Barclays Capital Inc. v. Theflyonthewall.com, Inc.

Barclays Capital Inc. v. Theflyonthewall.com, Inc. (650 F.3d 876 (2d Cir. 2011)) represents a significant decision by the United States Court of Appeals for the Second Circuit. The appellate court overturned the ruling of the US District Court, determining that claims brought by prominent financial institutions (Barclays Investment Bank, Morgan Stanley, and Merrill Lynch) against the online subscription-based stock news provider Theflyonthewall.com for "Hot-news" misappropriation under state common law were superseded by the Federal Copyright Act of 1976 (17 U.S.C. §§ 102, 103, 106).

This judgment altered the interpretation of the "Hot-news" misappropriation tort within the Second Circuit by treating prior precedent as obiter dicta. Legal analysts observed that this shift would likely hinder the viability of future hot-news misappropriation claims in this jurisdiction.

Background of the case

Theflyonthewall.com, the defendant, focused on collecting daily stock recommendations derived from research reports generated by plaintiffs Lehman Brothers (which later became Barclays Investment Bank), Morgan Stanley, and Merrill Lynch. These reports held significant value because of their exclusivity, precision, and timely issuance—often relevant only during hours preceding market opening—and were instrumental in attracting clientele, promoting trades through these firms, distinguishing their services, and driving commission income.

On June 26, 2006, plaintiffs initiated legal action seeking an injunction to prevent Theflyonthewall.com from disseminating portions of their proprietary research and stock recommendations. Their allegations comprised copyright infringement due to direct copying and common-law hot-news misappropriation for republishing such recommendations.

Prior to trial, defendants admitted to copyright infringement. The bench trial held at the Southern District of New York concentrated on determining appropriate remedies for copyright violation and assessing hot-news misappropriation liability. On March 18, 2010, the District Court ruled in favor of plaintiffs, issuing an injunction barring the defendant from publishing their reports and recommendations.

Theflyonthewall.com appealed to the Second Circuit, relinquishing defenses against copyright infringement but contesting the hot-news misappropriation judgment. They contended that federal copyright law preempted the claim, that the injunction was excessively broad, and that it infringed upon First Amendment free speech protections.

On June 20, 2011, the Second Circuit reversed the District Court’s ruling and directed dismissal of the hot-news misappropriation claim.

Hot-news misappropriation

The doctrine of hot-news misappropriation traces back to International News Service v. Associated Press, where the Supreme Court acknowledged time-sensitive information as a form of protectable "quasi-property." This legal principle seeks to safeguard substantial investments made to collect commercially valuable, time-sensitive data that lacks alternative legal safeguards. It primarily addresses preventing unauthorized copying and publication before the original gatherer can exploit their competitive advantage. Although the Copyright Act of 1976 provides protection for original creative works, courts have deliberated whether hot-news misappropriation constitutes a legitimate tort by distinguishing between copyrightable creative expression and unprotected raw facts. The 1976 decision in National Basketball Association v. Motorola, Inc. ("NBA") clarified these distinctions and formulated a five-factor test for establishing hot-news misappropriation claims.

Assessment of hot-news misappropriation

In the case of Barclays Capital Inc. v. Theflyonthewall.com, Inc., the court utilized the five-factor framework established in NBA:

1) The plaintiff incurs expenses to create or collect information;
2) The information has a time-sensitive nature;
3) The defendant’s utilization amounts to free-riding on the plaintiff’s efforts;
4) The defendant operates in direct competition with the plaintiff’s offerings;
5) Such free-riding would substantially diminish incentives to produce the product or service, endangering its viability or quality.

Element 1

The plaintiffs satisfied the initial criterion by allocating "hundreds of millions of dollars" each year toward equity research reports and employing expert analysts. The defendant did not challenge the substantial costs borne by the plaintiffs in gathering this information.

Element 2

The court recognized plaintiffs’ reports as "undeniably time-sensitive," given that clients relied on them to forecast stock price changes. This time sensitivity was vital because plaintiffs sought to be the first to release their findings and thereby generate commission income. This aspect was uncontested by the defendant.

Element 3

Concerning free-riding, the court concluded that the defendant’s primary business model involved capitalizing on plaintiffs’ expensive equity research without making comparable investments. The defendant did not create original research for the "Recommendations" it published; rather, it exploited plaintiffs’ established reputations and intensive expert analyses. This behavior was deemed free-riding on plaintiffs’ efforts.

Element 4

The court identified direct competition between the parties, both offering clients time-sensitive information. The defendant distributed information ahead of plaintiffs’ ability to fulfill demand for pre-market stock movement updates and trading recommendations, thereby drawing away clients who might have otherwise traded through plaintiffs. Both parties utilized similar distribution methods, including restricted-access media and authorized third-party distributors.

Element 5

The court determined that permitting the defendant’s actions to persist would pose a serious threat to plaintiffs’ market engagement. Plaintiffs relied on being first to provide reports and recommendations; if others preempted them, it would undermine the value of their costly research. Ongoing replication and dissemination by the defendant would cause plaintiffs to lose commission revenues, fail to recover research expenses, and ultimately discontinue producing such research.

District Court's decision on copyright infringement claim and consequent relief

The court found that Morgan Stanley and Barclays Capital’s copyrights were violated by the defendant, based on seventeen registered research reports and proof of exact copying. Although Fly initially asserted fair use, it did not contest infringement during trial. The court granted nominal damages, pre-judgment interest, attorney fees, and issued a permanent injunction preventing further infringement of any copyrighted elements within these plaintiffs’ research reports.

Second Circuit Court of Appeals Decision

The defendant challenged the District Court's rulings on hot-news misappropriation, bringing the case before the Second Circuit. The appellate court overturned the lower court’s judgment, siding with the defendant by determining that the plaintiffs' claims were "preempted by federal copyright law."

Federal Preemption Analysis

To assess preemption under 17 U.S.C. § 301, the Court employed a two-step evaluation:

• The General Scope Criterion: whether the state-law claim attempts to safeguard rights equivalent to those granted under 17 U.S.C. § 106; and
• The Subject Matter Criterion: whether the work in question falls within the categories protected by 17 U.S.C. §§ 102 and 103.

The Second Circuit concluded that the plaintiffs’ recommendations satisfied both conditions. It emphasized that the hot-news misappropriation exception to preemption, as recognized in the NBA case, was intended to be narrowly applied. Furthermore, the Court characterized the District Court’s use of the five-part NBA test as obiter dictum.

In a separate concurrence, Judge Raggi expressed disagreement with labeling the NBA test as dictum, asserting that it was a valid legal standard but had been incorrectly applied at the lower court level.

Organizations Expressing Concern Over the Second Circuit's Verdict

During the appeal, several influential organizations submitted amicus curiae briefs. The Electronic Frontier Foundation, Citizen Media Law Project, and Public Citizen, Inc. highlighted potential First Amendment issues arising from limitations on news gathering and commentary.

Google and Twitter advocated for the outright rejection of the hot-news misappropriation tort; however, the Court considered such a determination beyond its jurisdiction.

Prominent media and financial groups including the Newspaper Association of America, The New York Times Company, Philadelphia Media Holdings, Stephens Media, Time, The Washington Post, The Securities Industry and Financial Markets Association, Dow Jones & Company, and The Investorside Research Association also contributed briefs supporting their positions.

Use of Irony

The Court acknowledged that it "borrow[s] freely" from factual findings made by the District Court, adding a footnote that remarked: "The irony of doing so in a copyright-infringement and 'hot news'-misappropriation case is not lost on us."

Biblical Allusions

In discussing INS v. AP’s description of INS’s actions as "reaped where it ha[d] not sown," the Court explored this biblical metaphor. It pointed out its cautionary use in Galatians 6:7 while contrasting it with Leviticus 23:22, which prohibits reaping where one has not sown under specific circumstances.