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Business Law Today

Domain Names as Collateral
Are We All Just Kidding Ourselves?
By Warren E. Agin
In 2006, a group of private investors purchased the domain name sex.com for an undisclosed amount rumored to be in excess of $12 million. The buyers were able to close the transaction using funding from a New Jersey investment firm, Domain Capital, LLC. Today, transactions in high-quality domain names are big business. Names like diamond.com, fund.com, and pizza.com frequently sell for seven or even eight figures.

The present market for domain names is red-hot, fueled in part by the availability of purchase financing from companies like Domain Capital, LLC, and DigiPawn, Inc. According to Christian Kalled, chief negotiator for the domain name brokerage and auction house Sedo, LLC, domainers (people in the business of operating domain name portfolios) now use asset-based lending to finance their domain name acquisitions. The ability to finance the purchase of a domain name is driving the market.

No doubt about it, domain names are big business. Lenders need to think about the roles domain names play in their borrowers' businesses and in their portfolio of collateral. Some borrowers might be domainers. More likely, the domain name is nothing more than the address for the borrower's Web site--but still an essential part of the business. Imagine being the lender for Frontier Airlines (which filed a Chapter 11 petition in early 2008) and discovering that your collateral did not include the domain name frontierairlines.com. You would effectively lose the company's Web site if you tried to force a secured party sale.

If you are a bank lawyer and just broke out in a cold sweat, don't get too nervous too fast. No court has ever held that a domain name cannot serve as collateral for a loan, nor has any decision suggested that a lien against a domain name cannot be perfected under Article 9 of the Uniform Commercial Code (UCC). In fact, despite its title this article will demonstrate that a security interest in a domain name is easily perfected as a lien against a general intangible and will provide some advice on the practical issue of recovering the collateral.

Still, the question of whether a domain name is a form of property, and what kind of property, has intrigued commentators since the Internet's start. Is a domain name property? Asset-based financing requires that the borrower have a property interest in the intended collateral. What kind of property interest is a domain name? The answer to this question will drive the rules and procedures for obtaining and perfecting a security interest in the domain name. These questions remain unanswered.

The problem with domain names is that the system that assigns them to users was not designed or intended to grant or track property interests. Lawyers, and some courts, tend to view it as a system of registration ownership, but there really is no legal basis for concluding that the domain name registration system was intended to convey to a person an ownership interest in a domain name merely by virtue of the registration. A review of the system's early history shows the domain name registration system just was not intended to determine who owns what domain name.

The Internet started in the 1960s as the ARPANET--a limited network connecting various university computer science departments. In the early days, ARPANET did not use domain names. Instead, users identified the different computers on the network solely by use of lengthy numerical addresses----one for each computer or device attached to the network. Fairly early on, researchers realized that names would work better than numbers, and a hierarchical structure could be used to help locate various computers on the network. We can track the domain name system's structure by reading the Requests for Comments (RFCs) issued by members of the Internet Engineering Task Force, and, in particular, Jon Postel, a computer scientist at UCLA. While alive, Postel greatly influenced the systems used to register domain names. After his death, ICANN (the International Corporation for Assigned Names and Numbers) emerged, which now controls the domain name system, but more than any other individual or organization, Postel's work defined the current structure for tracking domain name registrations.

In 1971, Postel suggested the use of eight character domain names, each corresponding to a different university campus. (Incidentally, he proposed "sex" as a domain name for the Network Measurement Center at UCLA--apparently, the operating system running their computer was named "SEX.") The idea of using names instead of numbers continued to develop, and by 1981 there were more than 400 domain names in use. At that time each name simply corresponded to a different university or corporate research department.

In 1983, Postel suggested a top-level/sublevel structure for domain names, such as we have today. The first top-level domain would be .arpa, and the next would be .ddn. Postel also proposed that a single individual would be responsible for assigning the subdomains within each domain. Still, the domain names would just go to research departments—there was little (or no) thought given to the concept of someone having an ownership right in a domain name.

Then, in 1984 Postel and collaborator J. Reynolds issued RFC 920, "Domain Requirements." Here, Postel and Reynolds outlined the basic structure for our current domain name system, including the .com, .net, and .org top-level domain names. The system contemplated that each top-level domain name would have a manager responsible for handing out domain names on a first come, first served basis. Remember, in 1984 the modern Internet still did not exist. ARPANET, its predecessor, still was not available for commercial use. The only people on the Internet were academics, computer scientists, and the like. Individuals would not have domain names--organizations would have domain names, and most organizations would only need one or two. Domain names were not thought of as something you could own--or would need to own. They were thought of merely as a way to simplify and make sense of a rapidly growing computer network by using names instead of numbers to identify the different parts of that network. Despite the fact that the RFC included a .com top-level domain for "commercial-related domains," nothing indicates that the structure for assigning domain names was intended to convey or control property rights.

In fact, by 1994 Postel apparently recognized that the question of property rights would become an issue. In RFC 1591 "Domain Name System Structure and Delegation," Postel said the following on the topic:
  • The designated manager is the trustee of the top-level domain for both the nation, in the case of a country code, and the global Internet community. Concerns about "rights" and "ownership" of domains are inappropriate. It is appropriate to be concerned about "responsibilities" and "service" to the community.
In the same RFC, Postel stated that the designated manager should play no role in deciding disputes between two parties with respect to the rights to a particular name. In other words, it is clear that the domain name system was never intended to grant property rights in domain names. While Postel's comments carry no legal authority, they illustrate the domain name system was designed for engineers to meet their computer networking needs, not by lawyers for our needs. We should therefore be careful when analyzing the legal effect of the information in the domain name system, and in assuming that the "registrant" of a domain name owns the right to use that name.

Complicating matters further, the structures used to distribute and control domain names complicate the questions of ownership and property rights by distributing between a registry and registrar control over the different aspects of a domain name. A domain name registry is responsible for authoritatively tracking the relationship between a domain name and the intellectual property (IP) addresses (the numbers for computers on the Internet) related to that domain name. A single registry controls any top-level domain, such as .com or .org. The registry tracks which domain name relates to which IP address and makes that information available for use by computers on the Internet. It is sort of like the telephone book.

The job of distributing domain names and keeping track of ownership, however, is delegated to registrars. Even though there is only one registry for each top-level domain, such as .com, there are hundreds of companies acting as registrars. The registrars sell the domain names, keep track of who owns which domain name, and handle communications with the domain name owners. When you purchase a domain name, you enter into a contract with the domain name registrar, not the registry. Further, one registrar's contract terms may differ greatly from another registrar's.

So, what is a domain name? Is a domain name simply a right to have your domain name associated on the registry with your computer's IP address? Hundreds of domain name registrars sell .com domain names. Are they thus all selling the same thing? On the other hand, when you buy a domain name you enter into a contract with the registrar and each has different contracts. So, is a domain name just a contract with the registrar? Are all the domain name registrars selling something different? Or, as a third option, is a domain name as Jon Postel originally envisioned it: nothing more than a name identifier for a computer provided for the convenience of Internet users and conveying absolutely no rights whatsoever to the person who registers the name?

As the courts would have it, domain names are in fact a form of property. A number of decisions have now held that a domain name stands on its own as a form of intangible property right.

In 2003, the Court of Appeals for the Ninth Circuit issued the key decision in the area. In Kremen v. Cohen, entrepreneur Gary Kremen had sued domain name registrar Network Solutions for breach of contract and conversion in connection with the theft of the domain name sex.com (yes, that's the same sex.com that Kremen sold in 2006). Judge Kozinski addressed the question of whether a domain name registration was a form of property that could be converted under California law. In his analysis, he applied a three-part test for determining whether something is a property interest.

[F]irst, there must be an interest capable of precise definition; second, it must be capable of exclusive possession or control; and third, the putative owner must have established a legitimate claim to exclusivity.

Based on that test, Judge Kozinski determined that a domain name is, indeed, a form of intangible personal property. Other courts have followed suit.

Even those courts that do not recognize a domain name as a form of intangible personal property recognize that a person registering a domain name has a property interest in the contract with the registrar. Thus, in the view expressed in decisions like Dorer v. Arel and Network Solutions, Inc. v. Umbro International, the holder of a domain name has a contract right.

Either way, whether a domain name is a contract right or a new form of intangible property, it is property and, for secured financing purposes, will fall within that wonderful catch-all category in Article 9 of the Uniform Commercial Code--the general intangible. Thus, a lender can obtain a perfected security interest in a domain name.

At the beginning of this article, I wrote about companies making a business out of lending against domain names. So, how do the experts handle the task of obtaining and perfecting their security interests? Interestingly, not very well.

For example, domain name financier DigiPawn, Inc., doesn't file financing statements. Instead, DigiPawn requires that the borrower transfer the domain name to DigiPawn--to be returned on completion of payments. This is called a "collateral assignment," the same technique a pawnshop uses when it takes possession of a borrower's ring or camera. In fact, DigiPawn is a licensed Georgia pawnbroker. Pawnshops traditionally rely on UCC § 9-313(a), which allows lenders to perfect a security interest in goods (like a ring or camera) by possession. But, UCC § 9-313(a) does not apply to general intangibles like domain names. By requiring that borrowers transfer their domain names to DigiPawn, DigiPawn takes possession of the name. In most cases, DigiPawn should be able to retain possession of the name and resell it if the borrower defaults. But, because DigiPawn does not file financing statements, its security interest in a domain name will not be perfected. As a result, DigiPawn runs the risk of losing its lien under some circumstances; for example, if its borrower files for bankruptcy.

Domain Capital, LLC, does a little better. Like DigiPawn, it requires the borrower to transfer the domain name registration to it for the life of the loan. Both lenders sometimes then transfer the domain name to a registrar familiar to them. Domain Capital does file UCC financing statements--but the language used leaves something to be desired.

. . . all rights, title, and interest of Debtor in an undivided One Hundred (100%) percent interest in the internet domain name and related registrations of the URL www.GENERICDOMAIN.com, and One Hundred (100%) percent of all cash proceeds, accounts receivable, licensing rights and intellectual property rights directly associated with or derived from the ownership of such URL.

The idea is to capture not just the domain name, but rights in the related domain name registration agreements and any proceeds from the domain name's use. However, the description contains extraneous language, ignores the availability of standard asset categories under UCC Article 9, and contains a number of additional technical mistakes that could adversely affect perfection.

Both lenders have the right idea by requiring the borrower to transfer the domain name to them for the life of the loan. This lets them control the domain name while allowing the borrower continued use of the domain name. The lender can ensure the domain name is renewed when needed and prevent any unauthorized transfer of the domain name. Since it is listed as the domain name owner, the lender will find out about any trademark complaints resulting from the domain name's use. Finally, if the lender needs to foreclose, it already has complete control over the name. None of this affects the borrower's use of the name. As discussed earlier, a domain name registration's primary purpose is to associate the domain name with specific IP addresses. Even though the domain name is registered to the lender, the domain name remains associated with the borrower's IP addresses, letting its business run as desired, at least until it misses a payment.

But, both lenders have problems with perfection--which is needed under UCC Article 9 to give the lender's interest in the asset priority against junior liens, judicial attachments, and the feared bankruptcy trustee. DigiPawn is entirely unprotected because it does not file UCC financing statements at all. Domain Capital is in better shape, but the language used in its financing statement is far from ideal. The financing statement should reference the domain name, any trademarks and associated goodwill related to the domain name, any accounts receivable, accounts, instruments, general intangibles and payment intangibles arising from or related to use of the domain name, and proceeds. An after-acquired property clause is essential to pick up related rights.

Jon Postel, more than any other individual, created our current domain name system, and he clearly did not believe that the domain name system should be concerned with tracking property rights. As a result, the domain name system is poorly designed for the purpose of granting and tracking ownership rights in domain names. Still, the domain name system does grant property rights, and very valuable rights at that. But we cannot look to the domain name system to define the nature of those rights. Instead, we need to look to state law to determine the extent to which domain names are property and the appropriate treatment for domain names as property. Commercial needs require that domain names be property, and traditional property law principles provide a legal basis for treating domain names as property. As a result, domain names can serve as collateral—we just need to make sure we do not forget the basics of asset-based lending and do not overlook the technical issues involved in protecting and repossessing the collateral.

Relevant Articles:

  • Juliet M. Moringiello, False Categories in Commercial Law: The (Ir)Relevance of (In)Tangibility, 35 FLA. ST. U. L. REV. 119 (2007)

  • Warren E. Agin, I'm a Domain Name. What Am I? Making Sense of Kremen v. Cohen, 14 J. BANKR. L. & PRAC. 3 (2005)

  • Juliet M. Moringiello, Seizing Domain Names to Enforce Judgments: Looking Back to the Future, 72 U. CINN. L.R. 95 (Fall 2003)

  • Beverly A. Berneman, Navigating the Bankruptcy Waters in a Domain Name Rowboat, 3 J. MARSHALL REV. INTELL. PROP. L. 61 (2003)

  • Alexis Freeman, Internet Domain Name Security Issues: Why Debtors Can Grant Them and Lenders Can Take Them in This New Type of Hybrid Property, 10 AM. BANKR. INST. L. REV. 853 (Winter 2002)

  • Xuan-Thao N. Nguyen, Intellectual Property Financing: Security Interests in Domain Names and Web Contents, 8 TEX. WESLEYAN L. REV. 489 (2002)

Key Decisions:

Treating a domain name as property:
  • Kremen v. Cohen, 337 F.3d 1024, 1030 (9th Cir. 2003)

  • Harrods, Ltd. v. Sixty Internet Domain Names, 302 F.3d 214 (4th Cir. 2002)

  • Caesars World, Inc. v. Caesars-Palace.Com, 112 F. Supp. 2d 502 (E.D. Va. 2000)

  • In re Larry Koenig & Assoc., 2004 WL 3244582 (Bankr. M.D. La. 2004) (slip opinion)
Treating a domain name as a contract right:
  • Dorer v. Arel, 60 F. Supp. 2d 558 (E.D. Va. 1999)

  • Zurakov v. Register.com, Inc., 304 A.D.2d 176, 760 N.Y.S.2d 13 (1st Dep't 2003)

  • Network Solutions, Inc. v. Umbro International, Inc., 259 Va. 759, 529 S.E.2d 80 (2000)
Agin is a partner with Swiggart & Agin, LLC, in Boston. His e-mail is wea@swiggartagin.com.

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