Barclays Capital Inc v. Theflyonthewall.Com

700 F.Supp.2d 310

BARCLAYS CAPITAL INC., Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Morgan Stanley & Co. Incorporated, Plaintiffs,v.THEFLYONTHEWALL.COM, Defendant.

No. 06 Civ. 4908(DLC).

United States District Court S.D. New York.

March 18, 2010.

Opinion Denying Stay or Modification of Injunction May 7, 2010.

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R. Bruce Rich, Benjamin E. Marks, Jonathan Bloom, Jackson Wagener, Weil Gotshal & Manges LLP, New York, NY, for Plaintiffs.

Glenn F. Ostrager, Joshua S. Broitman, Dennis M. Flaherty, Roberto Gomez, Ostrager Chong Flaherty & Broitman P.C., New York, NY, for Defendant.

OPINION & ORDER

DENISE COTE, District Judge:

This litigation confronts the phenomenon of the rapid and widespread dissemination of financial services firms' equity research recommendations through unauthorized channels of electronic distribution. This dissemination frequently occurs before the firms have an opportunity to share these recommendations with their clients-for whom the research is intended-and to encourage the clients to trade on those recommendations. The firms contend that their recommendations are “hot news” and that the regular, systematic, and timely taking and redistribution of their recommendations constitutes misappropriation, which is a violation of the New York common law of unfair competition.

Barclays Capital Inc. (“Barclays Capital”), Merrill Lynch, Pierce, Fenner & Smith Inc. (“Merrill Lynch”), and Morgan Stanley & Co. Inc. (“Morgan Stanley”) (collectively, the “Firms”) have brought suit against defendant Theflyonthewall.com, Inc. (“Fly”). Fly is an internet subscription news service that aggregates and publishes research analysts' stock recommendations along with many other items of varying interest to investors. In addition to asserting hot-news misappropriation, the Firms accuse Fly of infringing the copyrights of Barclays Capital and Morgan Stanley in seventeen research reports released in February and March 2005. For the reasons described below, judgment shall be entered for the plaintiffs on both claims.

This action was originally filed on June 26, 2006 by Lehman Brothers Inc. (“Lehman Brothers”),¹ Morgan Stanley, and Merrill Lynch ² and assigned to the Honorable George B. Daniels. Fly answered on August 16, 2006 and asserted counterclaims for defamation, tortious interference with prospective business relations, and unfair competition under § 43(a) of the Lanham Act. Those counterclaims were dismissed on March 15, 2007. Following a lengthy period reserved for settlement negotiations, fact discovery closed on or about December 19, 2008.

The case was reassigned to this Court on June 8, 2009. The Firms and Fly each filed motions for summary judgment on May 18, 2009, which became fully submitted on August 11, 2009. Thereafter, the Firms advised that they would voluntarily waive their claims for damages to the extent that such claims would entitle any party to a jury trial. On September 3, Fly acknowledged that the parties were not entitled to a jury trial. The summary judgment motions were denied on November 6, 2009, and the case was set down for a bench trial.

With the parties' consent, the trial was conducted in accordance with the Court's Individual Practices. In advance of the March 8 trial date, the direct testimony of the witnesses was presented through affidavits submitted with the joint pretrial order along with the parties' trial exhibits. The Firms presented the affidavits of Barry Hurewitz, Chief Operating Officer of Investment Research at Morgan Stanley (“Hurewitz”); Stuart Linde, Global Head of Equity Research at Barclays Capital and former U.S. Director of Equity Research at Lehman Brothers (“Linde”); Kathleen Lynch, Chief Operating Officer for the Global Research Group at Merrill Lynch (“Lynch”); and Candace Browning, President of Global Research at Merrill Lynch (“Browning”). Fly presented affidavits from Ron Etergino, President and majority owner of Fly (“Etergino”); Kellie Berg Garfunkel, a news reporter for Fly (“Garfunkel”); Jay Mahr, a news editor for Fly (“Mahr”); and Margaret Muldoon, a marketing consultant for Fly (“Muldoon”). Of the Firms' witnesses, all four appeared at trial and were available for cross-examination. Plaintiffs also called Etergino as an adverse witness on their case-in-chief. Of the defendant's witnesses, Etergino, Garfunkel, and Mahr appeared at trial and were available for cross-examination. The parties accepted Muldoon's affidavit by stipulation. Etergino also demonstrated the functionality of Fly's website as part of the defendant's case-in-chief.

Four pretrial motions were filed. First, the Firms moved in limine to preclude the admission of testimony under Fed.R.Civ.P. 37(c)(1) by a third-party witness, Kevin Reynolds, on the basis that Fly had failed to make proper discovery disclosures concerning Reynolds as required by Fed.R.Civ.P. 26(a)(3)(A)(i).³ The parties stipulated to three of the four facts that Fly sought to elicit from Reynolds, and the motion to preclude was granted as to the fourth. Second, Fly moved in limine to preclude certain direct testimony proffered by the Firms on the grounds that it was irrelevant, hearsay, and/or improper lay opinion testimony. That motion was granted to the extent indicated on the record at the final pretrial conference and otherwise denied. Finally, Fly's motion for judgment on partial findings on the hot-news misappropriation claim, and Fly's motion to preclude evidence concerning its prior lawsuit for copyright infringement and hot-news misappropriation against its competitor TradeTheNews.com (“TTN”), were each denied.

This Opinion constitutes the findings of fact and conclusions of law following the March 8-11, 2010 bench trial. The factual findings are principally set forth in the first section of this Opinion, but appear as well in the final section.

FINDINGS OF FACT

I. The Firms' Equity Research Business Model

The Firms are major financial institutions that provide wealth and asset management, securities trading and sales, corporate finance, and various investment services. Collectively, their customers include large institutional clients, foundations, corporations, businesses of every size, families, and individuals. Among their clients of particular importance to the issues in this litigation are U.S. hedge funds, private equity firms, money managers, mutual funds, pension funds, and wealthy individual investors. The services that the Firms offer their clients, including research reports, financial analytics, and trading tools, support clients' investing activities and are intended to assist with maximizing their returns on those investments. One principal source of revenue for the Firms is the commissions earned when they facilitate trading on behalf of their clients.

The development and marketing of research about major publicly traded equity securities, or “equity research,” is a critical component of each Firm's business model. It is a foundational element of the relationship between the Firms and their most significant clients. The Firms use their equity research-and their reputations for creating reliable and valuable advisory reports based on that research-to attract and retain clients, to entice clients to execute trades through them, and to differentiate themselves from other financial services firms.

A. Content of Equity Research Reports

The Firms' equity research reports may be company-specific, industry-wide, or macroeconomic in focus, and may range from a single page to hundreds of pages in length.⁴ The Firms' company-specific research reports may include projections of future stock prices, judgments about how a company will perform relative to its peers, and conclusions about whether investors should buy, sell, or hold stock in a given company. Each Firm maintains its own rating system to indicate whether analysts believe the price of a stock is likely to increase, decrease, or remain relatively steady.⁵ Each of the Firms issues scores and sometimes even hundreds of research reports in a single day. Only a small fraction of reports, however, are “actionable” in the sense that they are likely to spur any investor into making an immediate trading decision. The actionable reports are those that upgrade or downgrade a security; begin research coverage of a company's security (an event known as an “initiation”); or predict a change in the security's target price.

While the actionable reports, which the parties and this Opinion will refer to as Recommendations, are issued around the clock, the vast majority of them are issued between midnight and 7:00 a.m.⁶ Recommendations may move the market price of a stock significantly, particularly when a well-respected analyst makes a strong Recommendation. Such market movement usually happens quickly, often within hours of the market opening following the Recommendation's release to clients. Thus, timely access to Recommendations is a valuable benefit to each Firm's clients, because the Recommendations can provide them an early informational advantage.

Each Firm also produces summaries of its company-specific reports that include, in aggregated form, the actionable elements (such as the Recommendations and brief commentary) of the research reports released by the Firm overnight or early that morning. For example, Barclays Capital provides a “Morning Meeting” flash summary and a “Before the Bell” report, each of which includes the Recommendations the Firm released that morning.

B. Production of Equity Research Reports

Each of the Firms devotes substantial resources to the production of their equity research reports. Each has hundreds of employees devoted full-time to the production of original equity research, and each invests hundreds of millions of dollars per year in creating the research. For example, Merrill Lynch's Global Research department covers approximately 3,200 stocks across 48...