Court Rejects “Hot News” Protection for Stock Recommendations

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The Court of Appeals for the Second Circuit ruled in Barclays Capital Inc. v. Theflyonthewall.com, Inc., No. 10-1372-cv (June 20, 2011) that a financial news service did not misappropriate analyst research by publishing stock recommendations on its website. The Court held that the Copyright Act preempted the “hot news” misappropriation claims brought by financial institutions to protect such ratings information.

Background

The plaintiffs in the case — Barclays Capital, Merrill Lynch and Morgan Stanley (collectively, the “Firms”) — engage in extensive research about the business prospects of publicly traded companies, the securities of those companies and the industries in which those companies are engaged. The Firms summarize the results of their research in reports that contain recommendations on the wisdom of purchasing, holding or selling securities of the subject companies. Each morning before the principal US securities markets open, the Firms circulate their reports and recommendations for that day to clients and prospective clients, giving the recipients an informational advantage over non-recipients with respect to possible trading in the securities. The Firms profit from the preparation and circulation of the reports and recommendations, in part, by earning brokerage commissions when a recipient turns to the Firm to execute a trade in the shares of the company being reported on.

The defendant, Theflyonthewall.com, obtained information about the Firms’ recommendations (and those of 62 other firms) before the Firms purposely made them available to the general public and before exchanges for trading in those shares opened for the day. By making these ratings changes available to a wider audience, the defendant reduced the informational and trading advantage of the Firms’ clients who were authorized recipients of the reports, and recipients of the information were less likely to trade securities using the brokerage services of the Firms.

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