'Hot News' Is a Triumph of Profit Over Free Speech

Although America's commitment to Free Speech is legendary and perhaps unique in the world, it turns out we have one higher value, at least in some states: profit.

Misappropriation of Hot News is a new type of lawsuit that news and information producers can bring in New York and some other states to slow or prevent others from disseminating their information on the theory that disseminating the information is a kind of unfair competition. If the original news producer can't sufficiently profit from its work, the logic goes, it'll stop producing the information in the first place.

The Hot News tort is in the spotlight now because of a David-and-Goliath fight between Barclays (BCS), Merrill Lynch and Morgan Stanley (MS) (the Banks) on one side and a relatively small financial news organization, theflyonthewall (Fly), on the other. Last month the Banks successfully got an injunction against Fly, barring Fly from publishing excerpts and recommendations from the Banks' analysts for two hours or before 10 am, to provide the Banks with the opportunity to solicit trades from customers based on the recommendations and thus profit from their research. As the New York Law Journal's coverage implicitly notes, the subordination of free speech to profit is most clear in one of the judge's footnotes, which says "[E]ven if true, it is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it."

Determining 'Hot News'

At the time the injunction was ordered, Southern District of New York Judge Denise Cotes noted that Fly was just one organization among many disseminating the analysts' work, and that if the Banks failed to sue all the others, enjoining Fly was wrong. The judge thus decided to review her order in a year to see how things were playing out. Fly has now asked the judge to stay the injunction, noting that it was losing a significant amount of newsletter subscribers because it couldn't include the analysts' content, but other news organizations were continuing to publish the information.

Not surprisingly, Fly also disagrees with the judge's analysis underlying the injunction. Five factors, as spelled out in National Basketball Association v. Motorola Inc.(1997, Second Circuit), determine if 'hot news' has been misappropriated: "(i) the plaintiff generates or collects information at some cost or expense, (ii) the value of the information is highly time-sensitive, (iii) the defendant's use of the information constitutes free-riding on the plaintiff's costly efforts to generate or collect it, (iv) the defendant's use of the information is in direct competition with a product or service offered by the plaintiff, (v) the ability of other parties to free-ride on the efforts of the plaintiff would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened" [citations omitted].

Fly protests that it does not compete with the Banks; it competes with other news organizations, and thus the NBA test is not met. Unfortunately for Fly, its recent efforts to partner with discount brokerages, thus facilitating and profiting from trades based on the analyst information it sells, undercuts its argument to some degree. Although Fly hasn't stressed it, an argument can be made that the fifth prong also isn't met; despite all the dissemination of the analysts' work, the Banks keep producing it, as do other banks that weren't party to the lawsuit. (If Fly posed such a threat, why weren't all the banks that have fleets of analysts party to the suit?) The Banks admittedly have reduced investment in analysts in recent years, but couldn't that be caused by the economic downturn, coupled with the fact that a settlement with the SEC prevents banks from using analysts to drive their investment banking business, greatly reducing the value of having analysts to them?

A couple of factors outside the narrow legal issues worked against Fly as well, including the fact Fly itself successfully argued a misappropriation of hot news claim against another financial news organization because that organization was selling Fly's reporting of analysts' work. As Fly would note, however, the defendant it targeted is one Fly sees as a true competitor, another news organization, and so Fly doesn't see itself as inconsistent. As her footnotes reflect, the judge apparently disagreed. Moreover she didn't like the testimony of Fly's president, considering him a "self-serving" witness. We can only hope these factors weren't particularly significant for the judge; the core legal issues are too important.

The AP Tort

Although the core test for the Misappropriation of Hot News tort takes it name from the NBA case, its history suggests we should call it the Associated Press tort. The 1918 U.S. Supreme Court case that created the tort, International News Service v. Associated Press, was brought by the AP because INS was taking AP European correspondents' WWI coverage and rapidly reprinting it, paraphrased, in its own newspapers without permission. The Supreme Court's analysis was more about unfair competition than free speech. Over the years the decision has been criticized, seemingly implicitly rejected by the Court in Feist Pubs, Inc. v. Rural Tel. Svc., and thought to have been preempted by the 1976 revisions to the copyright law. Nonetheless the tort survived in New York and elsewhere, though not throughout the entire country.

The AP has continued pursuing misappropriation claims, last year suing All Headline News for repackaging AP stories without permission. AP's suit survived a motion to dismiss, and the case settled. CNET's report on the case quoted and Electronic Frontier Foundation attorney as saying that the AP would have a hard time protecting all its assets via hot news cases, and noted in the Internet era the AP didn't want to end up like record labels, "with tens of millions of targets with no effective way to enforce" the doctrine. Nonetheless, the AP has been very aggressive about going after news aggregators.

A few commentators on the Fly decision note that Judge Cotes doesn't address the First Amendment in her opinion.
At least one commentator concerned about what the Fly decision means for the First Amendment is nonetheless sanguine that it's not great precedent against the news aggregators and blogs because the Banks made a showing of how they profit from the hot news that is hard for a traditional media outlet to match. Though I share his First Amendment concerns, I'm not sure I agree that the decision won't help media like the AP; besides, the AP seems to be winning already.

This whole "Hot News" area is an artifact from another era, and needs to be rethought in the digital age. Perhaps Congress can get motivated to enact comprehensive legislation that doesn't destroy services like the AP while nonetheless upholding our long cherished values of Free Speech. I'm not going to hold my breath though.