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Gary Kremen, et al. v. Stephen Michael Cohen, et al.

No. 01-15899 (9th Cir., July 25, 2003)

Reversing, in part, the court below, the Ninth Circuit Court of Appeals holds that plaintiffs have stated a valid conversion claim against defendant Network Solutions Inc. ("NSI") as a result of NSI's involvement in the improper transfer of plaintiffs' domain name to a third party.  NSI transferred the domain name to this third party as a result of its receipt of a forged "facially suspect" letter purporting to authorize such a transfer, without validating the request with plaintiffs.  In reaching this result, the Ninth Circuit held that the registrant of a domain name has an intangible property interest therein capable of being converted.

This case represents yet another attempt by plaintiffs to obtain recompense for the improper transfer of the domain name

In 1994, plaintiff Gary Kremen ("Kremen") "became the proud owner of" by registering it with NSI in the name of his company Online Classifieds Inc.  At the time of this registration, NSI neither charged registrants a fee, nor obligated them to enter into any agreement with NSI pertaining to its services.

Stephen Michael Cohen ("Cohen") thereafter sent a forged letter to NSI, purporting to be from Online Classified's "president" Sharon Dimmick.  The letter advised NSI that Kremen had been "dismissed" and authorized NSI to transfer the domain name to Cohen, as Online Classified had decided to abandon it.

The letter explained that it was being sent by Cohen, in lieu of Online Classified, because "we [Online Classified] do not have a direct connection to the Internet."  The letter purported to be signed by Ms. Dimmick, but the appended signature misspelled her name.

In reliance on this letter, and without contacting Kremen, NSI transferred the domain name to Cohen, who turned it into a profitable porn empire.  NSI subsequently refused to transfer the domain name back to Kremen, even after learning of Kremen's claim that the name had been improperly transferred.

In a suit brought against Cohen, the District Court determined that the domain name had been improperly transferred, and directed its return to Kremen.  The District Court further awarded plaintiffs $40 million compensatory and $25 million in punitive damages against Cohen.  Unfortunately, plaintiffs have had great difficulty in collecting this judgment.

As a result, plaintiffs pursued claims against NSI due to its involvement in the transfer, advancing breach of contract and conversion claims.  The District Court dismissed plaintiffs' claims on NSI's motion for summary judgment.  The Ninth Circuit reversed, in part, finding that plaintiffs had stated a valid conversion claim against NSI.

"To establish [a conversion claim] a plaintiff must show 'ownership or right to possession of property, wrongful disposition of the property right and damages.'"

The Ninth Circuit held that Kremen satisfied the first element of such a claim because he "had an intangible property right in his domain name."  To determine if a registrant has a property right in a domain name, the Ninth Circuit applied a three part test:

First, there must be an interest capable of precise definition; second, it must be capable of exclusive possession or control; and third, the putative owner must have established a legitimate claim to exclusivity.

Domain names satisfy each criterion.  Like a share of corporate stock or a plot of land, a domain name is a well-defined interest.  Someone who registers a domain name decides where on the Internet those who invoke that particular name - whether by typing it into their web browsers, by following a hyperlink, or by other means - are sent.  Ownership is exclusive in that the registrant alone makes that decision.  Moreover, like other forms of property, domain names are valued, bought and sold, often for millions of dollars, and they are now even subject to in rem jurisdiction, see U.S.C. § 1125(d)(2).

Finally, registrants have a legitimate claim to exclusivity.  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.

The Ninth Circuit further held that plaintiffs' claim satisfied the remaining elements of a conversion claim because "a jury could find that Network Solutions 'wrongful[ly] dispos[ed] of' that right to [plaintiffs'] detriment by handing the domain name over to Cohen."

Said the Court:

Kremen's domain name is protected by California conversion law, even on the grudging reading we have given it.  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.

*          *          *

The question becomes whether Network Solutions should be open to liability for its decision to hand over Kremen's domain name.  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 and force it to try to recoup its losses by chasing down Cohen.  This, at any rate, is the logic of the common law, and we do not lightly discard it.

In reaching this result, the Court also relied on the fact that the letter NSI received was "facially suspect" by virtue of its statement that Online Classified did not have a connection to the Internet, which a jury may conclude should have alerted NSI to contact Kremen or Online Classified prior to effectuating the transfer.

The Ninth Circuit held accordingly that plaintiffs had stated a valid conversion claim against NSI as a result of NSI's involvement in the improper transfer of the domain name to a third party.

The District Court had reached a contrary result based on its conclusion that ownership of a domain name was an intangible property interest that could not be converted because such a property interest was not 'merged into a document,' an approach advocated by the Restatement (Second) of Torts.  A prime example of such an intangible right is stock ownership, which is frequently evidenced by a stock certificate.

The Ninth Circuit rejected this reasoning.  If asked to determine this question, the Ninth Circuit stated that it would hold that under California law, all forms of intangible personal property are capable of conversion, regardless of whether they are merged into a document or not.

The Ninth Circuit held, however, that it did not need to resolve this question to decide the pending appeal.  Even assuming "that California retains some vestigial merger requirement, it is clearly minimal, and at most requires only some connection [between the intangible personal property at issue and] a document or tangible object - not representation of the owner's intangible interest [in the document in the] strict Restatement sense."  Any such need for a document was satisfied, according to the Ninth Circuit, by the listing of Kremen's domain name in the Domain Name System - the distributed electronic database that associates domain names like with particular computers on the Internet.

The Ninth Court did affirm so much of the decision of the District Court which dismissed plaintiffs' breach of implied contract and third party beneficiary claims.  As to the former, the Ninth Circuit Court held that "a defendant is not normally liable for breach of contract … if he promised to do something for free" as was the case here.  As to the latter, the Court held that domain registrants were not interested third party beneficiaries of NSI's contract with the National Science Foundation, pursuant to which NSI acted as domain registrar during the time period in question, because the contract's "language does not indicate a clear intent to grant registrants enforceable contract rights."

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