April 9, 1999
By CARL S. KAPLAN
Ruling Against Domain Name Speculator Could Set Precedent
For years people and companies have been buying Internet domain names
in the same way they purchase cars, golf clubs or meatballs. The
buyer says: Here's some money, now give me that thing you own.
But as so often happens with Internet-related legal matters, the law
has lagged behind the marketplace. Now, a state court judge in
Virginia has confirmed what most people have long assumed: domain
names are a type of property that is owned by domain name holders and
may be sold by them. But he also ruled that domain names can be
seized to help pay off a debt or a legal judgement.
The case has no legal force beyond a judicial district in Virginia,
and one of the parties has asked the Virginia Supreme Court to hear
an appeal. But legal experts say that if the ruling stands, it will
serve as a precedent and could affect many areas of cyberspace law.
For example, the ruling could be used as a new weapon by trademark
holders against domain name speculators, also known as
"cybersquatters," some lawyers said.
The ruling could also bring into question the role of Network
Solutions Inc. -- the exclusive registrar for ".com" domain names --
as an arbiter of some domain name disputes. The case also raises the
question of whether states at some point might tax domain names, as
they do other forms of property.
The facts of the legal story are simple enough. Two years ago, Umbro
International Inc., a marketer and distributor of soccer equipment,
discovered that the domain name "umbro.com" had been registered by a
small Canadian company. The firm had also registered at least 27
other domain names, many sex-related, including "sexxx.com" and
"pornplaza.com."
Umbro contacted the Canadian company and told it to hand over the
domain name. But the holder of the name, 3263851 Canada Inc.,
demanded that Umbro pay its sole shareholder $50,000, give $50,000 to
a charity and provide the shareholder with a lifetime supply of Umbro
soccer equipment, according to legal papers.
Umbro, figuring it was dealing with a classic domain name speculator,
sued for trademark infringement in Federal court in Greenville, South
Carolina, where the Italian company's United States subsidiary is
based. The shareholder of the Canadian corporation, named in court
papers as James Tombas, did not appear in court, and Umbro received a
default judgment directing him to turn over control of "umbro.com."
The court also ordered the defendant to pay $23,489.98 in legal fees.
But the speculator had no assets in the United States that Umbro or
its lawyers could find. Indeed, Alston & Bird, Umbro's law firm, did
not even know where the he lived. So how to collect on the $23,489.98?
The solution was a novel one. Umbro started a proceeding against
Network Solutions to force the judicial sale of the speculator's 27
domain names. Network Solutions denied that it held any money or
property belonging to the speculator, so Umbro sued to force the
company to turn the domain names over to the court so that the court
sheriff could auction them off to the highest bidder. The suit was
brought before the Circuit Court of Fairfax County, Virginia, home of
Network Solutions.
In a nutshell, the basic issue before the court was whether domain
names are "property" of the domain name holder that can be garnished
or seized by the sheriff for judicial sale.
In a ruling in early February, Judge M. Langhorne Keith said that
domain names were property under Virginia law, and that Network
Solutions was obligated to transfer the domain names into the court's
control.
Philip L. Sbarbaro, a lawyer for Network Solutions, declined to
comment on the case except to say that the company had filed an
appeal with the Virginia Supreme Court.
David Stewart, a partner at Alston & Bird, said one major effect of
the case is that it will help trademark owners in their battles with
domain name speculators. The case suggests that when a speculator
demands money from a large company, the company can threaten a suit
for trademark infringement, he said. And the suit could be
worthwhile, because if the company wins, it can go after every other
domain name that the speculator owns to cover the court award or
legal fees.
"It does give you extra leverage," said Stewart, referring to the
ruling. "Before, most domain name pirates without assets assumed they
would not be sued because of the legal expense and the difficulty of
collecting on a judgment." He added that in the last two months, he
has "persuaded" domain name speculators in two unrelated cases to
turn over infringing domain names after threatening to go after all
of their domain names.
Another implication of the ruling, said Stewart, is that frustrated
trademark owners may finally be able to obtain jurisdiction over
far-flung speculators even though their whereabouts are unknown. That
is because a court can obtain jurisdiction over the property of a
defendant even if the defendant is out of the state or the country.
The ruling indicates that the property of the speculators -- the
domain names themselves -- are located in Network Solution's
computers in Virginia. Stewart said that Porsche recently sued a
speculator in Virginia, arguing that the court had jurisdiction over
the property of the speculator.
Other implications of the Umbro case are even more tantalizing. Carl
Oppedahl, a Colorado-based lawyer with experience in Internet issues,
said that if domain names are considered property, "then one day some
state legislator will wake up and realize he can tax domain names
just like he taxes other intangible property, like leases."
Oppedahl noted that there is a federal law in force imposing a ban on
new state Internet-related taxes for two more years. "But after that,
who knows?" he said. "And if there is a tax, which state can levy it?
There are a lot of questions."
Network Solutions has previously maintained that domain name
registrants sign a contract and are given licenses to use domain
names, but do not in fact own them. The company and have a lot to
lose if the Virginia case stands, legal experts said. The competitors
it will face when it loses its monopoly on domain name registrations
later this year will face similar issues.
For one thing, Network Solutions could be deluged with similar
demands for compensation through the seizure and sale of domain
names, creating administrative havoc.
Also, the ruling could put into question the propriety of the
company's dispute policy, which dictates that a domain name be
automatically withdrawn from its holder when Network Solutions
receives a complaint from a trademark owner charging that the domain
name infringes its mark. If the charge turned out to be a false one,
the domain name holder might be able to sue, saying that Network
Solutions had wrongfully taken away his property, some experts say.
"If domain names are property, then it puts into question NSI's role
of withdrawing domain names" in certain circumstances, said Oppedahl.
Bret Fausett, a lawyer with the firm of Fausett, Gaeta & Lund in
Boston, which has a large Internet practice, added: "For a small
percentage of cases, I think NSI could now be liable for taking
property away and giving it to someone else."
Ian Ballon, a lawyer in Palo Alto who specializes in Internet law,
disagreed, however: "Even if there is a property right in a domain
name, that doesn't mean you can go after NSI."