June 19, 2000
The McGraw-Hill Companies of New York, parent company of Standard & Poor's, filed a lawsuit against Vanguard Group of Malvern, Pa. charging that Vanguard breached the 15-year-old licensing agreement it had with S&P by registering a new class of exchange-traded shares on three of Vanguard's equity index funds without the index creator's approval.
The suit was filed in the U.S. District Court for the Southern District of New York. The law firm of Weil, Gotschal & Manges, LLP of New York is representing McGraw-Hill.
While S&P maintains that its original 1985 agreement and subsequent expanded 1988 agreement allowed Vanguard to use the S&P 500 name and trademark in conjunction with several of its mutual funds, S&P claims that Vanguard never sought out S&P's approval before it registered a new exchange-traded class of shares with the SEC on May 12. The new exchange-traded shares will carry the acronym "VIPER" which stands for Vanguard Index Participation Equity Receipts.
S&P also alleged that Vanguard had been "working secretly" on obtaining a no-action letter of approval from the SEC for the new share class.
"At no point from (the) defendants' initial internal consideration of the concept of the new VIPERS product through their May 12 public announcement and SEC filing did the defendants ever even mention such an offer to McGraw-Hill or seek or obtain the right to use any S&P indices or the S&P Marks..." noted the lawsuit. "Defendants instead chose to trample brazenly on McGraw-Hill's proprietary rights, as well as to breach the terms of the 1988 agreement."
Vanguard does not need to obtain S&P's explicit approval because it was simply registering a new class of shares, something it has done repeatedly, on several funds that fall under the original licensing agreement with S&P, according to a statement on Vanguard's website.
"We're not creating a new pool of assets," said John Demming, a spokesperson for Vanguard. "We're creating a new share class to draw short-term investors out of the fund..." In an online posting to its website Vanguard claims that the complaint is "baseless and without merit."
Vanguard is proceeding with its VIPER share registration and expects to introduce its new share class in the third quarter of this year, said Demming.
S&P is seeking unspecified damages. The suit also asks the court to determine the precise scope of the rights granted under its earlier licensing agreement.
S&P further seeks an order requiring Vanguard to withdraw its SEC registration for the new VIPER shares. The suit notes repeatedly that S&P has the right to elect to terminate the amended 1988 agreement with Vanguard altogether.
The lawsuit may be decided based on a determination of what Vanguard's VIPER product is - a new product or another share class. But, the suit probably really is over licensing fees, said one fund industry attorney who has negotiated index licensing arrangements for several fund groups. Licensing fees, which are charged as a percentage of assets, are rising, the attorney said. Fees until recently had been just under one basis point but newly negotiated licensees are now paying more than one basis point, the attorney said.