Mendelsaur's  Instablog

The Fly Litigation arose from Theflyonthewall.com, Inc.’s (the “Defendant”’s) unauthorized practice of selling electronic summaries of financial firms’ equity research reports.  In March of 2005, Lehman Brothers, Merrill Lynch and Morgan Stanley sent several cease and desist letters to the Defendant.  These letters proved fruitless.  In June of 2006, the firms commenced the Fly Litigation in SDNY before Judge Daniels.  Lehman and Morgan Stanley asserted copyright infringement claims and all three plaintiffs asserted hot-news misappropriation claims under New York unfair competition law.  The parties then engaged in several years of unsuccessful settlement negotiations.   By 2009, Lehman had collapsed, its equity research operations were acquired by Barclays, and Merrill Lynch was acquired by Bank of America.  As a result, the currently captioned plaintiffs are Barclays, Merrill Lynch and Morgan Stanley (collectively, the “Plaintiffs”).  In June of 2009, the Fly Litigation was tranferred to Judge Cote.  Judge Cote rendered her decision in March of 2010.

Judge Cote’s 89-page Opinion (the “Fly Decision”) presents a meticulously detailed analysis that is well worth reading in its entirety.  The Fly Decision has myriad facets which cannot be captured in a summary.  At its heart, though, are abstract and unsettled legal principles, the recent financial crises, and the proliferation of discount brokers and independent equity research.  The following is a summary of the most salient aspects of the the Court’s legal analysis.

Barclays and Morgan Stanley (the “Copyright Plaintiffs”) argued that the Defendant had committed at least  seventeen instance of copyright infringement.  Though the Defendant initially asserted the fair use defense under 17 U.S.C. 107, it ultimately admitted to infringing the Copyright Plaintiffs’ work.  The Copyright Plaintiffs voluntarily limited their actual damages to the statutory minimum under 17 U.S.C. 504(c) (about $6,000).  The Defendant did not dispute the Copyright Plaintiffs’ entitlement to a permanent injunction.  The only copyright issues in dispute were the Copyright Plaintiffs’ entitlement to prejudgment interest and attorney’s fees.

The Court noted that the Copyright Act, in contrast to the Patent Act, neither forbids nor awards prejudgment interest.  Whether or not prejudgment interest is available under the Copyright Act remains unsettled in the Second Circuit.   The Court found that prejudgment interest was necessary here to fully compensate the Copyright Plaintiffs for their losses.

The Copyright Act expressly grants courts discretion to award attorney’s fees.  The Court awarded attorney’s fees here because the Defendant did not assert its fair use defense in good faith.  The Court seemed particularly dismayed with the fact that the Defendant maintained its defenses to the copyright claims for several years before finally admitting to infringement.  Furthermore,  the Defendant successfully asserted similar claims against TTN in October of 2007.  In fact, the Defendant’s complaint against TTN borrowed the language of the Copyright Plaintiffs’ complaint filed in 2006 in the Fly Litigation.  The Court issued a separate scheduling order to consider the calculation of attorney’s fees.

The Court reviewed the history of the hot-news doctrine, starting from the seminal case of International News Service v. Associated Press (“INS“).  The Court even delved into the philosophical bases for the hot-news doctrine: “sweat of the brow” labor theory, norms of commercial morality and fair dealing, and the utilitarian desire to preserve incentives for socially valuable services.  The Court observed that INS has been criticized by the Second Circuit and has been abrogated by the Copyright Act as well as the Restatement of Unfair Competition (Third).  However, the Court found that under the Second Circuit’s NBA v. Motorola holding, the hot-news doctrine still applies where a plaintiff can prove all of the following elements:

1.    the plaintiff incurs substantial cost in generating the information sought to be protected,

2.    the value of the information is highly time sensitive,

3.    the defendant is free-riding on the plaintiff’s costly efforts,

4.    the defendant is in direct competition with the plaintiff,

5.    free-riding would substantially threaten the quality or existence of the service.

The Court’s analysis of each of the above elements vehemently favored the Plaintiffs.  Much of the Court’s analysis revolved around the idea that research reports are valuable mainly because of their ability to move markets.  Indeed, despite its arguments in favor of the Plaintiffs, the Court ultimately only protected the Plaintiffs’ research for 30 minutes after the markets open.  Thus, the only value of the research that the Court protected was the value of knowing about a market movement before it happens.

Throughout its hot-news analysis, the Court relied on the principles described in the widely criticized INS decision.  The Court’s main concern was the continued existence of the Plaintiffs’ “socially valuable” research reports.  The Court described the Plaintiffs’ research reports as if they were endangered animals.  It seems the Court feared that it would destroy the equity research industry by ruling entirely in favor of the Defendant.  At the same time, the Court articulated an interest in protecting the free flow of information.  As a result, the Court vested the Plaintiffs with total control over the pre-market release of their equity research, while leaving the rest largely unprotected.

I believe the Fly Decision’s hot-news analysis makes a number of logical leaps that undermine the strength of the Court’s holding.  I’ll delineate these issues in a future post.

However, I believe the Fly Decision is a testament to the invaluable results excellent lawyering can achieve for a firm’s clients.  Weil Gotshal & Manges LLP, who represented the Plaintiffs, maneuvered with artful elegance throughout the Fly Litigation.  Weil chose a vulnerable defendant, meticulously built a record against the Defendant, whittled away issue after issue, discredited Fly Inc.’s witnesses, and focused the Court’s attention on the single claim that could bring their client the best result.  Once the Court was focused on this single issue, Weil convinced the Court that the fate of an industry was at stake.  Weil painted a picture of the equity research industry as a socially valuable service so severely weakend from parsitization that a single bad Court decision could stomp it out of existence.  In this context, the Court would be hard pressed to rule against the Plaintiffs and risk being responsible for the end of an industry.  Weil thereby achieved a valuable result that many commentators felt was unlikely.

Summary of the Permanent Injunction Issued in Barclays et al. v. Theflyonthewall.com, Inc.

Summarized below is the Permanent Injunction (the “Injunction”) preventing TheFlyOnTheWall.com from releasing summaries of certain financial firms’ research reports.  Please check back later this week for a summary of the Opinion and Order issued in this case.

A particularly interesting aspect of the Injunction is the exact nature of its restriction.  The Injunction requires TheFlyOnTheWall.com to wait 30 minutes before disseminating the results of research released before 9:30 a.m.  However, for research released on or after 9:30 a.m., TheFlyOnTheWall.com must wait two hours before disseminating information regarding the research.  This would seem to strongly encourage financial firms to release their research results exactly at the NYSE opening bell.

Furthermore, anytime after 9:30 a.m., TheFlyOnTheWall.com may refer to financial firms’ recommendations in the context of independent analysis of an already-occurred significant market movement.  This detail seems aimed at protecting the value of financial firms’ recommendations.  Advanced notice of a firm’s recommendation provides advanced notice of a possible significant movement in the price of a security.  Thus, once the markets have already moved in response to the release of a new recommendation, the value of that recommendation has greatly diminished.  Therefore, the Court is not as concerned with protecting the firms’ research after the markets have already adjusted to a new recommendation.

On 18 March 2010, The Honorable Denise Cote of SDNY issued a permanent injunction enjoining and restraining Theflyonthewall.com, Inc. from the following:

1. abstracting, copying or making derivative works, without prior written authorization from Morgan Stanley or Barclays (the “Copyright Plaintiffs”), of any portion of copyrighted elements of  the Copyright Plaintiffs’ research reports;
2. disseminating access codes to conference calls, webcasts or other access controls to events hosted by Barclays, Morgan Stanley or Merrill Lynch (“Plaintiffs”) regarding Plaintiffs’ research;
3. disseminating in any form, via any medium now known or ever developed, to anyone whatsoever, for any reason, any synopses of Plaintiffs’ research or analyses before:
   1. one half hour after the opening of NYSE, or 10am, when the recommendation is issued prior to 9:30 a.m., or
   2. two hours after a recommendation is distributed to clients for recommendations first distributed on or after 9:30 a.m.;
   3. however, this does not restrict Theflyonthewall.com, Inc. from referring after 9:30 a.m. to one of the Plaintiffs’ recommendations in the context of “independent analytical reporting on a significant market movement in a security that has already occurred that same day;”
4. marketing in a way that indicates Theflyonthewall.com will provide its subscribers with nearly immediate access to Plaintiffs’ newly released research.

On or after March 18, 2011, Theflyonthewall.com, Inc. may apply to SDNY to modify or vacate this order in the event Theflyonthewall.com, Inc. can demonstrate Plaintiffs have not taken reasonable steps to restrain misappropriation of Plaintiffs’ recommendations.