By Neal L. Slifkin
February 2001

In New York, the misappropriation branch of unfair competition was once described as a broad and flexible doctrine encompassing any form of commercial immorality or simply as endeavoring to reap where one has not sown. The cause of action is based on the taking of the skill, expenditures and labors of a competitor and misappropriating, for the commercial advantage of one person, the benefit or property right belonging to the other.¹ Two Second Circuit decisions have virtually eliminated this cause of action in New York.

THE ORIGINS OF MISAPPROPRIATION

The misappropriation branch of unfair competition originates with International News Service v. Associated Press.² In the case, the Associated Press (AP) used telegraph dispatches to send the latest news to the east coast of the United States. From there, AP wired the news to newspapers on the west coast. Reporters for the International News Service (INS), a rival news-gathering and publishing agency, copied that news from publicly available sources on the east coast and wired it to the west coast. Using the Eastern and Pacific Standard Time differences, INS reporters were enabling their subscribers to publish the news without INS having to collect the news themselves. Because copyright protects expression, not facts, and the news consists of facts, it was found that INS was not infringing the copyright of AP. The court did find, however, that INS misappropriated the labor and skill of AP. The type of information taken by INS and protected from copying by the Supreme Court became known as "hot news".

From this beginning, courts in New York and elsewhere have used the misappropriation doctrine to fill in the gaps left by the 1909 copyright act. The gaps occurred where information not protected through copyright was taken and used by competitors. In another significant decision, the plaintiff in Metropolitan Opera Association v. Wagner-Nichols Recorder Corp.³ had incurred great expense recording and licensing rights to the Metropolitan Opera broadcasts. The defendant copied the broadcasts and sold the recordings in competition with the plaintiff. The court found that the defendant unjustly benefitted from the labor of the plaintiff and had indeed misappropriated the plaintiff’s work.

PREEMPTION

While the above-mentioned decisions were significant to the broad and flexible interpretation of misappropriation claims, the Copyright Act of 1976⁴ laid the groundwork for the near elimination of state law misappropriation claims. Section 301 of the Copyright Act provides that federal copyright law preempts all state causes of action equivalent to those provided for by the Act for works falling within the scope of the Act. In other words, states are precluded from granting protection for works in which the subject matter of the work fails to achieve copyright protection because it is too minimal, lacks originality, or falls into the public domain. Thus, information that could be protected through copyright but fails to qualify for copyright protection under the Copyright Act cannot be protected from copying by state law. Factual information is not protected by copyright laws. Federal law preempts state law and prevents states from protecting such factual material from being copied.

THE MOTOROLA DECISION

Based on that preemption section of the Copyright Act, the Second Circuit further narrowed the misappropriation claims in The National Basketball Association v. Motorola, Inc.⁵ The National Basketball Association (the NBA) produces, organizes, and markets basketball games involving all of its member teams. The NBA derives great commercial value from the sale of broadcasting rights. Therefore, it has substantial interest in preventing unauthorized distribution of information about the games.

Motorola, Inc. (Motorola) began selling specialized pagers that enabled the owners to receive various types of statistical information about NBA games. The information included instantaneous updates on scores of ongoing games and other real-time game information. The NBA filed suit alleging, inter alia, state law unfair competition by misappropriation. The Second Circuit determined that the work in question, the game statistics, came within the subject matter of copyright. The court then went on to discuss whether and to what extent misappropriation claims vindicate rights equivalent to those provided by copyright law. In other words, the court sought to establish when those claims lie outside the "general scope" of copyright law's exclusive rights. The court applied the often used extra element test: "[I]f an extra element is required instead of or in addition to the acts of reproduction, performance, distribution or display, in order to constitute a state-created cause of action, then the right does not lie within the scope of copyright, and there is no preemption."⁶

According to the Second Circuit, a narrowly construed "hot news" form of misappropriation could survive copyright preemption because certain extra elements made the claim qualitatively different from copyright. Significantly, the court rejected the broader formulations of misappropriation advanced by prior New York cases, explaining that those cases permitted such claims under a more limited copyright regime. The Court stated: "Those cases were decided at a time when simultaneously recorded broadcasts were not protected under the Copyright Act and when the state law claims were not subject to Federal preemption."⁷

The court announced the elements of a misappropriation claim which survives preemption: (i) a plaintiff generates or gathers information at a cost; (ii) the information is time sensitive; (iii) the 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 plaintiff; and (v) the ability of other parties to free-ride on the effort 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.⁸

The Second Circuit held that the NBA had not proven these elements, and its misappropriation claim, based on New York law, was preempted. The court found no evidence of any anti-competitive effects with regard to the actual games and broadcasts because the pager market was no substitute for attending the games or watching them on television. The court also found no evidence of free-riding with respect to transmission of statistical information because Motorola expended its own resources to collect the factual information and to transmit it to the pagers.

Thus, the narrowly construed hot news form of misappropriation survives preemption because the claim contains certain extra elements to allow it to survive preemption. The hot news (i.e. INS) and free-ride elements allow an INS-like claim to survive. Because the act of copying is the real focus of the law, intent, unfairness and commercial immorality are not extra elements which allow the claim to survive preemption. Similarly, direct competition between the parties or the cost of creating the information are not the extra elements necessary to survive preemption.

MISAPPROPRIATION OF TANGIBLE PROPERTY

The Metropolitan Opera and Motorola decisions dealt with intangible property, i.e. information. In the unpublished decision of Frink America, Inc. v. Champion Road Machinery Ltd.,⁹ the Second Circuit found that the conversion of tangible property, such as drawings, and the use of the contents of those drawings cannot serve as the basis for a misappropriation claim. The Second Circuit declined to extend misappropriation to the conversion of tangible property, which embodies intangible information.

In Frink, the plaintiff, Frink America, Inc. (Frink) manufactured a line of snow plows. Champion Road Machinery, Ltd. (Champion) converted engineering drawings belonging to Frink The drawings allowed Champion to duplicate Frink’s entire line of snow plows. Champion then sold those plows in competition with Frink. Frink was unable to establish a copyright infringement claim and asserted a misappropriation-type unfair competition claim. The district court granted summary judgment on Frink’s unfair competition claim, incorrectly finding that likelihood of confusion was a necessary element of the misappropriation claim.

On appeal, the Second Circuit affirmed the district court but for a reason other than the lack of likelihood of confusion. The Second Circuit found that an unfair competition claim usually involves the taking and use of the plaintiff’s property to compete against the plaintiff’s own use of the same property. It concluded that it would seem illogical for the claim to be predicated on misappropriation of tangible property, which by definition could not be used by both parties simultaneously.

CONCLUSION

Read together, the Frink and Motorola decisions leave little room for misappropriation- type unfair competition claims in New York whether the property misappropriated is intangible or tangible. Under Frink, the taking of tangible property cannot result in a misappropriation claim. Under Motorola, the taking of most types of intangible property cannot serve as the basis for a misappropriation claim. What is left is only a very narrow "hot news" type misappropriation claim under New York law.

¹ Roy Export Company et al. v. Columbia Broadcasting System, Inc., 672 F.2d 1095 (2d. Cir. 1982).
² 48 U.S. 215 (1918).
³ 101 N.Y.S.2d 483 (1950).
⁴ 17 U.S.C. § 101 et. seq.
⁵ 105 F.3d.841 (2d. Cir. 1997)
⁶ 105 F.3d at 850.
⁷ 105 F.3d at 852.
⁸ 105 F.3d at 845
⁹ 2000 WL 754945 (2d. Cir. (N.Y.)).

Neal L. Slifkin is a Partner and Leader in the Intellectual Property Practice Group at Harris Beach LLP.

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