Bloomberg News

ISE Renews CBOE Automated-Markets Patent Court Fight

March 11, 2013

ISE Back in Court With CBOE in Automated-Markets Patent Fight

Traders at the Chicago Board Options Exchange work in the S&P 500 stock index options pit in Chicago, Illinois. Photographer: Tim Boyle/Bloomberg

International Securities Exchange LLC, an electronic options-trading forum, is set to renew legal hostilities with Chicago Board Options Exchange Inc. in a fight over an automated trading patent.

Jury selection began today at the federal courthouse in Chicago for a trial that U.S. District Judge Joan Lefkow told the prospective panelists may last into early April. The case is one of at least four legal disputes between Deutsche Borse AG- owned ISE and CBOE Holdings Inc. (CBOE:US), the Chicago-based operator of the biggest U.S. options exchange.

“The evidence will establish that CBOE deliberately copied ISE’s patented system for executing trades,” New York-based ISE said in a court filing last month.

Competition is increasing among derivatives-exchange operators including NYSE Euronext and Nasdaq OMX Group Inc. (NDAQ:US) ISE in a March 1 regulatory filing revealed plans to start a second options market called Topaz which, if approved, would be the 12th such U.S. forum. Nasdaq OMX owns three of the venues while CBOE and NYSE Euronext (NYX:US) have two each.

ISE’s patent scrap with the Chicago Board Options Exchange began with a complaint filed in federal court in Manhattan in 2006. The case was transferred to Chicago after CBOE counter- sued there, seeking a finding of non-infringement.

Lost Profits

ISE seeks a royalty and lost profits, as well as either an injunction barring further infringement or royalties for the balance of the patent’s life. The patent expires in 2019.

Lefkow, in a ruling dated March 10 and posted on the court’s electronic docket today, said she will bar ISE from presenting evidence of pre-suit damages. The New York-based exchange failed to comply with a federal “marking statute,” requiring it to make public its patent claim, the judge said.

“Although ISE sufficiently pleaded CBOE’s knowledge of the patent and its infringement, ISE did not disclose its theory that it was not required to mark because it did not make or sell the invention after issuance of the patent,” prejudicing CBOE as it prepared for trial, Lefkow said.

The statutory punishment for that failure is that damages can only be recovered for that time period after notice of infringement is given, according to the judge’s ruling.

Used Elsewhere

CBOE contends in court papers that ISE did nothing more than acquire a patent for a method that had already been used elsewhere.

“Automating such floor-based trading is far from new,” the Chicago exchange’s lawyers said in a pretrial brief filed last month. CBOE argued that the ISE patent claims lack innovation and should be declared invalid.

Lefkow declared the patent invalid in March 2011. A federal appeals court reversed that ruling in May.

While the process of selecting eight jurors began today, the judge told candidates for service they won’t begin hearing evidence until March 14. Lefkow will hear arguments on still- pending pretrial motions tomorrow and on March 13, according to her ruling.

C2 Options Exchange Inc., an all-electronic exchange owned by CBOE Holdings, in August sued ISE seeking a declaratory judgment that it too is not infringing the same patent at issue in the trial.

Chicago U.S. District Judge Matthew Kennelly in January denied ISE’s bid for dismissal of that complaint. It filed an answer on Jan. 28.

Case Transferred

CBOE, in a separate lawsuit filed in Chicago last year, accused ISE of infringing patents related to quote-risk monitoring and quote-modification. That case, in which CBOE seeks at least $525 million in damages, has been transferred to federal court in New York.

An Illinois appeals court last year rejected ISE’s bid to overturn a court order barring it from providing a forum for trading S&P 500 index options. ISE had been sued by McGraw-Hill Cos., parent of Standard & Poor’s, and CBOE, which claims an exclusive license to offer S&P 500-based options.

ISE has asked the U.S. Supreme Court to review that ruling.

The cases are Chicago Board Options Exchange Inc. v. International Securities Exchange LLC, 07-cv-00623, and International Securities Exchange LLC v. Chicago Board Options Exchange Inc., 07-cv-04709, U.S. District Court, Northern District of Illinois (Chicago).

To contact the reporter on this story: Andrew Harris in Chicago federal court at aharris16@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.


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