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September 1, 2005.


The opinion of the court was delivered by: HAROLD BAER, JR., District Judge


This case comes before the Court on a Motion for a Preliminary Injunction and a Motion to Dismiss in two consolidated cases, Dow Jones & Co., Inc. v. Int'l Securities Exchange, Inc. and The Options Clearing Corp., Inc., No. 05 Civ. 4954 (S.D.N.Y.), and McGraw-Hill v. Int'l Securities Exchange, Inc. and the Options Clearing Corporation, No. 05 Civ. 112 (S.D.N.Y.). The Court has decided these motions together. For the reasons discussed below, Motion for a Preliminary Injunction is DENIED, and the Motion to Dismiss is GRANTED. I. BACKGROUND

A. Procedural History

  This action poses the question — can there be a valid property right in trading options on index-tracking stocks without a license from the index providers? In this case, the providers are, McGraw-Hill Companies, Inc. ("McGraw-Hill") and Dow Jones Co., Inc. ("Dow"). Each sells what are called exchange traded funds ("ETFs"), Standard & Poor's Depositary Receipts ("SPDRs") and DIAMONDS, respectively. SPDRS are comprised of the stocks included in the Standard & Poor's 500 Composite Stock Price Index ("S&P" or "S&P 500 Index") while DIAMONDS are comprised of the stocks included in the Dow Jones Industrial Average ("DJIA"). Defendants, International Stock Exchange, Inc. ("ISE") and the Options Clearing Corporation ("OCC") are anxious to offer their customers options to buy SPDR shares and DIAMONDS shares on the International Stock Exchange and argue they can do so with out a license.

  On January 6, 2005, McGraw-Hill filed a complaint against ISE and OCC that alleges, misappropriation, trademark infringement, unfair competition, and trademark dilution of the intellectual property in SPDRs by Defendants.*fn1 The same day, a Temporary Restraining Order ("TRO") was sought and granted, and Defendants were enjoined from trading SPDR options. On January 31, 2005, McGraw-Hill filed a Motion for a Preliminary Injunction. Before the Court held a hearing, the parties stipulated to a temporary licensing arrangement that allows ISE to trade SPDRs options while the case is pending. The stipulation also dismissed OCC from the action. On March 8, 2005, ISE filed this Motion to Dismiss.

  On May 24, 2005, Dow filed a similar complaint against ISE and OCC with virtually identical issues, i.e., does an intellectual property right exist with regard to option trades for the ETF, DIAMONDS. This Court issued a Temporary Restraining Order for DIAMONDS options. Unlike the McGraw-Hill action however, Dow and the Defendants have not stipulated to a temporary license that would permit trading in DIAMONDS options because Dow had already sold an exclusive license to the Chicago Board Options Exchange, Inc. ("CBOE").

  On June 6, 2005, the two actions were consolidated. A Preliminary Injunction hearing was held on June 8 and 13, 2005, and Plaintiff McGraw-Hill was permitted to submit a supplemental memo in opposition to the Motion to Dismiss. The motions currently sub judice, and resolved herein, are (1) Dow's Motion for a Preliminary Injunction against ISE and OCC, pursuant to Fed.R.Civ.P. 65(a), to enjoin ISE from trading DIAMONDS options, and (2) ISE's Motion to Dismiss McGraw-Hill's Complaint pursuant to Fed.R.Civ.P. 12(b).

  B. Indexes, Exchange Traded Funds, and Options

  The following facts are taken from the Complaints, documents on which the Complaints rely, public records, and the evidence presented at the Preliminary Injunction hearing.

  Dow and McGraw-Hill are the creators and proprietors of securities indexes such as the DJIA and S&P 500, respectively. They own federal trademark registrations for a number of marks including DIAMONDS and SPDRs. Both the DJIA and S&P 500 consist of stocks meant to be a representative sample of U.S. stock market performance. Plaintiffs license their indexes.

  An Exchange Traded Fund ("ETF") is an investment vehicle that allows investors to participate in the performance of an established market index without having to purchase the basket of individual stocks that comprise the index. ETFs bundle together securities that comprise a market index like the Dow Jones Industrial Average or the S&P 500 Index. An ETF is usually established as a unit investment trust; its portfolio consists of the bundle of stocks in an index, in proportion to their weight in the index. They are traded just like stocks or other marketable securities. The price and yield of ETFs are intended to follow the price and yield performance of the index. ETFs are issued by the index provider or by a separate entity that has entered into a licensing arrangement with the index provider. Both SPDRs and DIAMONDS are initially issued by S&P and Dow respectively.

  An option is essentially a contract that gives the holder the right, but not the obligation to buy or sell a specified security at a specified price, on or before a given date. An option to buy is a call option, an option to sell is a put option, and the specified price is known as the strike price. If an option is not exercised by a certain date, it expires with no value. Options are traded much like their underlying securities and on any marketable security, like an ETF, or on an index itself. Options on ETFs, like options on other equity, provide the right to buy or sell a unit of an ETF at a specified price on or before a specified time. The gravamen of this controversy is whether an exchange, like ISE, separate from the issuer of an ETF can offer to sell options on those ETFs without a license from S&P and Dow.

  An index option is different from an ETF option because the underlying instruments are indexes and not marketable securities. Options traded on indexes are essentially options on the index number itself, which is an intangible, representative number. It is a value that changes over time as market prices fluctuate. An investor who purchases an index option obtains certain rights per the terms of the contract. In general, this includes the right to demand and receive a specified amount of cash from the writer of a contract with the same terms. When an option is traded on an index there is no underlying security attached to the option. ETF options are different from index options because they are fully settled when a share of an ETF is delivered, much the same way that options on stocks or other marketable securities are sold. ETFs may settle with cash in lieu of the transfer of the share or unit, but it is still connected to the performance of that share or unit and the possibility exists for the physical transfer of the asset when the put or call is exercised. Index options are always settled with the delivery of cash because there is no underlying security. The amount paid is the difference between the strike price and the cash value of the index at the time of settlement.

  Plaintiffs claim that unlicensed trading of ETF options on other exchanges would violate their proprietary rights in their indexes. II. DISCUSSION

  A. Case Law

  To succeed on any of their claims, Plaintiffs must show that they have a property or other protectible interest in ETF options after the options have been created and are sold on the market. Dow and McGraw-Hill rely on cases decided in the past twenty years where courts have found that a protectible interest existed. These cases recognize property rights in financial indexes and related trademarks and prohibit the unlawful misappropriation of such rights when a competitor creates an identical index or offers index-linked financial products such as futures contracts. See Standard & Poor's Corp. v. Commodity Exch., Inc., 538 F. Supp. 1063 (S.D.N.Y. 1982) aff'd, Standard & Poor's Corp. v. Commodity Exch., Inc., 683 F.2d 704 (2d Cir. 1982) ("Comex I" and "Comex II" respectively, or Comex); Board of Trade v. Dow Jones & Co., Inc., 98 Ill. 2d 109 (Ill. 1983) (Board of Trade). In Comex, the defendant, applied to the Commodity Futures Trading Commission to be a contract market for futures of the "Comex 500 Stock Index," which would use the same 500 stocks as the S&P 500 Index and the identical method of compilation. Comex II, 683 F.2d at 706. A futures contract is an obligation to purchase "a specific quantity of a particular commodity at a specified date in the future at a fixed price," the value of which is "keyed to broad-based stock indices." See Stephen J. Choi & Adam C. Pritchard, Behavioral Economics and the SEC, 56 Stan. L. Rev. 1, 73 (2003). S&P published its stock index (the S&P 500 Index) and licensed the rights to use the index values to ...

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