"Cheap" Shot? S&P Parent Sues Vanguard

June 8, 2000 (PLANSPONSOR.com) - Standard & Poor's parent McGraw-Hill has accused the ever-frugal Vanguard Group with breach of contract, trademark infringement and unfair competition in federal court. The charges are related to Vanguard's allegedly unpermissioned use of S&P proprietary indices and trademarks in conjunction with its proposed VIPER (Vanguard Index Participation Equity Receipts) exchange-traded funds (see FINANCE TRENDS).

While Standard & Poor’s currently has more than 400 license agreements covering clearly specified uses of S&P indices and marks, including agreements related to exchange-traded funds (ETFs), the complaint seeks to prevent Vanguard from using the trademarks in conjunction with Vipers or any other exchange-traded security.

It also seeks an order declaring Vanguard in material breach of their 1988 license agreement, as well as holding them liable for unspecified damages and attorneys’ fees.

“Cheap” Shot?

The complaint contends that Vanguard tried to “shoehorn” its usage of S&P indices and trademarks within the scope of a 1988 agreement between the two firms, rather than expanding that license – and the fees it pays for such license – to include the new offerings. In a press release S&P says that while the new exchange-traded funds have been positioned as shares of existing open-end mutual funds (and covered by the prior agreement), they are different. They “exhibit all of the characteristics of shares of an ETF, which differ significantly in a number of ways from shares of the open-end mutual funds that Vanguard has offered under the 1988 agreement”.

“Standard & Poor’s indices are among the most recognized and respected investment benchmarks in the world and have grown in popularity thanks to the innovative work and creativity of our staff,” said Leo C. O?Neill, president of Standard & Poor’s. “This lawsuit seeks to protect the invaluable intellectual property and work product that we have spent decades creating.”

A Surprising Tactic

In a statement, Vanguard characterized the complaint as “baseless and without merit, and a surprising tactic.” Greg Barton, Managing Director and General Counsel of The Vanguard Group distinguished the proposed Vanguard offerings from other exchange-traded shares. ” There has been no change in the management of the Vanguard index funds or Vanguard’s use of S&P’s intellectual property. Rather, the exchange-traded shares represent merely a different form of distributing shares of our existing funds.”

Vanguard maintains that the VIPERs represent interests in the same funds already covered by S&P licenses – and intends to contest McGraw-Hill’s charges. If approved, the Vanguard Group ‘s recent filing for five exchange-traded versions of its stock index funds would be the first time a traditional fund had an exchange-traded class of shares.

– Nevin Adams                editors@plansponsor.com