It was not just a copyright infringement suit. It was a test case.

The plaintiffs were three of the nation’s largest financial institutions: Barclays Capital, Merrill Lynch and Morgan Stanley. They jointly sued a small, financial news website——that had 28 employees.

The banks won their copyright infringement suit but lost the bigger battle. The 2nd Circuit rejected the companies’ attempt to use the “hot news” doctrine against the website. This state common law doctrine limits when facts reported by one company can be used by another.

Hot news is an amorphous doctrine. “It fits in the gap between copyright law, some other IP laws and general unfair competition law. It tries to find a range of bad activities not covered by other doctrines that need to be prohibited,” says Prof. Eric Goldman of Santa Clara Law School. The courts have repeatedly recognized this doctrine but have indicated it should be applied very sparingly. The 2nd Circuit’s ruling in Barclays Capital Inc. v.  The was a major setback for companies that want to strengthen the hot news doctrine and use it to shield themselves from new, online competition. “The ruling squelches a nascent effort on the part of some companies—largely news organizations—to protect their business models from the Internet,” says Prof. Jessica Litman of the University of Michigan Law School.

Conversely, the ruling is a big victory for Google, Twitter and many other companies that aggregate information online, according to experts. “The decision is very important because there is a huge proliferation of news aggregators on the Internet. was doing something fairly routine in that business, and the court has said they can continue to do it,” says Robert Clarida, a partner in Cowan Liebowitz & Latman.

Premature Posting

The banks in this case had good reason to be upset. They spend hundreds of millions of dollars each year analyzing public companies. They employ hundreds of research analysts, who conduct in-depth investigations, to produce reports recommending when a security should be purchased, held or sold.

These reports are distributed free to the banks’ clients between midnight and 7 a.m. Eastern time, so the clients can digest the reports and act on them as soon as the stock market opens. This gives the clients a significant advantage because once the reports’ recommendations become known, they often move the market. A “sell” recommendation will cause clients and nonclients to sell, creating a short-term drop in a security’s price. Similarly, a “buy” recommendation will drive the price up. By allowing clients first access to the recommendations, the banks enable their customers to reap maximum financial gain from the recommendations.

The, however, got in the way. It regularly obtained copies of the banks’ reports before they were publicly available and posted the full reports on its website before the market opened.

It also posted on its newsfeed brief summaries of the reports’ recommendations. Other financial news organizations did this, too. Bloomberg, Dow Jones, Thomson Reuters and other large companies regularly published the reports’ recommendations before the market opened, without the banks’ permission.

However, in 2006, the banks didn’t sue any of the large news organizations, only Theflyonthewall. “It is manifest that the banks selected a weaker player to create a test case and establish a precedent,” says Glenn Ostrager, a partner in Ostrager Chong Flaherty & Broitman. Ostrager represented Theflyonthewall in this case.

Setting Precedent

The banks initially got the precedent they wanted. A federal district court ruled in 2010 that Thef lyonthewall had committed not only copyright infringement (by posting copies of the banks’ reports) but also hot news misappropriation (by posting summaries of the banks’ recommendations). The court then enjoined Theflyonthewall from reporting the banks’ recommendations until after the market had been open for a significant period of time.

This ruling on the hot news doctrine created a precedent the banks could use against other news providers to force them to delay reporting on the banks’ recommendations until well after the markets opened. It also opened the door to many other hot news suits. Established news organizations, for instance, could file hot news suits when brief factual summaries of their news stories were posted online. Online news aggregators, such as Google, Yahoo! and Twitter, became worried.

The precedent, however, didn’t last long. On June 20, a 2nd Circuit panel overturned the district court’s judgment on hot news.

The 2nd Circuit began by noting that Section 301(a) of the Copyright Act explicitly pre-empts state law claims that cover copyrightable works and are equivalent to any rights protected by copyright. If these two factors are met, copyright law pre-empts a state from protecting uncopyrightable elements of a work (such as facts). That’s because Congress decided uncopyrightable elements (such as facts) should be available to the public, and the states cannot overrule the federal government’s decision. “Congress had important policy and 1st Amendment objectives in mind when it exempted facts from copyright protection,” Litman says.

Death of a Doctrine

A state law claim is not pre-empted, the court noted, if it goes beyond the bounds of copyright—if it requires an “extra element” beyond those that would create a cause of action under copyright law. The hot news doctrine is such a state claim, the court found, because it imposes liability only if a defendant is “free-riding” ona plaintiff’s hard work. A defendant news service, for instance, could be liable if it took facts from a rival’s hard-won news stories and cobbled these facts together to create news stories that it passed off as its own, which is supported by the Supreme Court’s 1918 ruling in International News Service v. Associated Press.

In this case, the 2nd Circuit found Theflyonthewall was not free-riding on the banks’ work, because the banks’ recommendations were news, and Theflyonthewall worked hard to uncover this news and present it to its subscribers in a timely fashion. Moreover, Theflyonthewall never claimed these recommendations as its own; it attributed the information to the appropriate bank. “We conclude,” the 2nd Circuit stated, that the banks’ “ability to make news—by issuing a Recommendation that is likely to affect the market price of a security—does not give rise to a right for it to control who breaks that news and how.”

The ruling’s narrow interpretation of “free-riding” all but kills the hot news doctrine, according to some copyright experts. “It would be difficult to find a case where publication was proper under the Copyright Act but would violate whatever is left of the hot news doctrine,” says Marc Greenwald, a partner in Quinn Emanuel Urquhart & Sullivan, which submitted an amicus brief in this case on behalf of Google and Twitter. 

Sidebar: Play It Safe

After the 2nd Circuit’s ruling in Barclays Capital, there may not be much left of the hot news doctrine. But online news services should play it safe and avoid indicia of free-riding.

They should obtain facts through hard work and significant expense, and they should properly attribute the facts they get from other sources.

“You need to take facts, not words, and attribute your sources,” says Prof. Jessica Litman of the University of Michigan Law School. “Then in the 2nd Circuit, you seem to be pretty safe.”