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29 Jul 2003
Holding on Property Status of Domain Names is Bad News for NSI
iBusiness Law.info

The 9th held last Friday that a domain name registrant may sue a registrar, NSI, for conversion of the registrant’s domain name. Kremen v. Cohen, CV-98-20718-JW (9th Cir. Jul. 25, 2003). The case turned on whether a domain name is a species of “property” susceptible to conversion. In an opinion written by Judge Kozinski, the 9th Circuit agreed with Kremen that domain names are such a species.

Judge Kozinksi is a former chief judge of the Court of Federal Claims, where takings claims against the government are litigated, and so knows from property rights (he is also, incidentally, a proto-blogger). The judge can be a funny guy, and the opinion is a hoot to read; given its implications, however, NSI and other registrars are unlikely to be laughing.

Background

Plaintiff Kremen registered the domain name “sex.com” through NSI in 1994. Back then, domain names were free for the asking, and NSI registered them without a written contract with the registrant.

Some time after Kremen registered sex.com, a con man named Stephen Cohen got out of prison, where he had been sent for impersonating a bankruptcy lawyer. Cohen sent a poorly-written, forged letter to NSI “from” Kremen’s company which purported to abandon the domain name and to recommend that Cohen be permitted to register it. NSI accepted the letter at face value and transferred the domain to Kremen. When Kremen later contacted NSI, the company told him that it was too late to recover the domain. Cohen went on to turn Sex.com into a lucrative porn portal.

Kremen sued Cohen and NSI in federal court, and won a staggering judgment against Cohen. Unfortunately for Kremen, Cohen liquidated his US assets, transferred the funds offshore, and fled to Mexico.

Thus, Kremen was left to look to NSI for recompense. Kremen advanced first and third-party breach of contract, conversion, and bailee-liability theories against NSI. On NSI’s motion for summary judgment, the district court rejected each of these theories.

On appeal, the 9th Circuit certified a question regarding the law of conversion in California to the California Supreme Court. After the California court refused to answer the question presented to it, the matter thus returned to the 9th Circuit for decision.

The 9th Circuit Decides

The appellate court agreed with the district court that Kremen’s contract claims were meritless. Kremen had argued that although NSI had no written contract with him, his registration of the domain nonetheless created an implied contract. The 9th Circuit rejected this theory, because NSI received no consideration in exchange for registering Kremen’s domain name. Although NSI might have hoped that Kremen would continue to use its services once NSI began to charge for registration, Kremen was under no obligation to do so. “As many Internet investors found out the hard way, ‘[m]ere . . . hope of profit is not consideration.’” (citation omitted). The court similarly rejected Kremen’s claim that NSI breached its contract with the National Science Foundation to provide domain registration services, because Kremen was not a third-party beneficiary of the contract.

The 9th Circuit reversed the lower court’s ruling on Kremen’s conversion claim, however. The lower court based its decision on a belief that California recognized conversion of intangible property only when the rights to such property are merged in a document. “An intangible is ‘merged’ in a document when, ‘by the appropriate rule of law, the right to the immediate possession of a chattel and the power to acquire such possession is represented by [the] document,’ or when ‘an intangible obligation [is] represented by [the] document, which is regarded as equivalent to the obligation.’”

The 9th Circuit reviewed California and local federal precedent and concluded that the state does not require that the rights to intangible property be merged in a document for that property to be subject to conversion. Rather, courts applying California law have recognized conversion of such diverse property as customer lists contained in a Rolodex, bootlegged musical records, radio broadcasts, and regulatory filings. In each such case, the court noted, the intangible rights at issue may be associated with some document, but such documents do not reflect the owner’s rights the way that, say, a stock certificate reflects a shareholder’s rights. The court held that the intangible rights at issue must only be associated with, not reflected by, some document.

The necessary document associated with Kremen’s domain name is the (DNS):

[Kremen] argues that the relevant document is the Domain Name System, or “DNS”-the distributed electronic database that associates domain names like sex.com with particular computers connected to the Internet. We agree that the 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 DNS also bears some relation to Kremen’s domain name. . . . It is sufficient to observe that information correlating Kremen’s domain name with a particular computer on the Internet must exist somewhere in some form in the DNS; if it did not, the database would not serve its intended purpose.

Thus the court found that Kremen stated a claim for conversion (Kremen had no need to maintain a separate claim for bailee-liability, the court noted, since it was subsumed in his conversion claim.)

The court contended that it was merely applying the common law to reach this result, but noted that public policy counsels such an approach in any event:

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.

The court likewise rejected the notion that it should leave the question presented to it to the legislature:

The legislature, of course, is always free (within constitutional bounds) to refashion the system that courts come up with. But that doesn’t mean we should throw up our hands and let private relations degenerate into a free-for-all in the meantime. 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.

Analysis

NSI has fought the notion that domain names are property, much less convertible property, for years, and with good reason. The net is full of allegations that NSI wrongfully transferred domain names and then refused to do anything about its errors after learning of them. The Kremen court’s holding finally validates – in California, at least – the tort of conversion as a vehicle by which registrants can, in theory, seek compensation for loss of their domains by careless registrars.

Of course, NSI no longer registers domain names without a contract. NSI’s standard contract, in fact, purports to absolve it from any liability or damages arising out of its registration services, except for the registration fees paid for the domain. (The contract also requires disputes to be resolved in Virginia according to Virginia law.) Thus, to collect more than nominal damages for conversion, a plaintiff would need to persuade a court to find NSI’s contract unconscionable. Judge Kozinski’s scathing observations about NSI’s conduct and the necessity of the common law to respond to such conduct may influence a court to make such a finding

 

 

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