June 24, 2011 | By Corynne McSherry

The "Hot News" Doctrine After Fly On the Wall: Surviving, But On Life Support

A federal appellate court this week issued a fascinating decision on whether the much-maligned “hot news doctrine” – which confers a quasi-property right in facts -- will survive in the digital age. The answer? Yes, but barely, and not as an easy way to defend an outdated business model.

The defendant in the case, TheFlyOnTheWall.com, runs a financial news service that gathered and reported on stock recommendations from investment banking firms like Merrill Lynch, Morgan Stanley, and Lehman Brothers (the"Firms") and reported them on its website. The Firms claimed that the information was "hot news" and that Fly was free-riding on the firms' work in creating the recommendations. A federal court agreed, and ordered Fly to delay reporting of the information for two hours after the reports are released.

The Second Circuit Court of Appeals reversed that holding. After a lengthy disquisition on the history of the doctrine (including a detailed analysis of its own landmark decision in NBA v. Motorola, most of which it treated as dicta, or nonbinding), the court found that the tort survives only in the narrow circumstance (the opinion uses the term “narrow” repeatedly) where a party is truly “free-riding.” Otherwise it is preempted by the Copyright Act, which forbids ownership claims in facts, or news of the day.

Free-riding, the court stressed, is not a matter of “fairness” or morality. The Firms had complained vociferously that Fly’s rapid reporting on their recommendations – made possible in part by new technologies – was impairing their traditional business model, which, they said, depends upon controlling the dissemination of their research reports. Said the court:

The adoption of a new technology that injures or destroys present business models is commonplace. Whether fair or not, that cannot, without more, be prevented by application of the misappropriation tort.

Fly, the court decided, was not free-riding because it was reporting on the fact of the Firms’ recommendations -- not attempting to pass those recommendations off as its own.

The Firms are making news; Fly, despite the Firms’ understandable desire to protect their business model, is breaking it.

Several amici, including EFF (joined by Citizen Media Law Project and Public Citizen), Google, and Twitter, had urged the court to consider the doctrine in light of the First Amendment. The court largely declined. Too bad – it still seems strange to us that this vestigial doctrine that clearly impacts speech about news of the day has never received First Amendment scrutiny. That scrutiny seems especially necessary now, when the Internet is increasingly allowing Americans to publicly gather, share, and comment on the news of the day. Misuse of the "hot news" doctrine could stifle this extraordinary growth of free expression.

This is a pretty good outcome nonetheless: the high bar that the court sets for applying this dangerous doctrine will help ensure it is rarely used.

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