Barclays Plc, Bank of America Corp.’s Merrill Lynch and Morgan Stanley can’t use New York law to block Theflyonthewall.com, an online financial news service, from issuing immediate reports about changes in their stock ratings, a federal appeals court ruled.
The appeals panel today in Manhattan reversed a lower court ruling to block Theflyonthewall.com, based in Summit, New Jersey, from reporting the upgrades or downgrades of stocks for two hours or until half an hour after the opening of the New York Stock Exchange.
U.S. District Judge Denise Cote in Manhattan issued the injunction last year after a four-day trial. Her decision relied on New York state law, which permits plaintiffs to sue for the misappropriation of so-called hot news.
“We conclude that in this case, 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,” U.S. Circuit Judge Robert Sack wrote on behalf of two judges on the three-judge panel.
In a statement, Theflyonthewall.com called the ruling “a complete victory in its long-running battle with the investment firms.”
Glenn Ostrager, lead counsel for Theflyonthewall.com, said in the statement that he is pleased the appeals court clarified the law governing the publication of hot news. Theflyonthewall.com will continue to publish its daily news feeds, the company said in the statement.
Cote’s injunction was held up by the appeals court since May 2010, pending its decision in the case.
“We are disappointed in the court’s decision, and we are reviewing the decision to determine our next steps,” Benjamin Marks, a lawyer for the banks, said in a statement. “Each of the plaintiffs remains committed to protecting their equity research against unauthorized appropriation. We note that the appellate court left undisturbed the trial court’s determination that Theflyonthewall.com had infringed copyrights in equity research and left in place the injunction against further such infringement.”
The financial firms said that permitting services like Theflyonthewall.com to publish the stock recommendations reduced their value to the firms and their clients, limiting their incentive to create reports and recommendations.
“This, the firms assert, will destroy their business models,” Sack wrote.
Subscribers to Theflyonthewall.com pay from $25 to $50 a month for unlimited access to its website, according to today’s opinion. The company, which employs 28, has about 3,300 direct subscribers who use the site. About 2,000 use third-party providers to get the service. Firms including Bloomberg LP and Thomson Reuters Corp. distribute Theflyonthewall.com’s content, Sack said.
Theflyonthewall.com reports recommendations produced by analysts working for 65 investment firms, including Barclays, Merrill Lynch and Morgan Stanley, Sack said.
Sack disagreed with the banks’ argument that Theflyonthewall.com was “free riding” on their research reports by publishing the upgrades and downgrades.
“The firms are making the news; Fly, despite the firms’ understandable desire to protect their business model, is breaking it,” Sack wrote.
The Associated Press, which joined with 13 other news organizations in filing a friend-of-the-court brief in the case, said in a statement that the ruling leaves intact the traditional legal rule preventing one news organization from stealing from another, then selling the information in competition with the organization that gathered the news.
“AP views the Second Circuit’s decision as a victory for the news media and the public,” it said. “News organizations, which obtain the news at substantial expense and break it to the public, continue to be protected against unfair competitors who would copy and resell this news while it is still fresh, while incurring little or no cost themselves.”
The panel’s third member, Circuit Judge Reena Raggi, agreed with the result reached by the other two, basing her conclusion on different grounds.
The ruling doesn’t affect Cote’s ruling that Theflyonthewall.com infringed on the firms’ copyrights, which Theflyonthewall.com didn’t appeal. Cote assessed damages and attorneys’ fees against the service, according to the ruling today.
The case is Barclays Capital Inc. v. Theflyonthewall.com Inc., 10-1372, U.S. Second Circuit Court of Appeals (Manhattan).