Instinet Incorporated et al v. Ariel (UK) Limited

Filing 53

MEMORANDUM OPINION AND ORDER:#100820 re: 45 MOTION to Amend/Correct Answer. filed by Ariel (UK) Limited. For the foregoing reasons, the defendant's motion is denied. Instinet entities ("Instinet") is hereby directed to file a motion for summary judgment within two weeks. Ariel UK Limited ("Ariel") is directed to respond to the motion within 30 days, and Instinet is ordered to reply to Ariel's submission within 15 days. (Signed by Judge John F. Keenan on 9/26/2011) (jfe) Modified on 9/26/2011 (jab).

Case 1:09-md-02013-PAC Document 57

Filed 09/30/10 Page 1 of 45
USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: 9-26-11

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-----------------------------------X
INSTINETSTATES DISTRICT COURT
:
UNITED INCORPORATED, INSTINET
HOLDINGS INCORPORATED, INSTINET
:
SOUTHERN DISTRICT OF NEW YORK
GROUP, LLC, and INSTINET, LLC,
-----------------------------------------------------------x:
In re FANNIE MAE 2008 SECURITIES
::
08 Civ. 7831 (PAC)
Plaintiffs,
LITIGATION
::
09 MD 2013 (PAC)
: : No. 08 Civ. 7141 (JFK) (RLE)
-against::
OPINION & ORDER
: MEMORANDUM OPINION AND ORDER
-----------------------------------------------------------x
ARIEL (UK) LIMITED,
:
:
Defendant.
:
-----------------------------------X
HONORABLE PAUL A. CROTTY, United States District Judge:
JOHN F. KEENAN, United States District Judge:

BACKGROUND1
Before the Court is Defendant Ariel (UK) Ltd.’s (“Ariel” or
The early years of for leave to amend its answer. was the
“Defendant”) motionthis decade saw a boom in home financing which For fueled, among
other things, by low interest rates the credit conditions. New and
reasons set forth below, and lax motion is denied lendingainstruments, such as
scheduling
subprime in effect.
order ismortgages (high credit risk loans) and Alt-A mortgages (low-documentation loans)
kept the boom going. Borrowers played a role too; they took on unmanageable risks on the
I.
Background
assumption that the market wouldfrom a to rise and that refinancing options would always be
This action arises continue dispute regarding the scope of
available rights in the computerized securities trading software
Ariel’s in the future. Lending discipline was lacking in the system. Mortgage originators did
not hold these high-risk mortgage loans. Rather than carry the rising risk on their books, the
developed by the Plaintiff Instinet entities (collectively
"Instinet" or “Plaintiff”) pursuant to a series of securitized packages
originators sold their loans into the secondary mortgage market, often as licensing
agreements signed in securities (“MBSs”).Unless otherwise noted, the
known as mortgage-backed the 1970’s.
MBS markets grew almost exponentially.
facts below arehousing bubble burst. In 2006, theComplainthousingAriel’s
But then the taken from Instinet’s demand for and dropped abruptly
Answer. prices began to fall. In light of the changing housing market, banks modified their
and home
A. The practices and became unwilling to refinance home mortgages without refinancing.
lending Parties and Their Business Relationship
Instinet is a successor in interest to Institutional
1
Unless otherwise indicated, all references cited as “(¶ _)” or to the in 1969 to develop and
Networks Corporation, which was founded “Complaint” are to the Amended Complaint,

dated June 22, 2009. For purposes of this Motion, all allegations in the Amended Complaint are taken as true.

1

operate a computerized trading system for securities.

Ariel is

a British company established in 1971 by a group of London-based
merchant banks which also sought to establish a computerized
trading system that could trade blocks of stock between large
institutions.
In or around 1970, Instinet obtained both European and
American patents on an early computerized securities trading
system.

Ariel was then attempting to develop its own trading

system and entered into a licensing agreement with Instinet on
August 11, 1972, under which Ariel could develop its own
computerized securities trading system based on the design of
the Instinet System.

The agreement had a term of 14 years,

subject to certain conditions that would provide Ariel licensing
rights under the agreement in perpetuity.
On December 24, 1975, Ariel sent a proposal to Instinet’s
attorney by cable to renegotiate the 1972 Agreement.

Under the

terms of this proposal, Ariel would pay Instinet $175,000
provided that, among other things, Ariel would receive "a nonexclusive license in all those territories where Instinet has
patents granted or pending" and "full and unencumbered access to
and right to make use of the Instinet Two System and
documentation on same terms as though [the 1972 Agreement] were
still in force."

This proposal was subject to the condition

that the parties’ attorneys would "draw up such legal

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documentation

. . . as will give effect to the preceding

agreement and conditions."
On December 26, 1975, Instinet responded by telex,
accepting the offer on the "terms set forth in [the] Ariel
cable."

In the telex, Instinet also urged that Ariel’s lawyers

"send confirming papers [to Instinet’s lawyers] soonest."
In April 1976, the parties finalized their agreement by
signing a written contract with an effective date of December
31, 1975. (“1975 Agreement").

The 1975 Agreement provided that

the 1972 Agreement "be treated as terminated" after the
effective date, "on the basis the obligations of both
parties . . . shall wholly cease on that date."
B.

Procedural History
In June 2008, Ariel sent a demand letter to Instinet,

claiming that it has a right of ingress in Instinet’s current
trading technology and software.

On August 11, 2008, Instinet

commenced this action seeking a declaratory judgment addressing
the rights and obligations of the parties.

Instinet requested

that the Court declare: (a) "[t]hat the 1975 Agreement
terminated the 1972 Agreement in its entirety"; (b) "[t]hat
pursuant to the 1975 Agreement, the technology and software
being licensed to Ariel is limited to such technology and
software as it existed no later than June 30, 1976"; (c) "[t]hat
Ariel has no rights in or to Instinet’s current technology or

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software"; and (d) "[t]hat Ariel does not have any of the rights
claimed in the Demand Letter, whether pursuant to the 1972
Agreement, the 1975 Cable Agreement, the 1975 Agreement, or
otherwise."
On September 9, 2009, Instinet filed a motion for summary
judgment, asserting that the 1975 Agreement is both integrated
and unambiguous, and thus it is entitled to the requested
declaratory relief as a matter of law.

On March 5, 2010, the

Court held that the 1975 Agreement is integrated, unambiguous,
and terminated the parties’ prior agreement in its entirety, and
that the 1975 Agreement did not provide Ariel perpetual rights
to technology developed by Instinet.

Whether Instinet’s current

securities trading platform still incorporates components of the
35-year-old computer technology to which Ariel has licensing
rights under the 1975 Agreement was an issue of material fact,
however, so the Court declined to declare that Ariel had no
rights in technology that comprises Instinet’s current
computerized securities trading platform. Instinet, Inc. v.
Ariel (UK) Ltd., No. 08 Civ. 7141, 2010 WL 779324, at *4
(S.D.N.Y. Mar. 5, 2010).
In July 2010, after the Court denied Ariel's motion for
reconsideration of its March 5, 2010, Memorandum Opinion and
Order, Ariel requested that Instinet produce the source code and
the documentation of the Instinet II System (referred to as the

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“1976 software”) "as at midnight of June 30, 1976."
Decl., Ex. D.)

(Bainton

After claiming that Ariel's request was barred

because discovery had closed, Instinet admitted that it did not
have "in its possession, custody, or control a copy of the 1976
software or documentation." (Bainton Decl., Ex. F.)

In

response, Ariel provided Instinent with a written "notice of
election to rescind" the 1975 agreement based on Instinet's
breach of Paragraph 5.4 of the 1976 Agreement.
At the pretrial conference on September 8, 2010, the Court
set a schedule for cross-motions for summary judgment.

Briefs

were due on November 5, 2010, responses by December 10, 2010,
and replies by January 7, 2011.

Just before Instinet was set to

file its renewed motion for summary judgment, Ariel made a
motion for leave to amend its Answer to include the affirmative
defense of rescission.
II. Analysis
A.

Legal Standard
Each party proffers that a different standard should govern

Ariel’s motion for leave to amend:

Ariel proposes the liberal

Rule 15(a) standard, while Instinet asserts that the stricter
Rule 16(b)(4) standard should apply.

In fact, the correct

standard to apply here is Rule 15(d), which governs the
amendment of pleadings to include "any transaction, occurrence,

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or event that happened after the date of the pleading to be
supplemented.” Fed. R. Civ. P. 15(d).
Rule 15(d) specifically governs motions to amend claims
where the occurrences giving rise to the claims arise after the
filing of the pleading to be amended.

“Where a plaintiff's

proposed additions to his complaint principally recite
transactions, occurrences or events that have transpired since
the date of the pleading sought to be supplemented, the motion
is technically categorized under Rule 15(d) . . . as opposed to
Rule 15(a).” Flaherty v. Lang, 199 F.3d 607, 610 (2d Cir. 1999);
see Bornholdt v. Brady, 869 F.2d 57, 68 (2d Cir. 1989).

Here,

Ariel contends that the event giving rise to the instant motion
is Instinet’s failure to produce the 1976 software.

Ariel

sought the software after the date of the pleading and
therefore, the court will apply Rule 15(d) to evaluate Ariel’s
motion for leave to amend its Answer.1
A court may grant a motion pursuant to Rule 15(d) "in the
exercise of its discretion, upon reasonable notice and upon such
terms as may be just.

Absent undue delay, bad faith, dilatory

tactics, undue prejudice to the party to be served with the

1

It should be noted that the Rule 15(d) standard is functionally
identical to the standard set forth in Rule 15(a). See Gittens
v. Sullivan, 670 F. Supp. 119, 123-24 (S.D.N.Y. 1987) (“The
standard for the exercise of discretion on a motion to
supplement the pleadings [under Rule 15(d) ] is the same as that
for . . . a motion to amend a complaint under Rule 15(a).”).
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proposed pleading, or futility, the motion should be freely
granted." Quarantino v. Tiffany & Co., 71 F.3d 58 (2d Cir.
1995); see also Weeks v. New York State, 273 F.3d 76, 88 (2d
Cir. 2001).

The Second Circuit’s admonition to grant leave

freely, however, “does not mean that all amendments should be
granted under all circumstances.” Sobel v. Yeshiva Univ., 477
F.Supp. 1161, 1168 (S.D.N.Y. 1979).
B.

Undue Delay and Prejudice
Ariel contends that its motion will not cause undue delay

because the event that gave rise to Ariel’s claim of rescission-specifically, Instinet's inability to provide the 1976 version
of the Instinet system--did not occur until August 2010.
According to Ariel, Instinet's inability to provide the 1976
software was an "unanticipated turn of events," and Ariel could
not have made its rescission motion before the event occurred.
(Def. Mem. at 6.)
Ariel admits in its reply memorandum, however, that David
Manns, an employee of Ariel in the 1970s, had informed Ariel
that "because Instinet II was still in development as of June
30, 1976, no copy of Instinet II was 'frozen' for posterity as
at midnight June 30, 1976." (Reply Mem. at 6-7.)

Therefore, as

early as July 1, 1976, Ariel was on notice that Instinet would
be unable to provide a copy of the June 30, 1976 software, as
Instinet was still making changes to it.

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Additionally, David Manns was deposed on April 16, 2009,
nearly a year before the entry of the March 5, 2010 Opinion and
Order.

During this deposition, Manns again explained that

Instinet II was not “frozen” on July 30, 1976.

At that time,

Ariel and its counsel should have known that Instinent would be
unable to provide a copy of the June 30, 1976 software.

Ariel

offers no explanation for its failure to bring this motion to
amend after deposing Manns.
barred by undue delay.

Therefore, granting this motion is

See Petramale v. Local Union 17, 775 F.

Supp, 775, 782 (S.D.N.Y. 1986), rev’d on other grounds, 847 F.2d
1009 (2d Cir 1988) (denying motion to amend where plaintiff was
made aware of an additional argument at a discovery deposition);
Evans v. Syracuse City Sch. Dist., 704 F.2d 44, 47 (2d Cir.
1983) (refusing to allow an amendment to add an affirmative
defense two years and nine months after it could have been
asserted, noting that defendant offered no compelling reasons
for the delay).
Permitting Ariel to amend at this late juncture would
result in substantial prejudice to Instinet, as it would require
the reopening of discovery and further delay the resolution of
this lawsuit. See Zenith Radio Corp. v. Hazeltine Research,
Inc., 401 U.S. 321, 332 (1971) (holding that whether to reopen
discovery is in the “sound discretion” of the trial judge).
Here, allowing plaintiff now to litigate matters that he “had an

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opportunity, but neglected, to litigate,” id. at 332, would
impose an injustice to defendants.
C.

Futility
Finally, if the proposed amendment is deemed to be futile,

“it is not an abuse of discretion to deny leave to amend.”
Ruffolo v. Oppenheimer & Co., 987 F.2d 129, 131 (2d Cir. 1993).
“An amendment to pleading is futile if the proposed claim could
not withstand a motion to dismiss pursuant to Fed. R. Civ. P.
12(b)(6).” Lucente v. Int'l Bus Machines Corp., 310 F.3d 243,
258 (2d Cir. 2002).

Because rescission of a contract is an

equitable remedy, Maldonado v. Valsyn, S.A., 390 Fed. App’x 27
(2d Cir. 2010), the defenses such as laches would apply.

If

laches operates to bar Ariel’s rescission claim, permitting
Ariel to amend its complaint to include rescission of contract
would be futile. See U.S. v. Lemos, 08 Civ. 11144, 2010 WL
1192095 (S.D.N.Y. Mar. 26, 2010) (basing a 12(b)(6) dismissal on
a laches defense).
Here, Ariel is attempting to access the 1976 software for
the first time in nearly 35 years.

The doctrine of laches “is

based upon maxim that equity aids the vigilant and not those who
slumber on their rights. It is defined as neglect to assert a
right or claim which, taken together with lapse of time and
other circumstances causing prejudice to the adverse party,
operates as bar in court of equity.” State of Kansas v. State of

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Colorado, 514 U.S. 673 (1995) (citing Black’s Law Dictionary).
Because Ariel has failed to preserve its rights with respect to
the software, it may not base rescission of the 1976 contract on
Instinet’s failure to produce such software.

Even if the

instant motion were granted, laches would bar Ariel from
rescinding the contract.

Therefore, Ariel’s motion is futile.

See TBC Consoles, Inc. v. Forecast Consoles, Inc., No. 05 Civ.
2756, 2009 WL 2337138 (S.D.N.Y. July 27, 2009) (denying
plaintiff’s motion to amend on the grounds that it is futile,
because the plaintiff had not offered any justification for its
failure to assert the claims in its original complaint);
American Stock Exch., LLC v. Mopex, Inc., 230 F. Supp. 2d 333,
336 (S.D.N.Y. 2002) (denying defendant’s motion for leave to
amend on the grounds that it was futile, noting that defendant’s
proposed additions were time-barred).

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III. Conclusion

For the foregoing reasons, the defendant's motion is
denied.

Instinet entities ("Instinet") is hereby directed to

file a motion for summary judgment within two weeks.

Ariel UK

Limited ("Ariel") is directed to respond to the motion within 30
days, and Instinet is ordered to reply to Ariel's submission
within 15 days.
SO ORDERED.

Dated:

New York, New York
september'lL 2011

JOHN F. KEENAN
United States District Judge

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