Alert December 16, 2010

Careful, That News May Be Hot! Digital Era Heightens Interest in "Hot News" Protection

Recent court decisions and Federal Trade Commission (“FTC”) proceedings demonstrate a reawakened interest in legal protection of “hot news” – not subject to copyright protection – where an online aggregator, blogger or other secondary content disseminator makes some use of news stories or other content produced by a news organization or other content provider.  “Hot news misappropriation” is a tort that has laid somewhat dormant for decades, but it is now generating greater attention as the web poses substantial legal and commercial challenges for many forms of content originators.  These court decisions and FTC proceedings are evidence of the difficulty inherent in balancing the legitimate economic interests of original content providers on the one hand, with longstanding limitations of intellectual property law on the other.  As the Supreme Court has stated, “originality is a constitutional requirement” for content to be protected by copyright, and facts do not constitute original content.  See Feist Pubs., Inc. v. Rural Telephone Serv. Co., Inc., 499 U.S. 340, 346-47 (1991) (“The distinction is one between creation and discovery:  the first person to find and report a particular fact has not created the fact; he or she has merely discovered its existence. . . . The same is true of all facts … ‘[t]hey may not be copyrighted and are part of the public domain available to every person.’”) (citation omitted).

The Hot News Doctrine:  A Primer

The hot news doctrine is a common law tort of misappropriation and an offshoot of the tort of unfair competition.  Although this tort generally has been applied in settings similar to those in which copyright law might be invoked, it is distinct from copyright protection in several important respects.

The 1918 Supreme Court decision in Int’l News Serv. v. Associated Press, 248 U.S. 215 (1918), recognized the basis for this common law tort distinct from copyright protection.  In that case, the plaintiff news wire service AP sued to prevent INS, another news wire service, from taking AP’s east coast stories pertaining to the war in Europe, and disseminating the same or very similar stories the same day via telegraph for publication in west coast newspapers.  Copyright provided only very limited protection for AP’s stories because they mostly recited facts about the war, and such facts are not subject to copyright protection.  As the court stated:

But the news element – the information respecting current events contained in the literary production – is not the creation of the writer, but is a report of matters that ordinarily are publici juris; it is the history of the day.  It is not to be supposed that the framers of the Constitution, when they empowered Congress “to promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries” (Const. Art. I, §8, par. 8), intended to confer upon one who might happen to be the first to report a historic event the exclusive right for any period to spread the knowledge of it.

248 U.S. at 234.

Further, any reader of AP’s news stories could repeat that news at will, so why, argued INS, should it not likewise be permitted to repeat that news for distribution in west coast newspapers?  Nonetheless, the Supreme Court held that there was a quasi-property right to “hot news” under the federal common law of misappropriation, and the court approved a limited injunction against INS “until its commercial value as news to the complainant and all of its members has passed away.”  Id. at 246. 

Although the Supreme Court later vitiated the concept of federal common law, many state courts would later recognize a similar cause of action pursuant to state law.  Although not all states recognize the cause of action and the elements may vary, the typical elements of a state “hot news” cause of action were set forth by the Second Circuit (applying New York state law) in Nat’l Basketball Assoc. v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1996).  The five factors are:

  1. the plaintiff generates or gathers information at a cost;
  2. the information in question is time sensitive;
  3. the defendant’s use of the information constitutes free-riding on the plaintiff’s efforts;
  4. the defendant is in direct competition with a product or service offered by the plaintiff; and
  5. the ability of other parties to free-ride on the plaintiff’s efforts would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.  Id. at 845. 

Because this tort required proof of several elements separate and distinct from those necessary for copyright infringement, the Second Circuit held that this tort survived preemption by the federal copyright statute.  Under this test, however, the court held that defendants that disseminated information from ongoing National Basketball Association (“NBA”) games via hand-held pagers had not misappropriated the NBA’s “hot news.”

Recent Applications:  Barclays Capital Inc. v. Theflyonthewall.com

The application of the hot news doctrine in the digital era is well demonstrated by a recent federal court decision involving the dissemination of time-sensitive financial research recommendations from brokerage firms.  In Barklays Capital Inc. v. Theflyonthewall.com, 700 F. Supp.2d 310 (S.D.N.Y. 2010), the accused defendant, flyonthewall.com, obtained the firms’ research recommendations and redistributed them.  The district court described the scenario:

This litigation confronts the phenomenon of the rapid and widespread dissemination of financial services firms’ equity research recommendations through unauthorized channels of electronic distribution.  This dissemination frequently occurs before the firms have an opportunity to share these recommendations with their clients — for whom the research is intended — and to encourage the clients to trade on those recommendations.  The firms contend that their recommendations are “hot news” and that the regular, systematic, and timely taking and redistribution of their recommendations constitutes misappropriation, which is a violation of the New York common law of unfair competition.

Id. at 313.

Flyonthewall.com conceded liability for copyright infringement with respect to a number of direct, verbatim copies of excerpts from research reports.  But the parties continued to dispute hot news liability with respect to defendant’s posting of headlines of the firms’ recommendations based on those research reports.  Importantly, the brokerage firms undertook considerable expense to fund the research, and the resulting recommendations were highly time-sensitive.  The firms informed large investors of the recommendations in order to prompt them to make investment decisions, for example, prior to the opening of the markets on the morning the recommendations were published.

At a bench trial the court found that flyonthewall.com had committed hot news misappropriation.  The court applied the five-factor test above, focusing on the parties’ disputes over the last three factors, namely, whether the defendant’s actions constituted “free-riding,” whether the parties were in direct competition, and whether the defendant’s actions created a substantial threat to the existence or quality of the plaintiff’s products.  In each instance the court found in the plaintiff’s favor.  With respect to free-riding, the court emphasized that flyonthewall.com did no equity research of its own, nor did it have any original reporting or analysis.  Id. at 336-37.  With respect to direct competition, the court found the element to be met even though the brokerage firms engaged in a business of making trades for its customers (not simply generating research reports), whereas flyonthewall.com did not have a brokerage business.  Id. at 339-40.  Finally, the court agreed with the plaintiff brokerage firms that flyonthewall.com’s actions would, if permitted, substantially threaten the viability of their research business.  Id. at 341-42.  The court’s decision is on appeal to the Second Circuit, where two dozen amici curiae, including entities such as Electronic Frontier Foundation, Google, Twitter and several major news organizations, have entered appearances.

In contrast, however, another district court recently held that a similar fact pattern failed to state a cause of action in Agora Fin., L.L.C. v. Samler, ___ F.Supp. 2d ___, 2010 WL 2899036 (D. Md. Jun. 17, 2010).  The court in that case noted that at least the Fourth Circuit has never adopted the NBA test, and opined that the test is incorrect in holding that a hot news cause of action is not preempted because it presents elements that are distinct from the rights protected by copyright.  Id. at *9.  The court held that because investment recommendations are not mere (uncopyrightable) facts, but rather original works, the federal copyright statute dictates the sole extent of legal protection.  Thus, “[w]hile plaintiffs may be able to protect their ‘original’ investment recommendations under federal copyright law, they cannot protect these recommendations under the ‘hot news’ misappropriation theory.”  Id. at *12.

A Duty to Consistently Enforce Hot News Protection?

One important aspect of the district court’s ruling in Barklays Capital is that the court, while finding liability, entered an injunction that was rather narrowly tailored and which seemed to impose on the plaintiffs an obligation to monitor and enforce hot news protection against others committing misappropriation.  The court noted that no entity had a monopoly on any “particular financial concept, formula, or line of business,” and that anyone, including the defendant, remained free to research and write research reports and make recommendations, as well as to disseminate publicly available information.  Id. at 345.  Likewise, public policy considerations dictated that there would be only a limited period of time under which the defendant would be delayed from disseminating the headlines.  Accordingly, the defendant was not prohibited entirely from disseminating headlines, but rather the court stated that it could not disseminate the information until several hours after its release by the plaintiff firms.

Finally, the court characterized the defendant’s practices as a “widespread phenomenon” and stated it would be unjust to enjoin defendant while others freely engaged in such practices.  Id. at 347.  Thus, the court’s opinion held, “one year from the issuance of this injunction, Fly may apply to modify or vacate the injunction in the event 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.”  Id. at 347-48Although the rigor with which the court will apply this requirement remains to be seen, the court arguably has imposed a fairly significant burden on the plaintiff firms to show that they have both monitored and enforced their rights against other third parties engaging in this “widespread phenomenon.”

FTC Workshops Invite Discussion of Hot News Protection

Consideration of legal protection for hot news has not been limited to the courts.  In a series of workshops held over the past year, the FTC has examined how the news media industry has suffered economically from competition with free content distributed over the web.  In that context, the FTC staff developed a discussion draft of policy measures for consideration.  Although the discussion draft emphasizes that it is not to be taken as a recommendation or as having the imprimatur of the FTC’s support, it is notable that one of the primary issues for consideration is the scope of hot news protection.  The FTC staff report provides three proposals for consideration:  (1) amending the federal Copyright Act to specifically recognize hot news protection; (2) enacting statutory limits to fair use for aggregators and search engines; and (3) industry-wide licensing arrangements for news providers, including possible statutory or compulsory licensing.  While it must be emphasized that the FTC has not endorsed any of these approaches to date, the attention devoted to this issue in the staff report demonstrates its importance.

Conclusion

The ease with which information can now be obtained and redistributed electronically has heightened interest in the hot news doctrine, while at the same time challenging the courts to determine the boundaries of the doctrine without offense to the statutory and constitutional limitations of copyright law.  Although the scope of legal protection for hot news remains in flux, both content originators and those who aggregate and/or disseminate such content should be mindful that state law tort protection may apply.  This is particularly the case in instances where time-sensitive information is at issue, and the defendant is free-riding on the plaintiff’s information in a manner that could eliminate the incentive for the plaintiff to continue to gather that information.  The contours of this tort – and whether hot news protection ought to be embraced at the federal level – will likely receive more attention in the coming year.