When Alex Rodriguez hits a home run, it not only drives Yankee fans wild and strikes fear in the hearts of the Red Sox, it also affects his batting average, his slugging percentage and any number of other statistics. Anyone who has ever watched TV knows that the telecast of the event is the property of Major League Baseball, and that its rebroadcast is prohibited without MLB’s famous “express written consent,” but what about those statistics?

Copyright protects the telecast, but can it also extend to the slugging percentage? MLB’s position on the issue has varied over the last several years during the course of its litigation against an online fantasy baseball league. It has stopped short of asserting that it owns copyrights in the statistics used by the league, and rightly so since the law is fairly clear that sports statistics are “facts,” and thus not copyrightable. 1

Major League Baseball now takes the position that the player’s names and associated statistics are protected by a right of publicity owned exclusively by the league, an argument that has been rejected at the trial court level but which is now on appeal.

The need for this kind of maneuvering arises out of the fact/expression dichotomy that is at the heart of copyright law. Copyright does not protect facts, but (with a few notable exceptions such as fashion design) it protects almost any kind of creative expression even if the amount of creativity is extremely small.

The U.S. Supreme Court has held that facts are discovered, not authored, and that a “modicum” of creativity is constitutionally required before copyright protection can be triggered – even if that creativity is only in the selection and arrangement of existing facts into a new work. 2

The flip side of this is the so-called “merger doctrine.” Generally, if there is only one practical way to express a given fact, the fact and its expression are said to have “merged” and the expression will not be protected. The merger doctrine is entirely judge-made and varies in its particulars from court to court, but it is a reasonably well-established part of the copyright law.

Electronic commerce, and the electronic systems that track ordinary physical commerce, tend to bring these issues to the fore. Every transaction with an electronic component, whether it is online or in the real world, generates data that is stored somewhere. Sifting and sorting that data (a process called “data mining”) can yield extremely valuable statistics about individual market participants and the markets generally. Because these statistics are commercially valuable, market operators – from eBay and Amazon to the New York Stock Exchange to Las Vegas casinos – tend to want to own them, and the copyright law is the natural place to look for support.

But last month the U.S. Court of Appeals for the Second Circuit had a chance to address these issues head-on and, although it chose a somewhat strained basis for doing so, it held decisively against copyright protection for that kind of data, despite its commercial value.

The NYMEX Case

The New York Mercantile Exchange (NYMEX) is an exchange for trading futures and options contracts on energy commodities, the most successful of which are those for Henry Hub natural gas and West Texas Intermediate crude oil.

Futures contracts require the delivery of a given commodity at a specified price at a specified future time (though most are simply investment vehicles and are liquidated before delivery actually takes place). At the end of each day of trading, the value of each outstanding contract is re-evaluated based on what the market thinks the eventual delivery price of the commodity will be on the specified future date. Based on that changing view of the market, NYMEX reassesses the value of the outstanding futures contracts each day in a process called “marking-to-market.”

This change in value of a customer’s open positions may require that the customer post additional margin or receive payments on margin, so it is an integral part of the daily futures market process.

At the end of each trading day, NYMEX determines the appropriate price for contracts for the delivery of crude oil for each of the next 32 or 33 months and for the delivery of natural gas for each of the next 72 months. It is required by the Commodity Futures Trading Commission to record and disseminate these settlement prices, which it does in several ways. It publicly discloses the prices by the next business day (as required by the commission); it posts them to its Web site; and, before doing either of those things, it provides the prices to its licensed market data vendors such as Reuters, who provide them to their subscribers.

In New York Mercantile Exchange, Inc. v. IntercontinentalExchange, Inc., 3 NYMEX sued IntercontinentalExchange, Inc. (ICE), the operator of an Internet-based market for the trading of physical commodities and derivative contracts. ICE does not clear trades, but it passes NYMEX settlement prices (which it gets from a licensed vendor) to its clearing vendor. In most cases, ICE simply copies the NYMEX settlement prices and sends them on to its clearing vendor, a practice NYMEX claimed infringed its purported copyright in the settlement prices.

Interestingly, at the time of the suit, NYMEX had already tried this argument once before and lost. In March 2002, NYMEX sought a copyright for its market database, including the settlement prices, but was told by the Copyright Office that it could not copyright the settlement data. NYMEX filed a replacement application without the settlement prices and obtained its copyright. Nonetheless, NYMEX brought its action based on ICE’s use of the settlement prices and alleging, inter alia, infringement of them. The Second Circuit therefore addressed the issue of whether the settlement prices were facts created by the market and “discovered” by NYMEX, in which case copyright protection would not be available, or creative works authored by NYMEX, perhaps based on market facts, in which case it would. It also considered the related question of whether the expression of the settlement prices was sufficiently merged with the concept of trading in futures contracts to foreclose copyright protection.

Creative Settlement Prices

NYMEX’s stated objective in setting settlement price is to determine the correct market value of each futures contract on each day, regardless of trading activity – not what the market value should be, or what traders think the market value is, but the actual market value.

As the Second Circuit noted, this argues in favor of the view that settlement price is an objective fact that NYMEX simply seeks to discover (rather than create) and thus against copyright protection. But NYMEX argued to the contrary, noting that there is not always an easy way to determine the “settlement price.”

The NYMEX trading floor is actually a remarkably low-tech operation. As described in the opinion:

Traders handwrite their transactions on cards which are thrown into the center of trading rings, scooped up, time stamped, and sent for processing. Because the cards may be ‘scooped up’ out of order, the card with the latest time stamp may not represent the final trade of the day. . . . On any given day, 32 or 33 months of crude oil futures contracts and 72 months of natural gas futures contracts are being traded. For the ‘outer’ months, those further from the trading date, there is often little or no trading on a particular day.


Thus, NYMEX must not only determine the appropriate settlement price in the absence of accurate “last trade” data, it must do so for some contracts on which there may have been no daily market at all.

For heavily traded contracts, typically those tied to upcoming months, the process is simple: NYMEX uses a formula consisting of a weighted average of the day’s trades within a certain range, with a potential discretionary override. For lightly traded contracts, however, the formula is apparently less specific, taking into account a larger range of trading and involving more discretion. For these reasons, and after lengthy discussion, the Second Circuit stated that it was “reluctant to hold” as a matter of law in the summary judgment context, that there was no set of facts under which the setting of settlement prices could meet the very low standard of creativity required for copyright protection. It then noted that the entire issue was irrelevant, however, because the settlement prices were un-copyrightable under the merger doctrine.

The Merger Doctrine

Copyright protects expression, not ideas. It is designed to protect individual creations without preventing others from expressing the same idea in a different way. Patents, which are designed to accomplish the same goals for ideas, have a much shorter period of protection. This represents the basic compromise of intellectual property law: We are willing to give inventors a certain, short period of total exclusivity for their ideas during which no one else may practice the same idea in any form; we are willing to give authors a much longer period of exclusivity because their protection is limited to their particular, specific expression of the idea.

The merger doctrine is an effort to prevent an “end run” around this bargain. If a particular idea can be expressed in only one way, that expression cannot be protected by copyright, otherwise the idea would effectively be removed from the marketplace for the very long period of copyright protection. When an idea can be expressed in only one practical way, the idea and expression are said to have merged.

The merger doctrine can be problematic because its outcome depends almost entirely on how the court chooses to define the “idea.” In NYMEX, for example, NYMEX argued that the “idea” should be “that a sound and reasonable opinion of fair market value for each NYMEX contract as of the close of open outcry trading on the NYMEX floor each day may be achieved by assessing trades, bids, and offers and (in various instances) off exchange information, particularly developed late in the trading day.”

For so nebulous a concept there could probably be myriad expressions ranging from written opinions to the prices themselves. The district court, on the other hand, defined the idea as “the price of a particular futures contract at the close of trading.” 4 The Second Circuit held (somewhat disingenuously, perhaps) that under either definition the only practical way to express the idea is as a dollar figure, and therefore that the merger doctrine bars copyright protection for settlement prices expressed as dollar figures. As a result, it upheld the district court’s grant of summary judgment against NYMEX on its infringement claim.

As an aside, this decision clarifies an important point in merger doctrine law in the Second Circuit. Some circuits have held that the merger doctrine is a bar to copyrightability (as the Second Circuit did here); others have held that it is a defense to infringement. For most of the history of copyright law that distinction made no difference as a practical matter. But that has changed under the Digital Millennium Copyright Act (DMCA).

The DMCA provides protections that, for the first time in the history of copyright law, go beyond infringement. For example, the anti-circumvention provisions of the DMCA have been held to apply even to non-infringing uses, such as fair use. Thus, if NYMEX had distributed its settlement prices on a password-protected Web site, and ICE had “circumvented” that protection in order to send copies of the settlement prices to its clearing house, the two interpretations of the merger doctrine would yield two different results.

If the merger doctrine prevents the settlement prices from being copyrightable at all (as the Second Circuit held) then the DMCA is inapplicable and ICE’s conduct would not be a violation.

On the other hand, if the merger doctrine is merely a defense to infringement, then the DMCA would still be applicable to the settlement price data and the fact that ICE had not infringed would not (in theory at least) prevent NYMEX from suing for circumvention under the DMCA.

This is a subtle distinction and one which the courts almost certainly have not considered, but the DMCA is a minefield of unintended consequences and this is one that some circuits (though apparently not the Second) will now have to review.

Conclusions

Intuitively, NYMEX presents a slightly dissatisfying result. The merger doctrine is a slippery inquiry, ill suited to copyright law, and market prices “feel,” to those who participate in the markets, like facts, not creative works.

In fact, the majority opinion repeatedly stresses precisely that point and makes clear the majority’s strong sense that the settlement prices do not meet the required creativity standard. Because the court found the settlement prices un-copyrightable under the merger doctrine, the entire discussion of creativity is dicta and was technically unnecessary (a point made forcefully in Judge Peter Hall’s concurrence). So why spend so much time on the issue?

It appears the court wanted to put its view on the record without fracturing the opinion. Judge Hall disagrees strongly with the majority view on the creativity issue: Where the majority is essentially dismissive of the creativity argument, Judge Hall argues that the majority’s discussion of NYMEX’s price-setting process sets the “creativity” bar far too high.

Perhaps to avoid a dissent, the court chose to base its opinion on the merger doctrine, on which all three judges agreed. While unanimity is a commendable goal, one cannot help but feel that the court missed an opportunity to clarify a difficult issue on the appropriate scope of creative works.

Stephen M. Kramarsky is a member of Dewey Pegno & Kramarsky specializing in complex intellectual property litigation.

Endnotes:

1. National Basketball Ass’n v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997).

2. Feist Publications, Inc. v. Rural Telephone Service Co., Inc., 499 U.S. 340, 347 (1991).

3. F.3d, 83 U.S.P.Q.2d 1609, 2007 WL 2189129 (2d Cir. Aug. 1, 2007).

4. New York Mercantile Exch., Inc. v. IntercontinentalExchange, Inc., 389 F.Supp.2d 527, 541 (SDNY 2005).