by Paul Alan Levy
In a major decision yesterday, the Second Circuit struck down an injunction issued by a federal court in New York forbidding an aggregator from selling to its clients information that it had obtained about investment recommendations by major investment houses. When I blogged about the district court’s injunction last year, decrying the possible impact of the hot news doctrine (or, to use the more technical legal term, the tort of misappropriation), I described the Second Circuit’s previous venture into the area, NBA v. Motorola, as only strong dictum rather than a holding. The Second Circuit took the same position yesterday, issuing a very narrow decision that tells us little more than that, in this case, the aggregator wins and the plaintiffs loses.
There are many things to cheer about in this decision. An injunction based on reasoning that was highly threatening to other aggregators has been overturned, and hence no longer stands as precedent to be cited against them. And the ruling is full of language expressing skepticism about hot news claims and their standard justifications, and that will, therefore, appeal to many free speech advocates.
At the same time, perhaps this is a case of, be careful what you ask for. In previous posts on this subject, I raised grave concerns about the impact of the tort of misappropriation. If companies have the right to own facts or information and to forbid others from publishing or discussing those facts (as opposed to the right to prevent copying of original expression), they could gain the right to prevent consumers from learning about, and speaking their minds about, subjects of wide public interest. I warned as well that the hot news doctrine is a vague and unpredictable doctrine whose chief function may be to allow big companies with large litigation budgets to rattle their sabers at smaller companies and even individuals to prevent them from re-reporting and discussing their information. In those respects, today’s majority ruling and concurring opinion may threaten to make matters worse.
The Majority Opinion
First, the decision. Nearly half of the 71 page majority opinion discusses the facts and proceedings to date, including mention of the issue whether flyonthewall waived any claims under the First Amendment. That is where discussion of the First Amendment ends, for despite the prominence of the First Amendment in both flyonthewall’s appellate arguments and the contentions of some amici, the Second Circuit has nothing to say on the issue. Then the majority begins by deciding that, as a matter of binding Second Circuit law, hot news must be regarded as a currently-viable doctrine under New York law. If there was any question about that, the Court said, the question should be resolved by certifying the question to the New York Court of Appeals.
The court proceeded to discuss the content of the doctrine and its relationship to copyright preemption, including a somewhat pejorative references to some of the terms in which hot news plaintiffs often refer to their litigation adversaries. The majority had little patience with contentions about free riding and the “reap where it had not sown” language from the Supreme Court’s decision in Independent News Service v. Associated Press decision as being unduly attentive to notions of ‘unfairness” and even “commercial immorality,” language that “sounded biblical in tone” but did not provide a proper basis for legal rulings. There was a nice reference to the fact that new technology often destroys existing business models. “Whether fair or not, that cannot, without more, be a basis for the application of the misappropriation tort.”
The court also expressed concern about the potential for differing interpretations of the hot news doctrine in different states as providing the potential for different outcomes depending on where the case was litigated and which state’s law was determined to apply. Firm application of copyright preemption doctrines is needed to keep the law governing this area national on scope and hence uniform.
Finally the court turned to the application of NBA v Motorola. The court noted that the Motorola court had described its five-part test for copyright preemption two times, using subtly different language on each occasion, and indeed that it has used a three-part test in another part of its opinion. But all of this was just dictum, the court said – different formulations of the reasons why it was holding that the misappropriation claim had not survived copyright preemption on the facts of that case. And the fact that the parties had all treated the five-factor test as a holding did not require the court to go along with that characterization.
Having stripped Motorola’s five-factor test of precedential value, the majority proceeded to explain why the misappropriation claim was preempted in this case. Here, the majority declares, the court is not presented with an INS type non-preempted claim because there was no free-riding. (In this regard, the court says that the holding that Motorola was not free-riding controls the decision that these is no free-riding here). First, Flyonthewall’s product is the product of considerable investigative effort, tracking down information to report to its customers: “the firms are making the news; Fly is breaking it.” Second, Fly was not reporting the recommendations as its own, as the Independent News Service had been accused of doing. Fly was carefully attributing the recommendations to the investment houses making them, indeed it was the attachment of the recommendations to their respective makers that made the information valuable and salable. And third, Fly was not taking profits as the investment houses were about to reap them – the plaintiffs hope to profit from sales pursuant to the recommendations, and those profits are not being diverted to Fly but rather to other brokers who are going to make the sales.
The Concurring Opinion
A concurring opinion by Judge Raggi takes a somewhat different route to the same position. First, she makes clear her strong reservations about the Motorola five-part test, which she regards as simply reflecting copyright values and hence not a basis for avoiding preemption; for example, she raises the possibility that “free riding” is just a pejorative term for forbidden copying. Still, she would have accepted Motorola as a binding precedent because, even if the five-part test was not a holding, it was so closely reasoned as to command respect. However, she decided that the two sides were not sufficiently in direct competition to come within that prong of the Motorola test.
Where Does This Leave the Hot News Doctrine?
At the outset it is worth noting what yesterday’s decision leaves undone. Once again, a case that appeared attractive at the trial court level for the possible enforcement of the tort of misappropriation failed to withstand scrutiny at the appellate level. Courts keep saying that the hot news doctrine is viable in theory but, since Motorola, appellate courts have yet to identify a case where the doctrine applied in practice. I am not so optimistic as some who have characterized the Flyonthewall decision as rejecting the hot news doctrine outright, but one does begin to wonder whether there is really any case in which an application of the hot news doctrine can be sustained on the appeal.
Also left unanswered are the various questions about the viability of the hot news doctrine that have been raised under the First Amendment. In both Motorola and Flyonthewall, the First Amendment issues were discussed at length by amici (Public Citizen joined an amicus brief prepared by EFF and the Citizen Media Law Project); the Motorola ruling ignored the presentation of First Amendment issues, and, as noted above, the Flyonthewall court did no more than note the existence of the issue and the question whether defendant had waived such arguments.
Impact of Reversion to a Fact-Specific Doctrine
Beyond that, there is some reason to be concerned about the majority’s treatment of Motorola which may, in fact, serve augment the First Amendment concerns. Many free speech advocates had been encouraged by the fact that the Motorola test seemed to leave such a narrow window for the application of the hot news doctrine, and hoped that the Second Circuit might use this case as an occasion to announce an even narrower interpretation of some of its terms. Although Flyonthewall was able to take advantage of the abandonment of the Motorola test, will plaintiffs also be able to take advantage of the elimination of the precedent, bringing the hot news doctrine to areas where its application might otherwise have been precluded?
Indeed, if Motorola was just a fact-specific application, and presumably Flyonthewall is also just a fact-specific application that offers no guidance to future cases, are we left with a hot news doctrine that cannot be predicted but must always be applied on a case-by-case basis. That kind of doctrine increases the transaction costs of resolving disputes, and hence favors parties with deep pockets that can afford to throw large numbers of lawyers at cases. Review of the briefs filed on the plaintiffs’ application for an award of attorney fees in connection with their copyright claim allows an estimate of the costs incurred in connection with the hot news claims, because the plaintiffs had to apportion their time between the copyright and hot news issues. It is apparent that the plaintiffs alone spent more than two million dollars in fees and expenses on the hot news issues in the case; the defendant seems to have spent considerably less on the hot news issue, but also a huge amount of fees.
I am not so worried about the impact of the newly fact-specific character of hot news claims that survive preemption on potential defendants like Google and Yahoo!, whose news aggregation functions have long been within the news media’s sights for possible challenge under the hot news doctrine. They are big companies who can afford to defend themselves. But the media are less likely to sue such defendants precisely for that reason. Instead they go after lower hanging fruit like All Headline News that have fewer resources to defend themselves, hoping to put the big entities in a corner by establishing precedents, either though published rulings or through capitulations through settlements that can be cited as examples to others.
Another question raised by the abandonment of the five part test and replacement with a system individualized, fact-specific determinations, is whether the doctrine of hot news as narrowed to avoid copyright preemption is becoming so vague as to violate the First Amendment just because it can no longer pass muster under vagueness doctrine.
Does the Loss of Motorola As Precedent Help More Than It Hurts?
Should we mourn the part of the majority opinion that declares Motorola’s five-part test to be non-precedential? The test plays two roles. On the one hand, it was announced to describe a class of cases in which, if the test was met, a creator or source of factual information could enforce the tort of misappropriation against later users of the information. At the same time, it raised a high barrier to the mounting of successful hot news claims. Many users took great comfort from what seemed to be the high barriers created by several parts of the test, and hoped that a narrow construction of some parts of the test -- such as Judge Raggi's construction of the "direct competion" requirement -- would raise those barriers still higher.
Just as the elimination of the Motorola five-factor test removes the promise of success to plaintiffs who can meet it, it also eliminates the promise of an easy exit from litigation. Without the test, it may be much easier for plaintiffs bringing hot news claims to survive motions to dismiss or motions for summary judgment, and hence to keep the litigation going and to continue to bludgeon smaller defendants with the costs and risks of litigation.
Again, therefore, it depends on the what the true message of this decision should be. Is it that, however viable hot news may be under state law, such claims will never really be allowed to succeed? If so, perhaps we can be pleased. But if we take the ruling literally, it just promises a future of more litigation. That may well benefit the law practices of commercial IP litigators, but it is not clear who else stands to benefit.