Class 1 Booth 42825: The Legal Infrastructure of Business Controlling Information: Property and Contracts Randal C. Picker James Parker Hall Distinguished

Class 1Booth 42825: The Legal Infrastructure of Business

Controlling Information: Property and Contracts

Randal C. PickerJames Parker Hall Distinguished Service Professor of Law

The Law School

The University of Chicago773.702.0864/[email protected]

Copyright © 2001-13 Randal C. Picker. All Rights Reserved.

Class Organization

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Class Organization

You need to do two posts to the blogOne was/is to have been done before class

todayThe second post can be done at any point

after the class starts but must be done by the due date of the final exam, Monday, October 5, 2013


Class Organization

Take Home Final ExamThere will be a two question take-home final

examThat will be handed out at the end of the

last class on SaturdayThe exam will be returned to me via email

by the end of the day on Monday, October 5, 2013



AP v INS

April 19, 2023 The Legal Infrastructure of Business. Copyright © 2001-13 Randal C. Picker. 6NYT (24 Dec 1918)


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?


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?


Key Allegations

Three1: Bribing employees of AP-member

newspapers2: Inducing members to violate AP bylaws3: Transmitting info from legally-obtained

newspapers


Why Isn’t this a Contracts Case?

Allegation 1: Bribing EmployeesAllegation was that INS was paying

employee of Cleveland newspaper $5 per week to give it information about Cleveland and non-Cleveland employees



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 . . . .”



Allegation 3: Free Ride on Purchased NewspapersSuppose 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.”

Legal Framing

StatutesThe 1909 Copyright Act

Key CasesBoard of Trade v. Christie Gain (1905)Sports and General Press Agency, Ltd., v.

“Our Dogs” Publishing Co., Ltd., [1916] 2 K.B. 880


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,


Board of Trade (1905)

The Key to the Decisioneven 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?


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?


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;


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.”


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.”


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?


Justice Brandeis Dissenting

The Brandeis DissentHe disagrees with the Court’s resultWhy?


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?


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,



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;



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.”


Senate Bill No. 1728, 48th 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?



Production of Property: The Great American Novel

SupplyNovelist-wannabe contemplates writing

book. It will cost her $12 to do soOnce 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


What happens?

Possibilities with Single PricePrivate Values

Price of 10, sells one copy at total cost of 13Price of 5, sells two copies, for revenues of

10 and costs of 14The book will not be produced

FC = 12, MC = 1VC1 = 10, VC2 = 5


What happens?

Social ValuesOne copy: Cost of 13, value of 10, net loss

of 3Two copies: cost of 14, value of 15, social

gain of 1Two copies should be produced, but won’t

be Price Discrimination Would Solve

Selling in Separate Markets

HypoSame cost structure as before: fixed costs

$12, per copy cost of $1Two markets separated by time and distance

Consumer in East values at $10Consumer in West values at $5

Monopolist and can sell in both markets What happens?


Selling in Separate Markets

AnswerSame hypo as beforeM should sell at $10 in the East and $5 in

the West and product will be producedSocial welfare rises by 1 ($15 in value

created against $14 in costs)


Entry in the West

Hypo AgainSuppose that distribution in the East makes

possible entry in the WestEntrant faces zero fixed costs but same

marginal costPricing

M charges $10 in East; assume for now that both M and E charge $5 in West

What happens?April 19, 2023 The Legal Infrastructure of Business. Copyright © 2001-13 Randal C. Picker. 32

Entry in the West

Hypo AgainSuppose that distribution in the East makes

possible entry in the WestEntrant faces zero fixed costs but same

marginal costPricing

M charges $10 in East; sssume for now that both M and E charge $5 in West

What happens?April 19, 2023 The Legal Infrastructure of Business. Copyright © 2001-13 Randal C. Picker. 33

Entry in the West

AnswerM sells in East and collects $10M sells 50% of the time in West and collects

$2.50 in expectationE sells 50% of the time in West and also

collects $2.50 on averageM now incurs expected costs of 12 + 1

+ .5*1 = 13.50 against expected revenues of 12.50


Entry in the West

ConclusionE’s free-riding entry in the West means that

M can’t make the product profitablyM won’t produce, so E can’t free ride

Extra social value lost Is this AP v. INS?




Contracts


Questions

Was a contract formed? When? On what terms?


Hypo 1: Click-Thru Contracts

FactsHome page of website sets forth contract

for use of websiteSurfer can get inside website only through

clicking-thru acceptance of contractValid contract?


UCC 2-204. Formation in General

(1)A contract for sale of goods may be made in

any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

(2)An agreement sufficient to constitute a

contract for sale may be found even then the moment of its making is undetermined.


2-204. Formation in General

(3)Even though one or more terms are left

open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.


Hypo 2: Deal Closes, Followed by More Docs

FactsClosing takes places; documents signedOne week later, one side sends the other a

new document with “additional terms for the contract”

Is there a contract? On what terms?


2-207. Additional Terms in Acceptance or Confirmation.

(1)A definite and seasonable expression of

acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.



(2)The additional terms are to be construed as

proposals for addition to the contract. Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;



(b) they materially alter it; or(c) notification of objection to them has

already been given or is given within a reasonable time after notice of them is received.



(3)Conduct by both parties which recognizes

the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract.



(3)In such case the terms of the particular

contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of the Act.


2-209. Modification, Rescission and Waiver.

(1)An agreement modifying a contract within

this Article needs no consideration to be binding.


2-209. Modification, Rescission and Waiver.

(2)A signed agreement which excludes

modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.


Answer

Answer2-207 covers situations in which new terms

are set forth as part of “acceptance” of offerSeparation here: accepted, and then

suggested more termsThe new document could be an attempt at

modification under 2-209


Hypo 3: ProCD?

FactsZ. buys the shrink-wrapped boxBox states: “Unwrapping constitutes

agreement to additional terms set forth inside the box.”

ProCD itself? Contract? On what terms?


Answer

Not ProCD, which was click-thru, so chance to read all terms before agreeing

But terms need not be complete to have contract, see UCC 2-204(3)


Hypo 4: ProCD with Hackers?

FactsZ. buys the boxed CDRuns it and finds click-through license with

termsFaxes letter to ProCD: “I reject your offer of

additional terms of the contract. My on-staff hackers will get beyond the license and I will use the software.”

Contract? What terms apply?


Answer

What Products are Offered for Sale in ProCD?

PossibilitiesA consumer version of the database?A commercial version of the database?A franchise version of the database?


The Contract in ProCD

When was the contract formed? Who was the contract between? On what terms?



Interaction of Copyright and Contract

Preemption under Sec. 301? On and after January 1, 1978, all legal or equitable

rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103, whether created before or after that date and whether published or unpublished, are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.


Sports Statistics

April 19, 2023 The Legal Infrastructure of Business. Copyright © 2001-13 Randal C. Picker. 59Time Magazine (16 Jan 1995)


“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?

April 19, 2023 The Legal Infrastructure of Business. Copyright © 2001-13 Randal C. Picker. 61NYT (1 Oct 1996)

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.”


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.”


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;


Test in NBA v. Motorola

Says the Courtand (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?



TheFlyontheWall.com


SCS

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;


FRCP 7: Pleadings Allowed

(6) an answer to a third-party complaint; and

(7) if the court orders one, a reply to an answer.


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


FRCP 8

(3) a demand for the relief sought, which may include relief in the alternative or different types of relief.



SCS

Fly on the Wall Complaint (26 June ‘06)


SCS


“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.”


SCS


“For a time, Fly reproduced these reports verbatim. These blatant acts of misappropriation and copyright infringement warrant both injunctive relief and damages.”


SCS



SCS



SCS


“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;”


SCS


“(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.”


SCS



SCS



SCS

Fly on the Wall Answer (16 Aug ‘06)


SCS



SCS



SCS


FRCP 56 Summary Judgment

(a) By a Claiming Party.A party claiming relief may move, with or

without supporting affidavits, for summary judgment on all or part of the claim.

(b) By a Defending Party.A party against whom relief is sought may

move, with or without supporting affidavits, for summary judgment on all or part of the claim.


FRCP 56 Summary Judgment

(c) Time for a Motion, Response, and Reply; Proceedings. …(2) The judgment sought should be

rendered if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.


What happens?

Go the 2nd Circuit Websitehttp://www.ca2.uscourts.gov/Opinion

Fly wins


http://www.ca2.uscourts.gov/

http://www.ca2.uscourts.gov/decisions/isysquery/ab8a0c6f-d65b-4536-aac6-19c39315c9fa/1/doc/10-1372_both.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/ab8a0c6f-d65b-4536-aac6-19c39315c9fa/1/hilite/


Wrap Up

Wrap Up and Takeaways

Court SystemFederal vs. StateFederal: Sup Ct, 13 appellate courts, each

state had at least one federal district court District court jurisdiction

Federal QuestionDiversity



Court SystemJurisdiction and venue are different

Jurisdiction goes to the power of a type of court to hear and decide a case

Venue is about location: of courts of the right type to hear a case, which one gets to hear the case



Property Definition and Creation IncentivesPrice discrimination can be useful, as

marching down the demand curve may facilitate the creation of property in the first instance

The scope of property rights as defined by the gov’t will influence the extent to which price discrimination can be undertaken



ContractsThe core of contract is offer and acceptanceThe UCC reflects the messy reality of

contracting and tries to implement what it believes most parties want in most circumstances



Business Models and the LawBoth AP v INS and ProCD emphasize the

way in which law can be sensitive to business models in how the law is define

Unfair competition is used to try to create space for the AP to recover on its investments in hot news



ProCD subjects Zeidenberg to the terms of the license in an effort to preserve sales of both a commercial and a consumer version, though Z was really looking to home-brew a franchise version



Business Models and LawsuitsActivities that try to do an end-run on a

business model are likely to result in lawsuits (INS, ProCD, NBA, Fly)

The lines between legitimate and illegitimate activity can be very thin

Is Fly reporting on Goldman Sachs or free-riding on GS’s reports?


Documents

Class 1 Booth 42825: The Legal Infrastructure of Business Controlling Information: Property and Contracts Randal C. Picker James Parker Hall Distinguished