The US court's holding may be correct, although this is a very strange case in a number of ways.
Start with the underlying merits of the dispute. It seems clear that the South African government does not have a trademark on the country's name – a prerequisite for a UDPR claim – and that the Seattle, US based company is making a perfectly bona fide use of the domain name under US law. You might think, therefore, that this would be slam-dunk case for the registrant. But then again, this is the UDRP, and the claim would be brought before WIPO - the people who brought you the barcelona.com decision (currently under litigation).
Rather than risk the vagaries of the UDRP, Virtual Countries went to court seeking a declaratory judgement that it properly registered the domain. South Africa responded by pleading sovereign immunity. Under this doctrine, sovereigns cannot be sued in US courts – unless they are engaged in a commercial activity, with affects in the US, related to the dispute. The court found, very plausibly, that South Africa was not engaged in such commerce. Given that this conclusion rests so heavily on a finding of fact, it would be hard to appeal.
According to a declaration filed with the court, however, South Africa does not plan to bring a UDRP case until the conclusion of the WIPO2 process in which it is advocating a much stronger pre-emptive right for countries to claim countryname.com. As the court observed:
Republic has affirmatively represented that it will not commence an arbitration in WIPO or other organization under existing UDRP procedures, which suggests that it will wait to see how WIPO and ICANN resolve the proposed changes before deciding on a course of action. It also added in footnote ten:
Given WIPO's views as expressed in the Interim Report, it is unlikely that WIPO will recommend or that ICANN will adopt a per se exclusion on ownership of country domain names by parties other than the country in question, or a binding arbitration procedure for abusive use of such names. Under such circumstances, the assertion of a claim by Republic against Virtual for ownership of the southafrica.com domain would be unlikely to succeed. The issue of whether Virtual would be bound by UDRP procedures in any event through its contract with the Internet registrar, a point suggested by Republic, (Def. Mem. at 4), is unclear from the record and need not be addressed here.
Thus, subject to any appeal, South Africa is now free to go to WIPO (or any other provider)for a UDRP decision, but it appears in no hurry to do so. If it invokes the UDPR and loses, that's the end of the story. In order to bring a claim, however, South Africa will have to sign the ordinary consent to jurisdiction in the event that the registrant seeks to bring a court action, which raises an interesting problem were it to prevail before WIPO. As no one who drafted the waiver was thinking about sovereign complainants, the waiver is couched in terms of personal jurisdiction, and doesn't includ an explicit waiver of sovereign immunity. It's an interesting question whether a US court would find this waiver, a consent to be sued, to suffice – it might, but then again it might not, and Judge Schwartz's decision explicitly avoids the issue.