Second Circuit Abandons “Extra Elements” Hot News Test

Federal copyright law preempts any attempt of the states to regulate or enforce any claim that contains rights that are equivalent to those protected under federal law, or which involves a work that is of the type protected by the copyright statute. 17 U.S.C. § 301 (statute here.) The rub is that the federal law may preempt a state law claim, even when the subject of the dispute is material that is uncopyrightable. There is preemption, but no remedy.

Courts for the last 14 years have relied heavily on the “extra elements” test articulated by the Second Circuit Court of Appeals in National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997) to decide whether a state-law claim for misappropriation was outside of federal preemption by the copyright statute. A divided panel of the Second Circuit, however, took a giant step back from the test in reversing a trial court decision in favor of the plaintiffs in a hot news dispute involving the dissemination of securities analyst report summaries. Barclays Capital, Inc. v., 650 F.3d 867 (2d Cir. 2011) (Opinion here.)

The significance of the extra elements test lies in the fact that copyright law protects only the manner of expression, not the underlying thoughts, facts, concepts or processes. The thoughts, facts, concepts or processes may provide commercial value, but if they are contained in a copyrightable expression, the owner is limited in pursing common law remedies if they are misappropriated by a third party.

The advance of technology that allows parties to assemble and redistribute the information of others quickly and cheaply has generated its fair share of disputes, a developing area of law known as “hot news” claims. In reality, “hot news” describes a discrete set of circumstances that allows a plaintiff to avoid the preemptive effect of the federal copyright statute when pursuing a state-law claim for misappropriation or unfair competition.

Barclays v. litigation

The opinion devotes as much effort to distancing itself from the five-factor (or alternatively three factors) “extra elements” test of the NBA panel as it does to the facts of the dispute, even though the parties to the dispute did not challenge that the NBA test governed the outcome of the dispute. Ultimately, the Barclays panel held that while it is bound by prior decisions of the Second Circuit, the five-factor test articulated in NBA was non-binding dicta not necessary to the outcome of the matter then in dispute.

The plaintiffs in Barclays were major financial institutions, which brought suit seeking to prevent, a subscription internet news aggregation service, to prevent the site from publishing news of the firms’ securities reports, including, of course, the firm’s recommendations about individual securities.

The defendant had been able to successfully collect information about reports and recommendations being issued by the major financial institutions and distribute them through its news feeds, sometimes before the clients of the firms received the information. Plaintiffs alleged both copyright infringement and a “hot news” misappropriation claim. Plaintiffs had prevailed at trial, winning an injunction and an award of attorneys’ fees.

Hot News Misappropriation Claim

Hot news claims had their genesis in International News Service v. Associated Press, 248 U.S. 215, 39 S. Ct. 68, 63 L. Ed. 211 (1918), a dispute in which INS lifted factual stories from the AP wire service and sold them to competitors. INS itself is no longer good law, being based upon the now abandoned concept of federal common law. But it still stands for the proposition that notwithstanding the preemptive nature of copyright law, there are some claims involving non-copyrightable aspects of copyrighted works for which a state claim of misappropriation survives.

The copyright statute was amended in 1976 and now contains a two-part test to determine whether a state-law claim is pre-empted. 17 U.S.C. § 301. The claim is preempted if it seeks to vindicate legal or equitable rights that equivalent to the rights protected by the copyright law – the right to copy, produce derivative works, distribute, perform and display – and if the claim involves a work that is of the type of works protected by copyright law. 17 U.S.C. §§ 102 and 103.

The preemption required by the copyright laws extends to both protected and unprotected elements of the copyrightable work. The NBA court, in considering a claim by the NBA against Motorola for distributing updates about NBA games by pager, reasoned that a state claim about a copyrightable work could survive if an “extra element” test is met. In other words, if the right sought to be vindicated is something in addition to the five rights protected by copyright law then the claim might be outside the realm of copyright preemption.

No Copyright for Protection for Facts

In the NBA case, the plaintiff sought to protect the facts of the ongoing basketball games, to which it clearly had certain copyright protections. The court, analyzing the INS opinion, developed a test, described as having three or five elements. The three-element version: the time-sensitive value of factual information; free-riding by the defendant and a threat “to the very existence” of the product or service of the defendant. The five-element version (arguably merely an expansion of the three elements): the information was gathered at cost; is time sensitive; the use constitutes free-riding on plaintiff’s efforts; direct competition between the parties; and the likelihood of the free-riding to reduce the economic incentive to develop the product. The NBA claim for state-law misappropriation was rejected.

Having parsed the analysis followed by the NBA panel, the Second Circuit decided that it was dicta, “sophisticated observations” that “could not be equivalent to a statutory command to which we or the district court are expected to adhere.” It seemed, then, to return to the Supreme Court’s analysis in INS – without explaining why it was construing a decision previously described as no longer being good law – and found that the claims were pre-empted.

Free-riding Claims for Misappropriation

The securities firms were not pursuing “a so-called INS-type non-preempted” claim, the court held because was not “free-riding.” Its business was to collect, aggregate and disseminate information. The fact of the firm’s recommendations, the court reasoned, were news in and of themselves, capable of the moving markets. The firms could not protect the fact that such recommendations had been made. The identity of the source of the news – that Barclays, for example had upgraded its opinion of a stock – was what gave the news story its value.

The Second Circuit similarly rejected the argument that the plaintiff and defendant were competitors in any meaningful sense. The tort, according to the Barclays panel was much simpler and taken directly from the INS opinion as “taking material that has been acquired by complainant as the result of organization and the expenditure of labor, skill, and money, and which is salable by complainant for money, and … appropriating it and selling it as [the defendant’s] own.”

The key difference between the decision of the NBA panel and the Barclays panel appears to be the relatively simple element of taking something created through the efforts of others and selling the same thing as one’s own. The NBA test appears to look more to the value of the thing that is taken rather the act of misappropriation. The Barclays decision articulates a stricter test that gives aggregators, republishers and syndicators much more room to republish without falling outside the scope of copyright preemption.