This article reviews the relevant case law and examines whether, under prevailing legal precedents, exchange-traded funds ("ETFs"), mutual funds or other investment vehicles may track the same basket of stocks that make up an index without obtaining (or paying for) a license.
Index providers have long argued that they have an intellectual property right in the basket of stocks and other components that comprise their indexes. Based on their considerable success in defending this right, they limit the number of ETFs and other financial products that track their indexes by entering into exclusive and restrictive licensing agreements with product developers. These agreements have become a central part of the industry's business model, and they collectively represent tens, if not hundreds, of millions of dollars in annual revenues.1
A recent ruling by the United States Court of Appeals for the Second Circuit, however, has thrown these rights-and this business model-into question. In Dow Jones & Co. v. International Securities Exchange, Inc.2 ("ISE"), the court found that index providers do not have the right to restrict the listing of options based on ETFs that track their indexes.
Although the ISE ruling dealt narrowly with options, the court left open a much larger question: whether index providers have any right to prevent use of their indexes for financial products. It may seem obvious that they do, but a careful reading of recent case law suggests that the courts may be ready to bring the period of exclusive and restrictive index licensing agreements to an abrupt end.
Background: The Tort Of Misappropriation
Misappropriation is a doctrine found in common law, and it is not easy to define. To illustrate this doctrine, courts frequently cite a 1918 United States Supreme Court case called International News Service v. Associated Press ("International News Service").3 In that case, the Associated Press ("AP") sought an injunction to prevent the International News Service ("INS") from distributing to INS's customers, commercially and for profit, news that had been gathered and published by AP. The district (or trial-level) court granted the injunction, and the appellate court affirmed. The Supreme Court upheld the injunction as well, finding that AP and INS were "competitors in business" and that INS had engaged in unfair competition by transmitting news it had appropriated from AP "for commercial use, in competition with [AP] . . . ." 4 [Emphasis added.]
For reasons that are beyond the scope of this article, the decision in International News Service is no longer binding on individual states. But to the extent that the doctrine of misappropriation survives in New York, the site of the recent ISE ruling, the basic reasoning of International News Services has been adopted nonetheless. In particular, the requirement of direct competition between the defendant accused of misappropriation and the product or service offered by the plaintiff has been recognized by the Court of Appeals for the Second Circuit within the last ten years as a requirement of New York law.5