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International Securities Exchange, LLC v. S&P Dow Jones Indices, LLC

United States District Court, Second Circuit

December 17, 2013




This lawsuit is seven years old. For much of its life, it lay dormant, while an identical lawsuit played out in the Illinois courts. That companion lawsuit has now been completed and a judgment in favor of defendant S&P Dow Jones, LLC ("Dow Jones") and its predecessors has become final. The Appellate Court of Illinois affirmed the judgment in favor of Dow Jones, and the Supreme Court of the United States denied certiorari. Now International Securities Exchange, LLC and its affiliate, International Exchange Holdings, Inc., (collectively "ISE"), the losing parties in the Illinois courts, seek to return to this Court, to litigate again the very issues that they lost in the Illinois courts. I hold that ISE cannot do so, that full faith and credit is to be given to the final judgment of the Illinois courts, and that ISE's lawsuit in this court is barred because of res judicata.

The Dispute Between the Parties

Dow Jones, the defendant in this court, and predecessor companies, created and maintains two widely-used stock indices, intended to reflect composite values and price movements of all U.S. securities. Dow Jones claims that the indices are proprietary and cannot be usurped or used except pursuant to license. The two indices are the S&P 500 Index ("S&P 500") and the Dow Jones Industrial Average ("DJIA"). The S&P 500, created in 1957, reflects a value that is a composite of the stock of 500 large U.S. companies. The DJIA, created in 1896, reflects a value that is the composite of thirty U.S. companies that are leaders in their respective industries. Dow Jones updates the indices throughout each day's trading sessions. Periodically, it modifies the composition and weighting of stocks, striving for as accurate a reflection of the status of American markets as practically can be achieved. Dow Jones considers both indices as proprietary and licenses the right to use them to others.

ISE, the plaintiff in this court, operates a securities exchange that lists various options and other securities to be bought and sold. This litigation arose when ISE proposed, without a license, to list put and call options on the S&P 500 and the DJIA.

ISE proposes to list options on the S&P 500 and the DJIA, on a cash-settled basis, settled, that is, by the issuer to the holder, according to how much the price of the options rose or fell, as between the "strike" price of the option (the price stated on the option), and the market price at the expiration date of the option. Unlike a conventional option on a stock security or commodity, the holder of the proposed ISE option has no right to any underlying asset. Rather, the ISE proposed options are "bet[s] on the future value of the [S&P 500 or DJIA] index." Dow Jones & Company, Inc. v. International Securities Exchange, Inc. , 451 F.3d 295, 301 n.6 (2d Cir. 2006). "If at the expiration date the index is above the value stated in the option contract, the holder of a call option has the contractual right to receive [the appreciated value]." Id. And, conversely, holders of put options have the contractual right to receive the depreciated value.

Dow Jones has licensed its indices exclusively to the Chicago Board Options Exchange, Inc. ("CBOE"), for use as bases for options listed by the CBOE. ISE, without a license from, or the payment of license fees to, Dow Jones, proposes to compete directly with the CBOE. Hence, the charge that ISE proposes to engage in unfair competition, to the detriment of both Dow Jones and CBOE.

The Prior Proceedings

ISE filed an action in this Court against Dow Jones on November 2, 2006, for a declaration of right to list the options for trading without a license. ISE alleged that Dow Jones' claims of exclusive proprietary interest under state law were preempted by the federal copyright laws, that Dow Jones couli not state an actionable copyright claim, and that ISE did not infringe Dow Jones' trademarks.

Two weeks later, on November 15, 2006, CBOE and Dow Jones sued ISE and its clearing agent, The Options Clearing Corporation ("OCC"), in the Circuit Court of Cook County, Illinois. Chicago Board Options Exchange v. International Securities Exchange, LLC, No. 06 CH 24798. Dow Jones and CBOE alleged that, under Illinois law, the options ISE proposed to list for trading would misappropriate Dow Jones' proprietary rights in the indices and its "substantial investment of resources, skill, judgment, creativity and efforts required to develop and maintain" the indices, thereby engaging in the torts of unfair competition and tortious interference with the Dow Jones - CBOE business relationship.

ISE removed the case from the Circuit Court of Cook County to the United States District Court for the Northern District of Illinois, alleging that the Illinois plaintiffs' misappropriation and unfair competition claims were completely preempted by federal copyright law. The Northern District of Illinois rejected the argument. Chicago Board Options Exchange v. International Securities Exchange, LLC, 06 C 6852, 2007 WL 604984 (N.D. III. Feb. 23, 2007). The district court held that section 301 of the Copyright Act, 17 U.S.C. § 301, provides for the preemption of state law rights only if two requirements are met: the subject matter requirement-that the rights "come within the subject matter of copyright as specified by sections 102 and 103"-and the scope requirement-that the rights "are equivalent to any of the exclusive rights within the general scope of copyright as specified by § 106 in works of authorship that are fixed in a tangible medium of expression." 17 U.S.C. § 301. The Northern District of Illinois concluded that the Illinois plaintiffs' claims did not meet either of these requirements. 2007 WL 604984, at *5. They did not meet the subject matter requirement because the claims were based on the defendants' intended use of plaintiffs' research and development used to create the indices, in addition to goodwill, skills, labor, reputation, and necessary expenditures, not the defendants' use of them as works of authorship. Id. And they did not meet the scope requirement because the Illinois plaintiffs were concerned with ISE's unlicensed use of the indices for profit, rather than its intention to copy the numbers produced by the indices. Id. Accordingly, the Northern District of Illinois remanded the case to the Circuit Court of Cook County. Id.

Following the remand, Dow Jones moved for a stay in this Court while the Cook County action proceeded. On July 25, 2007, Judge Robert L. Carter of this Court stayed this case pending resolution of the Illinois state court action. Int'l Sec. Exch., LLC v. Dow Jones & Co., Inc., 06 Civ. 12878 (RLC), 2007 WL 2142068 (S.D.N.Y. July 25, 2007), aff'd 07-3324-CV, 2009 WL 46889 (2d Cir. Jan. 8, 2009) (unpublished). Judge Carter noted that under Wilton v. Seven Falls Co. , 515 U.S. 277, 288 n.2 (1995), district courts have discretion regarding whether to hear declaratory judgment actions and may, in the interest of justice, stay a declaratory judgment action pending the resolution of state court proceedings concerning the same issue. Id. Exercising that discretion, Judge Carter stayed this case "[w]ithout expressing any opinion on either the Northern District of Illinois' remand order or whether the declaratory judgment defendants' claims are preempted by federal copyright law..." Id.

After discovery in the Illinois case, the parties moved for summary judgment. On July 8, 2010, Dow Jones obtained judgment against ISE and OCC in the Circuit Court of Cook County. The Circuit Court rejected ISE's defense that the state law misappropriation and tortious interference claims against it were preempted by federal copyright law. Specifically, the court concluded that section 301 of the Copyright Act did not require preemption because neither the subject matter requirement nor the scope requirement was met. The court concluded that the subject matter requirement was not met because the Illinois plaintiffs' claims were premised on the exploitation of their "research efforts, skills, expertise, reputation and goodwill, " intangible assets that were not protected by copyright because they could not be fixed in a medium, rather than the copying of published index values. And it concluded that the scope requirement was not met because the Illinois plaintiffs did not object to ISE copying the index numbers, and because ISE's use of those numbers was "incidental" to the way it would profit from the options.

Having concluded that the state law claims were not preempted, the Circuit Court conducted a choice of law analysis and concluded that, since there was no conflict between Illinois and New York law, Illinois law would apply as the law of the forum state. The Circuit Court then concluded that under the Supreme Court of Illinois' decision in The Board of Trade of the City of Chicago v. Dow Jones & Co., Inc., 98 lll.2d 109 (1983), ISE's listing of options would constitute misappropriation. Board of Trade held that the offering of a futures contract based on the DJIA would violate the index's owner's proprietary rights because "[t]he publication of the indices involves valuable assets of defendant, its good will and its reputation for integrity and accuracy." 98 I11.2d at 121-22. The Circuit Court concluded that Board of Trade was not distinguishable. Accordingly, it entered judgment for Dow Jones and CBOE (the "Illinois judgment"), permanently enjoining ISE from offering S&P 500 or DJIA index options and OCC from clearing or settling such index options for ISE.

ISE appealed. On May 25, 2012, the Illinois Appellate Court affirmed, concluding that the Illinois plaintiffs' state law claims were not preempted by the Copyright Act and that ISE's proposed listing of options constituted misappropriation under Board of Trade. Chicago Board Options Exchange, Inc. v. International Securities Exchange, LLC , 973 N.E.2d 390 (Ill.App.Ct. 1st Dist. 2012). On September 26, 2012, the Illinois Supreme Court denied ISE leave to appeal. 979 N.E.2d 875 (Ill. 2012). ISE then sought review from the United States Supreme Court which, on May 13, 2013, denied certiorari. 133 S.Ct. 2339 (2013).

The parties then returned to this Court, and each side filed a motion. ISE moved for leave to file a First Amended Complaint, to make three changes: First, ISE proposed to update the allegations supporting ISE's first cause of action, seeking a declaration that Dow Jones' state law claims are preempted and that Dow Jones cannot state a legally sufficient copyright claim. Second, ISE proposed to dismiss its second cause of action, seeking a ...

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