Court: Court of Appeals for the Ninth Circuit; July 25, 2003; Federal Appellate Court
Network Solutions' potential liability for transferring a domain name, sex.com, based on a forged letter is at issue. Gary Kremen registered sex.com in 1994 for his business, Online Classifieds. Con man Stephen Cohen, after serving time for fraud, forged a letter claiming that Online Classifieds had dismissed Kremen and authorized the transfer of the domain to him, despite the letter's implausible assertion that the company lacked an internet connection. Network Solutions accepted the letter without verifying its authenticity and transferred the domain to Cohen. When Kremen later sought to reclaim the domain, Network Solutions informed him that the transfer was irreversible. Kremen sued Cohen and affiliated companies, winning a federal court ruling that recognized the letter as a forgery, ordering the return of the domain and awarding him $40 million in compensatory and $25 million in punitive damages. However, Kremen faced difficulties collecting the judgment as Cohen ignored asset freezes and court orders, ultimately becoming a fugitive. Kremen's attempts to capture Cohen included a $50,000 reward posted on the sex.com site, but Cohen's lawyers claimed he was under house arrest in Mexico, a story the court dismissed as implausible. Cohen remains at large, prompting Kremen to seek accountability from Network Solutions for his losses.
Network Solutions, the exclusive domain name registrar, was sued by Kremen for mishandling his domain name, sex.com. Kremen's claims included an implied contract breach, violation of a cooperative agreement with the National Science Foundation, tort conversion, and liability as a bailee. The district court granted summary judgment in favor of Network Solutions, concluding that Kremen had no implied contract due to the absence of consideration, as he registered the domain for free. The court also rejected the third-party contract claim, stating that the cooperative agreement lacked enforceable rights for registrants. Although acknowledging that sex.com was Kremen’s property, the court determined that it was intangible, thus not subject to conversion. The bailee claim failed because Network Solutions was not considered a bailee. On appeal, Kremen argued that his registration constituted an implied contract, but the court noted he did not confer any benefit or compensation to Network Solutions, as he was a nonpaying customer. Kremen's argument that he provided marketing data was also dismissed since there was no evidence that this data was sought by Network Solutions as part of the registration process.
Kremen's claim against Network Solutions is undermined by the lack of consideration for the domain name, as it was given away under a contract with the National Science Foundation, not as part of a customer information-gathering gimmick. Without evidence that consideration was exchanged, no contract exists. Furthermore, Kremen's reliance on Network Solutions’ agreement with the National Science Foundation to argue for enforcement of a third-party contract fails. The law requires a clear intent from the parties to confer enforceable rights to third parties, especially in contracts involving government entities, where incidental beneficiaries typically lack enforcement rights. The language Kremen cites does not demonstrate such intent.
In contrast, Kremen's conversion claim is viable since he must show ownership or a right to possess the domain name, wrongful disposition of that right, and damages. Network Solutions acknowledges that registrants have property rights in domain names, aligning with its previous litigation positions. A domain name constitutes intangible personal property, satisfying a three-part test for property rights: precise definition, exclusive possession or control, and a legitimate claim to exclusivity. Domain names meet all criteria, being well-defined interests that can be owned, controlled, and valued in transactions, similar to tangible property.
Registrants possess a legitimate claim to exclusivity over domain names, akin to staking a land claim, which signals ownership to others. Significant investments in developing and promoting websites tied to these domains further support the notion that registrants should benefit from their investments, thus fostering overall Internet growth. Kremen held an intangible property right in his domain name, and a jury could find that Network Solutions wrongfully transferred this right to Cohen. However, the district court dismissed Kremen’s conversion claim, asserting that domain names, while considered property, are intangibles not subject to conversion based on historical tort law distinctions between tangible and intangible property. Although many jurisdictions have moved away from this rigid limitation, the district court applied a Restatement test that required evidence of a merger of intangible rights in a document, which it found lacking in Kremen's case. Upon review, it was determined that California law does not adhere to this strict merger requirement, as established by a leading case, Payne v. Elliot, which recognized the conversion of shares as personal property, thus rejecting the tangibility requirement altogether.
The California Court of Appeal, in Olschewski v. Hudson, diverged from the California Supreme Court's decision in Payne by ruling that a laundry route was not subject to conversion. The court criticized Payne's broad application of conversion doctrine, asserting that corporate stock could only be converted if represented by a tangible document. This reasoning was echoed in Adkins v. Model Laundry Co., where the court found no property right in the intangible interest of a laundry collection privilege.
While Olschewski could imply adherence to the Restatement's principles, Palm Springs-La Quinta Development Co. v. Kieberk Corp. allowed for a conversion claim involving intangible customer information, granting damages for both the destroyed index cards and the intangible information lost. This decision conflicted with Section 242(1) of the Restatement, which permits recovery for intangibles only if they are merged in the converted document, a standard not met by customer information.
The distinction between Palm Springs and Olschewski lies in the former involving the conversion of a document itself, while the latter did not. However, this distinction creates tension with the Restatement’s framework, as the plaintiffs in Olschewski and Adkins should have been able to recover under Section 242(2) if the intangible interests were indeed merged in a written form.
Further divergence from the Restatement is seen in A. M Records, Inc. v. Heilman, where the court ruled that misappropriation and sale of another's intangible property constitutes conversion, without considering whether the intellectual property rights were merged in a document. This broad interpretation extends to federal cases applying California law, such as Lone Ranger Television, Inc. v. Program Radio Corp. and G.S. Rasmussen, both of which similarly disregard the Restatement's "merged in a document" test.
The Seventh Circuit's interpretation of California law in FMC Corp. v. Capital Cities/ABC, Inc. suggested that there is no compelling reason to exclude conversion of intangible property, highlighting the inconsistencies in how California courts apply the doctrine of conversion to intangible assets.
A defendant can be held liable for depriving a plaintiff of the use of confidential information without needing to meet a tangibility requirement. This position aligns with previous rulings, including FMC and Payne, which assert that personal property can encompass intangible assets. California courts reject the Restatement's view that an intangible property right must be documented to be protected. Cases such as Bancroft, Masters, Inc. v. Augusta National Inc. affirm that conversion can apply to digital properties like domain names, treated as tortious conduct. The notion that an intangible property must be represented by a document is outdated, as courts recognize conversion of various intangibles, including confidential information and domain names. Even if California retains a minimal merger requirement, it does not necessitate strict representation of ownership in a document. Kremen’s domain name is classified as property, and the Domain Name System (DNS) serves as a relevant document, regardless of its electronic format. This perspective emphasizes that an electronic document holds the same legal weight as a physical one, countering arguments that prioritize physical documentation over digital data. The DNS is essential for linking domain names to specific computers, and altering this information directly affects website accessibility, underscoring its role in the conversion of domain names.
Network Solutions asserts that intangible assets are not subject to conversion unless linked to a single document. However, California law does not require a single record for such property rights, as demonstrated by examples like stock shares, which can be evidenced by multiple documents, or customer lists that may be recorded on index cards. Network Solutions' claim that the Domain Name System (DNS) cannot be classified as a document due to its frequent updates is also unconvincing, as the legal definition of a document remains intact regardless of how often it is revised. The court emphasizes that Kremen's domain name is protected under California's conversion law, regardless of Network Solutions' negligence in transferring it based on a forged letter. The district court's reluctance to apply strict liability in this case is questioned, particularly since they effectively absolved Network Solutions of any responsibility. Despite the actual thief, Cohen, being untraceable, it is reasonable to hold Network Solutions accountable for the transfer of Kremen’s property, aligning with common law principles. The ruling suggests that requiring Network Solutions to recover losses from Cohen reflects established legal logic.
The district court expressed concern that the potential for litigation might hinder the domain name registration system by necessitating additional regulations from Network Solutions and possibly increasing fees. The court noted that existing regulations allowed Network Solutions to transfer a registrant's domain name based on questionable documentation without contacting the registrant. This situation warranted further regulatory measures. The court left it to the legislature to create a suitable statutory framework, emphasizing that the common law should continue to address property rights in the interim.
Kremen's complaint included a claim for "conversion by bailee," but the district court granted summary judgment in favor of Network Solutions, ruling that it was not a bailee of Kremen's property. However, the appellate court determined that Kremen's claim did not present an independent cause of action distinct from his conversion claim, as California law does not recognize "conversion by bailee" as a separate tort. Consequently, Kremen's viable conversion claim warranted the reversal of the district court's judgment on that issue, leading to a remand for further proceedings. The judgment was affirmed in part, reversed in part, and remanded without costs. The court also noted the context of the dispute, mentioning related cases and the questionable validity of a letter signed by Kremen's housemate regarding the domain's ownership transfer. Throughout the proceedings, California law was applied, as neither party raised a choice of law issue.
The core issue is whether domain names, collectively, qualify as a type of property. The Restatement indicates that conversion can apply to certain documents essential for protecting rights, such as account books, but does not extend to intangible interests in real property, which are generally protected by trespass laws instead. California case law, including Vuich v. Smith and Thrifty-Tel, Inc. v. Bezenek, supports the view that courts traditionally do not recognize conversion of intangibles unless they are linked to tangible items. While Network Solutions argues about the lack of specific evidence regarding the Domain Name System (DNS), the determination of whether domain names are property is a legal question, not reliant on factual disputes. The Restatement clarifies that intangibles must be merged in a "document" rather than a tangible one. The holding does not hinge on the tangibility of electronic records, as demonstrated by case law indicating that electronic signals can be considered intangible. Network Solutions has not raised significant disputes regarding the nature of DNS despite opportunities to do so.
