News aggregators score a big win

June 21, 2011, 2:47 PM UTC

By Abigail Field, contributor

FORTUNE — Nearly a hundred years ago, the Associated Press won a U.S. Supreme Court case against a rival news service that was ripping off its stories, and in the process created a new type of lawsuit: the misappropriation of hot news. For decades, few hot news cases were pursued because ripping off reporting just wasn’t that common. But recently, as repackaging news gathered by others has become easy and ubiquitous, hot news lawsuits have undergone a revival.

On Monday, the Court of Appeals for the Second Circuit laid down the most recent version of hot news law with its opinion in
Barclays v. TheFlyOnTheWall
. Barclays (BCS), Morgan Stanley (MS), and other Wall Street banks accused TheFlyOnTheWall (Fly) of misappropriating their research when it published their time-sensitive ratings on Fly’s web site. Monday’s ruling came down in favor of Fly, reversing a lower court ruling.

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The facts of that case weren’t typical, so the real news in the decision is what the Court said — and didn’t say — about the hot news doctrine. The stakes are high, as evidenced by the various “friend of the court” briefs submitted in the case.

In one corner was journalism, in the form of some 14 different news services and publishers — including Time Inc., the parent company of Fortune. These news organizations asked the Court to recognize the importance of the doctrine to journalism’s survival, and thus to not make winning the cases any harder. (Dow Jones filed a separate brief, different in style and tone, but nonetheless focused on making sure the Court protected the concept of hot news lawsuits.)

In the other corner were Google and Twitter, who submitted their own friend of the court brief urging the Court to throw the doctrine out as barred by copyright law. The Internet titans also argued that the concept of “hot” news is obsolete in today’s 24/7 news cycle, and so should be voided on public policy grounds. As a practical matter, these new media firms asked, how long must one wait for the news to cool before it becomes fair game?

Google (GOOG) and Twitter also asked the Court to throw out the injunction the trial court issued against (Fly) after finding that Fly was misappropriating the banks’ hot news. The injunction classically violated our Constitution’s guarantee of Free Speech, Google and Twitter explained, because it blocked Fly from publishing newsworthy information. Not incidentally, as a news aggregator, Google is a possible target of hot news suits. That vulnerability perhaps explains why it worked out a licensing deal with the AP.

Free speech?

Joining the fray were public interest groups the Citizen Media Project, the Electronic Frontier Foundation, and Public Citizen, who urged the Court to give the First Amendment its due and sharply limit hot news misappropriation in light of Free Speech doctrine. Amazingly, as that brief discusses, all the Courts prior to this case have ducked the First Amendment problem.

And yesterday, the Second Circuit continued that tradition of avoiding a Free Speech analysis of hot news lawsuits, finding copyright law preempted the banks’ effort to sue Fly. The Court didn’t reach the Free Speech issue because it decided that Fly hadn’t misappropriated anything under the traditional analysis. In order for the banks to have won, the Court explained, they would have had to show that Fly was “free-riding” on the banks’ work — gaining the profits naturally owed the banks without doing any of its own work. But the Court decided Fly pulled its own weight.

The banks sued Fly because it routinely published bank analysts’ recommendations to buy or sell specific stocks in its newsletter, without the banks’ permission. The Court found that the banks’ analysts made news — potentially market-moving news — by issuing their recommendations, and nothing was wrong with Fly breaking that news. Moreover, because Fly was reporting news, not using the recommendations to drive stock sales for clients and get commissions, which is what Barclays and the banks were doing, Fly wasn’t siphoning off the profits the banks had rightfully earned. Finally, Fly wasn’t passing the banks’ work off as its own — as the Court noted, no one cares if Fly recommends something. The news value comes from accurately attributing the recommendations to the banks.

The Court’s ruling has simplified the hot news doctrine. Previously, news originators had to prove that the alleged misappropriator directly competed with the news originator, and that its free-riding sufficiently undermined the economic incentive to produce news. Whittling the doctrine down perhaps made winning hot news suits easier.

Nonetheless, the Court limited the kinds of actions that could be considered misappropriating hot news. For example, the Court emphasized that the traditional practice of media picking stories up from each other is perfectly legal. And by repeatedly calling Fly a “news aggregator,” the Court seemed to send Google reassurance.

Copyright protection vs. hot news

As guidance to what a viable hot news claim might look like, the Court gave an approving though not binding nod to the AP’s suit against All Headline News, which was settled two years ago. According to the AP’s complaint, All Headline News not only reprinted AP articles verbatim, in whole or in part, but the company also rewrote AP stories and passed them off as its own. The plagiarism would be covered by conventional copyright claims, since the way the AP authors presented the facts was original and creative. And although a Nevada court suggested yesterday in a case brought by copyright advocate Righthaven that wholesale copying might be defensible as “Fair Use” of copyrighted material in limited situations, news originators should feel secure that most suits based on copy and paste thievery are winnable.

But All Headline News’s alleged rewriting and reporting of the AP’s stories without attribution is not protected by copyright law. No one can copyright the facts, except in the context of otherwise copyrightable material such as the AP authors’ turns of phrase. For the AP to be protected in the rewrite situation, it needs to bring a hot news lawsuit. And yesterday the Court signaled the AP could.

So where does the Court leave aggregators like Google News? The site gives attribution, but also reprints verbatim snippets from the articles, and it does it by computer code, not by a staff expending its own effort. And because the money in online media is in driving eyeballs to a page to deliver them to advertisers, arguably Google News’s aggregation does meaningfully siphon off the profits rightfully due news originators. Reassuringly calling Fly a news aggregator is one thing; giving Google the all clear is another.

And how will hot news misappropriation doctrine fare when it finally faces the First Amendment’s strict scrutiny? Only time — and future suits — will tell. And those suits surely will come, given how the Internet makes free-riding easy and profitable journalism difficult.