Web Domains as Property

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Web Domains as Property

The subject of ownership with regards to web domains remains a controversial topic. In this article, we take a look at two  cases. In Virginia in Umbro Int’l V Can., Inc.

The Supreme Court of Virginia initially noted that although the right to use domain names is still  considered a form of intangible property, a domain-name registration is simply a contract for services between the registrar and registrant. Consequently, because a service contract does not qualify as “a liability” to the judgment debtor (registrant) (as the term is used in Va. Code § 8.01-511), domain name registrations are not subject to garnishment.  The majority expressed concern over extending the statutory language to encompass domain-name registrations, stating:

“[i]f we allow the garnishment of NSI’s services in this case because those services create a contractual right to use a domain name, we believe that practically any service would be garnishable.”  According to the dissent, however, NSI’s granting of an exclusive right to use the domain name, in which the registrant has a possessory interest, constituted a “liability” within the meaning of § 8.01-511, and should have been subject to garnishment.

The domain itself may or may not be an asset – cases have come down on both sides of the matter.   But the right to benefits from the ownership of the rights to rent the domains is an asset.  This is similar to the rights of a stock, or the rights to a use a name in a given territory for a fee, is an asset. Furthermore, if the domain is also trademarked as part of an enterprise’s assets, it too can lend weight to the concept that a domain is an asset.   Additionally, what of the time and energy and effort built to the contract of the web site and the revenue potential of the all of the copyrighted material on the web site? This too becomes an asset that can be recognized.

NSI has recently changed its terms of service (TOS) agreement in response to this case. The Prior version 5.0 of the TOS read:

NON-ASSIGNMENT. Your rights under this Agreement are not assignable. Any attempt by you to assign your rights shall render this Agreement voidable at our option. Any attempt by your creditors to obtain an interest in your rights under this Agreement, whether by attachment, garnishment or otherwise, shall render this Agreement voidable at our option.

Though the NSI has and continues to transfer domain names upon request, a literal reading of the TOS version 5.0 gave the registrant zero rights to assign the domain name they had paid for.

NSI’s TOS version 5.1 has made a significant change:

TRANSFER AND ASSIGNMENT. You may transfer your domain name registration to a third party of your choice, subject to the procedures and conditions found at: http://www.network solutions.com/makechanges/rnca/agreement.html, incorporated herein by reference. Your rights under this Agreement are not assignable and any attempt by your creditors to obtain an interest in your rights under this Agreement, whether by attachment, levy, garnishment or otherwise, renders this Agreement voidable at our option.

With this modification of the NSI’s TOS, domain buyers and sellers can now enter into agreements for the transfer of the domain name registration consistent with the rights the NSI has given to its registrants.

As always the TOS can be changed at any time without notice.

What does this mean?  Well, the major result is that creditors cannot go after domain names as easily as they could before this ruling.

An interesting result is a conflict with the State of California and the Ninth Circuit, which found domain holders to possess a property right in their domain names. The ruling also complicates some property based legal actions, for example, conversion by putting domain names under contract law, as opposed to property law. This also means the service agreements between the entities providing the domain name and the website owner are critical.

In the Kremen v. Cohen Sex.com case in 2003, it was held that a domain is an intangible asset.

The Sex.com saga began in 1994 when Gary Kremen registered Sex.com with the NSI. In October in 1995 Stephen Cohen stole the domain name by submitting forged transfer papers to NSI. When Kremen discovered the theft and he demanded that NSI fix it the NSI demurred and told  Kremen to go to court to fix the issue of the domain theft. Kremen did exactly that and insured a ten year battle over Sex.com.

During the litigation, Cohen allegedly made at least $40M, perhaps more from Sex.com during the time he possessed it.

Kremen v. Stephen Cohen

Kremen’s first attack was against the interloper, Cohen. Kremen won a $65M judgment against Cohen in 2001. Cohen did a “run about the world”, ticking off the judge, to which  the judge issued a contempt order and arrest warrant for Cohen. In 1985 Cohen was located in Tijuana, arrested and extradited to the US. The judge  demanded that Cohen disclose and disgorge the information on the tainted money ;Cohen remained silent, refusing to do any such thing and went to jail.

Kremen v. NSI

Kremen went after the NSI as the domain name registrar, claiming breach of contract and conversion. The district court rejected the claims, but on appeal, Judge Kozinski reversed the conversion claim dismissal, concluding that California law permits intangible assets to be converted. (Emphasis added) The case was remanded to district the court, but NSI settled the case in 2004. The settlement amount was confidential but we have seen speculations that NSI paid Kremen from 10 to 30 million dollars.

Under this ruling even a virtual asset stolen outside of an agreed upon online game’sset of rules could face liability for civil conversion under this Ninth Circuit ruling.

So what does this mean? Is a domain an asset or is not an asset?  Well it seems that domains represent a right to the use of a unique set of letters and numbers that can come to represent what we call a domain.  It is a contract that appears to be non-assignable but yet is regularly assigned each and every day and assigned for consideration.  So while a domain may be an operational asset, the assets still seem to be near worthless upon liquidation.  Is it an asset or is it a service agreement?  It appears to be a bit of both.

The final word on this has yet to be spoken. Technology is always ahead of the law – but this will need to be clearly solved by legislation for the benefit of all involved.

So in any assessment of the value of a domain for a business or in an acquisition – it should be dealt with assuming that the domains are service agreements that may or may not be a transferable asset. With regards to the accounting rules, I would deduce that as the assets are likely to be worth zero upon liquidation the acquisition of a domain should be treated as a cost – not a capital expenditure.

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