April 01, 2008

Class action filed against network solutions for bad 'taste'

Louisville Bar Association Bar Briefs, April 1, 2008

by Stites & Harbison, PLLC

On February 25, 2008, Kabateck Brown Kellner LLP filed a class action lawsuit against the domain name registration giant Network Solutions, alleging fraudulent concealment and unjust enrichment stemming from abusive domain name "tasting" practices. The suit also named the Internet Corporation for Assigned Names and Numbers ("ICANN"), which oversees the global domain name registry system, for aiding and abetting Network Solutions. The case is pending in the United States District Court for the Central District of California as McElroy v. Network Solutions, LLC, Case No. 2:08-cv-01247.

The lawsuit follows an Internet frenzy that began in January of this year when it was uncovered that Network Solutions was engaged in the controversial practice of domain "tasting" through systematically registering domain name queries without notifying consumers. Domain "tasting" occurs when a registrant only holds a domain for a few calendar days, usually five days, taking advantage of provisions in the ICANN registry agreements that enable a refund of the registration fee if the domain is returned within this grace period.

Chris McElroy, the putative class plaintiff, alleges that if a consumer searched for a domain name through Network Solutions and found that the name was available but the consumer did not immediately register the name, Network Solutions would then register the domain itself to temporarily lock up the registration. If the consumer later tried to register the domain name with a less expensive, competing registrar, the consumer would find that the domain name had become unavailable within minutes. The consumer would only be permitted to register the desired moniker through Network Solutions. McElroy claims that he conducted an availability inquiry for the domain name through Network Solutions and was then "forced" to register the domain name with Network Solutions for $34.99 per year or risk losing the name, whereas he could have registered the name with a competing registrar for $9.99 per year.

The complaint heralds Network Solutions' actions as "fraudulent and deceptive business practices that Network Solutions employs to effectively trap consumers into paying its grossly inflated domain name registration fees." The crux of the complaint is that Network Solutions fails to notify consumers that inquiring into the availability of a particular domain will result in Network Solutions secretly reserving the sole right to register the domain name. In a press release, class counsel stated, "Network Solutions has forced millions of people to buy Internet domain names from them instead of cheaper competitors through a scheme that’s netted the firm millions of dollars…."

Network Solutions' media response is that its program is a consumer protection measure to guard against frontrunners who are believed to collect search query data and preemptively register domains in hopes of a higher resale value. Network Solutions has endured a PR nightmare but defended its program as protective on the grounds that it has no intention of keeping the domains, which are all released after four days. Regardless of intentions, public perception of the implementation has been less than favorable, especially critical of the fact that Network Solutions will register the queried and locked domain to anyone and does not hold the reservation for the specific consumer who initially conducted the domain search. Network Solutions also touts the fact that it is not monetizing the reserved sites by placing advertising or other pay-per-click models frequently implemented by professional tasters to generate revenue during the grace period.

The grace period utilized by Network Solutions' reservation practice was initially adopted by ICANN registry agreements to provide a refund where domain names were registered in error; for example, when a domain name is misspelled during the registration process. In recent years, however, the growing sophistication of technology enabled the rapid growth of en mass computerized registration of domain names and abuse of the grace period. There can be no question that tasting is now big business.

The domain name industry is valued at $2 billion, according to a July 2007 Fox News report, with 90,000 domain names being purchased per day. Tasters use the grace period to try out several domain names to see which will generate more ad revenue from pay-per-click advertising and site links. Tasters can develop a site and introduce advertising with little or no expense. They take advantage of the short-term, free ownership to generate revenue and see which domains will be profitable for long-term registration. Some tasters engage in domain "kiting" by deleting a domain and immediately re-registering the name to restart the grace period and defer payment of the registration fee, improperly locking up thousands if not hundreds of thousands of domains. A recent report released by ICANN indicates that during the month of January 2007, 51 million names for .com and .net domains were registered and 48 million were deleted—about 94 percent. The top ten registrars engaged in domain name tasting deleted 45,450,897 domain names from the registry.

As domain name abuse steadily increases, mass registration creates broad implications for trademark owners. Trademark owners whose marks are improperly incorporated into domain names have three primary avenues for relief. Owners can (1) bring a trademark infringement action under the Lanham Act, 15 U.S. C. § 1051 et seq.; (2) bring a cybersquatting action under the Anticybersquatting Consumer Protection Act ("ACPA"), 15 U.S. C. § 1125(d); or (3) institute an arbitration proceeding under the Uniform Domain Name Dispute Resolution Policy ("UDRP") established by ICANN, where a transfer of the domain name is the only authorized remedy. The biggest challenge for trademark owners in today's Internet environment is tracking down cyberpirates due to the speed with which registrations change hands, the growing use of private proxy services to secure the Whois contact information for registrants, and the forgery or manipulation of Whois data.

These avenues are only available, however, for established trademark owners who have gained rights to their marks through commercial use on or in connection with the provision of goods or services. Merely registering a domain name or a business name does not by itself create rights to the name. Thus, a new company just starting out or a company seeking to launch a new brand or a new service often has little or no recourse if its desired mark is stolen after it searches for a domain's availability and its domain name is registered before being launched by the company.

Automated mass registration exacerbates the challenges faced by trademark owners, making it more difficult to establish the requisite level of bad faith required to obtain relief under the UDRP and ACPA. UDRP arbitration panels generally require a finding that the domain was registered with a bad faith intent to take advantage of the trademark owner's rights in that domain before it will order a transfer of the registration to the trademark owner. Where trademarks are common dictionary words, proving bad faith of a bulk buyer using automated registration software is more difficult. Where the trademark is not a generic dictionary word, at least two decisions issued by arbitration panels of the World Intellectual Property Organization were willing to grant trademark owners domain name registration transfers where the registrant failed to conduct prior checks for third-party rights in certain circumstances. See Mobile Communications Services Inc. v. WebReg RN, WIPO Case No. D2005-1304,; Media General Communications, Inc. v. Rarenames, WebReg, WIPO Case No. D2006-0964, (finding that the UDRP "implicitly requires [domain name registrants to use] some good-faith effort to avoid registering and using domain names corresponding to trademarks").

ICANN acknowledges that domain name tasting is a significant concern and began studying the problem in depth in the summer of 2007. The allegations against ICANN in the McElroy class action appear to stem from the existence of the grace period. Based on this fact alone, it is doubtful that liability for downstream abuse would be assessed against ICANN. On February 8, 2008, prior to the filing of this class action suit, ICANN released its Final Draft Report on Domain Tasting, recommending policy changes to the grace period. ICANN is moving to make its $0.20 registration fee non-refundable to make mass tasting unprofitable and curb the practice. ICANN's CEO, Dr. Paul Twomey said in a statement, "Charging the ICANN fee as soon as a domain name is registered would close the loophole used by tasters to test a domain name’s profitability for free."

Goggle is also acting to curb domain abuse by implemented a new kiting detection system on February 11 that will not allow any Google ads to appear on a domain it determines is being kited. Google did not release details of how its system will work but stated, "We believe this policy will have a positive impact for users and domain purchasers across the web." Google plans to more specifically crack down on tasters and will not offer AdSense revenue to sites until they have been registered for more than four days, a move that is expected to cost Google millions in lost ad revue but increase its good will and consumer trust in keeping its sites free of spam, trademark exploiters and profiteers.

Lessons learned: Checking the availability of a domain name may disclose interest or potential value. To avoid being a victim of domain spying, front-running or kiting, search the availability of domains with care and register promptly. For increased trademark protection, preemptively seek a trademark registration with the United States Patent & Trademark Office by utilizing the "intent-to-use" application process available to persons with a bona fide, good faith intent to use a mark.