In a convoluted 88-page decision, the Second Circuit simultaneously reaffirmed the continued existence of the "hot news" misappropriation tort, stripped the tort of its five-factor preemption test used for nearly fifteen-years, and replaced it with an abridged analysis under the theory of "free-riding." Barclays Capital, Inc. v., 2011 WL2437554 (2d Cir. June 20, 2011). The preemption holding arguably paves the way for news aggregators, such as Defendant Theflyonthewall ("Fly"), to continue to collect headlines and excerpts of other party’s news stories where the aggregator exhibits effort and expense to collect and distribute this information.

The Plaintiffs, Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and Morgan Stanley & Co. Inc., are all major financial institutions providing asset management, sales and trading, investment banking, and securities brokerage services. At issue in this decision is what the Plaintiffs describe as their "business model." This model consists of the creation of research-intensive reports containing the Plaintiffs’ recommendations regarding the purchase, holding or sale of securities of specific companies. These reports and their crucial recommendations are circulated daily to clients before the U.S. securities markets open, giving recipients an informational-advantage over non-recipients with attendant trades impacting the securities’ market prices. Together with the dissemination of these reports, the Plaintiffs initiate targeted solicitations to elicit trades based upon the recommendations, activity from which the Plaintiffs earn brokerage commissions. These daily, time-sensitive, and research-intensive recommendations formed the basis of the Plaintiffs’ copyright and hot news misappropriation arguments.

Fly operates an online subscription news service, the cornerstone of which is its online newsfeed containing hot stocks, rumors, analysis, and recommendations from sixty-five investment firms including the Plaintiffs. For years, Fly had obtained information about the Plaintiffs’ recommendations before they were made available to the public and before the U.S. securities markets opened. More recently, Fly has gathered its information by combing the Internet, including chat rooms and blast IMs, and conversations with contacts, traders, and money managers. Usurping the advantages of Plaintiffs’ recipients, the Plaintiffs argued that Fly’s activities diminished the trading advantages provided to Plaintiffs’ recipients and removed any incentives for the Plaintiffs to create these reports.

After a bench trial on Plaintiffs’ two causes of action -- copyright infringement based on extensive excerpting of Plaintiffs’ research reports and New York State’s "hot news" misappropriation based on Fly’s continual publication of Plaintiffs’ recommendations -- the Southern District of New York district court ruled for Plaintiffs on both counts. The district court permanently enjoined Fly from reporting Plaintiffs’ recommendation for periods of thirty-minutes to several hours after they are released by Plaintiffs.

On appeal, Fly contested the "hot news" misappropriation holding, arguing that (1) the district court erred in finding Plaintiffs had established "hot news" misappropriation; (2) the district court violated Fly’s free-speech rights; (3) the "hot news" misappropriation finding violated the Copyright Act and the Copyright Clause of the Constitution; (4) the district court failed to apply the proper standard in granting injunctive relief; and (5) the injunction was unreasonably overbroad. The Second Circuit’s decision, however, focused solely on the preemption issue after scolding the district court for failing to consider preemption in this case.

After a lengthy summary of the historical development of the "hot news" misappropriation tort, the Second Circuit analyzed the purported test for determining whether a claim fits within the narrow "hot news" misappropriation exemption from preemption by the Copyright Act. This test, as first outlined in National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), has since been the standard for determining whether an "extra element" exists permitting non-preemption of the claim. Carefully parsing the language of the 1997 NBA decision, the Second Circuit found that the NBA decision had not only presented the test in dicta merely opining about a hypothetical set of circumstance under which preemption would not be warranted, but had actually iterated three inconsistent tests. These tests, "[i]nconsistent as they were, [...] could not all be equivalent to a statutory command to which the district courts are expected to adhere."

Despite abandoning the NBA test, the Second Circuit nonetheless applied the NBA and copyright preemption principles to its preemption analysis, including principles outlined in the seminal "hot news" decision in International News Service v. Associated Press, 248 U.S. 215 (1918). Concluding that the Plaintiffs’ reports satisfied the "subject matter" requirement because they are works of a type covered by Copyright Act § 102 and met the "general scope" requirement because the rights abridged would infringe one of the Copyright Act’s exclusive rights, the court held that Plaintiffs’ claim was not a non-preempted claim because Fly was not "free-riding." Free-riding, taking material acquired by one party through expenditure of labor, skill, and money and selling it as one’s own, was defined under NBA’s analysis as an indispensable part of a "hot news" misappropriation claim.

Crediting the fact that Fly does not sell the recommendations as its own, but rather with specific and deliberate attribution to the issuing Plaintiff, the court likened this practice to accepted behavior by traditional news media reporting on, for example, winners of the Tony Awards. Moreover, the court noted that half of Fly’s twenty-eight employees were involved in the collection of the Plaintiffs’ recommendations and production of Fly’s newsfeeds, indicating that Fly, like the defendant in NBA, bore its costs of collecting financial information through a substantial organizational effort. From these facts, the court found a lack of "free-riding," an absence fatal to Plaintiffs’ "hot news" misappropriation claim.

Reversing the district court’s decision, Judge Sack closes with a statement regarding a recurring theme in the opinion, the overarching message that making the news, as Plaintiffs had done, does not confer a right to control who breaks the news and how. Although this decision appears to further narrow the application of the "hot news" misappropriation tort, the tort nonetheless survives to endure future metamorphosis in the Second Circuit.