650 F.3d 876 (2d Cir. 2011)
Barclays Capital Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., and Morgan Stanley & Co. Inc. are major financial institutions that compile equity research reports on publicly traded companies.1 They issue Recommendations to upgrade, downgrade, initiate coverage, or change target prices on securities.2 The Firms employ hundreds of analysts and spend hundreds of millions of dollars annually to produce these reports.3 They distribute the reports to institutional and individual clients before the New York Stock Exchange opens at 9:30 a.m. to generate trading commissions.4
Theflyonthewall.com, Inc. operates an electronic news aggregator service with approximately 5,300 subscribers who pay between $25 and $50 monthly.5 Fly publishes headlines summarizing Recommendations from sixty-five investment firms, including those of the plaintiffs, which comprise about 2.5 percent of its content.6 Until 2005 Fly obtained reports directly from employees at the Firms.7 Thereafter it gathered the information from news outlets, chat rooms, blast instant messages, and conversations with traders and money managers.8 It stopped publishing excerpts from the underlying reports.9
In March and April 2005 the Firms complained to Fly that its publication of Recommendations infringed copyrights and constituted hot news misappropriation.10 They demanded that Fly cease and desist.11 Fly's counsel responded that it had changed its practices to rely on independent public sources.12 On June 26, 2006, the Firms filed suit in the Southern District of New York alleging copyright infringement based on verbatim copying of seventeen reports released in February and March 2005 and hot news misappropriation based on the systematic early republication of Recommendations.13
Fly conceded liability on the copyright claims.14 The district court entered an injunction restraining further infringement of the copyrighted reports.15 After a four-day bench trial in March 2010, the district court ruled for the Firms on the misappropriation claim.16 It found that Fly engaged in free-riding, competed directly with the Firms, and threatened their economic incentives.17 The court issued a permanent injunction barring Fly from reporting Recommendations for periods ranging from thirty minutes to two hours after release.18
Fly appealed the misappropriation judgment and injunction to the United States Court of Appeals for the Second Circuit, which heard argument on August 6, 2010.19 The Firms had implemented internal security programs, licensing restrictions, media policies, and technological measures to limit early dissemination of Recommendations.20 The record did not establish the effectiveness of those efforts.21
Whether the plaintiffs' hot news misappropriation claim under New York law is preempted by federal copyright law?22
Under 17 U.S.C. § 301, a state-law claim is preempted if it falls within the general scope of copyright under 17 U.S.C. § 106 and the subject matter of copyright under 17 U.S.C. §§ 102 and 103, unless the claim contains extra elements that make it qualitatively different from a copyright infringement claim, as recognized in the narrow INS-like hot news exception identified in National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997).23
Yes. The Firms' hot news misappropriation claim satisfies the subject matter requirement because the research reports containing the Recommendations are original works of authorship fixed in a tangible medium.24 The claim satisfies the general scope requirement because it seeks to prevent reproduction and distribution of the Recommendations, rights equivalent to those protected by copyright.25 The claim lacks the extra elements necessary to survive preemption under the NBA analysis because Fly does not free-ride on the Firms' product.26 Instead Fly collects, collates, and disseminates factual information about Recommendations from public sources while attributing each Recommendation to its source, bearing its own costs in a manner analogous to the defendants in NBA.27
The Firms make the news by issuing Recommendations while Fly reports the news of those Recommendations.28
The plaintiffs' hot news misappropriation claim under New York law is preempted by federal copyright law.29
Related opinions on this issue
Judge Raggi concurs in the judgment of preemption but would apply the five-part NBA test rather than dismiss it as dictum.30 She concludes that the Firms failed to satisfy the direct competition requirement.31 The Firms disseminate only their own Recommendations to clients likely to trade through them to generate commissions.32
Fly aggregates and attributes Recommendations from sixty-five firms for any subscriber interested in financial news without seeking trading revenue.33 Although Fly's conduct shows free-riding, the products do not directly compete in the same market under the NBA standard.34 The Firms therefore cannot establish a non-preempted claim.35