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Is VeriSign Liable for Loss of Sex?

In a decision that takes some power away from registrars and puts it into the hands of their customers, the Ninth Circuit Court of Appeals last week gave the original owner of the Sex.com domain name the power to sue VeriSign for improperly turning his domain name over to a convicted felon based on a forged letter.

The opinion, authored by Judge Alex Kozinski, ironed out the legal status of domain names, determining that they are, in fact, property with the same stature as a plot of land. VeriSign has long argued that domain names, as intangible property, should not be accorded the same protections as tangible property like real estate.

The United States District Court for the Northern District of California had agreed with VeriSign, and on that basis rejected the tort of conversion put forward by Gary Kremen (the rightful owner of the Sex.com domain name and founder of the Match.com dating service), under which he argued that Network Solutions (now a subsidiary of VeriSign) should pay him damages for mishandling his domain name. The District Court had found that while the domain name was Kremen's property, as an intangible property, the tort of conversion would not apply.

While it upheld the district court's findings on other claims, the appeals court took issue with that finding. The opinion noted that tort law once drew a distinction between tangible and intangible property, and that 'Conversion' was originally a remedy for the wrongful taking of another's lost goods, meaning that it applied only to tangible property.

"Virtually every jurisdiction, however, has discarded this rigid limitation to some degree," Kozinski wrote in the opinion. "Many courts ignore or expressly reject it. Others reject it for some intangibles but not others."

Kozinski then said that the leading California Supreme Court case rejects the tangibility requirement.

"What Judge Kozinski's decision very appropriately recognizes is that we're in the information age," Larry Hertz, a partner with law firm Hall Dickler Kent Goldstein & Wood, told internetnews.com.

Jefferson Scher, a partner with Carr & Ferrell and specialist in intellectual property, added, "It's a crack in the dam. Until now, it seems that most courts have sided with the registrars. Perhaps as usual, one could say, the Ninth Circuit has take a maverick position. It is a logical evolution of the law."

Still, neither attorney expects that many other cases similar to the Sex.com case will come along, for two reasons: one, registrars have changed their domain transference procedures since Kremen registered Sex.com eight years ago, and two, there just aren't that many other domain names which generate such value in and of themselves.

"There aren't going to be very many Sex.com cases where you can demonstrate an enormous amount of value attributed mainly to the domain name," Scher told internetnews.com. "There may be very few in fact. This doesn't mean the insurance prices won't go up. I'm sure they will."

Hertz agreed, "I don't see this as really being a trailblazing case, other than it is really recognizing the importance of intangible rights."

However, both noted that while there aren't likely to be many cases the likes of Sex.com, the ruling does give domain name owners recourse if registrars mishandle a renewal.

"Conversion is not limited to wrongful transfers," Scher said. "If NSI mishandled a renewal, that might fall under the definition of conversion. That's something that might be happening on a regular basis throughout the year. I don't know if it will turn out to be a lot of monetary, but it's a significant headache, for sure."

Hertz added, "Mishandling a renewal is something that can be insured against. The risk should lie there and its an insurable risk. I think that's where it should be."

But in the meantime, Kremen told internetnews.com that the court's ruling was a victory not just for him, but for anyone that registers a domain name.

"Should you be using any of VeriSign's services? Their certificate authority, anything? I think that's a fair question to ask," Kremen said.

He added, "Now this ruling says domain names are property. They can be borrowed against. They can be bought and sold, not as a service contract as VeriSign says they are, but as actual property. People can say 'hey, this thing is property and you lost my property.'"

Hertz added, "I think it makes [registrars] pony up to the bar here and be a little bit more responsible in the ways they handle their businesses. There were egregious facts here, I think."

A Sordid Tale
For Kremen, the ruling frees him to seek damages from VeriSign in a plot that could have been ripped straight from a soap opera.

In 1994, Internet domain names were free for the asking, and Kremen was quick to capitalize, registering Sex.com to his business, Online Classifieds, with a quick email to Network Solutions. At the time, Network Solutions ran the entirety of the Internet registry and registrar business in the United States under a cooperative agreement with the National Science Foundation. No one, at that time, had to pay to register a domain.

After serving time for impersonating a bankruptcy lawyer, a con man by the name of Stephen Cohen decided to claim the domain name for himself. He sent Network Solutions a forged letter from Online Classifieds which claimed the company had fired Gary Kremen and had sold the domain to Cohen.

The letter claimed that Cohen, rather than Online Classifieds, was sending the letter to NSI because Online Classifieds did not have "a direct connection to the internet." Additionally, the letter was signed with the name of Kremen's housemate, purportedly the president of Online Classifieds. However, the name was misspelled in the signature.

Despite this, NSI did not attempt to contact Kremen, who had listed himself as the contact when registering the domain name, and transferred it to Cohen. When Kremen contacted NSI later, he was told that it was too late to transfer the domain name back.

While Cohen turned Sex.com into "a lucrative online porn empire," according to Judge Kozinski, Kremen took the matter to court. He successfully sued Cohen, and the district court ordered Cohen to hand over his profits, and the domain name. It awarded Kremen $40 million in compensatory damages and another $25 million in punitive damages.

But by that time, Cohen was long gone.

"Kremen, unfortunately, has not had much luck collecting his judgment," Kozinski wrote. "The district court froze Cohen's assets, but Cohen ignored the order and wired large sums of money to offshore accounts. His real estate property, under the protection of a federal receiver, was stripped of all its fixtures -- even cabinet doors and toilets -- in violation of another order. The court commanded Cohen to appear and show cause why he shouldn't be held in contempt, but he ignored that order, too. The district judge finally took off the gloves -- he declared Cohen a fugitive from justice, signed an arrest warrant and sent the U.S. Marshals after him."

Cohen had apparently fled the country. After Kremen placed a "wanted" poster of Cohen on his Web site, offering a $50,000 reward to anyone who brought him to justice, Cohen's lawyers attempted to have the court vacate its arrest warrant because, "They reported that Cohen was under house arrest in Mexico and that gunfights between Mexican authorities and would-be bounty hunters seeking Kremen's reward money posed a threat to human life."

The court didn't buy it, but Cohen remains at large. Kremen told internetnews.com Tuesday that he has heard Cohen is currently living in France.

Unable to collect damages from Cohen, Kremen sought to collect them from Network Solutions.

"I'm not holding my breath [on Cohen paying up]," Kremen said. "But VeriSign will pay."

Both Scher and Hertz said VeriSign will have a difficult time defending the case now that it has been remanded to the district court.

"You don't have to do anything wrong to be liable for conversion," Scher said. "It doesn't require bad faith and it doesn't require negligence. It's difficult to defend. I'm not sure that NSI has a defense at this point."

Scher pointed out that Judge Kozinski noted it would be fair for NSI to pay Kremen the damages and then put its resources behind collecting the money from Cohen.