Comments on the Second Circuit Hot News Decision–Barclays v. theflyonthewall [Catch up post]

By Eric Goldman

Barclays Capital Inc. v., Inc., 10-1372-cv (2d Cir. June 20, 2011). My prior blog post on the case.

[I was traveling in mid-June and a few interesting rulings fell through the cracks. This is a catch-up post.]

Even if I might be persuadable about the merits of a very circumscribed hot news doctrine if I saw sufficient utilitarian evidence (i.e., without hot news protection, society will suffer a demonstrated loss of socially valuable production), plaintiffs will always try to stretch and morph such a circumscribed doctrine into something unrecognizable. Given the transaction costs and error costs associated with this pushing by plaintiffs, I don’t think the hot news game is worth the candle. In other words, we’d be better off killing the doctrine outright rather than trying to preserve it as a niche IP. For this reason, I’m cheered whenever I see defense-side hot news wins. Chances are those rulings move us closer to the socially optimal result.

As you recall, this case involved a website’s republication of stock recommendations made by brokerage firms. The brokerage firms aimed to give their loyal customers a headstart in trading a stock based on the recommendation. By republishing the recommendations, the website substantially narrowed or eliminated this time advantage. The majority takes a seemingly dim view of the brokerage firms’ scheme. In FN29, the majority almost characterizes it as a type of insider trading:

[hot news protection] would ensure that the authorized recipients of the Recommendations would in significant part be profiting because of their knowledge of the fact of a market-moving Recommendation before other traders learn of that fact. In that circumstance, the authorized recipient upon whose commissions the Firms depend to pay for their research activities would literally be profiting at the expense of persons from whom such knowledge has been withheld who also trade in the shares in question ignorant of the Recommendation.

None of this affects our analysis, nor do we offer a view of its legal implications, if any. We note nonetheless that the Firms seem to be asking us to use state tort law and judicial injunction to enable one class of traders to profit at the expense of another class based on their court-enforced unequal access to knowledge of a fact — the fact of the Firm’s Recommendation.

[Although I'm sympathetic to this, isn't this also a defining characteristic of our market economy--that buyers and sellers have differential information that affects their valuation of goods and services? The concurring judge thinks this discussion was unnecessary.]

Based on my standards, there was plenty of good news in the Second Circuit’s hot news ruling. The majority says that the website wasn’t free-riding because the brokerage recommendations were the news (not a reporting of someone else’s news), and the website was just reporting the news created by the brokerage firms. The majority says: “the Firms seek only to protect their Recommendations, something they create using their expertise and experience rather than acquire through efforts akin to reporting.” The majority also notes the website attributed the information to the brokerage firms. The majority implies that the website doesn’t compete directly with the brokerage firms because it doesn’t sell stock trading services, although it says later that it’s not addressing the direct competition prong. Finally, the majority seems to treat the standard 5-factor hot news test articulated in the Motorola case as dictum. Although I can see this argument because the Motorola court ruled for the defense, the concurrence disagrees with the dictum characterization, and I suspect most other panels will as well.

Even though the majority and concurrence don’t agree on a lot, this case indicates it will be hard to find a successful hot news claim that doesn’t involve one direct competitor doing a straight ripoff of the other. Perhaps the INS v. AP facts would still trigger the hot news doctrine, but not much else ought to. Certainly the majority is wary of incumbents’ efforts to expand IP doctrines as a way of fighting off new technological innovations. The court says:

The adoption of new technology that injures or destroys present business models is commonplace. Whether fair or not, that cannot, without more, be prevented by application of the misappropriation tort.

Along the way, the opinions express mixed sentiments about one of the recent plaintiff hot news successes, the All Headline News case. Among other things, the majority observes that the case may have interfered with the state-by-state uniformity sought by the copyright preemption doctrine. I wonder if this discussion kills that case as precedent (not that it was very strong to begin with).

Although this ruling gets to a good place, it’s too bad the court couldn’t embrace what was clearly on its mind–that the Second Circuit screwed up in the Motorola case by revitalizing the hot news doctrine and therefore the entire hot news doctrine needs rethinking.