Hot News for Financial Index Issuers: Southern District Decision in

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1 Hot News for Financial Index Issuers: Southern District Decision in The Associated Press v. All Headline News Corp. March 4, 2009 In a decision with important potential implications for the protection of intellectual property rights in financial indexes, the United States District Court for the Southern District of New York issued a ruling on February 17, 2009 in The Associated Press v. All Headline News Corp., 1 confirming the viability of quasi property rights based on the so-called hot news doctrine and rejecting the argument that Federal copyright law preempts common law claims for misappropriation. Although the case involved The Associated Press rights in breaking news reports, the decision has implications that extend to the right of an issuer of a financial index to prevent third parties from copying or creating products based on the indexes without a license. The Associated Press Decision The Associated Press case centers around the hot news doctrine, first established in the landmark Supreme Court case, International News Service v. Associated Press, 248 U.S. 215 (1918). The Associated Press (AP) sued All Headline News (AHN) for misappropriation arising out of AHN s copying and republication of the AP s online news articles. AHN, which is an Internet company that disseminates news reports, including breaking news, to its customers websites, allegedly does not undertake any original reporting of news. Instead, AHN allegedly enlists people to scour the Internet for news articles and prepare them for republication as AHN stories. In many cases, AHN simply copies the articles it locates in full without any rewriting of the news stories. According to AP s complaint, AHN copied AP news stories that were legitimately licensed to AP s customers. The complaint alleges claims for copyright infringement, misappropriation, Digital Millennium Copyright Act (DMCA) violations, trademark infringement, and unfair competition. AHN moved to dismiss all of AP s claims other than its claim of copyright infringement. Although the court granted AHN s motion to dismiss AP s claims of trademark infringement and unfair competition under the Lanham Act, the court denied S T R O O C K & S T R O O C K & L A V A N L L P N E W Y O R K L O S A N G E L E S M I A M I M A I D E N L A N E, N E W Y O R K, N Y T E L F A X W W W. S T R O O C K. C O M

2 AHN s motion as to the misappropriation claim, allowing the misappropriation claim to proceed. As discussed below, in doing so, the court reaffirmed the legal principles that traditionally underlie the protection of financial indexes. Associated Press and the Protection of Financial Indexes Sounding a familiar argument in cases involving misappropriation of intellectual property rights, AHN argued that the federal copyright laws preempt state misappropriation laws, and therefore the AP s misappropriation claim should be dismissed. 2 The court rejected AHN s motion to dismiss based on preemption following the Second Circuit s own precedent 3 holding that misappropriation survives copyright preemption. A similar preemption argument was raised recently (and rejected) in Dow Jones & Co., Inc. v. International Securities Exchange LLC, 2007 WL (N.D. Ill. 2007), a case involving the use by the International Securities Exchange of the Dow Jones Industrial Index in the trading of options in competition with those traded by Dow Jones licensee, the Chicago Board Options Exchange, Inc. The Associated Press decision is particularly important in the context of protection of intellectual property rights in financial indexes and related financial products. This is because the hot news doctrine, established in the International News Service case, has been the bedrock principle upon which financial indexes have been held protectable. Unlike the International News Service case, which also involved breaking news stories, the Associated Press case involves the dissemination of new stories via the Internet. Still, much of the rationale from the bricks and mortar context of the International News Service case applies to the Associated Press decision, as well as to recent cases that seek protection of financial indexes. Quoting International News Service, the Associated Press court explained that allowing one news agency to appropriate and profit from the work of another would render publication profitless, or so little profitable as in effect to cut off the service by rendering the cost prohibitive in comparison with the return. 4 Finding that newsgathering requires the expenditure of labor, skill, and money, the Supreme Court held that the appropriation of such work by another is endeavoring to reap what it has not sown. 5 In early cases that found a protectable interest in financial indexes, courts recognized the parallels between newsgathering and the creation and maintenance of financial indexes and relied on the rationale set forth in the International News Service case. For example, in Board of Trade of the City of Chicago v. Dow Jones & Co., Inc., 98 Ill. 2d 109 (Ill. 1983), the Supreme Court of Illinois held that Dow Jones had a proprietary interest in its financial indexes stemming, in part, from a recognition of the effort expended to create the indexes and their pecuniary value. The Board of Trade court also reasoned that although the protection of the indexes would create a very limited monopoly, their protection would yield a positive public effect by spurring others to develop competing indexes designed for the purpose of hedging against systemic market risk. 6 The continued viability of the common law claim of misappropriation remains critical to the protection of financial indexes, because other causes of action, including copyright and trademark infringement, and unfair competition, have failed in various contexts. In Dow Jones & Co., Inc. v. International Securities Exchange, Inc., 7 for example, although the Second Circuit assumed there was a property right in the underlying index, it rejected Dow Jones argument that use of the index values in pricing of options constituted misappropriation. 8 In another case, New York Mercantile Exchange, Inc. v. Intercontinental Exchange, Inc. 9, the Second Circuit held that settlement prices on futures contracts were not copyrightable. Taken together, these decisions cast doubt on whether the end-of-day index values, as opposed to the index itself, are protectable. 2

3 In certain circumstances, courts have also rejected protection of financial indexes based on trademark law. In the Dow Jones case, the defendant listed options based on Dow Jones trademarked ETFs and used Dow Jones trademark in referring to the option products. In that case, the Second Circuit rejected Dow Jones trademark infringement claim, reasoning that trademark law does not prevent one who trades a branded product from accurately describing it by its brand name, so long as the trader does not create confusion by implying an affiliation with the owner of the product. 10 See also Nasdaq Stock Market, Inc. v. Archipelago Holdings, LLC, 336 F.Supp.2d 294 (S.D.N.Y. 2004) (finding that defendant s use of plaintiff s trademark in marketing ETF shares based on plaintiff s financial index, did not infringe plaintiff s trademark rights); Golden Nugget, Inc. v. American Stock Exchange, 828 F.2d 586, 591 (9th Cir. 1987) (finding defendant s creation of market for trading Golden Nugget shares was not trademark infringement). Conclusion The Associated Press decision provides significant support for the continued viability of the common law of misappropriation, which is important for the protection of financial indexes and related instruments. Yet, that law remains in flux. Recent cases have tested the limits of the traditional intellectual property causes of action for copyright and trademark infringement and have squarely placed the locus of protection on the common law right to prevent misappropriation, which was originally established in the International News Services decision. Due to this evolution of protection for financial indexes, both creators of indexes, as the potential licensor of rights, and creators of derivative products, as the potential licensee of rights, must consider the protection provided by various intellectual property rights and plan their actions accordingly. On the one hand, mindful of the costs of creating and marketing an index, index creators seeking strategies to maximize the value of the index as an asset, should address intellectual property strategies early in the process. These strategies should focus on maximizing the benefits of industry recognition and revenue from licensing programs, including the creation of a brand strategy and a licensing program for derivative products. In addition, an often overlooked strategy is to evaluate the patentability of a new index, which can provide a right to exclude others from using the invention to create derivative products. Attention to these details at an early stage of development will likely reap benefits later in the business life cycle of the index and increase the value of the index to its creator. On the other hand, those considering competing indexes or derivative products based on established indexes may be in a position to avoid costly licenses or worse, lawsuits by understanding the metes and bounds of the intellectual property protection for such indexes. For example, careful attention to the components of a competing index or how a derivative product is structured, and how the underlying index is referenced, can realize significant license fee savings and avoid disputes. As indexes and related index funds continue to increase in popularity (and, therefore, commercial value), market participants will increasingly be at odds regarding their respective rights. As the Associated Press decision foretells, misappropriation actions are likely to continue to be viable in the financial index context and there will be a premium placed on the ability to safely navigate the legal minefield. 3

4 This Stroock Special Bulletin was prepared by members of Stroock s Intellectual Property Practice Group. For more information on the issues raised by the Associated Press case or other intellectual property issues faced by the securities and commodities industries, please contact: Steven B. Pokotilow, Partner ( ; spokotilow@stroock.com), Ian G. DiBernardo, Partner ( ; idibernardo@stroock.com), or Richard Eskew, Special Counsel ( ; reskew@stroock.com). 1. The Associated Press v. All Headline News Corp., 08 Civ. No. 323, Slip Op. 2. According to Section 301 of the Copyright Act, 17 U.S.C. 1 et seq., the copyright laws preempt all other causes of action equivalent to any of the exclusive rights within the general scope of copyright. Generally, the preemption extends not only to clearly copyrightable works, but also to works that are ultimately deemed to be uncopyrightable. 3. National Basketball Association v. Motorola, Inc., 105 F.3d 841 (2d. Cir. 1997). 4. Associated Press, Slip Op. at 5, quoting International News Service, 248 U.S. at Associated Press, Slip Op. at 5, quoting International News Service, 248 U.S. at In Standard & Poor s Corp v. Commodity Exchange, Inc., 683 F.2d 704 (2d Cir. 1982), the Second Circuit, in affirming the grant of a preliminary injunction prohibiting the Comex from listing and trading a futures contract based on the S&P 500, addressed, but did not fully resolve, whether S&P s index was protectable under the misappropriation standard established in the International News Service case F.3d 295, 302 (2d Cir. 2006). 8. For a more detailed discussion of the Dow Jones case, and other cases cited herein, please see Intellectual Property Protection for Financial Indexes, ETFs and Other Financial Products, by Steven B. Pokotilow, Ian G. DiBernardo, and Jeffrey M. Mann, Stroock Special Bulletin, August 3, 2006, available at sitecontent.cfm?contentid=58&itemid= F.3d 109 (2d Cir. 2007) F.3d at

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