1. Class 1 Booth 42201: The Legal Infrastructure of Business Controlling Information: Property and Contracts Randal C. Picker James Parker Hall Distinguished Service Professor of Law The Law School The University of Chicago 773.702.0864/r-picker@uchicago.edu Copyright © 2001-13 Randal C. Picker. All Rights Reserved.

2. Class Organization Syllabus  http://picker.uchicago.edu/GSBOnline/GSB SyllOnline.htm http://picker.uchicago.edu/GSBOnline/GSB SyllOnline.htm Blog  Read and comment at: http://picker.typepad.com/legalinfrastructure / http://picker.typepad.com/legalinfrastructure /  Post at: http://www.typepad.com/http://www.typepad.com/ August 18, 20152

3. 3 AP v INS

4. August 18, 20154 NYT (24 Dec 1918)

5. August 18, 20155 Starting Questions Why does this litigation arise? What is going on here?  What is the organization of the news business?  How does AP’s business model differ from INS’s?

6. August 18, 20156 Starting Questions What is the legal setting for this case?  What is the procedural posture of this case? Does that matter here?  What are the relevant statutes?  What are the relevant cases? What are the public policy issues raised by the case?

7. August 18, 20157 Key Allegations Three  1: Bribing employees of AP-member newspapers  2: Inducing members to violate AP bylaws  3: Transmitting info from legally-obtained newspapers

8. August 18, 20158 Why Isn’t this a Contracts Case? Allegation 1: Bribing Employees  Allegation was that INS was paying employee of Cleveland newspaper $5 per week to give it information about Cleveland and non-Cleveland employees

9. August 18, 20159 Why Isn’t this a Contracts Case? Allegation 2: Members Violating Bylaws  “Under complainant’s by-laws, each member agrees upon assuming membership that news received through complainant’s service is received exclusively for publication in a particular newspaper... [and] no other use of it shall be permitted....”

10. August 18, 201510 Why Isn’t this a Contracts Case? Allegation 3: Free Ride on Purchased Newspapers  Suppose each newspaper was enclosed in a wrapper including the following disclaimer:  “The news contained herein is for the sole benefit of our subscribers and may not be reproduced for commercial use without the express written consent of the AP.”

11. Legal Framing Statutes  The 1909 Copyright Act Key Cases  Board of Trade v. Christie Gain (1905)  Sports and General Press Agency, Ltd., v. “Our Dogs” Publishing Co., Ltd., [1916] 2 K.B. 880 August 18, 201511

12. Board of Trade (1905) The Key to the Decision  “This court held that, apart from certain special objections that were overruled, plaintiff’s collection of quotations was entitled to the protection of the law; that, like a trade secret, plaintiff might keep to itself the work done at its expense, and did not lose its right by communicating the result to persons, August 18, 201512

13. Board of Trade (1905) The Key to the Decision  even if many, in confidential relations to itself, under a contract not to make it public; and that strangers should be restrained from getting at the knowledge by inducing a breach of trust.” Does this differ from AP v. INS? August 18, 201513

14. Unfair Competition? Says the Court  “The parties are competitors in this field; and, on fundamental principles, applicable here as elsewhere, when the rights or privileges of the one are liable to conflict with those of the other, each party is under a duty so to conduct its own business as not unnecessarily or unfairly to injure that of the other.” What does this mean? August 18, 201514

15. Unfair Competition Says the Court  “Stripped of all disguises, the process amounts to an unauthorized interference with the normal operation of complainant’s legitimate business precisely at the point where the profit is to be reaped, in order to divert a material portion of the profit from those who have earned it to those who have not; August 18, 201515

16. Unfair Competition Says the Court  “with special advantage to defendant in the competition because of the fact that it is not burdened with any part of the expense of gathering the news. The transaction speaks for itself and a court of equity ought not to hesitate long in characterizing it as unfair competition in business.” August 18, 201516

17. One More Says the Court  “It has all the attributes of property necessary for determining that a misappropriation of it by a competitor is unfair competition because contrary to good conscience.” August 18, 201517

18. Justice Holmes Dissenting The Holmes Dissent (Joined by McKenna)  What is Holmes worried about?  Could INS modify its business practices to solve his problems?  What would that mean for AP? August 18, 201518

19. Justice Brandeis Dissenting The Brandeis Dissent  He disagrees with the Court’s result  Why? August 18, 201519

20. What should be the scope of new market rights? Brandeis on New Markets  “He who follows the pioneer into a new market, or who engages in the manufacture of an article newly introduced by another, seeks profits due largely to the labor and expense of the first adventurer; but the law sanctions, indeed encourages, the pursuit.” Is this right? Make sense? August 18, 201520

21. Should the AP be treated as a public utility? Brandeis again:  “If a Legislature concluded (as at least one court has held, New York and Chicago Grain and Stock Exchange v. Board of Trade, 19 N.E. 855) that under certain circumstances news-gathering is a business affected with a public interest; it might declare that, in such cases, news should be protected against appropriation, August 18, 201521

22. Should the AP be treated as a public utility? Brandeis again:  “only if the gatherer assumed the obligation of supplying it at reasonable rates and without discrimination, to all papers which applied therefor. If legislators reached that conclusion, they would probably go further, and prescribe the conditions under which and the extent to which the protection should be afforded; August 18, 201522

23. Should the AP be treated as a public utility? Brandeis again:  “and they might also provide the administrative machinery necessary for insuring to the public, the press, and the news agencies, full enjoyment of the rights so conferred.” August 18, 201523

24. Senate Bill No. 1728, 48 th Cong. The bill provides:  “That any daily or weekly newspaper, or any association of daily or weekly newspapers, published in the United States or any of the territories thereof, shall have the sole right to print, issue, and sell, for the term of eight hours, dating from the hour of going to press, the contents of said daily or weekly newspaper, or the collected news of said newspaper association, exceeding one hundred words. What should we make of this? August 18, 201524

25. August 18, 201525 Production of Property: The Great American Novel Supply  Novelist-wannabe contemplates writing book. It will cost her $12 to do so  Once written, each copy of the book can be produced for $1 Demand  Two consumers: One would value the book at 10, the second at 5

26. August 18, 201526 What happens? Possibilities with Single Price  Private Values  Price of 10, sells one copy at total cost of 13  Price of 5, sells two copies, for revenues of 10 and costs of 14  The book will not be produced FC = 12, MC = 1 VC 1 = 10, VC 2 = 5

27. August 18, 201527 What happens?  Social Values  One copy: Cost of 13, value of 10, net loss of 3  Two copies: cost of 14, value of 15, social gain of 1  Two copies should be produced, but won’t be Price Discrimination Would Solve

28. Selling in Separate Markets Hypo  Same cost structure as before: fixed costs $12, per copy cost of $1  Two markets separated by time and distance  Consumer in East values at $10  Consumer in West values at $5  Monopolist and can sell in both markets What happens? August 18, 201528

29. Selling in Separate Markets Answer  Same hypo as before  M should sell at $10 in the East and $5 in the West and product will be produced  Social welfare rises by 1 ($15 in value created against $14 in costs) August 18, 201529

30. Entry in the West Hypo Again  Suppose that distribution in the East makes possible entry in the West  Entrant faces zero fixed costs but same marginal cost  Pricing  M charges $10 in East; assume for now that both M and E charge $5 in West What happens? August 18, 201530

31. Entry in the West Hypo Again  Suppose that distribution in the East makes possible entry in the West  Entrant faces zero fixed costs but same marginal cost  Pricing  M charges $10 in East; sssume for now that both M and E charge $5 in West What happens? August 18, 201531

32. Entry in the West Answer  M sells in East and collects $10  M sells 50% of the time in West and collects $2.50 in expectation  E sells 50% of the time in West and also collects $2.50 on average  M now incurs expected costs of 12 + 1 +.5*1 = 13.50 against expected revenues of 12.50 August 18, 201532

33. Entry in the West Conclusion  E’s free-riding entry in the West means that M can’t make the product profitably  M won’t produce, so E can’t free ride Extra social value lost Is this AP v. INS? August 18, 201533

34. August 18, 201534 Yelp

35. Using Yelp www.yelp.com August 18, 201535

36. The Questions in Yelp What is the behavior that the plaintiffs are complaining about? What is their legal theory about why that behavior should give rise to liability? What is the court’s view of that? What should Yelp do going forward? The plaintiffs? August 18, 201536

37. August 18, 201537 Contracts

38. What Products are Offered for Sale in ProCD? Possibilities  A consumer version of the database?  A commercial version of the database?  A franchise version of the database? August 18, 201538

39. The Contract in ProCD When was the contract formed? Who was the contract between? On what terms? August 18, 201539

40. Going Shopping (and Contracting?) www.barnesandnoble.com August 18, 201540

41. August 18, 201541 Time Magazine (16 Jan 1995)

42. August 18, 201542 Sports Statistics

43. August 18, 201543 Time Magazine (16 Jan 1995)

44. August 18, 201544 “For those who want their information delivered in a trickle, rather than in a stream, consider Motorola’s Sports Trax, a pager that feels like a cross between a radio and the sports page of a daily newspaper. Pick your favorite baseball team, and the clever pager ‘trax’ it like a die-hard fan, transmitting pitch- by-pitch updates of every game and displaying the action on a calculator-like screen in real time all season long -- if there ever is another season.” Time Magazine (16 Jan 1995) What are the legal risks posed by this product?

45. August 18, 201545 NYT (1 Oct 1996)

46. Framing of NBA v. Motorola (CA2, 1997) Says the Court  “The crux of the dispute concerns the extent to which a state law ‘hot-news’ misappropriation claim based on International News Service v. Associated Press, 248 U.S. 215 (1918) (‘INS’), survives preemption by the federal Copyright Act and whether the NBA’s claim fits within the surviving INS-type claims.” August 18, 201546

47. Framing of NBA v. Motorola (CA2, 1997) Says the Court  “We hold that a narrow ‘hot-news’ exception does survive preemption. However, we also hold that appellants’ transmission of ‘real- time’ NBA game scores and information tabulated from television and radio broadcasts of games in progress does not constitute a misappropriation of ‘hot news’ that is the property of the NBA.” August 18, 201547

48. Test in NBA v. Motorola Says the Court  “We hold that the surviving ‘hot-news’ INS- like claim is limited to cases where: (i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendant's use of the information constitutes free riding on the plaintiff's efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; August 18, 201548

49. Test in NBA v. Motorola Says the Court  and (v) the ability of other parties to free- ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened. We conclude that SportsTrax does not meet that test.” Why not? August 18, 201549

50. August 18, 201550 TheFlyontheWall.com

51. August 18, 201551

52. FRCP 7: Pleadings Allowed (a) Pleadings. Only these pleadings are allowed:  (1) a complaint;  (2) an answer to a complaint;  (3) an answer to a counterclaim designated as a counterclaim;  (4) an answer to a crossclaim;  (5) a third-party complaint; August 18, 201552

53. FRCP 7: Pleadings Allowed  (6) an answer to a third-party complaint; and  (7) if the court orders one, a reply to an answer. August 18, 201553

54. FRCP 8: General Rules of Pleading (a) Claim for Relief. A pleading that states a claim for relief must contain:  (1) a short and plain statement of the grounds for the court’s jurisdiction, unless the court already has jurisdiction and the claim needs no new jurisdictional support;  (2) a short and plain statement of the claim showing that the pleader is entitled to relief; and August 18, 201554

55. FRCP 8  (3) a demand for the relief sought, which may include relief in the alternative or different types of relief. August 18, 201555

56. August 18, 201556 SCS Fly on the Wall Complaint (26 June ‘06)

57. August 18, 201557 SCS Fly on the Wall Complaint (26 June ‘06) “Without the slightest pretext of generating original equity research on its own, Fly systematically and impermissibly accesses the Firms’ proprietary equity research and— free riding on these significant research efforts—rushes to market with the intent and effect of undermining the Firms’ enormous investments in providing clients and other authorized recipients with exclusive and time- sensitive financial market analysis.”

58. August 18, 201558 SCS Fly on the Wall Complaint (26 June ‘06) “For a time, Fly reproduced these reports verbatim. These blatant acts of misappropriation and copyright infringement warrant both injunctive relief and damages.”

59. August 18, 201559 SCS Fly on the Wall Complaint (26 June ‘06)

60. August 18, 201560 SCS Fly on the Wall Complaint (26 June ‘06)

61. August 18, 201561 SCS Fly on the Wall Complaint (26 June ‘06) “Specifically, Fly’s practice of obtaining and competitively posting on or streaming via its website the substance of the Firms’ equity research reports is unlawful because: (i)the Firms generate the analysis contained in their reports at considerable cost and expense; (ii)the value of the analysis is highly time- sensitive;”

62. August 18, 201562 SCS Fly on the Wall Complaint (26 June ‘06) “(iii) Fly’s use of the analysis constitutes free riding on the Firms’ costly efforts to generate it; (iv) Fly’s use of the analysis is in direct competition with the analysis offered by the Firms; and (v) the ability of other parties to free ride on the Firms’ efforts will substantially threaten the Firms’ incentive to continue to invest in their research activities at the same level.”

63. August 18, 201563 SCS Fly on the Wall Complaint (26 June ‘06)

64. August 18, 201564 SCS Fly on the Wall Complaint (26 June ‘06)

65. August 18, 201565 Barclays Capital, 650 F.3d 879 (2 nd Cir. 2011) “We conclude that under principles that are well established in this Circuit, the plaintiffs’ claim against the defendant for ‘hot news’ misappropriation of the plaintiff financial firms’ recommendations to clients and prospective clients as to trading in corporate securities is preempted by federal copyright law.”