TheFly Case And Official League Data

The question many are asking is, why should the leagues get paid? What is the foundation of their argument? The short answer: Their argument’s foundation is built on sand in a typhoon zone.

What follows is an overview of one of the cases that is the basis for the long answer:

What happened?

This case originates from the Second Circuit Court of Appeals (the same circuit as the NBA v. Motorola case.) It involves Barclays Capital and a host of other major financial institutions who initiated a lawsuit against TheFlyOnTheWall.com (The Fly.)

The Fly operated a news service that gave electronic briefings of financial news, including firms like Barclays, recommendations and ratings for securities. The Fly often sent out the financial institutions’ information before the firms had a chance to release the information to the general public.

The concern for Barclays and other financial entities was that if entities like The Fly could simply beat the financial firms at their own game, then the financial giants would lose customers who do not need to receive the recommendations from the firms themselves. They could instead use discount brokerage services that do not have the costs associated with the large companies’ research departments.

Steps to prevent dissemination

Barclays and the other financial institutions took active steps to prevent the dissemination of the reports they collected prior to their release. According to the court, the financial giants:

• “communicated to their employees that the unauthorized dissemination of their equity research or its contents is a breach of loyalty to the Firm, undermines the Firm’s creation of revenue, and can result in discipline, including firing.”
• “included in their licensing agreements with third-party distributors and in the reports themselves provisions prohibiting redistribution of their content;”
• “adopted policies limiting public dissemination of the reports and the information they contain;” and
• “employed emerging Internet technology by which the Firms can seek to find the source of such “leaks” and to “plug” them.”

Despite these procedures, the recommendations continued to make their way outside the walls of the financial giants before the companies were able to release them to their customers.

The financial entities brought a lawsuit against The Fly for hot news misappropriation.

What is hot news misappropriation?

The hot news doctrine, according to John McDonnell, can be summarized as

“while the facts and ideas produced by a content producer may not be copyrightable, the content producer invested time and resources in obtaining this content and should retain some right to derive revenue from that content until its commercial value has passed.”

The idea is that because of the resources invested in gathering the information, and the producer should be able to protect the information for a limited period of time.

The Copyright Act vs. hot news

The question in the case before the Second Circuit was whether the Copyright Act of 1976 preempts the hot news doctrine and renders it inapplicable. The Court of Appeals in The Fly looked to the “only judicial decision” to address the issue, which was NBA v. Motorola. The Fly Court noted that the Copyright Act of 1976 preempts state law if two conditions are met:

1. if it seeks to vindicate “legal or equitable rights that are equivalent” to one of the bundles of exclusive rights already protected by copyright law under 17 U.S.C. § 106—the “general scope requirement”; and
2. (ii) if the work in question is of the type of works protected by the Copyright Act under 17 U.S.C. §§ 102 and 103—the “subject matter requirement.”

Back to Motorola?

In the Motorola case, the court found that the second factor is met if the subject matter is within the scope of copyright protection. The first factor was met in the Motorola case when the information that was sought to be protected was within the “general scope of copyright.”

The Fly court stated:

“No matter how “unfair” Motorola’s use of NBA facts and statistics may have been to the NBA—or Fly’s use of the fact of the Firms’ Recommendations may be to the Firms—then, such unfairness alone is immaterial to a determination whether a cause of action for misappropriation has been preempted by the Copyright Act.”

Adding:

“The adoption of 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. Indeed, because the Copyright Act itself provides a remedy for wrongful copying, such unfairness may be seen as supporting a finding that the Act preempts the tort.”

An apt comparison?

The Second Circuit compared the Motorola case to The Fly case stating:

“We do not perceive a meaningful difference between (a) Fly’s taking material that a Firm has created (not “acquired”) as the result of organization and the expenditure of labor, skill, and money, and which is (presumably) salable by a Firm for money,  and selling it by ascribing the material to its creator Firm and author (not selling it as Fly’s own), and (b) what appears to be unexceptional and easily recognized behavior by members of the traditional news media—to report on, say, winners of Tony Awards or, indeed, scores of NBA games with proper attribution of the material to its creator.”

The Second Circuit noted that like in the Motorola case, The Fly maintained its own network for gathering and disseminating information, like Motorola. The court concluded, ruling in favor of The Fly by stating:

“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.”

How does this apply to official league data?

The Fly case is yet another unhelpful precedential decision in the sports leagues’ own neighborhood of the Second Circuit.

MLB’s purported marketing shift no longer calls it an integrity fee, which presupposes some type of property right for which the leagues seek to be compensated. Much like the Motorola case which we discussed in part 7 of this series, The Fly was not free-riding on Barclays’ work. The Fly was maintaining its distribution and collection network.

As long as data firms are independently collecting and disseminating data without free-riding on actually protectable sports league intellectual property rights, leagues face long odds in prevailing in a lawsuit over official league data rights.

This one’s gonna hurt

The Fly case is particularly damaging to the leagues because if they were to make a claim based on hot news misappropriation, as the NBA did in the Motorola case, they would be limited to a few jurisdictions which recognize hot news misappropriation.

With precedent weighing heavily against them in New York and up to the Second Circuit, that would leave them with Illinois, California, Missouri, or Pennsylvania as jurisdictions where they could advance a hot news claim.

The leagues continue to advance the proposition that they are entitled to be compensated by states which authorize sports betting despite a lack of support for this proposition from the existing case law.