Opinion ID: 219099
Heading Depth: 1
Heading Rank: 6

Heading: The Trial and The District Court Decision

Text: In a joint pre-trial order dated February 12, 2010, the parties stipulated to, among other things, the district court's jurisdiction and the identification of the issues presented for trial. Joint Pre-Trial Order (Dkt. No. 167), Barclays Capital Inc. v. Theflyonthewall.com, No. 06-cv-4908 (S.D.N.Y. April 21, 2010) (the Joint Pre-trial Order). The parties also agreed that: The following affirmative defenses previously asserted by Defendant are not to be tried: . . . Defendant's publication of daily news from firms in the financial industry, including Plaintiffs, is constitutionally protected by the First Amendment to the U.S. Constitution. Joint Pre-trial Order at 5 (emphasis in original). The district court read this to mean that Fly had waived any First Amendment defenses to the Firms' hot news misappropriation claim. See Barclays Capital Inc. v. Theflyonthewall.com ( Fly II ), 700 F.Supp.2d 310, 352-54 (S.D.N.Y.2010) (Opinion and Order Denying Stay). [16] Fly also abandoned the fair use copyright-infringement defense, thereby effectively conceding liability on the copyright claim. An injunction which restrains Fly from further infringement of `any portion of the copyrighted elements of any research reports' generated by Barclays Capital or Morgan Stanley, Fly I, 700 F.Supp.2d at 331, was entered and, so far as we know, remains in effect. In the pre-trial order, the Firms contended that they satisfied all five elements of the tort purportedly identified in NBA, 105 F.3d at 845, although the Firms did not explicitly refer to that case. Joint Pre-Trial Order at 3. Fly appeared to concede that the Firms generate their Recommendations at great expense and that the Recommendations are time-sensitive, but disputed the other three elements of the misappropriation claim. Id. at 4. At a four-day bench trial in early March of last year, the witnesses for the plaintiffs were primarily Firm executives responsible for or familiar with a Firm's research activities. The defendant called, inter alios, Fly employees to testify, including Fly's President and majority owner, Ron Etergino. Inasmuch as Fly had effectively conceded liability for copyright infringement, the primary issues at trial were (1) the scope of remedies for copyright infringement, (2) whether Fly was liable for hot news misappropriation and, if so, (3) the appropriate remedy. On March 18, 2010, the district court issued its Opinion and Order, deciding for the plaintiffs on both the copyright-infringement and the hot news misappropriation claims. It awarded the plaintiffs statutory damages and attorney's fees [17] related to the copyright infringement claim. As part of its judgment in favor of the plaintiffs on the misappropriation claim, the court entered an order, inter alia, enjoining Fly from reporting Recommendations for a period ranging from thirty minutes to several hours after they are released by the plaintiffs. See Fly I, 700 F.Supp.2d at 348; Permanent Injunction (Dkt. No 138), Barclays Capital v. The-flyonthewall.com, No. 06-cv-4908 (S.D.N.Y. March 18, 2010) (the Permanent Injunction). Relying upon one of two  or arguably three  iterations of NBA's multi-factor test, the district court concluded that for a misappropriation claim under New York law to survive federal copyright law preemption, and for the plaintiff to succeed on the claim, the plaintiff is required to demonstrate that: (i) [it] 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. Fly I, 700 F.Supp.2d at 334-35 (quoting NBA, 105 F.3d at 845). [18] The district court concluded that the first two elements  the cost of generating information and time-sensitivity  were not disputed by Fly and in any case were easily met. Id. at 335-36. The district court decided with respect to the third factor, free riding, that, [i]n essence, [it] exists where a defendant invests little in order to profit from information generated or collected by the plaintiff at great cost. Id. at 336. According to the court, Fly does no equity research of its own, nor does it undertake any original reporting or analysis. Id. at 336. In deciding in the Firms' favor on this issue, the district court rejected Fly's argument that its efforts in the collection, aggregation, and dissemination of information were sufficient to avoid a finding of free-riding, on the ground that efforts contributed nothing to the actual Recommendations that Fly provided to its subscribers. Id. at 336-37. The court also disagreed with Fly's argument that its gathering of the Recommendations from public sources renders that information freely available for all: [T]he fact that others also engage in unlawful behavior does not excuse a party's own illegal conduct. Id. at 337. In concluding that the fourth factor, direct competition, was present, the district court relied on its finding that both Fly and the Firms were engaged in disseminating Recommendations to investors for their use in making investment decisions, that production and distribution of the reports was among the Firms' primary businesses, and that the companies used similar distribution channels. Id. at 339-40. The court also thought significant Fly's then-recent attempts to link its subscribers to discount brokerage services, which in the district court's view had the potential to further draw commission revenue away from the Firms. The district court rejected Fly's contention that our decision in NBA required the court to find head-to-head competition in a primary market, concluding that neither Fly's lack of brokerage and investment-advisory services nor its role as a news aggregator was inconsistent with a finding of direct competition. Id. at 340. The court appeared to conclude that Fly's other activities were immaterial, so long as Fly, like the Firms, was engaged in the business of disseminating Recommendations. Finally, the district court concluded that the fifth factor, sufficiently reduced economic incentives, was present. The court found that common sense and the circumstantial evidence about the plaintiffs' business model make the Firms' contentions about [their] reduced incentives utterly credible. Id. at 342. The Firms had asserted that they had been forced to cut their analyst staffs and budgets significantly during the previous five years, in significant measure although by no means exclusively because of competition from unauthorized redistributions of their Recommendations. They acknowledged, as did the court, that there were unrelated substantial causes for the contraction during this period, including the then-recent recession and accompanying stock-market collapse, and the April 2003 Global Research Analyst Settlement. [19] Fly sought to portray the Firms' evidence of reduced economic incentives, which was based almost entirely on the testimony of the Firms' own research executives, as speculative and self-serving. The district court concluded to the contrary (1) that the executives' testimony was credible despite their employment by the Firms, (2) that the Firms did not need to demonstrate actual harm, but rather merely show that harm would occur if Fly and others were allowed to continue their conduct, and (3) that the precise impact of the recent recession and the Global Research Analyst Settlement was irrelevant, because the mere showing that Fly and others like it significantly affected the Firms' incentives was sufficient to establish the fifth factor, even if other events also contributed to the reduction in incentives. Id. at 342-43. Having concluded that the Firms had established the tort of hot news misappropriation, the district court entered a permanent injunction barring Fly from reporting a Recommendation until either (a) half an hour after the market opens, if the report containing the recommendation was released before 9:30 a.m., or (b) two hours after release, if the report was released after 9:30 a.m. [20] This time period represented roughly the midpoint between what Fly and the Firms, respectively, requested. [21] Perhaps because Fly purported to waive its First Amendment defenses, the district court's opinion contains no explicit discussion of First Amendment doctrine beyond the court's reference, in consideration of the propriety of injunctive relief, to public policy considerations, and the balancing of the public interest in unrestrained access to information. Id. at 344. Similarly, although in the court's thorough recitation of the history of the law of hot news misappropriation, it explained in some detail the role of Copyright Act preemption of state tort law, it did not expressly consider whether hot news misappropriation was preempted by federal copyright law in this case. Instead, it adopted as determinative NBA 's ruling that a narrow form of the hot news misappropriation tort survives preemption, and it applied language from that decision indicating the tort's limitations by virtue of preemption doctrine.