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Chicago Board Options Exchange, Inc. v. International Securities Exchange

February 23, 2007

CHICAGO BOARD OPTIONS EXCHANGE, INC., DOW JONES & CO., INC., AND THE MCGRAW-HILL COMPANIES, INC., PLAINTIFFS,
v.
INTERNATIONAL SECURITIES EXCHANGE, LLC AND THE OPTIONS CLEARING CORP., DEFENDANTS.



The opinion of the court was delivered by: Judge Robert W. Gettleman

MEMORANDUM OPINION AND ORDER

Plaintiffs Dow Jones & Co., Inc. ("Dow"), The McGraw-Hill Companies, Inc. ("McGraw-Hill"), and Chicago Board Options Exchange, Inc. ("CBOE") filed a three-count complaint in state court against defendants International Securities Exchange, LLC ("ISE") and Options Clearing Corp. ("OCC") alleging: misappropriation (Count I); tortious interference with prospective economic advantage (Count II); and unfair competition (Count III). Defendants removed the action to federal court, claiming that Counts I and III are completely preempted by Section 301 of the Copyright Act, 17 U.S.C. § 301(a), and that Count II is similarly preempted or within the court's supplemental jurisdiction pursuant to 28 U.S.C. § 1367. Plaintiffs filed a joint motion to remand the action to state court. Defendants filed a motion to stay the proceedings until the Southern District of New York rules on a similar action, as well as a motion to transfer this litigation to the Southern District of New York. For the reasons set out below, the court grants plaintiffs' motion to remand and denies defendants' motions to stay and transfer as moot.

FACTS

Plaintiff Dow is the producer of the Dow Jones Industrial Average ("DJIA"). Plaintiff McGraw-Hill, a New York corporation, is the producer of the Standard & Poors 500 Composite Stock Price Index ("S&P 500") and has a principal place of business in New York City. The DJIA and the S&P 500 will be referred to collectively as the "Indexes." Plaintiff CBOE operates a national securities exchange and specializes in the trading of standardized securities options. Plaintiff CBOE holds the exclusive license to list standardized options contracts ("index options") on the Indexes. Defendant ISE is an all-electronic securities exchange that offers trading in securities options and proprietary index options products. Defendant OCC is the sole clearing agency for standardized securities options in the United States. Both plaintiff CBOE and defendant ISE must clear all trades through defendant OCC.

The Indexes track the United States stock markets and measure stock market performance. Plaintiff Dow Jones licenses use of the DJIA to certain securities exchanges and investment companies, which create financial products that track the DJIA and depend on the DJIA for their settlement value. Additionally, plaintiff Dow Jones publishes the official value of the DJIA on a real-time basis. It calculates the DJIA whenever one of its underlying components is transacted and disseminates the DJIA every two seconds.

Plaintiff McGraw-Hill produces the S&P 500 and other financial indexes. Plaintiff McGraw-Hill licenses the use of the S&P 500 to securities exchanges and investment companies, which create, manage, and sell financial instruments. Plaintiff McGraw-Hill (through S&P, one of its divisions) calculates S&P 500 values throughout the trading day and disseminates updated values every fifteen seconds.

Investors use the published values of the Indexes to make investment decisions. These published values also form the basis for index options contracts. An index options contract confers on the holder the right, but not the obligation, to exercise the option and receive cash for the difference between the "strike price" of the option (the price as stated in the options contract) and the value of a designated index on a specified expiration date. Unlike an equity option contract, in which an equity security (a share of common stock or exchange-traded fund) is the underlying interest, the financial index itself is the underlying interest for index options contracts. Securities exchanges, such as plaintiff CBOE and defendant ISE, offer trading in standardized securities options, which means that all terms of the contract are fixed except the price of the option itself. All standardized securities options must be traded on a national securities exchange registered with and regulated by the United States Securities and Exchange Commission ("SEC"). All exchange-traded options must also be cleared through defendant OCC, the sole issuer of standardized options contracts traded by U.S. options exchanges.

Plaintiff CBOE is registered with the SEC as a national securities exchange. It is the only exchange authorized by plaintiff McGraw-Hill to offer options on the S&P 500 Index. Plaintiff CBOE also holds the exclusive right to offer options based on the DJIA in the United States and options based on other Dow Jones Indexes.

Defendant ISE is an options trading exchange. Additionally, like plaintiffs Dow Jones and McGraw-Hill, defendant ISE creates and disseminates its own indexes. It also offers index options on its own indexes, as well as licensing the use of proprietary indexes created and disseminated by others. On November 2, 2006, defendant ISE announced its intention to commence unauthorized options trading on DJIA and S&P 500 options, although it does not have licenses from either plaintiff Dow or plaintiff McGraw-Hill. Defendant ISE seeks to offer these products in direct competition with the licensed S&P 500 and DJIA options offered by plaintiff CBOE, in which plaintiffs McGraw-Hill and Dow Jones have a financial stake.

On November 2, 2006, defendant ISE and its parent company, International Securities Exchange Holdings, Inc., filed a declaratory judgment against plaintiffs Dow Jones and McGraw-Hill in the United States District Court for the Southern District of New York, seeking a declaration that: (1) defendant ISE will not infringe any rights of plaintiffs Dow Jones and McGraw-Hill by listing DJIA and S&P 500 options without licenses; and (2) such conduct by defendant ISE will not infringe plaintiffs' trademarks by using the marks in connection with the unlicensed listing of unlicensed options. Defendant ISE has also taken steps to begin listing these options without authorization, including: (1) adding DJIA and S&P 500 options to its central database; (2) preparing to allocate unauthorized DJIA and S&P 500 options among its members; and (3) drafting notices to its allocation committee regarding its allocation of unauthorized DJIA and S&P 500 options.

On November 15, 2006, plaintiffs filed a three-count complaint in the Circuit Court of Cook County, Illinois against defendants ISE and OCC. Count I asserts that permitting ISE to list and trade options on the Indexes, causing OCC to clear trades in and settle the exercise of those options, would be a misappropriation of the proprietary interests of plaintiffs Dow Jones and McGraw-Hill, as well as a misappropriation of CBOE's exclusive rights under the license agreements it has with Dow Jones and McGraw-Hill. Further, defendant ISE would "wrongfully reap" the benefits of the efforts, time, and money expended by plaintiffs in creating their Indexes and license rights. Count II alleges that allowing defendant ISE to list options on the Index would cause member firms and customers to stop doing business with plaintiff CBOE and potentially damage its reputation, which constitutes tortious interference with prospective economic advantage. Count III alleges that defendant ISE's threatened acts and defendant OCC's participation "constitute unfair competition under the common law of the state of Illinois."

Defendants removed the case to federal court, asserting that Counts I and III are preempted by Section 301 of the Copyright Act. Plaintiffs filed a motion to remand the case to state court, and defendants filed a motion to stay the proceedings pending resolution of the matter before the Southern District of New York. Defendants also filed a motion to transfer the litigation to the Southern District of New York.

DISCUSSION

Currently before the court are plaintiffs' motion to remand and defendants' motion to stay. The court must decide which motion to consider first. Defendants argue that the court should first decide their motion to stay because the declaratory judgment action in the Southern District of New York was filed first in time, and "[t]wo identical lawsuits should not proceed in federal court in different districts." Colborne Corp. v. MC Retail Foods, 1996 WL 470226 (N.D. Ill. 1995). This circuit, however, "has never adhered to a rigid 'first to file' rule." Tempco Electric Heater Corp. v. Omega Eng'r, Inc., 819 F.2d 746, 750 (7th Cir. 1987). Further, "the mere fact that [a] party filed its declaratory judgment action first does not give ...


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