A federal district court judge ruled on March 18, 2010, that financial news website Theflyonthewall.com (Fly) had misappropriated the financial recommendations of three prominent Wall Street firms and instituted strict time guidelines for the site's future publication of stock recommendations.
Fly is a New Jersey-based Internet subscription news service that aggregates and publishes stock recommendations along with other items of interest to investors. The investment firms in the case, Barclays, Merrill Lynch, and Morgan Stanley, accused Fly of misappropriation by using information from the firms' reports to publish recommendations on stock upgrades and downgrades, in many cases before the firm's paying clients received the investment advice. The firms also accused Fly of copyright infringement for the "verbatim copying of key excerpts" of several 2005 investment recommendation reports.
In Barclays Capital, Inc. v. Theflyonthewall.com, No. 06 Civ. 4908, 2010 U.S. Dist. LEXIS 25728 (S.D.N.Y. March 18, 2010), the three firms argued that their equity recommendations were "hot news" and that Fly's consistent and timely redistribution of the content constituted a violation of the New York common law of unfair competition. Each of the firms invests hundreds of millions of dollars annually to compile their equity research, and the judge agreed with the firms that Fly's conduct was a disincentive for the firms to expend resources to produce the reports."Fly's core business is its free-riding off the sustained, costly efforts by the Firms and other investment institutions to generate equity research that is highly valued by investors," wrote Judge Denise L. Cote of the U.S. District Court for the Southern District of New York in the opinion, which was issued after a four-day bench trial. Cote's final ruling instituted specific time requirements for Fly's future publication of the firms' recommendations. For recommendations issued when the stock market is closed, Cote forbade publication by Fly before 10 a.m. the following day. For recommendations issued while the market is open, Cote wrote that Fly cannot publish the reports for two hours after their release.
"This time frame preserves incentives for the Firms to create and disseminate research reports to their investor clients, while still recognizing the inevitable, fast-moving, and widespread informal communication of Recommendations on Wall Street," Cote wrote.
The time restrictions will not apply if Fly reports the firms' recommendations "in the context of independent analytical reporting on a significant market movement that has already occurred that same day," Cote wrote.
According to its website, Fly produces more than 800 stories per day on stock recommendations, rumors, and other financial events. Trial testimony indicated that, as of August 2008, more than 3,000 subscribers paid up to $50 per month to access Fly, Bloomberg News reported on March 18.
Until 2005, Fly relied on employees at the various firms to e-mail unauthorized research reports directly to Fly after they were published. Fly's employees would then scan and type selected recommendations as headlines into its newsfeed, sometimes adding passages lifted directly from the report.
Fly did not dispute the firms' claim that it was guilty of copyright infringement for publishing verbatim portions of 17 research reports in 2005. Cote ordered Fly to pay $12,750 in damages to the firms for the copyright violations.
Ron Etergino, president and majority owner of Fly, testified at trial that as a result of the copyright lawsuit, Fly changed its process for gathering the firms' recommendations, and no longer looks at the reports directly. Instead, Etergino testified that Fly relies on other sources, such as news services, chat rooms, and exchanging instant messages and e-mails with industry contacts to learn the information contained in the reports.
Fly argued that if it could show that the firms' recommendations are already "public," or available from sources other than the firms, then it should be free to republish them, since other Internet companies, as well as major news organizations, constantly report the firms' recommendations.
Cote disagreed. "The fact that others also engage in unlawful behavior does not excuse a party's own illegal conduct," she wrote. "Similarly, even if true, it is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it."
Glenn Ostrager, an attorney representing Fly, said he planned to appeal the decision to the 2nd Circuit U.S. Court of Appeals, according to the March 18 Bloomberg report. "We fully expect that the financial press will vigorously support Theflyonthewall.com with amici briefs to the circuit court on the grounds that the recommendations are news which the financial press regularly reports," Ostrager said.
Sam Bayard, Assistant Director of the Citizen Media Law Project at Harvard's Berkman Center for Internet and Society, pointed out in a March 23 post on the project's blog that Cote's lengthy opinion lacked any discussion of how hot-news misappropriation intersects with the First Amendment. Bayard noted that Fly currently appears to rely on publicly available information and employ "good-old fashioned journalism" [sic] in reporting stock recommendations. He questioned whether newspapers and other media would try to use the case to prevent news aggregators and social media from reproducing the content of their original news reporting.
Bayard argued in the blog post that under Bartnicki v. Vopper, 532 U.S. 514 (2001), the First Amendment protects Fly's right to publish the recommendations as long as Fly lawfully obtained the information. "There is nothing inherently unlawful about Fly reading about a stock recommendation on a newsfeed provided by another news service or participating in a public chat room where Wall Street 'rumors' are discussed," Bayard wrote. "The court says that Fly has engaged in 'illegal conduct' by publishing the information it did, but this label begs the question - that is, whether the state may constitutionally penalize publication of truthful information relating to a matter of public concern that was not obtained in violation of any other applicable laws."
Bayard acknowledged that the Barclays Capital case might be distinguishable from other instances of news aggregation because investment information is inherently time-sensitive, and that it could be difficult for newspapers to show that news aggregation on blogs and social media hurts their financial bottom line.
Charles Davis, executive director of the National Freedom of Information Coalition at the University of Missouri in Columbia, agreed in the March 18 Bloomberg report that Barclays Capital could have broad significance for the news industry. "If that's theft of intellectual property, there's a lot of theft of intellectual property across the journalism landscape," Davis said. "If information is on the street, it's on the street."
- CARY SNYDER
SILHA RESEARCH ASSISTANT