SIG Indices LLLP
The Honorable Jonathan G. Katz
On behalf of SIG Indices LLLP, I welcome the opportunity to provide the Commission with some additional comments regarding the proposed regulations on licensing arrangements for index options.1
Indices Are Protected Under U.S. Copyright and Trademark Law
An index is essentially a collection of data that attempts to replicate certain market, industry, and/or geographic segments based on the performance of publicly traded companies or other visible and quantifiable variables. Index providers select and arrange this information using proprietary methods and professional judgment that require a considerable amount of time, effort, and expense.
These types of investment vehicles are protected in the United States under the copyright and trademark laws.2 For example, the name of an index may be protected as a trademark, as long as the name is either distinctive or has acquired distinctiveness. If a name is eligible for trademark protection, the index provider can prevent others from using that name if that unauthorized use is likely to cause confusion. Specifically, the name of an index cannot be used to suggest that another company's products or services are authorized by or otherwise affiliated with the index provider, if no such affiliation or authorization exists.
In addition, the comprehensive list of securities that form an index may also be protected under copyright law. Such lists are copyrightable as long as the selection of securities on the list involves some creative judgment -- i.e., which specific securities to include, which broad categories to include or exclude, and which securities are to be dropped or added in a dynamic database. Assuming that an index contains the necessary modicum of creativity, the index developer can prevent others from copying that index, or using or reproducing one that is substantially similar to the developer's index without its authorization.
In Europe, the scope of protected works is even greater. Europeans protect compilations of data that are selected or arranged uncreatively (in the copyright sense), but which are arranged nonetheless in a systematic or methodical way. Even the most mundane and unoriginal index of securities would pass this European test, as long as it took time and money to compile. I note for the record that Representative Lamar Smith of Texas, the Chairman of the House Subcommittee on Courts, the Internet, and Intellectual Property, is about to introduce a bill with strong bi-partisan support that would create a similar regime of protection for uncopyrightable databases in the United States. It is expected to pass in the 108th Congress.
The Proposed Regulation Will Impose a Compulsory License on Index Providers
Index providers invest significant time, personnel, capital and other resources to develop products that they hope will meet a need within the investment community and thereby become a successful product. In some cases, these products are highly successful and become of enormous benefit to investors on a long term basis. However, most products fail to generate a reasonable return for the index provider. Even a product that fills a vital role for investors will often lose favor and not sustain its profitability for the index provider over the long term, since the "hot" sector is traditionally a fast moving and ever changing target. Consequently, to account for the expense of being in the business of creating and maintaining such products, index providers obtain trademark or service mark registrations of their indices and seek to license their indices in a manner designed to enhance the return on the successful investment products that they develop. Index providers have often determined that a reasonable return on their investment is jeopardized by market fragmentation. Index providers also often rely upon the exchanges and their members to make significant investments in capital, technology, marketing efforts and personnel towards the success of a product based on their indices. In return and as an incentive for an exchange and its members to make these commitments, index providers may determine that it is best for them to license their trademarks and copyrights to the options exchanges on an exclusive basis.3 In addition, in some instances, exchanges themselves have developed their own index products. The exchanges then protect their ideas by obtaining intellectual property rights in their indices and recoup their costs and generate income by serving as the exclusive trading site for their index option products.
If the Commission adopts the proposed amendments to Rule 19c-5, index providers would be prohibited from entering into exclusive or preferential licensing arrangements with an options exchange. Instead, they would be required to offer the same terms and conditions to all of the options exchanges. Indeed, even exchanges that develop their own indices would be required to license their indices to other exchanges.4 In other words, the proposed regulation would create a compulsory license that would require index providers to make their copyrighted and trademarked products available to all of the options exchanges. The index providers would have no choice but to give all of the options exchanges the right to use their intellectual property, and, as a result, they would have no bargaining power in their negotiations over development commitments, license fees and the various degrees of exclusivity. Thus, the proposed regulations effectively amount to an ad hoc confiscation of the index providers' valuable and proprietary copyright and trademark rights.
The Proposed Regulation Will Undermine the Rights of Copyright Owners and Will Violate International Treaties
Under the U.S. Constitution and the U.S. copyright law, the author of a copyrighted database is entitled to exclusive rights of exploitation, and only Congress or the courts can impose a limitation on those exclusive rights. It would be unprecedented if the Commission were to declare an important subset of copyrighted works subject to a compulsory license, absent a court finding of copyright misuse.
Not only would such a limitation run counter to the clear provisions of the U.S. copyright laws -- § 101 and § 106, the rights of reproduction, public display, and distribution, and the right to create a derivative work -- but it would also violate our treaty obligations as well. The United States spearheaded the international effort to extend copyright protection to databases in the 1980's and 90's, and that hard-fought battle resulted in explicit protection for databases in Article 10 of the GATT/TRIPs agreement that we signed in Marrakech in 1994.
In 1996, the United States also took the lead in negotiating a new treaty -- the World Intellectual Property Copyright Treaty -- that provides express protection for compilations of data in Article 5. It would be a supreme irony if the Commission's proposed curtailment of the normal rights of exploitation for copyrightable databases resulted in a finding that the United States is not in compliance with these treaty obligations which it had labored so strenuously to implement. These sophisticated lists of securities, compiled by experts based on their judgment and experience, reflect copyrightable authorship under both treaties, and the United States has an international obligation to protect those compilations of data..
If the Commission by regulation were to deprive the U.S. creators of their guaranteed rights of exploitation for their valuable compilations, the owners of those rights could challenge that arbitrary taking in federal court. If the Commission were to deprive foreign creators of their rights of exploitation, the United States would be called to account for its actions at the World Trade Organization. Either way, the Commission should not run roughshod over the rights of creators.
Compulsory Licenses Are Detrimental to Trademark Owners
Using a trademark to identify a particular type of product or service serves an important purpose in a free-market economy. It promotes competition by giving the public the means to identify companies that provide successful products or services, and to reward those companies with continued patronage. Index providers use trademarks to identify themselves and the indices that they create, while options exchanges use these trademarks under license in order to identify the various options contracts that are based on these indices. In both cases, these trademarks symbolize the tremendous amount of research and professional judgment that is required in order to create and maintain an index. Without this means of identification, investors would not be able to make informed purchasing decisions, and, thus, meaningful competition would not exist.
The ISE has argued that index providers should be required to license their trademarks to all of the options exchanges on a non-exclusive basis, because "such license arrangements will enhance competition in the market." The Pacific Exchange (the "PLX") has taken this notion one step further by suggesting in a conclusory manner that "exclusive listings encourage anticompetitive behavior. . . ." However, neither the ISE nor the PCX can provide any support for these statements. Index products are among the most actively traded products in the United States with many competing market participants providing quotes. However, even if the ISE's and PCX's concerns had merit, compulsory trademark licensing has never been awarded as a remedy for violating the antitrust laws, because it unfairly deprives the trademark owner of the goodwill associated with his or her mark.5 As the leading authority on trademark law has explained,
For the same reasons, SIG respectfully submits that there is no basis for forcing index providers to license their trademarks in order to address some speculative inequities in the options market. Simply put, compulsory trademark licensing is an inherently punitive remedy of last resort that should only be imposed after considering and rejecting less destructive alternatives.
Moreover, compulsory trademark licensing is also prohibited under international agreements and treaties to which the United States adheres on the protection of intellectual property rights. For example, Article 21 of the GATT/TRIPs agreement states that "compulsory licensing of trademarks shall not be permitted." During the congressional hearings on this treaty, the U.S. Trade Representative made it clear that the United States remains sharply opposed to any form of compulsory licensing of trademarks or servicemarks.7 The U.S. Trade Representative also made it clear that compulsory licenses should only be applied to patents, and, even then, only in extraordinary circumstances, such as national health or security emergencies or adjudicated antitrust violations.8 Therefore, if the Commission adopts the proposed amendments to Rule 19c-5, and imposes a compulsory trademark licensing regime on foreign and domestic index providers, there is, again, a strong likelihood that our trading partners will challenge that regulation in the World Trade Organization on the grounds that it violates the United States' obligations under the GATT/TRIPs agreement. If the WTO dispute resolution panel found a violation of U.S. obligations to the disadvantage of foreign index providers, it would impose sanctions on U.S. companies.
The Commission Does Not Have the Resources or the Expertise Necessary to Administer a Compulsory Licensing Regime
Finally, if the Commission requires index providers to make their copyrighted and trademarked products available to options exchanges under the proposed amendments to Rule 19c-5, the Commission will be forced to monitor a complex and contentious compulsory licensing regime. After all, monitoring usage and maintaining quality control under a forced license opens a Pandora's box of troublesome questions. Who will set the terms of the license? Can the index provider terminate licensees who exceed the scope of the license or fail to observe the proper quality standards? Can the index provider sue the licensees or former licensees for copyright or trademark infringement if they deviate from those standards? Could one of the licensees argue that the copyright or trademark is no longer valid and protectable, because the index provider has failed to monitor the quality and use of the mark, or because the index does not contain a sufficient amount of creative authorship? Who makes all of these judgments? How are they appealed? How are they enforced? Simply put, the end of this rulemaking proceeding would mark the beginning of a series of disputes between copyright and trademark owners and licensees over the scope of each compulsory license, the licensees' obligations under the terms and conditions of that license, and the extent of the licensees compliance with those obligations. SIG respectfully submits that the Commission does not have the authority, the resources or the expertise necessary to deal with these contentious issues.
If the Commission adopts the proposed amendment to Rule 19c-5, it could destroy valuable intellectual property rights of the owners of the indices by requiring them to make their trademarked and copyrighted works available to all options exchanges on the same terms and conditions, without any effective form of quality control, and without the right to say "yes" or "no", which is the essence of an exclusive right. Confiscation of any form of property -- including intellectual property -- without compensation would violate the Fifth Amendment's prohibition on the taking of private property for public use without just compensation. Moreover, compulsory licensing regimes are expressly prohibited under our international treaties, and, thus, could expose the United States to monetary retaliation from our trading partners. SIG respectfully submits that the proposed amendment should be rejected.
Cc: William Donaldson, Chairman