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Coalition for ICANN Transparency Inc. v. Verisign

February 21, 2006

COALITION FOR ICANN TRANSPARENCY INC, A DELAWARE CORPORATION PLAINTIFF,
v.
VERISIGN, INC., A DELAWARE CORPORATION; INTERNET CORPORATION FOR ASSIGNED NAMES AND NUMBERS, A CALIFORNIA CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Ronald M. Whyte United States District Judge

RMW ORDER [TENTATIVELY] DENYING VERISIGN'S MOTION TO DISMISS AND GRANTING DEFENDANTS' MOTIONS FOR JUDGMENT ON THE PLEADINGS [Re Docket No. 63, 66, 74]

On November 28, 2005 the Coalition For ICANN Transparency, Inc. ("CFIT") sued VeriSign, Inc. ("VeriSign") and the Internet Corporation for Assigned Names and Numbers ("ICANN") (collectively "defendants") for antitrust violations, unfair competition, cybersquatting, and intentional interference with prospective economic advantage. CFIT filed a motion for a Temporary Restraining Order ("TRO"). On November 30, 2005 this court denied CFIT's motion. The court noted that it would construe the motion as a request for a preliminary injunction if CFIT desired and set a briefing schedule. On January 17, 2006 CFIT withdrew its motion. VeriSign now moves to dismiss CFIT's complaint for improper venue. In addition, both defendants seek judgment on the pleadings. The court has read the moving and responding papers and considered counsels' arguments. For the reasons set forth below, the court tentatively denies VeriSign's motion to dismiss and grants defendants' motions for judgment on the pleadings with leave to amend.

I. BACKGROUND

CFIT is a nonprofit membership organization whose members "include certain Internet domain registrars, registrants, back order service providers, and other Internet stakeholders." Complaint ("Comp.") ¶ 7. CFIT alleges that every computer connected to the Internet has a unique Internet Protocol ("IP") address. Id. at ¶ 15. IP addresses are long strings of numbers, such as 64.233.161.147. Id. The Internet domain name system ("DNS") provides an alphanumeric shorthand for IP addresses. Id. at ¶ 16. For example, the IP address 64.233.161.147 is commonly known by its domain name: google.com. Id. The portion of the domain name to the right of the period is the top-level domain ("TLD"). TLDs include .com, .gov, .net., and .biz. Id. at ¶ 17. The .com and .net TLDs are "dominant" in the United States and of paramount importance for many businesses. Id. at ¶¶ 6, 20, 25. Second-level domain names are to the left of the TLDs, such as "google" in "google.com." Id. Each domain name is unique and thus can only be registered to one entity. Id. at ¶ 18. Thus, recognizable domain names are a finite resource. Id. at ¶ 25. To ensure that each domain name refers to the appropriate IP address, each TLD has a single "registry" that links the two. Id. at ¶ 19.

ICANN is a private not-for-profit corporation that coordinates the DNS on behalf of the United States Department of Commerce ("DOC"). Id. at ¶¶ 1, 5, 27. ICANN's bylaws provide that it shall "[i]ntroduc[e] and promot[e] competition in the registration of domain names where practicable and beneficial in the public interest." Id. at ¶ 29. ICANN operates under a Memorandum of Understanding ("MOU") with the DOC. Id. at ¶ 27. The MOU "is effectively ICANN's charter." Id. The MOU's purpose is to "promote[ ] the management of the DNS in a manner that will permit market mechanisms to support competition and consumer choice in the technical management of the DNS." Id. The MOU prohibits ICANN from "unjustifiably or arbitrarily" injuring "particular persons or entities or particular categories of persons or entities." Id.

It requires ICANN to "act in a non-arbitrary and reasonable manner with respect to . . . any . . . activity related to a DNS project." Id. The original MOU was scheduled to expire in September 2000. Id. ICANN and the DOC have amended it six times. Id. The most recent amendment reiterates the DOC's "policy goal of privatizing the technical management of the DNS in a manner that promotes stability and security, competition, coordination, and representation." Id. In this amendment, ICANN also reaffirms its "commitment to maintaining security and stability in the technical management of DNS, and to perform as an organization founded on the principles of competition, bottom up coordination, and representation." Id.

ICANN has contracted with VeriSign to serve as the registry for all .com and .net domain names. Consumers, or "registrants," sign up for domain names, causing VeriSign's database to relate the domain name with the specific IP address. Id. at ¶¶ 19, 21. Registrants do not have direct access to this database. Id. at ¶ 21. Instead, prospective registrants use "registrars" to handle the technical details. Id. This process is automated. Id. at ¶ 22. VeriSign grants a limited number of connections to its registry computers. Id. A registrar sends an "add" command to the registry. Id. If the name is available, the registrar acquires the name on behalf of the registrant. Id. When a popular domain name expires, registrars send rapid-fire "add" commands to try to register the name. Id. at ¶ 23. Because the system is based on chance, and because a registrar's odds of registering an expired domain name increase with the number of "add" commands it sends, it "functions, in essence, like a lottery." Id. "[J]ust as buying more tickets in a lottery increases the chance of winning, lining up more registrars to participate in the domain name lottery on behalf of a registrant increases the chance of success." Id. at ¶ 64.

Accordingly, this regime spawned a new business: "back order service providers." Back order service providers are companies that combine forces with several registrars in order to increase the odds of winning the domain name registration lottery. Id. at ¶ 24. A registrar receives an order from a client and hires a back order service provider to pool the resources of several registrars. Id. If the back order service provider is successful, it and its partner-registrars "all share appropriately in the registration fee charged to the client." Id. The back order service business is "robust and competitive," with hundreds of registrars generating millions of dollars in revenue. Id. at ¶ 26. Without back order service, the cost to register a new or previously-released name is between $6.95 and $7.50. Id. VeriSign and ICANN collect $6.25 ($6.00 to VeriSign and $0.25 to ICANN) for registration of each .com domain name and $4.25 ($3.50 to VeriSign and $0.75 to ICANN) for each .net domain name. Id. The registrar keeps the balance. Id. However, a valuable domain name is likely to be registered through a back order service provider. Id. The price of back order service is generally around $60. Id. Of this, VeriSign collects $6.00 for the registry fee for .com domain names and $4.25 for .net domain names. Id. The back order service provider generally retains about half of the remaining sum and splits the other half among its registrar partners. Id.

Two contracts govern ICANN and VeriSign's relationship: the .com Registry Agreement and the .net Registry Agreement. ICANN and VeriSign initially signed these agreements on May 25, 2001 ("the 2001 Agreements"). Id. at ¶ 31. Both 2001 Agreements require VeriSign to provide "Registry Services" to ICANN-accredited registrars "in a manner meeting certain performance and functional specifications." Id. at ¶ 34. "Registry Services" is a defined term. Id. VeriSign also must comply with "Consensus Policies": rules established by certain Internet stakeholders. Id. at ¶ 35. Appendix G to both Agreements caps the prices VeriSign can charge for its services. Id. at ¶ 36. Under Appendix G, VeriSign can charge no more than $6 per year for registration or renewal of a domain name. Id. In addition, it calls for a "registry-level transaction fee" payment of $0.25 to ICANN for each domain name registration. Id. Appendix I to both Agreements includes a Code of Conduct that tasks VeriSign with "at all times striv[ing] to operate as a trusted and neutral third-party provider of Registry Services." Id. The Code of Conduct also forbids VeriSign from "warehousing or registering domain names in its own right other than through an ICANN-accredited registrar." Id. Appendix W to both Agreements provides that VeriSign will spend $200,000,000 "for research, development, and infrastructure improvements to the .com, .net, and .org Registries" between 2001 and 2010. Id. at ¶ 38. Finally, both Agreements prohibit VeriSign from "unreasonably retrain[ing] competition." Id.

The 2001 .com Agreement is scheduled to expire on November 10, 2007, but allows VeriSign to submit a written extension proposal between November 10, 2005 and May 10, 2006. Id. at ¶ 32. ICANN must consider this proposal for no more than six months "before deciding whether to call for competing proposals . . . ." Id. VeriSign "shall be awarded a four-year renewal term," expiring on November 10, 2011, unless ICANN determines that VeriSign has materially breached the 2001 .com Agreement or the proposal's prices are too high. Id. According to CFIT, ICANN believes that VeriSign has materially breached the 2001 .com Agreement. In addition, VeriSign's current proposal to renew the 2001 .com Agreement contains excessive prices. Id. Thus, if ICANN wishes, it can "require competitive bidding for operation of the .com registry in 2007." Id.

Instead, however, defendants intend to replace the 2001 .com Agreement with the 2005 .com Agreement. Id. at ¶ 40. On October 24, 2005 defendants agreed to submit the 2005 .com Agreement for public comment and approval by ICANN's Board of Directors. Id. at ¶ 41. The Board was scheduled to vote at an ICANN meeting between November 30, 2005 and December 4, 2005. Id. The initial expiration of the 2005 .com Agreement is November 30, 2012. Id. at ¶ 42. It will be renewed thereafter unless an arbitrator or court has issued a final ruling stating that VeriSign has materially breached its obligations under the contract. Id. It increases the maximum price for domain name registration. Id. at ¶ 43. Until December 31, 2006 the maximum price is $6.00. Id. Beginning in 2007, it increases by seven percent each year. Id. In addition, the 2005 .com Agreement defines maximum price so that it does not include "registry-level transaction fees." Id. at ¶ 44. Thus, a registrar would pay these fees in addition to VeriSign's fee. Id. The "registry-level transactions fees" also increase over time, thus "allow[ing] ICANN to share in the monopoly profit generated by . . . the 2005 .com Agreement." Id.

The 2005 .com Agreement allows VeriSign "to use commercially valuable traffic data for its own commercial benefit, including promoting the sale of domain names." Id. at ¶ 45. It defines "Registry Services" in a manner that permits VeriSign to exclude certain tasks from the maximum price provisions. Id. at ¶ 46. Appendix 9 to the Agreement allows VeriSign "to offer many services in markets that are downstream and adjacent to the [DNS] market." Id. at ¶ 48. ICANN previously opposed these services under the 2001 .com Agreement unless they were approved through the Consensus Policy. Id. One such service is the "Wait List Service," which ICANN viewed as a breach of the 2001 .com Agreement. Id. at ¶ 49. VeriSign intends to launch a modified version of the Wait List Service, which it has renamed the Central Listing Service ("CLS"). Id. The CLS overhauls the domain name registration system. Id. Under the current regime, when a registrant does not renew a domain name, VeriSign provides a forty-five day grace period before releasing the name. Id. By contrast, under the CLS, VeriSign will immediately conduct an auction for expired names among all registrars who have signed a CLS service agreement. Id. at ¶ 50. VeriSign will receive ten percent of the auction price. Id. In addition, while the 2001 .com Agreement allows registrants to "return" domain names within five days of acquiring them, the 2005 .com Agreement provides no such guarantee. Id. The 2005 .com Agreement also defines Consensus Policies differently and eliminates (1) the provision in the 2001 .com Agreement that requires VeriSign to spend $200,000,000 for research and development and (2) the Code of Conduct. Id. at ¶¶ 52-54.

ICANN and VeriSign signed the 2005 .net Agreement, on June 29, 2005. Id. at ¶ 56. The 2005 .net Agreement shares many provisions with the 2005 .com Agreement, including the automatic renewal procedure. Id. at ¶¶ 57, 58. It also eliminates the 2001 .net Agreement's price controls and raises the registry-level transaction fee." Id. at ¶ 58.

CFIT contends that the 2005 Agreements will destroy the back order service provider business by replacing the current lottery-like system with the CLS. Id. at ¶¶ 65, 68. Because "nothing in the contracts or otherwise will prevent VeriSign from further increasing prices," consumers will pay more. Id. at ¶¶ 66-67. In addition, VeriSign intends to use its monopoly power over the .com and .net domain names to lock up the market for Web address directory assistance services. Under the current system, if a user enters domain name that is not registered, he receives a standard error page. Id. at ¶ 70. VeriSign's proposed SiteFinder service would "replace the standard error page with a customized VeriSign page that states that the desired page could not be found and offers some links to domain names with similar spellings." Id. at ¶ 71. For example, if a user types www.bokkstore.com, which is not registered, "the user will be directed to a VeriSign SiteFinder page at www.bokkstore.com featuring such links as www.bookstore.com or www.bkstore.com." Id. VeriSign may be able to collect a Pay Per Click fee from the owners of these web sites. Id. Some registrants already purchase domain names that are misspellings of common web sites for the sole purpose of generating Pay Per Click revenue. Id. Because of VeriSign's unique position as the depository of all unregistered .com and .net domain names, only it will be able to receive revenue from this service and will drive out "some of those who are currently active in the Pay Per Click market." Id. at ¶ 72. In addition, because VeriSign has eliminated the five-day grace period for "returning" registered domain names, only VeriSign will be able to "test .com and .net domain names to see if they are suitable for use in the Pay Per Click market without paying a registry fee." Id. at ¶ 73. No one will be able to compete with VeriSign in this market because every other registrant will have to pay the non-refundable $6 or $4.25 registry fee to test traffic on such a domain name. Id. VeriSign has employed the SiteFinder service before, on September 15, 2003.

Id. at ¶ 74. An ICANN advisory board determined that it "considerably weakened the stability of the Internet." Id. VeriSign abandoned the system only after ICANN threatened to take legal action. Id. at ¶ 75. However, VeriSign "announced that it would reintroduce SiteFinder at its discretion, and made clear that it had no intention of turning SiteFinder off for good." Id. Now, ICANN has agreed to permit VeriSign to launch SiteFinder "subject only to perfunctory procedural requirements." Id. at ¶ 76.

CFIT alleges causes of action against (1) VeriSign in the .com and .net Registration Markets for monopolization under section 2 of the Sherman Act, (2) VeriSign in the .com and .net Registration Markets for attempted monopolization under section 2 of the Sherman Act, (3) VeriSign in the Expiring Names Registration Services and Directory Assistance Services Markets for attempted monopolization under section 2 of the Sherman Act, (4) VeriSign and ICANN in "all relevant markets" for conspiracy to monopolize under section 2 of the Sherman Act, (5) VeriSign and ICANN in "all relevant markets" for conspiracy in restraint of trade under section 1 of the Sherman Act, (6) VeriSign and ICANN in "all relevant markets" for conspiracy in restraint of trade under the Cartwright Act, (7) VeriSign and ICANN for unfair competition under California Business and Professions Code section 17200, (8) VeriSign for cybersquatting under 15 U.S.C. section 1125(d), and (9) VeriSign and ICANN for intentional interference with prospective economic advantage. Id. at ¶¶ 79-147. CFIT seeks (1) a declaration that the 2005 .com Agreement is unlawful, (2) a declaration that sections of the 2005 .net Agreement is unlawful, and (3) injunctive relief.

II. ANALYSIS

A. Motion to ...


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