The owner of the porn site Sex.com scored a victory Friday in a protracted dispute with the nation's largest domain name registry.
In a ruling that could pave the way for a large payment of damages, a federal appeals court in San Francisco held that Network Solutions, which operates the central database of dot-com domains, may be held liable for wrongfully transferring the Sex.com domain to a con man based on a forged letter.
Although Network Solutions, a unit of VeriSign (VRSN), did not steal the domain, the court held that the company should be held responsible for giving it to someone else without properly informing its rightful owner.
"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," wrote Judge Alex Kozinski, who penned the unanimous opinion (PDF) for the three-judge panel.
The ruling marks the latest twist in a 5-year-old legal imbroglio that began when Gary Kremen, a San Francisco entrepreneur, sued to regain control of the Sex.com domain from Stephen Michael Cohen, an ex-con who appropriated the domain by sending a forged letter to Network Solutions.
Kremen filed the suit against both Cohen and Network Solutions, but initially prevailed only in his case against Cohen.
After a federal judge in San Jose, California, rejected his claims against Network Solutions, Kremen appealed. He argued that the court had erred in ruling that domain names are a form of intangible property not eligible for damages.
Kremen also argued that Network Solutions should be held liable for damages despite the fact that he didn't actually pay anything to register the domain in 1994, when Web addresses were free. The company still had a contract to fulfill, he claimed.
The appeals court rejected Kremen's claim that Network Solutions is liable for breach of contract. But the judges agreed that the company should be held liable under the "tort of conversion," a statute under which damages can be assessed for contributing to loss of property.
"Negligent or not, it was Network Solutions that gave away Kremen's property. Kremen never did anything. It would not be unfair to hold Network Solutions responsible," Kozinski wrote.
James Wagstaffe, Kremen's attorney, said the ruling has relevance outside the narrow realm of domain-name litigation, since it firmly establishes that owners of property stored in electronic form have rights to protection.
"The law has always required people who are protecting property to do so. Whether you're a coat-check person or you're running a car lot, you're obligated to protect people's property," he said. "All this case does in one sense is apply those rules to electronic property."
Wagstaffe predicted that the ruling would be widely read in the legal departments of companies that do business online and may spur them to bolster security practices. In addition to domain names, he said the ruling could apply to disputes involving e-tickets and other goods stored in electronic form.
For Kremen, it's still unclear how the ruling will affect his personal fortunes. The case now goes back to a federal district court in San Jose, where the same judge who issued the original rulings in the dispute will assess how much Network Solutions will pay in damages.
Wagstaffe predicts the sum could realistically top $40 million, since Kremen lost out on tens of millions of dollars in revenue for the several years the site was in Cohen's hands.
VeriSign declined to comment on the ruling.