On June 20, 2011, in Barclays Capital Inc. v. TheFlyontheWall.com, Inc. (Fly), a three-judge panel of the U.S. Court of Appeals for the Second Circuit clipped the wings of the “hot news” misappropriation doctrine, holding that financial news aggregator Fly was not liable for reporting “buy” and “sell” stock Recommendations made by plaintiff financial firms (the Firms), including Merrill Lynch and Morgan Stanley, to their clients. Plaintiffs’ claim was preempted by copyright law because defendants’ conduct did not fall within the scope of the misappropriation “hot news” tort, as originally recognized by the Supreme Court in 1918 and upheld by an earlier Second Circuit panel in 1997. The Court expressly noted, but declined to address, the “wide variety of interesting legal and policy issues” raised by the parties and amici, because it was bound by existing Second Circuit law, and was “without authority” to repudiate the tort wholesale as some amici had urged it to do. At the same time, the majority opinion strained to define the existing law as narrowly as possible in order to reposition New York State’s hot news misappropriation tort into a much-reduced role.

Case background

The Firms offer daily stock analyst reports to their institutional and individual clients before each morning’s opening of the U.S. securities markets. The Firms’ primary source of profit on the reports is commissions they collect on client stock trades in response to the information contained in the reports. (There is also a small market for later sales of the reports, but this is a negligible source of revenue for the Firms.) The Recommendations in these reports can themselves be market movers in the short term, so recipients of the reports and Recommendations can profit from trading on them before they are available to other investors.

Defendant Fly offered its paying subscribers advance notice of the information contained in the Firms’ daily reports. In some cases, Fly reported the information before the reports had been delivered to all of the Firms’ clients. Fly’s initial business model involved obtaining the reports from the Firms’ own employees and publishing portions of them on Fly’s website. More recently, Fly obtained the reports from other sources, and disseminated only the analysts’ Recommendations (such as “buy,” “sell,” or “hold,” and price targets). After trial, Judge Denise Cote of the District Court for the Southern District of New York found that Fly’s publication of excerpts from the reports infringed the Firms’ copyrights, a finding that Fly did not appeal. The only issue on this appeal was the validity of the lower court’s additional finding that Fly’s publication of the Recommendations constituted misappropriation of hot news.