“Hot News” Doctrine Not So Hot

In Barclays Capital, et al. v. Theflyonthewall.com, Inc., Docket No. 1-1372-cv (2nd Cir. June 20, 2011), the Second Circuit U.S. Court of Appeals dealt a significant blow to the viability of the tort of “hot news” misappropriation and thereby gave an additional boost to the status of online content aggregation companies. 

As so-called “new media” companies go, the subset known as content aggregators — such as the Huffington Post or the Drudge Report — have been a curious burr in the side of many, more traditional media businesses engaged in news gathering and reporting.   If content aggregation sites are readily able and without payment to repurpose the efforts of the old line news outfits such as the Associated Press, The New York Times or ABC News, for example, does this threaten the core news gathering and reporting functions of that latter group and, if so, should there be a prohibition on such aggregation activities.

Background of Hot News Doctrine

The “hot news” doctrine is intertwined with copyright law and derives from a 1918 U.S. Supreme Court case involving International New Service (INS) and the Associated Press (AP),  in which INS was prohibited from free riding on the AP’s efforts by taking factual accounts derived from AP news stories and then presenting the news stories as INS’s own reports.  International News Service v. Associated Press, 248 U.S. 215 (U.S. 1918).   The doctrine was later severely limited by the Second Circuit in National Basketball Association v. Motorola, 105 F.3d 841 (2nd Cir. 1997), which addressed a collaboration between Motorola and a reporting service using pagers to transmit with only a few minutes delay game scores and data compiled from various sources and which competed somewhat with the NBA’s own efforts at packaging and selling games data in more or less real time.  The NBA court articulated a multi-factor test for when a hot news misappropriation claim would survive copyright law preemption and ultimately concluded that the hot news claims asserted by the NBA were preempted by copyright law because the actions complained about by Motorola, among other things, did not involve any free riding and thus did not satisfy the elements of a hot news claim.  

Barclays Case

In Barclays, a group of brokerage firms, including Barclays Capital, Merrill Lynch and Lehman Brothers,  that created reports with recommendations about whether to buy or sell certain stocks complained that Theflyonthewall.com misappropriated the brokerage reports by publishing the recommendations without authorization on a financial news website operated by Theflyonthewall.  The trial court, citing NBA, found for the brokerage firms on grounds of copyright infringement and hot news misappropriation.    

On appeal, Theflyonthewall did not contest the copyright infringement claims but took issue with the findings concerning the hot news tort violations.   In a complete reversal of the district court on the misappropriation issue, Judge Robert Sack noted in his lengthy opinion that the brokerage firms claims of unfairness by Theflyonthewall was immaterial to whether a misappropriation claim has been preempted by the Copyright Act and that “[t]he adoption of new technology that injures or destroys present business models is commonplace.  Whether fair or not, that cannot, without more, be prevented by the application of the misappropriation tort.”

The Second Circuit likened Theflyonthewall’s activity to the newsgathering functions engaged in by traditional news media and took exception to the characterization of Theflyonthewall’s reporting as involving free riding or serving as a substitute for the reports or recommendations of the brokerage firms.  By issuing stock recommendations, the firms were making news and Theflyonthewall simply reported that news with appropriate attribution to the brokerage firms, even if such reporting thereby impacted the profitability to the firms of having exclusive control over their recommendations.  The Barclays court also determined that because Theflyonthewall devoted substantial resources to news gathering and did not rely solely on repurposing the subject brokerage reports and because the profits claimed to be lost by the brokerage firms were not diverted to Theflyonthewall, the activities of Theflyonthewall were distinguishable from the prohibited activities that would give rise to hot news misappropriation.

In addition, the Barclays court used the case before it as an opportunity to revisit the multi-factor test previously announced in NBA v. Motorola.  As Judge Sack pointed out in Barclays, the NBA decision expresses two variations of its five-part test and also sets forth a separate three-part test in its analysis of whether a hot news claim is preempted by the federal copyright law.  The Barclays court regarded these tests as inconsistent and providing inadequate guidance on the matter and were in any event not essential for the NBA court’s holding and, so, should be regarded as non-essential dicta.  The net result seems to be that the factual situation supporting a viable claim for hot news misappropriation must adhere very closely to the activity described in the original INS case. 

The Takeaway

Hot news misappropriation claims may still be brought but the free riding aspect is paramount.  Content aggregators should take note of the factors that allowed Theflyonthewall (and, for that matter, Motorola) to prevail and ensure that the content aggregator’s activities exhibit sufficient supporting parallels.

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