Kremen v. Cohen

OPINION: KOZINSKI, Circuit Judge:

We decide whether Network Solutions may be liable for giving away a registrant's domain name on the basis of a forged letter.

Background

"Sex on the Internet?," they all said. "That'll never make any money." But computer-geek-turned-entrepreneur Gary Kremen knew an opportunity when he saw it. The year was 1994; domain names were free for the asking, and it would be several years yet before Henry Blodget and hordes of eager NASDAQ day traders would turn the Internet into the Dutch tulip craze of our times. With a quick e-mail to the domain name registrar Network Solutions, Kremen became the proud owner of sex.com. He registered the name to his business, Online Classifieds, and listed himself as the contact. n1

Con man Stephen Cohen, meanwhile, was doing time for impersonating a bankruptcy lawyer. He, too, saw the potential of the domain name. Kremen had gotten it first, but that was only a minor impediment for a man of Cohen's boundless resource and bounded integrity. Once out of prison, he sent Network Solutions what purported to be a letter he had received from Online Classifieds. It claimed the company had been "forced to dismiss Mr. Kremen," but "never got around to changing our administrative contact with the internet registration [sic] and now our Board of directors has decided to abandon the domain name sex.com." Why was this unusual letter being sent via Cohen rather than to Network Solutions directly? It explained:

Because we do not have a direct connection to the internet, we request that you notify the internet registration on our behalf, to delete our domain name sex.com. Further, we have no objections to your use of the domain name sex.com and this letter shall serve as our authorization to the internet registration to transfer sex.com to your corporation. n2

Despite the letter's transparent claim that a company called "Online Classifieds" had no Internet connection, Network Solutions made no effort to contact Kremen. Instead, it accepted the letter at face value and transferred the domain name to Cohen. When Kremen contacted Network Solutions some time later, he was told it was too late to undo the transfer. Cohen went on to turn sex.com into a lucrative online porn empire.

And so began Kremen's quest to recover the domain name that was rightfully his. He sued Cohen and several affiliated companies in federal court, seeking return of the domain name and disgorgement of Cohen's profits. 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 competition" statute, Cal. Bus. & Prof. Code § 17200 et seq. It awarded $ 40 million in compensatory damages and another $ 25 million in punitive damages. n3

Kremen, unfortunately, has not had much luck collecting his judgment. The district court froze Cohen's assets, but Cohen ignored the order and wired large sums of money to offshore accounts. His real estate property, under the protection of a federal receiver, was stripped of all its fixtures-- even cabinet doors and toilets -- in violation of another order. The court commanded Cohen to appear and show cause why he shouldn't be held in contempt, but he ignored that order, too. The district judge finally took off the gloves -- he declared Cohen a fugitive from justice, signed an arrest warrant and sent the U.S. Marshals after him.

Then things started getting really bizarre. Kremen put up a "wanted" poster on the sex.com site with a mug shot of Cohen, offering a $ 50,000 reward to anyone who brought him to justice. Cohen's lawyers responded with a motion to vacate the arrest warrant. They reported that Cohen was under house arrest in Mexico and that gunfights between Mexican authorities and would-be bounty hunters seeking Kremen's reward money posed a threat to human life. The district court rejected this story as "implausible" and denied the motion. Cohen, so far as the record shows, remains at large.

Given his limited success with the bounty hunter approach, it should come as no surprise that Kremen seeks to hold someone else responsible for his losses. That someone is Network Solutions, the exclusive domain name registrar at the time of Cohen's antics. Kremen sued it for mishandling his domain name, invoking four theories at issue here. He argues that he had an implied contract with Network Solutions, which it breached by giving the domain name to Cohen. He also claims the transfer violated Network Solutions's cooperative agreement with the National Science Foundation -- the government contract that made Network Solutions the .com registrar. His third theory is that he has a property right in the domain name sex.com, and Network Solutions committed the tort of conversion by giving it away to Cohen. Finally, he argues that Network Solutions was a "bailee" of his domain name and seeks to hold it liable for "conversion by bailee."

The district court granted summary judgment in favor of Network Solutions on all claims. Kremen v. Cohen, 99 F. Supp. 2d 1168 (N.D. Cal. 2000). It held that Kremen had no implied contract with Network Solutions because there was no consideration: Kremen had registered the domain name for free. Id. at 1171-72. It rejected the third-party contract claim on the ground that the cooperative agreement did not indicate a clear intent to grant enforceable contract rights to registrants. Id. at 1172.

The conversion claims fared no better. 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. Id. at 1173. The conversion by bailee claim failed for the additional reason that Network Solutions was not a bailee. Id. at 1175.

Kremen appeals, and we consider each of his four theories in turn.

Breach of Contract

Kremen had no express contract with Network Solutions, but argues that his registration created an implied contract, which Network Solutions breached. A defendant is normally not liable for breach of contract, however, if he promised to do something for free. The 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. Cal. Civ. Code § 1605. n4 The adequacy of consideration doesn't matter, but it must be "something of real value." Herbert v. Lankershim, 9 Cal.2d 409, 475, 71 P.2d 220 (1937) (internal quotation marks omitted).

Kremen did not pay Network Solutions or exchange some other property in return for his domain name. Nor did his registration increase the amount of money Network Solutions received from the National Science Foundation; under the cooperative agreement, Network Solutions was paid on a fixed-fee basis. The cooperative agreement did contemplate that Network Solutions might one day charge fees. Kremen seizes on this fact and claims he conferred a benefit on Network Solutions by becoming a customer "at a time when [it] was eager to expand its customer base."

The problem with this theory is that Kremen was a nonpaying customer, so his status as a registrant was valuable only because of the possibility he might stick around if Network Solutions started charging fees. Kremen was under no obligation to do so. He was in the same position as one who promises to do something but reserves the right to change his mind. See, e.g., County of Alameda v. Ross, 32 Cal. App. 2d 135, 143-44, 89 P.2d 460 (1939); 1 Witkin Contracts § 234. He might have become a paying customer or he might not; the choice was up to him once Network Solutions started charging fees. As many Internet investors found out the hard way, "mere . . . hope of profit is not consideration." Williams v. Hasshagen, 166 Cal. 386, 390, 137 P. 9 (1913).

Kremen argues that he gave Network Solutions valuable marketing data by submitting his contact information when he registered the domain name. But there is no evidence that Network Solutions sought the data as part of its benefit of the bargain. See Bard v. Kent, 19 Cal.2d 449, 452, 122 P.2d 8 (1942). It collected only information reasonably necessary to complete the registration process. Any marketing value it had was an incidental consequence of the process. This is not a case where a party's actions can only be explained as a gimmick to collect customer information; Network Solutions was giving away domain names because the National Science Foundation was paying it to do so. Knowledge of the recipient's identity is a nearly inevitable consequence of any gift. Absent evidence it was actually something the donor bargained for, it is not consideration.

Kremen did not give consideration for his domain name, so he had no contract with Network Solutions. Cf. Oppedahl & Larson v. Network Solutions, Inc., 3 F. Supp. 2d 1147, 1160-61 (D. Colo. 1998).

Breach of Third-Party Contract

We likewise reject Kremen's argument based on Network Solutions's cooperative agreement with the National Science Foundation. A party can enforce a third-party contract only if it reflects an "express or implied intention of the parties to the contract to benefit the third party." Klamath Water Users Protective Ass'n v. Patterson, 204 F.3d 1206, 1211 (9th Cir. 1999). "The intended beneficiary need not be specifically or individually identified in the contract, but must fall within a class clearly intended by the parties to benefit from the contract." Id. When a contract is with a government entity, a more stringent test applies: "Parties that benefit . . . are generally assumed to be incidental beneficiaries, and may not enforce the contract absent a clear intent to the contrary." Id. The contract must establish not only an intent to confer a benefit, but also "an intention . . . to grant [the third party] enforceable rights." Id.

Kremen relies on language in the agreement providing that Network Solutions had "primary responsibility for ensuring the quality, timeliness and effective management of [domain name] registration services" and that it was supposed to "facilitate the most effective, efficient and ubiquitous registration services possible." This language does not indicate a clear intent to grant registrants enforceable contract rights. We accordingly reject Kremen's claim. Cf. Oppedahl & Larson, 3 F. Supp. 2d at 1157-59.

Conversion

Kremen's conversion claim is another matter. To establish that tort, a plaintiff must show "ownership or right to possession of property, wrongful disposition of the property right and damages." G.S. Rasmussen & Assocs., Inc. v. Kalitta Flying Serv., Inc., 958 F.2d 896, 906 (9th Cir. 1992). The preliminary question, then, is whether registrants have property rights in their domain names. Network Solutions all but concedes that they do. This is no surprise, given its positions in prior litigation. See Network Solutions, Inc. v. Umbro Int'l, Inc., 259 Va. 759, 529 S.E.2d 80, 86 (Va. 2000) ("[Network Solutions] acknowledged during oral argument before this Court that the right to use a domain name is a form of intangible personal property."); Network Solutions, Inc. v. Clue Computing, Inc., 946 F. Supp. 858, 860 (D. Colo. 1996) (same). n5 The district court agreed with the parties on this issue, as do we.

Property is a broad concept that includes "every intangible benefit and prerogative susceptible of possession or disposition." Downing v. Mun. Court, 88 Cal. App. 2d 345, 350, 198 P.2d 923 (1948) (internal quotation marks omitted). We apply a three-part test to determine whether a property right exists: "First, 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." G.S. Rasmussen, 958 F.2d at 903 (footnote omitted). Domain names satisfy each criterion. Like a share of corporate stock or a plot of land, a domain name is a well-defined interest. Someone who registers a domain name decides where on the Internet those who invoke that particular name -- whether 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, see Greg Johnson, The Costly Game for Net Names, L.A. Times, Apr. 10, 2000, at A1, and they are now even subject to in rem jurisdiction, see 15 U.S.C. § 1125(d)(2).

Finally, registrants have a legitimate claim to exclusivity. Registering a domain name is like staking a claim to a plot of land at the title office. It informs others that the domain name is the registrant's and no one else's. Many registrants also invest substantial time and money to develop and promote websites that depend on their domain names. Ensuring that they reap the benefits of their investments reduces uncertainty and thus encourages investment in the first place, promoting the growth of the Internet overall. See G.S. Rasmussen, 958 F.2d at 900.

Kremen therefore had an intangible property right in his domain name, and a jury could find that Network Solutions "wrongfully disposed of" that right to his detriment by handing the domain name over to Cohen. Id. at 906. The district court nevertheless rejected Kremen's conversion claim. It held that domain names, although a form of property, are intangibles 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. See Prosser and Keeton on the Law of Torts § 15, at 89, 91 (W. Page Keeton ed., 5th ed. 1984). Virtually every jurisdiction, however, has discarded this rigid limitation to some degree. See id. at 91. Many courts ignore or expressly reject it. See Kremen, 325 F.3d at 1045-46 n.5 (Kozinski, J., dissenting) (citing cases); Astroworks, Inc. v. Astroexhibit, Inc., 257 F. Supp. 2d 609, 618 (S.D.N.Y. 2003) (holding that the plaintiff could maintain a claim for conversion of his website); Val D. Ricks, The Conversion of Intangible Property: Bursting the Ancient Trover Bottle with New Wine, 1991 B.Y.U. L. Rev. 1681, 1682. Others reject it for some intangibles but not others. The Restatement, for example, recommends the following test:

(1) Where there is conversion of a document in which intangible rights are merged, the damages include the value of such rights.

(2) One who effectively prevents the exercise of intangible rights of the kind customarily merged in a document is subject to a liability similar to that for conversion, even though the document is not itself converted.

Restatement (Second) of Torts § 242 (1965) (emphasis added). An intangible is "merged" in a document when, "by the appropriate rule of law, the right to the immediate possession of a chattel and the power to acquire such possession is represented by [the] document," or when "an intangible obligation [is] represented by [the] document, which is regarded as equivalent to the obligation." Id. cmt. a (emphasis added). n6 The district court applied this test and found no evidence that Kremen's domain name was merged in a document.

The court assumed that California follows the Restatement on this issue. Our review, however, revealed that "there do not appear to be any California cases squarely addressing whether the 'merged with' requirement is a part of California law." Kremen, 325 F.3d at 1042. We invoked the California Supreme Court's certification procedure to offer it the opportunity to address the issue. Id. at 1043; Cal. Rules of Court 29.8. The Court declined, Kremen v. Cohen, 2003 Cal. LEXIS 1342, No. S112591 (Cal. Feb. 25, 2003), and the question now falls to us.

We conclude that California does not follow the Restatement's strict merger requirement. Indeed, the leading California Supreme Court case rejects the tangibility requirement altogether. In Payne v. Elliot, 54 Cal. 339 (1880), the Court considered whether shares in a corporation (as opposed to the share certificates themselves) could be converted. It held that they could, reasoning: "The action no longer exists as it did at common law, but has been developed into a remedy for the conversion of every species of personal property." Id. at 341 (emphasis added). While Payne's outcome might be reconcilable with the Restatement, its rationale certainly is not: It recognized conversion of shares, not because they are customarily represented by share certificates, but because they are a species of personal property and, perforce, protected. Id. at 342. n7

Notwithstanding Payne's seemingly clear holding, the California Court of Appeal held in Olschewski v. Hudson, 87 Cal. App. 282, 262 P. 43 (1927), that a laundry route was not subject to conversion. It explained that Payne's rationale was "too broad a statement as to the application of the doctrine of conversion." Id. at 288. Rather than follow binding California Supreme Court precedent, the court retheorized Payne and held that corporate stock could be converted only because it was "represented by" a tangible document. Id.; see also Adkins v. Model Laundry Co., 92 Cal. App. 575, 583, 268 P. 939 (1928) (relying on Olschewski and holding that no property right inhered in "the intangible interest of an exclusive privilege to collect laundry").

Were Olschewski the only relevant case on the books, there might be a plausible argument that California follows the Restatement. But in Palm Springs-La Quinta Development Co. v. Kieberk Corp., 46 Cal. App. 2d 234, 115 P.2d 548 (1941), the court of appeal allowed a conversion claim for intangible information in a customer list when some of the index cards on which the information was recorded were destroyed. The court allowed damages not just for the value of the cards, but for the value of the intangible information lost. See id. at 239. Section 242(1) of the Restatement, however, allows recovery for intangibles only if they are merged in the converted document. Customer information is not merged in a document in any meaningful sense. A Rolodex is not like a stock certificate that actually represents a property interest; it is only a means of recording information.

Palm Springs and Olschewski are reconcilable on their facts --the former involved conversion of the document itself while the latter did not. But this distinction can't be squared with the Restatement. The plaintiff in Palm Springs recovered damages for the value of his intangibles. But if those intangibles were merged in the index cards for purposes of section 242(1), the plaintiffs in Olschewski and Adkins should have recovered under section 242(2)--laundry routes surely are customarily written down somewhere. "Merged" can't mean one thing in one section and something else in the other.

California courts ignored the Restatement again in A & M Records, Inc. v. Heilman, 75 Cal. App. 3d 554, 142 Cal. Rptr. 390 (1977), which applied the tort to a defendant who sold bootlegged copies of musical recordings. The court held broadly that "such misappropriation and sale of the intangible property of another without authority from the owner is conversion." Id. at 570. It gave no hint that its holding depended on whether the owner's intellectual property rights were merged in some document. One might imagine physical things with which the intangible was associated -- for example, the medium on which the song was recorded. But an intangible intellectual property right in a song is not merged in a phonograph record in the sense that the record represents the composer's intellectual property right. The record is not like a certificate of ownership; it is only a medium for one instantiation of the artistic work. n8

Federal cases applying California law take an equally broad view. We have applied A & M Records to intellectual property rights in an audio broadcast, see Lone Ranger Television, Inc. v. Program Radio Corp., 740 F.2d 718, 725 (9th Cir. 1984), and to a regulatory filing, see G.S. Rasmussen, 958 F.2d at 906-07. Like A & M Records, both decisions defy the Restatement's "merged in a document" test. An audio broad-cast may be recorded on a tape and a regulatory submission may be typed on a piece of paper, but neither document represents the owner's intangible interest.

The Seventh Circuit interpreted California law in FMC Corp. v. Capital Cities/ABC, Inc., 915 F.2d 300 (7th Cir. 1990). Observing that "'there is perhaps no very valid and essential reason why there might not be conversion' of intangible property," id. at 305 (quoting Prosser & Keeton, supra, § 15, at 92), it held that a defendant could be liable merely for depriving the plaintiff of the use of his confidential information, id. at 304. In rejecting the tangibility requirement, FMC echoes Payne's holding that personal property of any species may be converted. And it flouts the Restatement because the intangible property right in confidential information is not represented by the documents on which the information happens to be recorded.

Our own recent decision in Bancroft & Masters, Inc. v. Augusta National Inc., 223 F.3d 1082 (9th Cir. 2000), is especially relevant. That case involved a domain name -- precisely the type of property at issue here. The primary question was personal jurisdiction, but a majority of the panel joined the judgment only on the understanding that the defendant had committed conversion of a domain name, which it characterized as "tortious conduct." Id. at 1089 (Sneed & Trott, JJ., concurring); cf. Astroworks, Inc., 257 F. Supp. 2d at 618 (holding that the plaintiff could maintain a claim for conversion of his website).

In short, California does not follow the Restatement's strict requirement that some document must actually represent the owner's intangible property right. On the contrary, courts routinely apply the tort to intangibles without inquiring whether they are merged in a document and, while it's often possible to dream up some document the intangible is connected to in some fashion, it's seldom one that represents the owner's property interest. To the extent Olschewski endorses the strict merger rule, it is against the weight of authority. That rule cannot be squared with a jurisprudence that recognizes conversion of music recordings, radio shows, customer lists, regulatory filings, confidential information and even domain names. n9

Were it necessary to settle the issue once and for all, we would toe the line of Payne and hold that conversion is "a remedy for the conversion of every species of personal property." 54 Cal. at 341. But we need not do so to resolve this case. Assuming arguendo that California retains some vestigial merger requirement, it is clearly minimal, and at most requires only some connection to a document or tangible object -- not representation of the owner's intangible interest in the strict Restatement sense.

Kremen's domain name falls easily within this class of property. He argues that the relevant document is the Domain Name System, or "DNS" -- the distributed electronic database that associates domain names like sex.com with particular computers connected to the Internet. n10 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. See, e.g., Thrifty-Tel, 46 Cal. App. 4th at 1565 (recognizing conversion of information recorded on floppy disk); A & M Records, 75 Cal. App. 3d at 570 (same for audio record); Lone Ranger Television, 740 F.2d at 725 (same for magnetic tape). It would be a curious jurisprudence that turned on the existence of a paper document rather than an electronic one. Torching a company's file room would then be conversion while hacking into its mainframe and deleting its data would not. That is not the law, at least not in California. n11

 

FOOTNOTES

n1 We assume basic familiarity with the Internet. Those just tuning in should read the helpful discussions in Kremen v. Cohen, 325 F.3d 1035, 1038-39 (9th Cir. 2003) (order certifying question), and Thomas v. Network Solutions, Inc., 336 U.S. App. D.C. 74, 176 F.3d 500, 502-04 (D.C. Cir. 1999).

n2 The letter was signed "Sharon Dimmick," purported president of Online Classifieds. Dimmick was actually Kremen's housemate at the time; Cohen later claimed she sold him the domain name for $ 1000. This story might have worked a little better if Cohen hadn't misspelled her signature.

n3 We dismissed Cohen's appeal in an unpublished memorandum disposition. See Kremen v. Cohen, 45 Fed. Appx. 746, 2002 WL 2017073 (9th Cir. 2002).

n4 Neither party argued choice of law, so we apply California law throughout. See McGhee v. Arabian Am. Oil Co., 871 F.2d 1412, 1424 (9th Cir. 1989).

n5 Network Solutions does suggest in passing that we should distinguish domain names supported by contracts from those (like Kremen's) that are not. It also stresses that Kremen didn't develop the sex.com site before Cohen stole it. But this focus on the particular domain name at issue is misguided. The question is not whether Kremen's domain name in isolation is property, but whether domain names as a class are a species of property.

n6 The Restatement does note that conversion "has been applied by some courts in cases where the converted document is not in itself a symbol of the rights in question, but is merely essential to their protection and enforcement, as in the case of account books and receipts." Id. cmt. b.

n7 Intangible interests in real property, on the other hand, remain unprotected by conversion, presumably because trespass is an adequate remedy. See Goldschmidt v. Maier, 7 Cal. Unrep. 162, 73 P. 984, 985 (Cal. 1903) (per curiam) ("[A] leasehold of real estate is not the subject of an action of trover."); Vuich v. Smith, 140 Cal. App. 453, 455, 35 P.2d 365 (1934) (same). Some California cases also preserve the traditional exception for indefinite sums of money. See 5 Witkin Torts § 614.

n8 The California Court of Appeal addressed the issue most recently in Thrifty-Tel, Inc. v. Bezenek, 46 Cal. App. 4th 1559, 54 Cal. Rptr. 2d 468 (1996), which noted that courts had "traditionally" refused to acknowledge conversion of intangibles "not merged with, or reflected in, something tangible." Id. at 1565 (citing Olschewski and Adkins). The court declined to decide whether that limitation was still good law and resolved the case on other grounds. See id. at 1565-66.

n9 Witkin cites the Restatement favorably. See 5 Witkin Torts § 613. Notably, though, he points to only three cases rejecting conversion of intangibles: Olschewski (which disavowed binding California Supreme Court authority directly on point, see p. 10168 supra); Vuich (which involved real estate and so was not within Payne's holding anyway, see n.7 supra); and Italiani v. Metro-Goldwyn-Mayer Corp., 45 Cal. App. 2d 464, 114 P.2d 370 (1941) (which denied protection to intellectual property rights and has been overtaken by later cases such as A & M Records and Lone Ranger Television, see pp. 10169-70 supra).

n10 Network Solutions complains about the absence of specific record evidence regarding the DNS. But whether domain names are a species of property to which conversion applies is a question of law rather than of adjudicative fact; we may consider record evidence but need not so restrict ourselves. See Fed. R. Evid. 201(a) advisory committee notes. Network Solutions has had ample opportunity to contest the nature of the DNS in both its answering brief on appeal and its response to amici. It has raised no material point of dispute.

n11 The Restatement requires intangibles to be merged only in a "document," not a tangible document. Restatement (Second) of Torts § 242. Our holding therefore does not depend on whether electronic records are tangible. Compare eBay, Inc. v. Bidder's Edge, Inc., 100 F. Supp. 2d 1058, 1069 (N.D. Cal. 2000) ( "It appears likely that the electronic signals sent by [Bidder's Edge] to retrieve information from eBay's computer system are . . . sufficiently tangible to support a trespass cause of action."), with Intel Corp. v. Hamidi, 30 Cal. 4th 1342, 1 Cal. Rptr. 3d 32, 71 P.3d 296, 2003 WL 21488209, at *11 (Cal. 2003) (implying that electronic signals are intangible).

 

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