CBOE Must Face Patent Claim on Options-Trading System

CBOE Holdings Inc. (CBOE)’s Chicago Board Options Exchange must face patent-infringement claims brought by International Securities Exchange over an automated system for trading options contracts, a U.S. appeals court said.

The U.S. Court of Appeals for the Federal Circuit said today a trial judge erred in interpreting key aspects of the ISE patent, and remanded the case for further proceedings. The lower court had ruled that CBOE’s Hybrid Trading System didn’t infringe the patent.

ISE was the first all-electronic U.S. options exchange when it began in May 2000. CBOE sued ISE in 2007 after it received a letter from ISE demanding that it pay patent royalties and was sued by ISE in New York over its Hybrid system that blends traditional open-outcry trading with electronic execution. Chicago-based CBOE sought a court ruling that cleared its system of any infringement claims.

There are currently nine U.S. options exchanges, which compete by offering different rules and pricing to attract specific types of traders. Three more exchanges are planned for this year.

CBOE Holdings had 28.4 percent of options volume last month, according to data compiled by Chicago-based OCC, which clears and settles all equity transactions. ISE had 16.3 percent, making it the third-largest of the nine current exchanges.

Competing Platforms

“CBOE is confident that the evidence at trial will establish that our Hybrid Trading System, which includes matching and allocating through the use of open-outcry trading, is not an ‘automated exchange’ covered by ISE’s patent,” Gail Osten, a spokeswoman for CBOE, said in an e-mail.

ISE is owned by Frankfurt-based Deutsche Boerse AG’s Eurex subsidiary. In March, the company said it may introduce a second platform for U.S. equity options.

“We are very gratified that the appeals court ruled unanimously in ISE’s favor,” Gary Katz, ISE’s chief executive officer, said in a statement. “We will continue to vigorously pursue our ongoing effort to protect our patented technology as this case moves back to the trial judge for further consideration.”

The case is Chicago Board Options Exchange Inc. v. International Securities Exchange LLC, 2011-1267, U.S. Court of Appeals for the Federal Circuit (Washington). The lower court case is Chicago Board Options Exchange v. International Securities Exchange LLC, 07cv623, U.S. District Court for the Northern District of Illinois (Chicago).

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editor responsible for this story: Bernard Kohn at bkohn2@bloomberg.net

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