'Hot News' And Preemption

This article was originally published in Bloomberg Law Reports on September 6, 2011.

In Barclays Capital Inc. v. Theflyonthewall.com, Inc., the Southern District of New York ruled that Theflyonthewall's use of stock recommendations developed by a number of financial institutions constituted "hot news" misappropriation under New York Law and issued an injunction against Theflyonthewall. The Second Circuit Court of Appeals, on June 20, 2011, reversed the district court, ruling that the claim for hot news misappropriation is preempted by the Copyright Act.1 On August 8, 2011, the Second Circuit denied the plaintiff's petition for a rehearing en banc. Here is the case in a nutshell, with the question remaining as to whether a petition for certiorari will be filed.

Theflyonthewall ("TheFly") is a subscription service that gathers current stock research from public sources and reports the information, including headlines of brokerage research reports as well as their upgrades and downgrades, before the New York Stock Exchange opens so that its subscribers have an opportunity to follow the advice of many of the large financial institutions such as Barclays, Merrill Lynch and Morgan Stanley. TheFly does not provide any brokerage services. It does not provide investment advice. It only reports the news with 80 percent of its recommendation headlines posted before the financial markets open.

"Emphasizing the timeliness of its reporting, [TheFly] asserts that, as the 'fastest news feed on the web,' it delivers to its customers 'actionable, equity news in a concise & timely manner.' In the words of TheFly's website, '[o]ur quick to the point news is a valuable resource for any investment decision.'"2 In marketing its services, TheFly points out "its quick and comprehensive access to Recommendations made by Wall Street research analysts. . . . Fly asserts that '[h]aving a membership with TheFly is like having a seat at Wall Street's best houses and learning what they know when they know it' . . . . it allows its subscribers to be a 'fly on the wall' inside the investment firms' research departments."3

Barclays is a major financial institution. It provides wealth and asset management services, brokerage services and investment advice. It spends hundreds of millions of dollars a year in stock research to develop stock reports. It does not sell its reports in the traditional sense; rather, it provides them as a service to its clients in order to encourage them to invest with Barclays. It employs sophisticated password protected internet platforms to minimize the chances that the common investor will gain access to its recommendations before the N.Y.S.E. opens. Barclays regularly monitors the list of recipients entitled to receive its reports. The reports also include prohibitions on redistribution. Although Barclays' customers include businesses of every size, families and individuals, among its clients of particular importance are private equity firms, money managers and wealthy individual investors. Barclays markets its brokerage services to provide its highest commission paying customerstypically large institutional and wealthy individual investors-an edge in equity buying.

The development and marketing of equity research is a "critical component" of Barclays' business model.4 Barclays uses its equity research to enhance its reputation for "creating reliable and valuable advisory reports" and recommendations that, if followed, are more likely to enable their customers to reap significant monetary benefits from timely trades in the financial markets.5

TheFly, after extensive internet and other public record searching, might find a Barclays equity research report on the near term (in terms of hours) projection for a stock price. Such reports typically "range from a single page to hundreds of pages in length."6 They "may include projections of future stock prices, judgments about how a company will perform relative to its peers, and conclusions about whether investors should buy, sell, or hold stock in a given company."7 A Barclays report may "indicate whether analysts believe the price of a stock is likely to increase, decrease, or remain relatively steady."8

The majority of key "actionable" reports are "issued between midnight and 7:00 a.m. [They] may move the market price of a stock significantly, particularly when a well-respected analyst makes a strong Recommendation. Such market movement usually happens quickly, often within hours of the market opening following the Recommendation's release to clients. Thus, timely access to Recommendations is a valuable benefit to each [of Barclays'] clients, because the Recommendations can provide them an early informational advantage."9 Barclays provides personalized service to its keys customers, known as "short horizon" investors, to discuss its exclusive Recommendations and solicit business before the financial markets open and when the Recommendations are most timely and valuable.

Notwithstanding its knowledge that Barclays reports were confidentially generated, were issued before the N.Y.S.E. opened...