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Misappropriation

Misappropriation is an amorphous tort that is a part of state unfair competition law. The concept of “unfair competition” is an equitable doctrine that can be broken into two parts: (1) The term “unfair competition” is sometimes reused to refer more narrowly to actions that confuse consumers as to the source of a product. (2) “Unfair trade practices” include other causes of action, such as false advertising and bait and switch selling tactics. The narrower unfair competition concept involving source confusion can result from misrepresentation (ie. passing off of ones product as another) or from misappropriation of another’s product and claiming it as one’s own (this latter subtype was first established in the following case).

International News Service v. Associated Press

International News Service v. Associated Press is the famous, seminal 1918 Supreme Court case creating the doctrine of misappropriation as part of unfair competition law. In that case, AP sued INS for taking its news stories on the east coast and providing them to customers on the west coast. INS accomplished this by taking advantage of the difference in time zones and using the intervening time to rewrite the news stories and wire them to publishers on the west coast. Since the essential facts were first extracted and articles rewritten, there was no copyright infringement. Nevertheless, the Supreme Court granted relief since the defendants had “misappropriated” the “hot news” generated by AP. The Court reasoned that the plaintiff had acquired an intangible quasi-property right in the news (at least temporarily while it was “hot”):

But in a court of equity, where the question is one of unfair competition, if that which complainant has acquired fairly at substantial cost may be sold fairly at substantial profit, a competitor who is misappropriating it for the purpose of disposing of it to his own profit and to the disadvantage of complainant cannot be heard to say that it is too fugitive or evanescent to be regarded as property. 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.
The court also seems to recognize the plaintiff’s “sweat of the brow:”

[B]y its very act, admits that it is taking material that has been acquired by complainant as the result of organization and the expenditure of labor, skill, and money, and which is salable by complainant for money, and that defendant in appropriating it and selling it as its own is endeavoring to reap where it has not sown, and by disposing of it to newspapers that are competitors of complainant’s members is appropriating to itself the harvest of those who have sown. 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; 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.
In recognizing a quasi-property right, the Court establishes a new cause of action for misappropriation. The newly minted doctrine is meant to rest on the broader foundation of unfair competition that deals with actions by a defendant that result in confusion as to source. Previous court decisions had only recognized a cause of action for a defendant misrepresenting or “passing off” their product as that of the plaintiff. This was probably caused by the fact that there had been no examples of “intangibles” in prior cases, and the taking of “tangibles” is covered by other causes of action. The Court explains:

It is said that the elements of unfair competition are lacking because there is no attempt by defendant to palm off its goods as those of the complainant, characteristic of the most familiar, if not the most typical, cases of unfair competition. But we cannot concede that the right to equitable relief is confined to that class of cases. In the present case the fraud upon complainant’s rights is more direct and obvious. . . . [T]hese two competing parties are endeavoring to make money, and treating it, therefore, as quasi property for the purposes of their business because they are both selling it as such, defendant’s conduct differs from the ordinary case of unfair competition in trade principally in that, instead of selling its own goods as those of complainant, it substitutes misappropriation in the place of misrepresentation, and sells complainant’s goods as its own.
In addition to quasi-property rights and a desert rationale for efforts expended, the court also endorses a utilitarian rationale for protection as necessary to incentivizing the gathering and reporting of news.

Although the Court does not clearly outline a set of elements, from a whole reading of the opinion, the Court does seem to cabin the doctrine of misappropriation in several ways. (1) The subject matter seems to be limited to some type of “intangible,” but it is unclear what other types of quasi-property will suffice. (2) The protection seems to only apply against a competitor who uses the appropriated items to the advantage of the defendant and to the disadvantage of the plaintiff. There are no such rights against the public at large since facts are not protectible. (3) The nature and extent of the protection is proportional to the value of the “intangible.” The intangible in this case was not news, but “hot” news, and the news itself would no longer receive protection under this doctrine once the news was no longer fresh.

In his dissent, Justice Brandeis says that new private rights work an injury to the public interest unless boundaries are clearly established. He points to the fact that the holding will effectively give AP a monopoly over its news reports.

Subsequent Developments

After the INS decision, it was unclear how far the Supreme Court intended this new doctrine to reach. Much of the dilemma was eliminated with the 1938 Supreme Court case of Erie Railroad v. Tompkins, which abolished federal common law over matters involving state law. Accordingly, the fate of the doctrine rested with the states. Some adopted and refined in different forms while others eliminated it entirely. New York, California, and Florida were the first to adopt the doctrine. New York continues to apply a very flexible approach to handle a wide range of business malpractice. However, no cases have applied the doctrine to non-commercial, personal use the market harm must at least be discernible. As of 1994, 14 states recognized the tort of misappropriation.

One major concern about the validity of the state tort of misappropriation is whether the doctrine is able to pass Constitutional muster. As cases like the 1964 Stiffel and Compco decisions demonstrate, the Court will strike down state laws that attempt to expand or redefine property-like protections in areas preempted by federal patent or copyright law. In addition, § 301(a) of the 1976 Copyright Act explicitly preempts any state law attempting to create § 106 rights to works of authorship. As a result, courts have often tried to limit the doctrine in one of two ways: either (1) restricting the subject matter to avoid areas covered by patents and copyrights, or (2) tacking on additionally required elements (above those required for patent or copyright) to limit its scope. Subject matter limits may be necessary in the area of patent law with additional elements required to avoid conflict with copyright law. However, some have expressed concern that regardless of form, “sweat of the brow” protection under misappropriation impinges on the exclusions of copyright law. As states have attempted to wrestle with these concerns and adopted the doctrine (if at all) according to their preferences, a variety of state laws have emerged some have expanded and some have constricted INS.

Although some state cases have interpreted the doctrine broadly (for example, in Mercury Records v. Economic Consultants, the Wisconsin Supreme Court required only that value be expended, competition, and damages), most have attempted to contain the doctrine in some way. For instance, many have added elements that are required, such as time-sensitivity, direct competition (or substantial market affects), and/or inhibition of future activities by the plaintiff; a defendant’s “free ride” or a plaintiff’s “sweat of the brow” are rarely enough. Courts are concerned about an overreaching cause of action that could be perpetual if not tailored.

A good, recent example comes from the 2nd Circuit, which has long been hostile to the doctrine since its inception, in the 1997 NBA v. Motorola decision. In that case, defendant Motorola had watched games or used reporters to collect and transmit sports scores to its SportsTrax pagers while games were in progress. The plaintiff NBA sued claiming that the sports scores were hot news and entitled to protection. Even though the court concluded that a narrowly construed misappropriation action would not be preempted by copyright laws, the court denied their request for relief on several grounds: the defendant was not free riding, the defendant allowed the real-time results of the match to enter the public domain through broadcasting and by allowing the public to attend the games, and their was no direct competition. The court did recognize a cause of action under misappropriation but required the following elements:

It is interesting to note that although INS did not expressly adopt all of these factors, they all would have been met by the facts of that case.

Other state cases have required some or all of these factors to be met. Nearly all cases require that some expenditure be made by the plaintiff to create the so-called quasi-property right deserving protection. Likewise, cases generally hold that the defendant somehow “free ride” on the back of the plaintiff in order to create a cause of action. However, different courts have construed the other three factors outlined in NBA differently. First, how much competition and how direct must it be? A few cases have expanded the reach to include less direct forms of competition as long there is a conceivable harm to the plaintiff. In 1951, a California court held in McCord v. Plotnick that certain credit reports were misappropriated even though the defendant utilized a lesser scope for a different audience. In 1983, the Illinois Supreme Court in Chicago Board of Trade v. Dow Jones effectively reduced the competition element to simple plaintiff harm. In that case, defendant CBT was using the plaintiff Dow Jones Industrial Average as an index for its futures contracts. Dow Jones argued that the defendant was free riding on plaintiff’s goodwill in resting its securities on its name. Adopting a utilitarian argument of spurring the creation of more indices, the court held there was a misappropriation even though there was no direct competition and plaintiff had not yet planned on licensing use of its index to others. This is rather expansive, but most states see Chicago Board of Trade as an anomaly.

Second, some states differ on the importance of the time-sensitivity of the information. In index calculation cases like Chicago Board of Trade, there was held to be misappropriation even though the numbers were available from publications around the same time. A 1925 Texas case, Gillmore v. Sammons, held that protection extends for six months (until the next issue is published) on a compiled list of construction projects in the Dallas area. This case raises the interesting question of whether the period of time-sensitivity extends as long as the information retains value (ie. until it becomes outdated). By contrast, other courts hold that time is the essence and that value is irrelevant. Financial Information v. Moodys. Another Texas case in 1993, US Sporting Products v. Jonny Stewart Game Calls, practically eliminated the time requirement by extending protection to hunting calls that were copied, rearranged, and sold by a competitor.

Third, courts differ on what reduces the plaintiff’s incentive to create the information. Many courts require that the information relate to the plaintiff’s primary business and that no other incentive to create and assemble the information exist. For instance, if a movie hotline took a movie theatres movie schedule, this would probably not be misappropriation since the plaintiff is in the business of selling movie tickets, not times. In fact, distribution of movie times is likely to benefit the plaintiff (even if some lost possibility of licensing of the information exists).