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Legal Article - Domain Registration Liaibility

Dimitry Tsimberg, Esq.

Higher Standards of Domain Registration - Liability After Sex.com Case


In the wake of the $15 million settlement between Gary Kremen (owner of Sex.com) and VeriSign, I was forced to re-examine the much discussed opinion of the 9th Circuit in Kremen v. Network Solutions. Well, actually, this article by Rod Dixon on CircleID.com prompted me to comment on his thoughts about our (perhaps parochial) CA law.

Having searched the news sites and weblogs, I realized that, other than the basic news of the case, not much has been published about the substantive legal issues and their implications on future conduct and litigation. So, as a follow-up, I decided to put together this primer on domain name registration and civil liability for mishandling this "property right."

The Facts of Kremen v. Network Solutions

To understand the legal issues and their implications, one must grasp the basic facts of the Sex.com case. Judge Alex Kozinski wrote a fantastic (and quite entertaining) opening of the facts:

"Sex on the Internet?," they all said. "That'll never make any money." But computer-geek-turned-entrepreneur Gary Kremen knew an opportunity when he saw it. The year was 1994; domain names were free for the asking, and it would be several years yet before Henry Blodget and hordes of eager NASDAQ day traders would turn the Internet into the Dutch tulip craze of our times. With a quick e-mail to the domain name registrar Network Solutions, Kremen became the proud owner of sex.com. He registered the name to his business, Online Classifieds, and listed himself as the contact.

Con man Stephen Cohen, meanwhile, was doing time for impersonating a bankruptcy lawyer. He, too, saw the potential of the domain name. Kremen had gotten it first, but that was only a minor impediment for a man of Cohen's boundless resource and bounded integrity. Once out of prison, he sent Network Solutions what purported to be a letter he had received from Online Classifieds. It claimed the company had been "forced to dismiss Mr. Kremen," but "never got around to changing our administrative contact with the internet registration [sic] and now our Board of directors has decided to abandon the domain name sex.com." Why was this unusual letter being sent via Cohen rather than to Network Solutions directly? It explained:
"Because we do not have a direct connection to the internet, we request that you notify the internet registration on our behalf, to delete our domain name sex.com. Further, we have no objections to your use of the domain name sex.com and this letter shall serve as our authorization to the internet registration to transfer sex.com to your corporation."
The letter was signed "Sharon Dimmick," purported president of Online Classifieds. Dimmick was actually Kremen's housemate at the time; Cohen later claimed she sold him the domain name for $1000. This story might have worked a little better if Cohen hadn't misspelled her signature.

Despite the letter's transparent claim that a company called "Online Classifieds" had no Internet connection, Network Solutions made no effort to contact Kremen. Instead, it accepted the letter at face value and transferred the domain name to Cohen. When Kremen contacted Network Solutions some time later, he was told it was too late to undo the transfer. Cohen went on to turn sex.com into a lucrative online porn empire. And so began Kremen's quest to recover the domain name that was rightfully his.

The Legal Issues

By the time the 9th Circuit received the case, Cohen (the con man) had violated every court order and absconded with all of the money to Mexico. Since a $50,000 reward offered by Kremen failed to bring Cohen back to the U.S., the only viable defendant left was Network Solutions and it had filed a motion for summary judgment, arguing that it could not be held liable as a matter of law.

The District Court sided with Network Solutions and held that Kremen had no implied contract because there was no consideration: Kremen had registered the domain name for free. The court rejected the third-party contract claim on the ground that the cooperative agreement did not indicate a clear intent to grant enforceable contract rights to registrants. The conversion claims fared no better. The court agreed that sex.com was Kremen's property, but concluded that it was intangible property to which the tort of conversion does not apply. The conversion by bailee claim failed for the additional reason that Network Solutions was not a bailee.

Thus, Kremen was left with a huge injury (theft and exploitation of the domain he registered), but literally no remedy under the law. Confronted with this obvious injustice, the 9th Circuit applied the old legal addage that "every right, when withheld, must have a remedy, and every injury its proper redress." What was Kremen's right to sex.com? The 9th Circuit found that he had an "intangible property" right, since a domain name satisfied the legal definition of "property." The court commented:
"Registering a domain name is like staking a claim to a plot of land at the title office. It informs others that the domain name is the registrant's and no one else's. Many registrants also invest substantial time and money to develop and promote websites that depend on their domain names. Ensuring that they reap the benefits of their investments reduces uncertainty and thus encourages investment in the first place, promoting the growth of the Internet overall."

Much of the remaining opinion is devoted to legal technicalities of whether the domain name was reduced to a document for purposes of conversion law (and Network Solutions took the idiotic view that a domain name is not supported by any document). The Court of course rejected this, and held that the Domain Name System (DNS) "is a document (or perhaps more accurately a collection of documents). That it is stored in electronic form rather than on ink and paper is immaterial."

The court also rejected a narrow Restatement approach (adopted by some states) that limited conversion claims to only tangible property rights. Finding that CA law was more broad and applicable to all property rights, tangible or intangible, the Court held that "Kremen therefore had an intangible property right in his domain name, and a jury could find that Network Solutions 'wrongful[ly] dispos[ed] of' that right to his detriment by handing the domain name over to Cohen." Thus, the summary judgment granted by the District Court on the conversion claim was reversed, and the case was sent back for a jury trial.

Judge Kozinski is (arguably) one of the best legal minds in the nation, and he carefully considered the consequences of the ruling:
"Exposing Network Solutions to liability when it gives away a registrant's domain name on the basis of a forged letter is no different from holding a corporation liable when it gives away someone's shares under the same circumstances. We have only applied settled principles of conversion law to what the parties and the district court all agree is a species of property. It would not be unfair to hold Network Solutions responsible and force it to try to recoup its losses by chasing down Cohen. The district court was worried that 'the threat of litigation threatens to stifle the registration system by requiring further regulations by [Network Solutions] and potential increases in fees.' Given that Network Solutions's 'regulations' evidently allowed it to hand over a registrant's domain name on the basis of a facially suspect letter without even contacting him, 'further regulations' don't seem like such a bad idea. And the prospect of higher fees presents no issue here that it doesn't in any other context. A bank could lower its ATM fees if it didn't have to pay security guards, but we doubt most depositors would think that was a good idea. We apply the common law until the legislature tells us otherwise. And the common law does not stand idle while people give away the property of others."

The Implications

There are several important lessons to be drawn from the sex.com case.

What must domain registrars now do?

Domain name registrars can no longer sit back and do nothing when there is a dispute over a domain registration, and certainly never simply transfer the domain to another without investigation of that person's legal right. A registrar faces liability for conversion of a property right in the domain name, under CA common law.

What is considered conversion under CA common law?

To establish conversion, a plaintiff must show "ownership or right to possession of property, wrongful disposition of the property right and damages." "Disposition" may involve the taking of the property, but also covers any actual interference with the ownership/property right, including destruction, alteration or transfer (as well as unauthorized use and refusal to return after demand).

What is "wrongful" is a bit tricky to understand. The ACT of interference (taking, loss, transfer, etc.) must be knowingly and intentionally done. Mere negligence in doing the act is insufficient to hold someone liable for conversion. Thus, for example, if a defendant did not intend to transfer a domain name, but did so because some employee negligently pushed a wrong button, there is no liability for conversion.

However, wrongful intent is not necessary, and mistake, good faith and due care are ordinarily immaterial, and cannot be used as defenses to conversion. Thus, ignorance of ownership is no excuse, as is mistaken delivery to the wrong person. For example, unauthorized sale of pledged stock and release of securities, without complying with required formalities, have been found to be conversion. This only reflects a social policy that as between the innocent property owner and the party who is responsible for the act, the latter should bear the loss. It is not to say that this party has no recourse against the transferee - it can recoup its damages as against the party in possession of the converted property through what is called an "indemnity" claim.

Who may be liable for conversion of a domain name?

While the Kremen case dealt solely with Network Solutions (now VeriSign), CA common law extends liability for conversion to even innocent agents. Thus, an agent who sells converted goods for his prinicipal, or turns over money with knowledge of paramount title, is liable for conversion. This could include any party that is asked to transfer a domain, such as domain name resellers, web hosting service providers, web programmers, or ISPs Innocent buyers are in the same position, and can be liable for conversion. Again, this harsh rule is moderated by their ability to file a cross-action against the principal/transferor.

Are there no defenses or solutions to safe transfer of domains?

Sure there are. First, if transferring a domain, one can simply take steps to make sure that the true owner gave permission. Network Solutions screwed up in failing to contact the registered owner to verify the alleged permission, and relied on a badly forged and implausible letter.

Second, one can refuse to take on the responsibility of being the registrant of record for a customer, contrary to what many ISP and web hosting services seem to want to do. If a Registrar (like VeriSign) is requested to transfer a domain, the ISP/web service then has to verify that the request to transfer is authorized by the person on whose behalf the doman is held. Why not simply register in the name of the customer and save the headache?

Third, a defense of "privilege" exists where the defendant has a claim for unpaid fees, or lien on the property, and has a privilege to peacefully repossess the property. To that end, prompt recourse to the courts should be sought, and one case concluded that a reasonable opportunity to determine the claim must be afforded (e.g. in a court proceeding), which "negatived any theory of conversion."

As such, anyone that is in a position of transfering domains (and wants to register in its own name for another person) should consult with an attorney to correctly structure documents and customer agreements, as well as internal policies, in order to reduce the risk of unauthorized transfer. To that end, "indemnity" agreements are essential to assure the ability to recoup losses in case of a problem domain transfer. In cases of competing claims for a domain, an attorney may also save many future problems by getting a court to determine the true right of ownership.

In short, the general strategy, when dealing with authorizations for domain name transfers, should include careful record keeping, proof of all ownership rights, and close communication and verification with the current domain owner. Proper authorization procedures will go a long way in reducing the risk of a civil lawsuit.

To read about another recently filed case against VeriSign (for allegedly allowing a former employee of Optima to steal the corporate site, optimatech.com) click here. I invite your suggestions and comments.

This post is for educational and information purposes only. It is not legal advice on any particular case, and merely a general opinion of one California lawyer. You should not rely on it without consulting a competent attorney in your area about your specific case and facts. It is not intended to, and shall not, create an attorney-client relationship. So, be happy you got some free info and use your grey matter!


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