour after the opening of the New York Stock Exchange or 10:00 a.m. The Court further enjoined Fly from distributing recommendations issued while the NYSE is open for two hours after their release by the Firms. The Court included a provision that allowed Fly after a year to pursue the modification or vacating of the “injunction in the event that it can demonstrate that the Firms have not taken reasonable steps to restrain the systematic, unauthorized misappropriation of their Recommendations, for instance, through the initiation of litigation against any parties with whom negotiation proves unsuccessful.”

Comments:

I think many of us are eagerly anticipating a Second Circuit if not a Supreme Court opinion on the viability of hot news claims in the internet age. The Court’s order in this case was framed almost more like an arbitration decision than a federal court order. The Court appeared to strive for an injunction that the defendant’s could possibly abide by, and that wouldn’t be a target for appeal. So, this case may not end up being the vehicle that makes appellate law on misappropriation claims. If this case isn’t appealed, any site that aggregates financial news has a giant court-mandated target on it.