Network Solutions Is Not Above the Law
Date: Friday July 25 2003, @12:43PM
Topic: Verisign/NSI

In the latest in the sex.com saga, and overturning the district court, the 9th Circuit held today that Network Solutions has to obey the same laws as the rest of us: If it gives away your domain name to someone else, it is potentially liable, just as you'd be if you gave away something you didn't own. Read all about it in Kremen v. Cohen, a racy opinion by prose stylist Judge Kozinski.

One particularly interesting aspect of this case is that the court holds that the right to use a domain name -- which NetSol used to claim was no more than an interest in a service contract -- is a form of intangible personal property. What's more, the court of appeals held that even though it's intangible property, it is sufficiently tied to a record in the DNS so that if that control of that record is stolen, it is a tort. Even more, it is a tort for which, "Network Solutions should be open to liability... 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."

Kremen is the original registrant of sex.com. Cohen is the fraudster who stole it away by sending NetSol a forged transfer letter. Here are some choice quotes from the opinion, starting from the district court judgement against Cohen (all footnotes have been omitted):

Kremen, unfortunately, has not had much luck collecting his judgment. 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.

Then things started getting really bizarre. Kremen put up a "wanted" poster on the sex.com site with a mug shot of Cohen, offering a $50,000 reward to anyone who brought him to justice. Cohen's lawyers responded with a motion to vacate the arrest warrant. 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 district court rejected this story as "implausible" and denied the motion. Cohen, so far as the record shows, remains at large.

Given his limited success with the bounty hunter approach, it should come as no surprise that Kremen seeks to hold someone else responsible for his losses. That someone is Network Solutions, the exclusive domain name registrar at the time of Cohen's antics. Kremen sued it for mishandling his domain name

...

The court agreed that sex.com was Kremen's property. It concluded, though, that it was intangible property to which the tort of conversion does not apply. Id. at 1173. The conversion by bailee claim failed for the additional reason that Network Solutions was not a bailee. Id. at 1175. Kremen's conversion claim is another matter. To establish that tort, a plaintiff must show "ownership or right to possession of property, wrongful disposition of the property right and damages." G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 906 (9th Cir. 1992). The preliminary question, then, is whether registrants have property rights in their domain names. Network Solutions all but concedes that they do. This is no surprise, given its positions in prior litigation. See Network Solutions, Inc. v. Umbro Int'l, Inc., 529 S.E.2d 80, 86 (Va. 2000) ("[Network Solutions] acknowledged during oral argument before this Court that the right to use a domain name is a form of intangible personal property."); Network Solutions, Inc. v. Clue Computing, Inc., 946 F. Supp. 858, 860 (D. Colo. 1996) (same). The district court agreed with the parties on this issue, as do we.

Kremen therefore had an intangible property right in his domain name, and a jury could find that Network Solutions "wrongful[ly] dispos[ed] of" that right to his detriment by handing the domain name over to Cohen. Id. at 906. The district court nevertheless rejected Kremen's conversion claim. It held that domain names, although a form of property, are intangibles not subject to conversion. This rationale derives from a distinction tort law once drew between tangible and intangible property: Conversion was originally a remedy for the wrongful taking of another's lost goods, so it applied only to tangible property. See Prosser and Keeton on the Law of Torts 15, at 89, 91 (W. Page Keeton ed., 5th ed. 1984). Virtually every jurisdiction, however, has discarded this rigid limitation to some degree. See id. at 91. Many courts ignore or expressly reject it. See Kremen, 325 F.3d at 1045-46 n.5 (Kozinski, J., dissenting) (citing cases); Astroworks, Inc. v. Astroexhibit, Inc., 257 F. Supp. 2d 609, 618 (S.D.N.Y. 2003) (holding that the plaintiff could maintain a claim for conversion of his website); Val D. Ricks, The Conversion of Intangible Property: Bursting the Ancient Trover Bottle with New Wine, 1991 B.Y.U. L. Rev. 1681, 1682. Others reject it for some intangibles but not others. The Restatement, for example, recommends the following test:

(1) Where there is conversion of a document in which intangible rights are merged, the damages include the value of such rights.
(2) One who effectively prevents the exercise of intangible rights of the kind customarily merged in a document is subject to a liability similar to that for conversion, even though the document is not itself converted.
Restatement (Second) of Torts 242 (1965) (emphasis added). An intangible is "merged" in a document when, "by the appropriate rule of law, the right to the immediate possession of a chattel and the power to acquire such possession is represented by [the] document," or when "an intangible obligation [is] represented by [the] document, which is regarded as equivalent to the obligation." Id. cmt. a (emphasis added). The district court applied this test and found no evidence that Kremen's domain name was merged in a document.

The court assumed that California follows the Restatement on this issue. Our review, however, revealed that "there do not appear to be any California cases squarely addressing whether the 'merged with' requirement is a part of California law." Kremen, 325 F.3d at 1042. We invoked the California Supreme Court's certification procedure to offer it the opportunity to address the issue. Id. at 1043; Cal. Rules of Court 29.8. The Court declined, Kremen v. Cohen, No. S112591 (Cal. Feb. 25, 2003), and the question now falls to us.

We conclude that California does not follow the Restatement's strict merger requirement. Indeed, the leading California Supreme Court case rejects the tangibility requirement altogether. In Payne v. Elliot, 54 Cal. 339 (1880), the Court considered whether shares in a corporation (as opposed to the share certificates themselves) could be converted. It held that they could, reasoning: "[T]he action no longer exists as it did at common law, but has been developed into a remedy for the conversion of every species of personal property." Id. at 341 (emphasis added). While Payne's outcome might be reconcilable with the Restatement, its rationale certainly is not: It recognized conversion of shares, not because they are customarily represented by share certificates, but because they are a species of personal property and, perforce, protected. Id. at 342.

...

In short, California does not follow the Restatement's strict requirement that some document must actually represent the owner's intangible property right. On the contrary, courts routinely apply the tort to intangibles without inquiring whether they are merged in a document and, while it's often possible to dream up some document the intangible is connected to in some fashion, it's seldom one that represents the owner's property interest. To the extent Olschewski endorses the strict merger rule, it is against the weight of authority. That rule cannot be squared with a jurisprudence that recognizes conversion of music recordings, radio shows, customer lists, regulatory filings, confidential information and even domain

...

Assuming arguendo that California retains some vestigial merger requirement, it is clearly minimal, and at most requires only some connection to a document or tangible object--not representation of the owner's intangible interest in the strict Restatement sense.

Kremen's domain name falls easily within this class of property. He argues that the relevant document is the Domain Name System, or "DNS"--the distributed electronic database that associates domain names like sex.com with particular computers connected to the Internet. We agree that the DNS is a document (or perhaps more accurately a collection of documents). That it is stored in electronic form rather than on ink and paper is immaterial. See, e.g., Thrifty-Tel, 46 Cal. App. 4th at 1565 (recognizing conversion of information recorded on floppy disk); A & M Records, 75 Cal. App. 3d at 570 (same for audio record); Lone Ranger Television, 740 F.2d at 725 (same for magnetic tape). It would be a curious jurisprudence that turned on the existence of a paper document rather than an electronic one. Torching a company's file room would then be conversion while hacking into its mainframe and deleting its data would not. That is not the law, at least not in California.

The DNS also bears some relation to Kremen's domain name. We need not delve too far into the mechanics of the Internet to resolve this case. It is sufficient to observe that information correlating Kremen's domain name with a particular computer on the Internet must exist somewhere in some form in the DNS; if it did not, the database would not serve its intended purpose. Change the information in the DNS, and you change the website people see when they type "www.sex.com."

...

The district court supported its contrary holding with several policy rationales, but none is sufficient grounds to depart from the common law rule. The court was reluctant to apply the tort of conversion because of its strict liability nature. This concern rings somewhat hollow in this case because the district court effectively exempted Network Solutions from liability to Kremen altogether, whether or not it was negligent. Network Solutions made no effort to contact Kremen before giving away his domain name, despite receiving a facially suspect letter from a third party. A jury would be justified in finding it was unreasonably careless.

We must, of course, take the broader view, but there is nothing unfair about holding a company responsible for giving away someone else's property even if it was not at fault. Cohen is obviously the guilty party here, and the one who should in all fairness pay for his theft. But he's skipped the country, and his money is stashed in some offshore bank account. Unless Kremen's luck with his bounty hunters improves, Cohen is out of the picture. 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.

The district court was worried that "the threat of litigation threatens to stifle the registration system by requiring further regulations by [Network Solutions] and potential increases in fees." Kremen, 99 F. Supp. 2d at 1174. Given that Network Solutions's "regulations" evidently allowed it to hand over a registrant's domain name on the basis of a facially suspect letter without even contacting him, "further regulations" don't seem like such a bad idea. And the prospect of higher fees presents no issue here that it doesn't in any other context. A bank could lower its ATM fees if it didn't have to pay security guards, but we doubt most depositors would think that was a good idea.

The district court thought there were "methods better suited to regulate the vagaries of domain names" and left it "to the legislature to fashion an appropriate statutory scheme." Id. The legislature, of course, is always free (within constitutional bounds) to refashion the system that courts come up with. But that doesn't mean we should throw up our hands and let private relations degenerate into a free-for-all in the meantime. We apply the common law until the legislature tells us otherwise. And the common law does not stand idle while people give away the property of others.

The evidence supported a claim for conversion, and the district court should not have rejected it.

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CNET News.com updates the story
by dmehus on Friday July 25 2003, @04:21PM (#12007)
User #3626 Info | http://doug.mehus.info/
CNET News.com [com.com] has just posted an article [com.com] on this story, written by staff writer John Borland. It's a good read, with a less legalese explanation of the ruling and much easier to understand (for those of us who are not lawyers).

Cheers,
Doug
Doug Mehus http://doug.mehus.info/ [mehus.info]
[ Reply to This | Parent ]
more coverage
by fnord (groy2kNO@SPAMyahoo.com) on Friday July 25 2003, @09:13PM (#12008)
User #2810 Info
Here is the AP version [kansascity.com]. -g
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