Case Comment: Gary Kremen v. Stephen Michael Cohen

Citation: [99 F. Supp 2d 1168(ND Cal 2000)]
Decided on: May 30, 2000.
Hon’ble Judges: Kozinski, Mckeown (Circuit Judge) and Fitzgerald, District Judge

Background of the Case
In 1994, Plaintiff Kremen (“Kremen”) obtained the domain name “sex.com” from the Defendant, domain name registrar Network Solution, Inc. (“NSI”). Because the internet had not yet gained mass popularity as a vehicle for commercial profit, obtaining domain names at that time was free. At the time, NSI had a government cooperative agreement with the National Science Foundation making NSI the (dot)com registrar. Kremen registered the domain name to his business, Online classifieds, and listed himself as the contact. Con man Stephen Cohen (“Cohen”) desired to obtain the name sex.com for himself, so he sent a forged letter to NSI claiming that Online classifieds had been forced to dismiss Kremen and that the company wished to abandon the domain name sex.com. NSI made no attempt to contact Kremen and instead transferred the domain name to Cohen, who went on to turn sex.com into a lucrative online porn empire. When Kremen contacted Network Solutions sometimes later, he was told that it was too late to undo the transfer.  Kremen sued Cohen (Kremen v. Cohen)[2]  and several affiliated companies in federal court, seeking return of the domain name and disgorgement of Cohen’s profits. Kremen also sued Network Solution Inc. for mishandling his domain name, invoking four theories at issue. He argued that he had an implied agreement with NSI, which he breached by giving the domain name to Cohen.

Plaintiff contends that the October 15, 1995 letter is a forgery by Mr. Cohen. On October 16, 1998, Plaintiff filed suit against numerous defendants, including NSI, for its deletion of the domain name. Plaintiff alleges the following causes of action against NSI:

  • breach of contract,
  • breach of intended third-party beneficiary contract,
  • breach of fiduciary duty,
  • negligent misrepresentation,
  • conspiracy  to convert property and
  • conversion of bailee.[3]

The District Court found that the letter was indeed a forgery and ordered the domain name returned to Kremen. It  also told Cohen to hand over his profits, invoking the constructive trust doctrine and California’s unfair compensation statute.” It awarded $40 million in compensatory damages and another $25 million in punitive damages. The District Court granted summary judgement in favour of Network Solutions Inc. on all claims. It held that “Kremen had no implied contract with Network Solution Inc. because there was no consideration; Kremen had registered the domain name for free.” 

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. It held that “domain names, although a form of property, are intangible 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.” The conversion by bailee claim failed for the additional reason that Network Solutions Inc. was not a bailee.

Kremen appealed against the judgement of the District Court, which had granted summary judgement in favour of Network Solutions Inc. in the Ninth Circuit Court of Appeal.[4]

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Issue
Whether a registrant of an internet domain name has an intangible property right in that domain name such that wrongful disposition of that property can constitute the tort of conversion?

Judgement & Analysis
Judge, Kozinski, gave a seminal judgement on behalf of the Appellate Court on July 25, 2003. It regarded Kremen’s argument that though he had no express contract with Network Solution, but his registration created an implied contract, which Network Solutions breached. It observed, “a defendant is normally not liable for breach of contract, however, if he promised to do something for free. A party claiming breach must show that, in return for the promise, it conferred some benefit the other party was not already entitled to receive, or suffered some prejudice it was not already bound to endure.”[5] Further to establish tort, a plaintiff must show “ownership or right to possession of property, wrongful dispossession of property right and damages.” The Appellate Court took up the preliminary question, whether the registrants have property rights in their domain names.

 The Court observed, “property is a broad concept that includes “every intangible benefit and prerogative susceptible of possession or dispossession.” We apply a three test to determine whether a property right exists: Firstly, 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.” Domain name satisfy each criterion. Like a share of corporate stock or a plot of land, a domain name is well-defined interest.  Someone who registers a domain name decides where or on the Internet – those who invoke that particular name – whether by typing it into their web browsers, by following a hyperlink, or by typing it into their web browsers, by following a hyperlink, or by other means- are sent. Ownership is exclusive in that the registrant alone makes that decision. Moreover, like other forms of property, domain names are valued, bought and sold, often for millions of dollars, and they are now even subject to in rem jurisdiction.[6]

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Kremen’s domain name falls easily within this class of property. He argues that the relevant document is the Domain Name System (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. It would be a curious jurisprudence that turned on the existence of a paper document rather than an electronic one.[7]

Torching a company’s file room would then be conversion while hacking into mainframe and deleting its data would not. That is not the law, at least not in California.

The NDS 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 exit somewhere in some form in the DNS; if it did not, the database would not serve its intended purposes. The argument put forth by Network Solutions that the DNS is not a document because it is refreshed every twelve hours when updated domain name information is broadcast across the internet. This theory is even less persuasive. A document does not cease being a document merely because it is often updated. If that were the case, a share registry would fail whenever, shareholders were periodically added or dropped, as would an address file whenever business cards were added or removed. Whether a document is updated by inserting and deleting particular records or by replacing an old file with entirely new one is  a technical detail with no legal significance.

Exposing Network Solutions to liability when it gives away a registrant’s domain name on the basis of forged letter is no different from holding a corporation liable when it gives away someone’s shares under the same circumstances. Kremen had a viable claim for tort of conversion. The Judgment of the District court is reversed in this count, “the judgement underlines the fact that a domain name is form of property whether tangible or intangible, it is beside the point”.

[2] 99 F. Supp. 2d 1168 (ND Cal 2000).

[3] Kremen v. Cohen, 99 F. Supp. 2d 1168 (N.D. Cal. 2000), Available at: https://law.justia.com/cases/federal/district-courts/FSupp2/99/1168/2290571/

[4] Kremen v. Network Solutions Inc. (No. 01-15899 D.C. CV-98201718-JW)

[5]Kremen v. Network Solutions, Inc.: Update on Mr. Kremen and Mr.

Cohen, available at: http://utlawcontracts.blogspot.in/2006/01/kremen-v-network-solutions-inc-update.html

[6] Vakul Sharma,  Information Technology: Law & Practice, 547 (Universal Law Publishing, Haryana4th Edition, 2015)

[7]Id at 548.

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