The Fly On The Wall, and Other Free-Riders

As reported by Reuters (h/t: PC Magazine), Judge Denise Cote, of the U.S. District Court, Southern District of New York, recently handed down an injunction in Barclays Capital Inc. v., Inc. (06 Civ. 4908).

The background:

This litigation confronts the phenomenon of the rapid and widespread dissemination of financial services firms’ equity research recommendations through unauthorized channels of electronic distribution. This dissemination frequently occurs before the firms have an opportunity to share these recommendations with their clients — for whom the research is intended — and to encourage the clients to trade on those recommendations. The firms contend that their recommendations are “hot news” and that the regular, systematic, and timely taking and redistribution of their recommendations constitutes misappropriation, which is a violation of the New York common law of unfair competition.

Barclays Capital Inc. (“Barclays Capital”), Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”), and Morgan Stanley & Co. Inc. (“Morgan Stanley”) (collectively, the “Firms”) have brought suit against defendant, Inc. (“Fly”). Fly is an internet subscription news service that aggregates and publishes research analysts’ stock recommendations along with many other items of varying interest to investors. In addition to asserting hot-news misappropriation, the Firms accuse Fly of infringing the copyrights of Barclays Capital and Morgan Stanley in seventeen research reports released in February and March 2005. For the reasons described below, judgment shall be entered for the plaintiffs on both claims. …

The facts:


I. The Firms’ Equity Research Business Model

The Firms are major financial institutions that provide wealth and asset management, securities trading and sales, corporate finance, and various investment services. Collectively, their customers include large institutional clients, foundations, corporations, businesses of every size, families, and individuals. Among their clients of particular importance to the issues in this litigation are U.S. hedge funds, private equity firms, money managers, mutual funds, pension funds, and wealthy individual investors. The services that the Firms offer their clients, including research reports, financial analytics, and trading tools, support clients’ investing activities and are intended to assist with maximizing their returns on those investments. One principal source of revenue for the Firms is the commissions earned when they facilitate trading on behalf of their clients.

The development and marketing of research about major publicly traded equity securities, or “equity research,” is a critical component of each Firm’s business model. It is a foundational element of the relationship between the Firms and their most significant clients. The Firms use their equity research — and their reputations for creating reliable and valuable advisory reports based on that research — to attract and retain clients, to entice clients to execute trades through them, and to differentiate themselves from other financial services firms.

A. Content of Equity Research Reports

The Firms’ equity research reports may be company-specific, industry-wide, or macroeconomic in focus, and may range from a single page to hundreds of pages in length. The Firms’ company-specific research reports 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. Each Firm maintains its own rating system to indicate whether analysts believe the price of a stock is likely to increase, decrease, or remain relatively steady.

Each of the Firms issues scores and sometimes even hundreds of research reports in a single day. Only a small fraction of reports, however, are “actionable” in the sense that they are likely to spur any investor into making an immediate trading decision. The actionable reports are those that upgrade or downgrade a security; begin research coverage of a company’s security (an event known as an “initiation”); or predict a change in the security’s target price.

While the actionable reports, which the parties and this Opinion will refer to as Recommendations, are issued around the clock, the vast majority of them are issued between midnight and 7:00 a.m. Recommendations 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 Firm’s clients, because the Recommendations can provide them an early informational advantage.

Each Firm also produces summaries of its company-specific reports that include, in aggregated form, the actionable elements (such as the Recommendations and brief commentary) of the research reports released by the Firm overnight or early that morning. For example, Barclays Capital provides a “Morning Meeting” flash summary and a “Before the Bell” report, each of which includes the Recommendations the Firm released that morning.

B. Production of Equity Research Reports

Each of the Firms devotes substantial resources to the production of their equity research reports. Each has hundreds of employees devoted full-time to the production of original equity research, and each invests hundreds of millions of dollars per year in creating the research. For example, Merrill Lynch’s Global Research department covers approximately 3,200 stocks across 48 different industries and issues approximately 40,000 equity research reports per year. In addition, each Firm calls upon its analysts to undertake other activities as well, such as participating in conference calls, interfacing with clients, and hosting corporate access events. The preparation of research reports, however, is at the core of everything that the research departments at the Firms do.

The work done by the analysts to prepare equity research reports at each Firm is broadly similar. The analysts typically specialize by following particular industries, companies, and/or countries or geographic regions. The creation of research reports is a time-consuming endeavor. To carry out their work, analysts gather company-specific and industry-wide financial results; visit a company’s facilities; build and maintain relationships with sources of information, including salespeople, corporate representatives, traders, clients, experts, and fellow analysts; conduct surveys of customers and competitors; track industry and economic trends; assess relative stock valuations; create and update financial models; synthesize the gathered data; make quantitative projections about future earnings, cash flow, balance sheet items, and stock valuations; draw conclusions; and, finally, collaborate with team members to arrive at a formal Recommendation. The Firms’ analysts must also exercise judgment in determining when to initiate or terminate research coverage of a particular company, how often to issue new reports, and when to change the rating, target price, or other investment advice for a given security.

The Firms are widely recognized for their expertise and reputation in the field of equity research. All three Firms have been recognized by industry observers such as Institutional Investor for their research quality, with Lehman Brothers and its successor Barclays Capital being named the top U.S. equity research team every year from 2002 through 2009.

C. Distribution of Equity Research Reports

Each of the Firms maintains sizable client bases that act as consumers of their research and expends substantial resources to disseminate their research to those clients. For example, Morgan Stanley has approximately 7,000 institutional investor clients and close to 100,000 individual investors who receive regular access to its research reports. A single sophisticated client, such as a hedge fund or mutual fund, may have many employees who receive a copy of the Firms’ research reports; thus, for the 7,000 institutional accounts at Morgan Stanley, a total of 125,000 “contacts” are collectively authorized to receive research. Thus, Hurewitz estimated at trial that approximately 225,000 separate people have full entitlement to receive research reports from Morgan Stanley. Millions more Morgan Stanley retail clients can also gain access to its research by requesting specific reports from their Financial Advisor. Aside from distributing their own research, the Firms are not otherwise involved in the business of reporting or distributing financial or business news.

As is explained below, each Firm has a system for determining which clients are allowed to receive the Firm’s full set of research reports and Recommendations. The Firms distribute their research reports to these “entitled clients” through several authorized channels.

First, entitled clients are granted access to password-protected proprietary internet platforms, separately maintained by each Firm, to which the research reports are posted. Second, to serve clients who wish to consolidate on one platform all of the research to which they are entitled from multiple sources, each of the Firms also licenses third-party distributors to disseminate their research. Such licensed distributors, which vary from Firm to Firm, include Bloomberg, Thomson Reuters, (“TMC”), FactSet, and Capital IQ. For licensed distributors that also maintain their own financial news reporting businesses, such as Bloomberg and Thomson Reuters, the Firms require that the distributors maintain a “firewall” such that the media arm cannot obtain information from the research arm, although an end user may nevertheless receive both research and media content on the same physical interface.

The Firms also insist that the licensed distributors employ systems that ensure that a Firm’s research reports are accessible only to that Firm’s entitled clients. In recent years, the Firms have redoubled their efforts to manage “entitlements” on these third- party platforms so that no one can access their research through the licensed distributors that would not already have direct access through the Firms themselves. At each of the Firms, once an analyst releases a research report, it is delivered simultaneously to all authorized distribution channels, both internal and external, with the exception of an embargoed research market.

The Firms also personalize the distribution of their research to a targeted subset of entitled clients. After the research reports have been distributed through the two channels described above, brokers and sales-traders at the Firms may email the research reports directly to certain entitled clients or disseminate their substance by instant message (“IM”) or telephone. The Firms also host private conference calls or “webcasts” in which their analysts discuss their research reports and Recommendations with Firm clients; access is restricted to those who have been given a call-in number or login and passcode.

This targeted and personalized outreach is at the heart of this case. The Firms have identified a small number of clients, principally institutional clients, on which they concentrate their analyst and sales outreach efforts. For example, roughly 200 of Morgan Stanley’s thousands of institutional clients account for over two-thirds of the time and resources the Firm devotes to marketing its research. As noted above, any one of these 200 clients may have scores of contacts entitled to receive research, each of whom plays some role in the client’s investment decisions, including the choice of which brokerage firm will receive their trading order.

The Firms’ follow-up regarding their Recommendations with this targeted subset of clients is a highly orchestrated and intensive sales effort. Each of the Firms conducts a morning meeting at roughly 7:15 a.m., at which an analyst who has just released a significant Recommendation is given only three minutes to describe the Recommendation. This series of analyst presentations is delivered to the Firm’s sales staff and concludes by 8:00 a.m. Armed with this new information — as well as their existing knowledge of their clients’ needs and interests — the sales force calls, emails, and IMs clients in a sustained effort to reach their contacts at the targeted client base, recommend a trading strategy, and invite the client to place the trading order at the Firm. Most communications are very short; for example, each telephone contact may last anywhere from 90 seconds for a voicemail to five minutes, or longer, for a conversation. This activity is most intense from the hours of 8:00 a.m. to mid-day, but can extend over a two-day period for a particularly significant Recommendation. The Firms act with such alacrity and intensity because they believe that every second counts for many contacts in this target client base.

Thus, equity research at the Firms is not an independent, self-sustaining business, but rather, complements each Firm’s brokerage and trading operations. Equity research reports are the Firms’ intellectual capital, and their substantial investment in producing high-quality equity research is ultimately justified only by the role that research plays in driving commission revenue. The greater the perception of value, the more that clients are willing to pay to gain and retain access to that research by directing their trading business to the Firm.

The value of the research derives not just from its quality, however, but also from its exclusivity and timeliness. Some sophisticated clients, such as hedge funds, seek to act on the Recommendations before other investors do so. These sophisticated clients seek an advantage over other investors by relying on the high-quality analysis underpinning the Firms’ Recommendations, anticipating market movement, and making rapid trading decisions. Such “short-horizon” investors are also the principal drivers of trading revenues for the Firms.

For other investors, with longer investment horizons, research reports retain value over hours, days, or even longer. Whatever a client’s trading model, however, it is the Firms’ experience that their clients are more likely to execute a trade through the Firm if they learn of the Recommendation directly from the Firm rather than from another source. As Lynch explained at trial, a client who learns of a Recommendation from a telephone call from Merrill Lynch often will decide to initiate a trade on the spot. Even those clients who learn about a Merrill Lynch recommendation through Merrill Lynch’s internet distribution platform or one of its licensed outside vendors are expected to, and usually do, execute their trades through the Firm. Lynch and Browning estimated at trial that at least 60 percent of all trades conducted in their Firm’s Global Wealth Management division are caused by Firm solicitations. …

E. The Firms’ Frustrations Over Lack of Control

Even though the Firms have always tried to limit the distribution of their Recommendations to entitled clients, they do not dispute that many of their Recommendations leak from authorized channels and are then posted by online aggregators or reported as financial news in the mainstream media. This leakage became a noticeable phenomenon by 2004. In that year, they identified Fly as one of the most systematic unauthorized publishers of their Recommendations, and by 2005, the Firms had begun to take serious steps to address the problem of unauthorized redistribution of their Recommendations and research. Thus, many of the systems designed to control access to research reports and Recommendations that are described above were implemented or tightened in the years following 2004. In the last five years, each of the Firms has also invested substantial resources in studying how its research, and in particular its Recommendations, were being redistributed and how it could stop or impede that process.

The unauthorized redistribution of research reports and Recommendations has had another impact on the Firms. The Firms have cut their analyst staff and budgets significantly in the last five years because of their perception that equity research is no longer driving commission revenue as forcefully or consistently as it once had. With clients able to review the Firms’ Recommendations and even research reports through other sources, the research departments have been handicapped in their ability to argue for their historical share of the Firms’ overall budgets. Thus, with the decline in exclusivity of their research, the resources that the Firms have devoted to research production have declined. For example, the number of analysts in one Firm has been cut by 20 percent over the past five years, and the research budget at another has been cut in half over the past decade. At one of the Firms, the North America research team, which includes all research into U.S. stocks, has been scaled back even more dramatically. Because of these cuts, many companies’ equities are no longer being covered by the Firms’ analysts.

During this same period, of course, other factors have had an impact on the financial well-being of the investment firms in general and on their research budgets in particular. Since 2008, the world has experienced an economic cataclysm. Discount trading platforms have proliferated, which enable investors to buy or sell securities with cut-rate commissions. Moreover, in 2002, a joint investigation by the New York Attorney General and federal securities regulators uncovered widespread conflicts of interest among equity research analysts in major Wall Street firms. The resulting Global Research Analyst Settlement, finalized in April 2003, required ten major investment firms — including the plaintiff Firms — to pay approximately $1.4 billion in disgorgement and civil penalties. In addition, based on various information unearthed by the joint investigation, dozens of class action lawsuits were filed by investors against the investment firms and litigated over the years that followed.

While each of the above factors has undeniably had an independent impact on the health of the research departments at each Firm, the evidence at trial was compelling that the unauthorized redistribution of Recommendations has also been a major contributor to the decline in the resources that each Firm devotes to equity research. The reason for this is not hard to fathom; the investment in research is justified by its ability to drive commission income, and when that linkage is broken, the justification is greatly diminished.

One example will suffice. In May 2006, Merrill Lynch issued a Recommendation “contrary to the industry consensus” upgrading General Motors stock from “hold” to “buy.” The basis of this contrarian call was the Firm’s prediction that far more union-affiliated workers would accept the company’s offer to buy out their contracts than was previously expected by most market observers. General Motors stock price rose approximately 30 percent following the release of Merrill Lynch’s research report, and clients who traded promptly on that information earned a sizable return. Fly, however, had posted the upgrade on its site within minutes after Merrill Lynch released the Recommendation to its clients, and thus, before the Firm’s sales professionals could reach their clients to inform them of the Recommendation.

It bears noting that it does not matter to the Firms whether the unauthorized distribution is through a small internet company like Fly or through media giants like Bloomberg, Thomson Reuters, or Dow Jones. The damage is caused not by the identity of the publisher, but by the timely and systematic unauthorized redistribution of the Firms’ Recommendations, whatever the medium. To that end, through conference calls and face-to-face meetings with mainstream media, the Firms have objected to the systematic publication of their Recommendations. At least one mainstream publisher of financial news has represented that it is watching this litigation against Fly closely and will adjust its practices based on its evaluation of the outcome of this litigation. The Firms have also sent cease-and-desist letters to several of Fly’s competitors in the online newsfeed niche market.


Fly is a New Jersey corporation that, since 1998, has been engaged in the business of collecting and publishing financial news, rumors, and other information flowing from Wall Street via its online subscription newsfeed, Fly describes itself as a “single source internet subscription news service . . . reporting relevant, market-moving financial news and information,” including “the most comprehensive database of analyst trading calls, events, and syndicate information on the web.” Emphasizing the timeliness of its reporting, it 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 Fly’s website, “[o]ur quick to the point news is a valuable resource for any investment decision.”

In particular, Fly emphasizes its quick and comprehensive access to Recommendations made by Wall Street research analysts. It states that its newsfeed allows investors to “keep track of the latest Upgrade/Downgrade,” and is a “one-stop solution for accessing analyst comments, directly sourced in a real time basis.” As Fly advertises, “ is designed to bridge the gap between Wall Street’s big players ‘in the know’ and those who want into their club.” Similarly, Fly asserts that “[h]aving a membership with the Fly is like having a seat at Wall Street’s best houses and learning what they know when they know it.” It brags that it posts “breaking analyst comments as they are being disseminated by Wall Street trading desks,” “consistently beating the news wires.” Indeed, its very name is intended to convey that it allows its subscribers to be a “fly on the wall” inside the investment firms’ research departments.

Fly’s website contains an explicit disclaimer advising users that Fly staff are not brokers, dealers, or registered investment advisors. Nevertheless, Fly’s marketing materials emphasize that its service is intended to assist investors. In Fly’s words, by “[c][/c][/c]ombining industry experience, market acumen and extensive industry contacts, [sic] helps investors to make better informed investment decisions.”

A. Fly’s Newsfeed

The cornerstone of Fly’s business is its online newsfeed, which is updated continuously every day between 5:00 a.m. and 7:00 p.m. The newsfeed, which Etergino demonstrated at trial, presents a constant stream of “headlines” — on average, over 600 per day — in ten different categories. These categories include: “Hot Stocks,” “Rumors,” “Recommendations,” “Conference/Events,” “Syndicate,” “Options,” “General News,” “Periodicals,” “Technical Analysis,” and “Earnings.” Fly does not conduct its own equity research or include any original research in its newsfeed.

The headlines in one of these categories, “Recommendations,” are the basis of this litigation. It is to this category that Fly posts the Recommendations by sixty-five investment firms’ research analysts, including the three plaintiff Firms. A typical Fly headline from 2009 reflecting a Recommendation by one of the Firms is “EQIX: Equinox initiated with a Buy at BofA/Merrill. Target $110.” On occasion, the headline is accompanied by a brief summary of the research report’s reasoning, but with the commencement of this lawsuit Fly has generally not included such summaries for the plaintiffs’ Recommendations. Etergino estimated at trial that approximately 80 percent of Fly’s Recommendation headlines are posted before the 9:30 a.m. market opening each day. Fly has posted more than two dozen Morgan Stanley Recommendations, and up to ten Recommendations for both Merrill Lynch and Barclays Capital, in a single day before the opening of the market.

Fly has devised a software program that permits it to compose the headline quickly by tabbing through a few categories of information. For instance, it has a drop-down menu that permits it to indicate an upgrade or downgrade through a single keystroke. Another tabbed menu lists every investment firm covered by Fly and is automatically linked to each firm’s recommendation system, so that the individual firm’s evaluative descriptor can be quickly plugged into the headline. When Etergino makes an error in reporting a Recommendation, which he contends is rare, he blames it on a keystroke entry error and not on his newsgathering.

Within the “Conference/Events” category, Fly frequently posts call-in numbers and passcodes for conferences hosted by equity analysts at various Wall Street firms. Fly posted conference call-in numbers and passcodes at the Firms until 2008. The Firms never authorized Fly to post their Recommendations or these call-in numbers and passcodes. At trial, Etergino asserted that any posting of the Firms’ conference calls after 2006 was inadvertent.

The user may filter information from the entire Fly newsfeed by selecting one or more categories of headlines. The “Recommendations” category and several other categories are also searchable, sortable, and viewable in different formats. Users may establish a “portfolio” of up to 150 different stocks through which they can automatically receive email, pop-up, or audio alerts whenever Fly posts content relevant to those stocks. Fly also provides an audio feed of headlines streamed through the internet, which it calls “FlyRadio.” The audio feed, also known as a “squawk box,” runs silently in the background but is audible when there is news or information to be heard.

While Fly’s initial growth can be attributed to its extensive and timely publishing of Recommendations by investment and brokerage firms, over time it has diversified the kind of information that it reports through headlines. Thus, Fly represents that while headlines about the three Firms’ Recommendations accounted for roughly 7 percent of its overall newsfeed in 2005, as of 2009, only about 2.5 percent of Fly’s total content consisted of the Firms’ Recommendations.

Like the Firms, Fly disseminates its content both directly and through licensed distributors. Fly currently distributes its content to approximately 3,300 direct subscribers on its website and to another 2,000 subscribers who access its content through Fly’s licensed financial content partners, such as Bloomberg, Thomson Reuters, and others, including AOL, NASDAQ, Acquire Media, and Wall Street Source.19 Fly also distributes its newsfeed to eSignal, a trading platform, and to NewsWare, owned by the Track Data Corporation, which maintains its own broker/dealer and offers a service called My Track that combines live data streams with a brokerage platform. Additionally, at least of one Fly’s former distribution partners, Cyber Trader, maintained an online discount brokerage platform and was associated with the online brokerage firm, Charles Schwab.

Fly’s subscribers include individual investors, institutional investors, retail investors, brokers, and day traders. Subscriptions to Fly’s website may be customized based on three content packages — “news,” “events,” and “syndicate” — and can be purchased on either a monthly or a yearly basis. Etergino estimated at trial that two-thirds of Fly’s customers subscribe to all three of Fly’s content packages, while the remaining one-third subscribe only to the “news” package, which includes the “Recommendations” category. The price to subscribe to all three packages is $50 per month or $480 per year, while the price to subscribe to just one package is $25 per month or $240 per year.

Fly has also established an RSS (really simple syndication) feed that distributes Fly’s newsfeed headlines over various RSS readers, including Google, AOL, Yahoo!, and SkyGrid.21 This RSS feed contains all of Fly’s headlines, with one exception: Fly’s RSS feed does not contain any headlines reporting the three plaintiffs’ Recommendations. While the RSS feed is available free of charge and does not earn any revenue for Fly, it is Etergino’s hope that readers of the RSS feed will decide to subscribe to Fly’s website in order to benefit from somewhat quicker and less cumbersome access to the newsfeed.

Fly’s staff has grown from five employees in 2002 to a current staff of 28 full- and part-time employees. Approximately half of its staff is involved in production of the live newsfeed, while a smaller number work on the other arms of the business. At one time, six Fly employees worked on the “Recommendations” category, but only two or three employees are now involved.

The law:


The Firms have brought two claims against Fly. As for the first claim, Fly does not dispute that it engaged in copyright infringement and that an injunction may issue, but contests the imposition of attorney’s fees and prejudgment interest. As for the second, Fly contests that it is liable for hot-news misappropriation. …

II. Hot-News Misappropriation

The Firms have also sued Fly for misappropriation of the time-sensitive Recommendations contained in their equity research reports. The parties agree that this cause of action is properly defined as one for “hot-news misappropriation.” Before addressing this claim, some background to this doctrine of misappropriation is warranted.

A. Legal Context

The modern cause of action for misappropriation has its origin in International News Service v. Associated Press, 248 U.S. 215 (1918) (“INS”), a case decided by the Supreme Court under federal common law that found that hot news is protectible as “quasi-property.” The Associated Press (“AP”) engaged in reporting in Europe during World War I at great expense and distributed the news to its member newspapers on the East Coast of the United States for dissemination to the public. Associated Press v. Int’l News Serv., 240 F. 983, 986-87 (S.D.N.Y. 1917). The defendant, International News Service (“INS”), obtained the news from the AP by, among other means, copying AP’s stories from bulletin boards and early editions of newspapers printed by AP’s eastern affiliates. INS then transmitted those stories to the West Coast, where it sold the paraphrased news stories as its own. The district court declined to enjoin this means of copying stories, but the Court of Appeals reversed and granted AP a permanent injunction. Affirming the Court of Appeals, the Supreme Court located the tort of misappropriation within unfair competition law. Justice Pitney wrote for the Court:

The fault in the reasoning [of defendant] lies in applying as a test the right of the complainant as against the public, instead of considering the rights of complainant and defendant, competitors in business, as between themselves. The right of the purchaser of a single newspaper to spread knowledge of its contents gratuitously, for any legitimate purpose not unreasonably interfering with complainant’s right to make merchandise of it, may be admitted; but to transmit that news for commercial use, in competition with complainant — which is what defendant has done and seeks to justify — is a very different matter. In doing this defendant, by its very act, admits that it is taking material that has been acquired by complainant as the result of organization and the expenditure of labor, skill, and money, and which is salable by complainant for money, and that defendant in appropriating it and selling it as its own is endeavoring to reap where it has not sown, and by disposing of it to newspapers that are competitors of complainant’s members is appropriating to itself the harvest of those who have sown. Stripped of all disguises, the process amounts to an unauthorized interference with the normal operation of complainant’s legitimate business precisely at the point where the profit is to be reaped, in order to divert a material portion of the profit from those who have earned it to those who have not; with special advantage to defendant in the competition because of the fact that it is not burdened with any part of the expense of gathering the news. The transaction speaks for itself and a court of equity ought not to hesitate long in characterizing it as unfair competition in business.

INS, 248 U.S. at 239-40.

A fair reading of this passage suggests that the Court’s decision was strongly influenced by several policy ideals: a “sweat-of-the-brow” or “labor” theory of property; norms of commercial morality and fair dealing; and a utilitarian desire to preserve incentives to produce socially useful services. Thus, in INS, the misappropriation doctrine was developed to protect costly efforts to gather commercially valuable, time-sensitive information that would otherwise be unprotected by law. Justice Brandeis, voicing his displeasure with the result reached by the majority, noted in dissent that “[t]he general rule of law is, that the noblest of human productions — knowledge, truths ascertained, conceptions, and ideas — become, after voluntary communication to others, free as the air to common use.” Id. at 250 (Brandeis, J., dissenting). …

The question of whether a hot-news misappropriation claim survives federal preemption was finally resolved in National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997) (“NBA”). In NBA, “[t]he crux of the dispute concern[ed] the extent to which a state law ‘hot-news’ misappropriation claim based on [INS] survives preemption by the federal Copyright Act” and, if so, whether the plaintiff’s claim fit “within the surviving INS-type claims.” Id. at 843. Plaintiff, a national sports league, sued the maker of a handheld pager sold by Motorola and marketed under the name “SportsTrax,” which displayed real-time information about professional basketball games while they were in progress. Id. at 843-44. The Court of Appeals concluded that “a narrow ‘hot-news’ exception does survive preemption,” given the “extra elements” of time sensitivity, free-riding, and “the threat to the very existence of the product or service provided by the plaintiff.” Id. at 843, 853; see also Briarpatch Ltd., L.P. v. Phoenix Pictures, Inc., 373 F.3d 296, 305-06 (2d Cir. 2004) (articulating the “extra elements” test for determining the scope of preemption under § 301 of the Copyright Act). Under NBA, the elements of an INS claim surviving federal preemption are:

(i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendant’s use of the information constitutes free riding on the plaintiff’s efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.

NBA, 105 F.3d at 845. …

B. Application of the NBA v. Motorola Elements

The parties do not dispute that the elements of the hot- news misappropriation tort under New York law are those set out in NBA, 105 F.3d 841. The burden is on the Firms to establish each of the elements of the tort, and each element is considered in turn below.

1. Cost of Generating Information

The first element is that a plaintiff “generates or collects information at some cost or expense.” Id. at 852. The Firms collectively employ hundreds of skilled analysts and expend hundreds of millions of dollars each year to produce their equity research reports. Fly does not dispute that the Firms have incurred substantial expense in generating their research reports and Recommendations. …

3. Free-Riding

The third element of the NBA hot-news misappropriation tort is that “the defendant’s use of the information constitutes free-riding on the plaintiff’s costly efforts to generate or collect it,” 105 F.3d at 852, thereby enabling the defendant “to produce a directly competitive product for less money because it has lower costs.” Id. at 854. In INS, the Supreme Court described such conduct as a competitor “endeavoring to reap where it has not sown . . . [by] appropriating to itself the harvest of those who have sown.” INS, 248 U.S. at 239-40; see also Chi. Prof’l Sports Ltd. P’ship v. NBA, 961 F.2d 667, 675 (7th Cir. 1992) (“Free-riding is the diversion of value from a business rival’s efforts without payment.”). In essence, free-riding exists where a defendant invests little in order to profit from information generated or collected by the plaintiff at great cost.

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. Fly does no equity research of its own, nor does it undertake any original reporting or analysis that could generate the opinions reflected in the headlines published in the “Recommendations” section of its newsfeed. Fly’s Recommendation headlines consist entirely of regurgitations of the Firms’ Recommendations and those of other investment institutions. Because it makes no investment of its own in equity research, Fly can sell the reprinted Recommendations at a cut-rate price to its subscribers and still make a profit. Its only cost is the cost of locating and lifting the Recommendations and then entering a few keystrokes into its newsfeed software.

Although Fly does attribute each of the Recommendations to its originating firm, if anything, the attributions underscore its pilfering. A Recommendation is valuable not because it is a fact that General Motors stock has a new target price, but because one of the Firms has opined that it has one. Investors appreciate that a Recommendation by one of the Firms reflects their very substantial investment in expert analysis and thus merits careful consideration. In contrast, there is no evidence that a Recommendation by Fly itself to buy, sell, or hold a particular stock would be given any weight whatsoever by any investor. Thus, it is essential to Fly’s misappropriation of the Firms’ research capital that it connect each Recommendation to its source.

Fly vigorously disputes that it “free-rides” on the Firms’ efforts, but its arguments are not persuasive. First, Fly argues that it itself invests substantial resources to quickly gather, edit, and disseminate financial news from various sources. To the extent that Fly adds value through its collection and aggregation of information, however, the value reflected in that act of aggregation does not controvert the fact that Fly expends no effort to produce the Recommendations and does not contribute to the underlying research and analysis process.

Second, Fly argues that for the last few years it has not been free-riding off the Firms’ efforts because it no longer lifts the Recommendations from the Firms’ research reports, but instead relies on others’ headlines, thereby establishing in Fly’s view that the Recommendations have become “public” and free for the taking. It points to the frequent publication of the Recommendations by other news services, both mainstream and internet, in advance of Fly’s own publication of headlines and to the widespread discussion of the Recommendations in market chat rooms and “blast IMs,” among other sources.

The fact that others also engage in unlawful behavior does not excuse a party’s own illegal conduct. Although the practices of other potentially liable parties is highly relevant to the fashioning of equitable relief and will be considered below, the conduct of third parties is simply of no moment in finding Fly liable for hot-news misappropriation. 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.

It is the issue of free-riding that concerns us here; see the decision for the remainder of Judge Cotes’s legal analysis, and the details of the injunctions (or just read the Reuters (incomplete) summary).

The controlling Halachah with regard to free-riding is based upon the related principles of כופין על מדת סדום and זה נהנה וזה לא חסר פטור; the remainder of this post will consist of the citation and discussion of several of the classic responsa in this area.

Rav Yehezkel Landau was asked about a printer who had been commissioned by a client to print two tractates of the Talmud along with the client’s commentary on them. After doing so, the printer reused the plates to print his own edition of the two tractates, sans the client’s commentary. The client then demanded a partial refund of his fees, since the printer had benefited from the work himself:

על דבר אשר נשאלתי מק”ק ליווארני וז”ל השואל. ראובן חיבר פירוש על סדר נזיקין וקדשים והלך אצל שמעון המדפיס ונתפשר עמו בסך ידוע בעד כל דף שידפיס לו אלו השני סדרים עם פירש”י ותוספות ופירוש של המחבר הנ”ל למטה.

והנה דרך המדפיסים אחר גמרם כל דף ודף סותרים סידור האותיות לסדר מהם דף אחר וזה המדפיס יש לו הרבה אותיות לכן לא קלקל הסידור והניחו כמות שהוא רק הסיר מלמטה הפירוש החדש והדפיס לעצמו שני סדרים הנ”ל עם פירש”י ותוספות שיהיו מוכנים בידו בעת הפנאי שישלים להדפיס כל הש”ס.

וטען ראובן המחבר הנ”ל יען שתשלומי שכירות המסדרים האותיות הוא היה משלם ועתה למה יהנה שמעון מסידור אותיות חנם ויחזיר לו חלקו מסידור האותיות כדין כל הנהנה ממלאכת חבירו כדין מעין המשקה שדות והמקיף את חבירו משלש רוחותיו.

ושמעון טוען מאחר שהאותיות הם שלו יכול להשתמש בהם כרצונו ואין כח ביד ראובן לקלקל הסידור וכו’.

יורנו רבינו הדין עם מי. עכ”ל השואל.1

Rav Landau’s analysis is subtle and intricate; we will merely cite here his concluding paragraph, in which he argues that this case is not considered לא חסר at all, since a competing edition of the two tractates will certainly hurt the sales of the client’s edition:

אמנם אחר היישוב נראה שחייב לשלם חלקו שהרי גם בדר בחצר חבירו אפילו לא קיימא לאגרא אם חסרו אפילו דבר מועט מגלגלין עליו כל השכר כפי שנהנה כמבואר בשלחן ערוך בסימן שס”ג סעיף ז’ יע”ש. והרי גם כאן מחסרו הרבה שאם לא היה שמעון מדפיס סדרים הללו הוו שכיחי וקפצו זביני על ספריו של ראובן שאפילו מי שלא היה קונה פירושו לחוד מכל מקום אגב שהיה צריך לשני סדרים הללו ללמוד מתוכם גמרא עם פירש”י ותוספות היה מוסיף איזה דבר לקנותם עם פירושו של ראובן ועכשיו שמדפיס שמעון יהיה סדרים הללו שכיחי ובזול ולא ימצאו כל כך בריוח קונים שיקנו מראובן וכיון שגורם לראובן הפסד בזה מגלגלין עליו כל מה שנהנה לפי חלקו מסידור האותיות.

[ועיין שם שדן במחלוקת הראשונים אם חייב לשלם את כל מה שנהנה, או רק מה שהפסידו, והעלה:] מכל מקום כאן בנדון שלפנינו אינו דבר מועט ואי אפשר לומר בזה שאינו חייב רק מה שהפסידו כי ההפסד לדעתי הוא יתר על הוצאה לכן חייב שמעון לשלם כל מה שנהנה מסידור האותיות לפי חלקו כל אחד לפי מספר מה שמדפיס. כן נלענ”ד:

The same basic argument is proposed by Rav Avraham Shmuel of Eišiškės (Ejszyszki, or Eishyshok), although he is not certain of its correctness. He discusses the case of someone who illicitly utilizes proprietary information about dyeing procedures, obtained by another at great cost, to compete with the latter:


על דבר איש אחד שלמד מלאכת הצביעה והפריז כסף רב על ידי זה. והיה לו ספר כתוב כל פרטי הסממנים וסדר המלאכה מהחל ועד כלה. ולמד ממנה מלאכת הצביעה והנה איש אחד גנב לספר הנ”ל והעתיקו כדמותו וצלמו. ולמד ממנו מלאכת הצביעה והחזיר אחר כך להספר לבעליו. ותבעו בעל הספר בדין שהוציא הוצאה רבה על זה. וגם הוא ירד לאומנתו. ותובע שיחזיר לו גם את ההעתק: …

תשובה בעזה”י

… ומעתה נעתיק מענין לענין ואדבר איך היה אם העובדא היה בגוונא אחריתא באופן דלא היה שייך בזה קנין גזילה ותקנת השבים היינו שלא נתכוין לגזול. והוא שאחד אמר בשקר על ספר הצבע ההוא איך ששלו הוא. ואינו מקפיד על מי שיחפוץ להעתיק ממנו וללמוד זה האומנות ומרשה זה לכל. ושמע אחד לזה והאמין לדבריו והעתיק ממנו בתם לבבו. ושוב בא בעל ספר הצבע בעצמו וצווח איך ששקר ענה בו אחיו. ויביא על זה ראיה או שהיה ברשותו וחזקתו וחזקה שכל מה שברשותו של אדם הוא שלו וצועק אשר היה לו הוצאה רבה על זה וכשילמד הזולת וישתמש במלאכתו הוא חסרון לו. ותובע שעל כל פנים ישלם מה שנהנה: …

ותלוי הדין באם שנאמר שהוא כזה נהנה וזה חסר חייב לשלם בעד ההנאה שהיה צריך ליתן שיורשה לו להעתיק. ובאם שנאמר שזה דלא מקרי חסרון פטור. ובאם שחסר מה להספר שהעתיק ממנו כי היה חדש. ומחמת ההעתקה שהעתיק ממנו אינו חדש וניכר כשחרוריתא דאשייתא מאיזו דיו וכדומה ולפי מה שכתבו התוספות בבבא קמא (דף כ”א) ד”ה ויהבה וברא”ש שם דכשגורם חסרון מועט מתחייב בכל מה שנהנה מתחייב וודאי גם בזה כך. ולדעת הרמ”ה ומובא בנמוקי יוסף שאין משלם רק כפי מה שחסר גם בזה כך הוא ומובא ב’ הדיעות בשלחן ערוך סימן שס”ג סעיף ז’ יעוי”ש:

אכן אם לא קלקל כלל הספר שהעתיק ממנו. בזה אני מסתפק אם מה שגרם לו הפסד כשישתמש זה שהעתיק באותו אומנות. אם חשוב הוא חסרון לשישלם על ידי כן מה שנהנה. ודומה זה לדר ומשתמש בחנותו של חבירו שלא מדעתו שאינו כלל בהעיר והחנות לא קיימא לאגרא. אבל לבעל החנות הזאת יש חנות אחרת בזה המבוי שיושב שם קבלנותו או שותפו וסוחר מסחרו. וכאשר עוסק זה הדר שלא מדעת בחנות השני מגרע להפרנסה מחנות השני של חבירו. אם חשוב הוא זה נהנה וזה חסר דמחייב או לא ונופל הספק אף בזה וגדר הספק הוא אם זה נהנה וזה חסר חייב הוא רק כשנהנה זה מחסרונו של זה אבל כשההנאה הוא מהחפץ שלא מתחסר הבעלים פטור. ואף דנמשך חסרון במקום אחר הוא זה רק כגרמא לבד. או דילמא כיון שיש קפידא להבעלים בזה שעל ידי גרמא דידיה יש להם היזק הוי שפיר זה נהנה וזה חסר: [ועיין שם מה שהאריך עוד בחקירה זו, ולא העלה דבר ברור.]2

This same argument, that even the tangential harm caused by business competition is sufficient basis for liability for free-riding, is also made by Rav Malkiel Tannenbaum. The plaintiff in his case had secured, “understandably” through not insignificant effort and expense, a permit from the בית מועצות הרפואה בווארשא to produce “sweet, aromatic waters”, and he then printed labels with his name and the governmental permit. Someone else than began to produce the same product, and affixed to his bottles the identical labels, containing the first man’s name. The original producer objected to this free-riding on his effort and expense, and also argued that the competition would hurt his revenues:

על דבר אשר חפץ לדעת דעתי בדבר אשר אחד המציא לעשות מים מתוקים ומריחים והשיג רשיון על זה מבית מועצות הרפואה בוורשא ומובן כי דרוש לזה עמל והוצאה לא מעט. והדפיס ניירות שקורין עטיקעטין להדביק על הכלים של מים הנ”ל ובניירות הנ”ל מפורש שמו והרשיון מהממשלה על זה.

ועתה קם אחד הדר במרחק ט”ז פרסה ממנו והדפיס עטיקעטין כמתכונה של איש הנ”ל ועושה גם כן מים הנ”ל ומדביק עליהם עטיקעטין שכתוב בהם שם האיש הנ”ל.

וטוען הראשון שאינו רוצה שהלה יהנה מזכותו שהשיג רשיון מה שעלה לו בטורח והוצאה. וגם כי על ידי זה תתמעט פרנסתו. כי אם לא ימכור הלה אזי ימכור הוא למקומות ההם.3

Rav Tannenbaum’s analysis, too, is quite intricate, and is divided into two portions. The first considers whether the original producer may demand compensation for the benefit derived from his efforts, and the second, whether he may block the second producer altogether from utilizing the fruits of his labors. His conclusion in the first portion, finding that the first producer is, indeed, entitled to compensation, is ultimately based (at least in part) upon the same argument that we have seen made by the aforementioned Aharonim, whom he cites in support:

ועוד הא קיימא לן בבבא קמא כ. ובחו”מ סימן שס”ג סעיף ז’ דהיכא דחסרו דבר מועט צריך לשלם לו. ופסק בשלחן ערוך שם שמשלם כל ההנאה ולא החסרון חבד. והוא הדין בנדון דידן מחסרו במה שמוכר סחורה זו. כי לולא הוא היה יכול למכור יותר. …

ואין לומר דבעינן דווקא שיחסר אותו דבר בידים וכמו שחרוריתא דאשייתא דבבא קמא שם שעל ידי שדר בבית משחיר בידים הכותלים. זה אינו דהא איתא שם שלפי שגרם לו הקיפא יתירתא צריך לשלם כפי ההנאה אף שלא גרם לו זה בידים. … ואם כן הוא הדין בנדון דידן כיון שגורם לו היזק קצת יש לחייבו לשלם כל מה שנהנה …

[ועיין שם שהאריך עוד ביסוד זה, והעלה:] וממילא מוכח דבנדון דידן שגורם לו היזק מצד שאינו יכול למכור סחורתו בריבוי כל כך. וגם לפעמים יעשה הלה הסחורה שלא כהוגן ויתלו החסרון בסחורתו. מגלגלין עליו הכל. ואף שאינו מזיק ממש שיתחייב לשלם עבורו. הא בארנו דסגי בגרם היזק לחוד:

וכעין זה כתב הנודע ביהודה … אלמא דאף דאינו מזיק גמור. ואף גרמי אין כאן. בכל זה כיון שיש לו איזה חסרון חייב לשלם מה שנהנה על ידו. והוא הדין בנדון דידן. וכן מצאתי בשו”ת עמודי אש להגאון הרא”ש זצ”ל … ושמחתי שכוונתי לדעתו הקדושה:

[The second half of Rav Tannenbaum’s responsum, analyzing whether the original producer may demand that the interloper refrain from utilizing the fruits of his expense and labor, is beyond the scope of this post.]

I cannot let a discussion of free-riding pass without mentioning one of my favorite responsa, by Rav Aharon Lapapa, which I shall not translate, summarize or comment on, for obvious reasons:

שאלה ראובן היה חייב לגוי סך מה ונפגר הגוי וראובן זה יעץ תחבולות וחשב מחשבות ושיחד ליושב על חשבון ממון יורש הגוי ולקח דף מפנקסי הגוי מקום אשר חובותיו כתובים ובתוך אותו הדף נמצאו חובות קצת יהודים וניצולו בחמלת ד’ עליהם לא בכוונת ראובן כי הוא לא ידע כי היו חובותיהם כתובים שם ולא עלתה על לבו כי אם להציל חובותיו והוא שואל שיפרעו לו גם הם חלקם לפי שעל ידו ניצולו והם אומרים מה שעשה וטרח בשלו עשה ואנחנו נקיים כי מד’ היתה לנו:

[ועיין שם בתשובה חשובה זו, שהאריך הרבה ביסודות של סוגיא זו, ולבסוף העלה:] הכלל העולה דחזרתי על כל צדדין וצידי צדדין … [ו]זכינו לדין בנדון דידן דיאודים אלו פטורים מלשלם אפילו שכר טרחם …4

Historical note: Rav Lapapa, in addition to his status as a distinguished seventeenth century Posek, is also famous for being an early and vehement anti-Sabbatean, at the epicenter of the Sabbatean cancer:

In 1665, when the Shabbethai Ẓebi movement was at its height there, he was one of the few rabbis who had the courage to oppose the false prophet and excommunicate him. Shabbethai Ẓebi and his adherents retorted by deposing him and forcing him to leave the city, and his office was given to his colleague, Ḥayyim Benveniste, at that time one of Shabbethai’sfollowers. After Shabbethai Ẓebi’s conversion to Islam, Lapapa seems to have been reinstated.

As I recall, I first heard of Rav Lapapa while reading, as a child, Rabbi Yosef Reinman’s (“Avner Gold”) wonderfully vivid dramatization of the above terse, dry account of the affair in The Imposter. [I don’t currently have access to the book, and I am writing from memory.]

Update: I was sorting through my archives, and I came across this discussion of literal free-riding, involving the brothers-in-law Rav Yitzchok Zilberstein and Rav Chaim Kanievsky:

An Interesting Psak From Rav Chaim Kanievsky

October 30, 2007

The Hebrew Mishpacha newspaper reported on a story that occurred this past week that drew an interesting Psak from Rav Chaim Kanievsky Shlita.

A yeshiva bochur from Bnei Brak went to learn in a Yeshiva in Yerushalayim. He told his mother he was having a hard time getting used to the food being served and he was hungry. Being a mother, she decided to send him food from home.

The mother packed up a home cooked meal. His father took the package to the bus station, found the bus that goes to Yerushalayim and stuck the package of food in the luggage compartment under the bus. He called his son and told him when to expect the bus to arrive and that he should be waiting by the station in Yerushalayim to remove the food.

The plan worked, the Yeshiva Bochur got the food, satisfied his hunger and all was good. …

Rav Zilbershtein … added, there might be a different problem that he is stealing from Egged by sticking the package under the bus without paying for the transport.

The father was shocked. He assumed it was OK because of the concept of Zeh Ne’he’ne V’zeh Lo Chasser – one person benefiting while not causing any loss to the other person.

Rav Zilbershetin suggested it does not qualify for the Zeh Ne’he’ne status because if it became public knowledge one could do this, many would send packages like that causing Egged a loss because the luggage compartment would be full with, theoretically, no room for luggage.

Rav Zilbershtein directed the question to his brother in law Hagoen Rav Chaim Kanievsky Shlita.

Rav Kanievsky considered the question and paskened that one would be prohibited from sending packages in this fashion unless he paid Egged for the service.

His logic was fairly simple – when you use a bus service for anything – either a trip or a delivery, you have to pay. If, however, a person traveling on the bus would be willing to take the package under his responsibility, then he would not have to pay. But just to stick it in the luggage compartment requires full payment. He also said the father has to pay for the packages he had already sent in this fashion.

  1. שו”ת נודע ביהודה, תנינא חו”מ סימן כ”ד, הובאו קצת מדבריו בפתחי תשובה חו”מ סימן ק”ע ס”ק א’ וסימן שס”ג ס”ק ג []
  2. שו”ת עמודי אש, חלק א’, דף סו:-סז: – קשר []
  3. שו”ת דברי מלכיאל חלק שלישי סימן קנ”ז – קשר []
  4. שו”ת בני אהרן, סימן ט”ז – קשר []

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