A federal appeals court handed a major defeat to Wall Street banks by ruling that an online news service did not misappropriate their stock research by publishing headlines about analyst upgrades and downgrades.
Reversing a lower court ruling, the 2nd U.S. Circuit Court of Appeals said Theflyonthewall.com Inc could not be liable for systematically republishing "hot news" on its website.
Monday's unanimous ruling is a defeat for Bank of America Corp.'s Merrill Lynch unit, Barclays Plc and Morgan Stanley, which said Theflyonthewall.com was getting a "free ride" on their research, costing them profits.
It is also a victory for investors who might otherwise have to wait longer to learn of market-moving news.
"A firm's ability to make news — by issuing a recommendation that is likely to affect the market price of a security — does not give rise to a right for it to control who breaks that news and how," Judge Robert Sack wrote for a three-judge appeals court panel.
Theflyonthewall.com had argued that it typically got its information from public sources and traders, and had a First Amendment right to publish before news went stale.
In its ruling, the appeals court ordered the dismissal of the banks' misappropriation claim under New York state law, which it said was "pre-empted" by federal copyright law.
"It makes clear that the theory that one can be liable for misappropriating hot news is very narrow," said Eugene Volokh, a professor at the UCLA School of Law. "Copyright law prevents the copying of expression, but not the copying of fact."
Bank of America spokesman Bill Halldin, Barclays spokesman Seth Martin and Morgan Stanley spokeswoman Sandra Hernandez declined to comment. Bruce Rich, a lawyer for the banks, did not immediately return requests for a comment.
Theflyonthewall.com called the ruling a "complete victory." Its lawyer Glenn Ostrager said the case was challenging because of the "enormous legal resources" expended by the banks.
"Enforcing a ban can result in onerous restrictions on what most of us would regard as basic, fundamental communicative rights," said Edward Wasserman, a journalism ethics professor at Washington & Lee University in Lexington, Virginia.
"Someone can put them in an email, or someone can tweet them," he added. "The technology has simply gotten away from us and the reach of these recommendations cannot be confined."
GOOGLE, TWITTER WEIGHED IN
In March 2010, U.S. District Judge Denise Cote ordered Theflyonthewall.com to wait until 10 a.m. ET to report research issued before the U.S. stock market opens, and at least two hours for research issued later.
The Summit, New Jersey-based company said these limits cost it subscribers and threatened its survival. The 2nd Circuit put that injunction on hold during the appeal.
Sack accepted Cote's ruling that Theflyonthewall.com infringed the banks' copyrighted material, but said there was not enough evidence to suggest the activity interfered with the banks' ability to profit from buying and selling securities.
Google Inc. and Twitter Inc. were among companies to support Theflyonthewall.com's appeal.
Kathleen Sullivan, a lawyer who argued on their behalf before the 2nd Circuit, did not immediately return a call seeking a comment.
Monday's ruling followed a settlement last November by News Corp.'s Dow Jones & Co. and financial news service Briefing.com in a similar case. A lawyer representing Dow Jones did not immediately return a call seeking comment.
Wasserman said the ruling is also important for other websites that "aggregate" news from third parties.
"I have tremendous concern about the larger implication of how far you can prevent people who originate news, in this case the banks, from profiting," he said. "I'm thinking about news organizations that find their original content republished on aggregation websites, and which can lose revenue they need for their operations."
Theflyonthewall.com has said it employs about 30 people, and according to its website it charges $65 per month, or $624 annually, for its services. Thomson Reuters Corp. is among the companies that distribute its content.
The case is Theflyonthewall.com Inc v. Barclays Capital Inc et al, U.S. Second Circuit Court of Appeals, No. 10-1372.
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