domain names as collateral presented by matthew kavanaugh buchalter nemer, a professional law...

Domain Names as Collateral

Presented by

Matthew KavanaughBuchalter Nemer, A Professional Law Corporation

Los Angeles, CA

Christopher DormanPhillips Lytle LLP

New York, NY

Domain Fest

• Conference in Hollywood, California

• “Domainers” (those who buy and sell internet domain names) gathered to trade internet domain names

• Numerous domain names changing hands at auction and in private transactions

1Buchalter Nemer | 1000 Wilshire Boulevard, Suite 1500, Los Angeles, CA 90017 | 213.891.0700 | www.buchalter.com

Domain Name Firms

• At least two companies (Demand Media and Oversee.net) with business model as investment domain names

• $400 million of funding in 2007 from private equity firms

• Specialty finance company, Domain Capital, formed to finance domainers


• S&P 500: Book value of intangible assets has increased dramatically

• 1975: Book Value of intangible assets was 1.6% of market cap

• 2005: Book value of intangible assets was 15.5% of market cap

[Per 2005 study by Ocean Tomo, IP valuation and management company]

Value of IP and Domain Names


• Dramatic surge in book value of intangibles as a percentage of the book value of all assets of S&P companies

• 1.9% in 1975 and 43.2% in 2005

• Reflect changes in the U.S. economy, from dominance of manufacturing to growing services sector

• Service sector increased from 41% of gross domestic product in 1960 to 58% in 2006

• Estimated patent licensing revenue at $100 billion per year

Value of IP and Domain Names


• Also known as a “URL” (uniform resource locator)

• Like a telephone number or a street address for the internet

• Specifies the internet location of a website

• Every computer on the internet has a unique address established under the Domain Name System

• Under the Internet Protocol, that address is a string of numbers

What is a Domain Name?


• Strings of numbers not user friendly

• Domain Name System permits the use of letters and words to be associated with the numeric internet addresses

• Registration of a domain name in the directory of internet domain names

What is a Domain Name?


• Registration by application to a registrar company (e.g., Network Solutions)

• Information regarding parties who hold domain names (“registrants”) is publicly available

• Registrar makes the registrant’s contact information available at the “whois” link on ICANN’s website, http://www.internic.net

• Registration requires listing three contacts for the registrant for administration of the domain name

• Registration is for a term of one to 10 years, subject to renewal

• Registrant can transfer its domain name from one registrar to another

Domain Name Registration


http://www.internic.net/

• Once registered is a domain name considered an asset, a property right, of the registrant?

• Available to be pledged with other assets by the registrant as collateral to support financings?

• The sex.com case illustrates the issue

Domain Names as Assets?


• Gary Kremer was owner and registrant of domain name sex.com

• An “entrepreneur,” Steven Cohen, lusted after sex.com

• Cohen forged a transfer letter to the registrar, Network Solutions

• Registrar transferred the domain name to Cohen

• Cohen successfully exploited the domain name (porn)



• Kremer sued Cohen alleging conversion among other claims

• District Court dismissed conversion claim

• Held: the domain name was not an asset but rather a designation for a service, analogous to a phone number

• Reasoning limited to attempted levy, garnishment or attachment of a domain name?

• Distinguish from voluntary pledge?



• Ninth Circuit reversed District Court

• Held: a URL is personal property and therefore a claim for conversion will stand. Kremer v. Cohen, 337 F.3d 1024 (9th Cir. 2003)

• NY Court of Appeals followed Kremer in Thryoff v. Nationwide Mutual Insurance Company (2007 Slip Op. 02442), holding electronic data is subject to conversion claim

• Uncertainty remains: Virginia Supreme Court held domain name not a property right subject to garnishment. Network Solutions v. Umbro Int’l, 54 U.S.P.Q. 2d 1738 (Va. Sup. Ct. 2000)



• Domain name value derives from related rights and interests held by the registrant

• Trademark rights often critical part of domain name value

• E.g., Morgan Stanley v. Meow (Nat Arb. Forum, May 22, 2006): Meow, a cat, registered (presumably, as the arbitration panel astutely observed, with the help of its owner) the domain name mymorganstanleyplatinum.com

• Morgan Stanley requested that the domain name be transferred from Meow to Morgan Stanley

• Held: domain name must be transferred to Morgan Stanley because (i) the name registered by the felonious feline was confusingly similar to Morgan Stanleys’ trademark, (ii) the fuzzy bandit did not have a legitimate interest in the name, and (iii) its registration and use was in bad faith because it was suspected that the klepto kitty’s owner was involved in this thievery, but he would not fess up

• Reliance on domain name as collateral requires lien on associated trademark rights

• Trademark lien requires lien on the goodwill associated with the trademark to avoid “assignment in gross.” Green River Bottling Co. v. Green River Corp., 997 F.2d 359 (7th Cir. 1993)

Domain Name as Bundle of Rights


• Information technology supporting URL website is source of value

• Capture the “going concern” nature of a website to capture the value of its domain name as collateral

• Enterprise solution and other software

• Data warehouses and databases

• Licenses

• Online credit/payment systems

Domain Name as Bundle of Rights


• Domain Name rights as general intangibles under UCC

• General intangibles include trademarks

• Secured party taking URL as collateral should obtain and perfect lien on general intangibles

• UCC requires UCC-1 financing statement be filed to perfect lien

• Secured party should also file lien in the U.S. Patent and Trademark Office against registered trademarks to protect against bona fide purchasers of trademarks. 15 U.S.C. Section 1060(a).

Domain Name Lien Perfection


• Consider notifying the domain host of security interest

• If possible, obtain agreement from host that it will provide secured party notice of and a right cure defaults respecting domain and that it will follow instructions from the secured party

• Sample host letter attached

Host Agreement


• Secured party should consider sending joint instruction letter with debtor to registrar

• Notice of security interest

• Direct registrar to follow instructions from secured party

• Alternative: obtain pre-executed instruction letter from debtor to be held in escrow, to be delivered to registrar only if debtor defaults

• Alternative: list secured party as a contact party in domain name registration to receive notices regarding domain name

Registrar Notification


• At least obtain power of attorney to execute and deliver in name of debtor transfer instruments respecting the URL

• Note that at least one registrar (Network Solutions) states its consent required to transfer domain names

• Also uncertain if registrars will accept transfer instruments based on powers of attorney

Registrar Notification


• Consider structure sometimes used for other collateral similar to domain names (FCC broadcast licenses, state liquor licenses)

• Special purpose entity formed as a subsidiary or affiliate of the debtor

• SPE holds the domain names

• Secured party granted lien on ownership interest in SPE as well as domain names and associated assets

• Alternate remedy: foreclose on ownership interest and transfer ownership of SPE without transferring ownership of the URL

• Complications: SPE must have the necessary associated rights (trademarks and otherwise), or the secured party must otherwise have recourse to those rights

Special Purpose Entity Structure


Matt Kavanaugh is a principal in the Los Angeles office, Bank & Finance Group, of the law firm of Buchalter Nemer and is Chair of the ABA’s IP Financing Subcommittee of the Commercial Finance Committee, Business Law Section. He can be reached at [email protected].

Christopher Dorman is a partner in the New York, NY office of Phillips Lytle LLP. He can be reached at [email protected].


mailto:[email protected]

mailto:[email protected]

________________ __, 2008[Domain Host]__________________________________Re: ____________________ (“Obligor”)

Dear Ladies and Gentlemen:

(“Lender”) has or is about to enter into financing arrangements with Obligor pursuant to which Lender may make loans and provide other financial accommodations, from time to time, to Obligor, (“Loans”), which Loans are secured by the personal property of Obligor, including without limitation, the domain names set forth on Exhibit A annexed hereto (“Doman Names”) for which you are the domain host (“Host”).

In order to enter into the Loans, Obligor and Lender request that Host acknowledge and agree that:

Host recognizes Lender’s first priority lien and security interest in the Domain Names and in any contracts (“Contracts”) between the Host and Obligor.

Host has and shall continue to act as the administrative contact with the Registrar of Domain Names, which is [_______________] (“Registrar”).

Host will promptly notify Lender, at the address set forth below, of any notice of adverse action received from the Registrar, or any other party, through Host as administrative contact.

Sample Host Letter


Host recognizes that Obligor is the owner of the Domain Names, subject to Lender’s security interest, and that Host has no ownership rights in the Domain Names.

Host will not make any changes in the contact information at Registrar other than as instructed by Lender, or Obligor, with Lender’s written consent.

Host will, upon receipt from Lender of notice of a default under the Loan documents, deal directly with Lender and follow Lender’s instructions with respect to the Domain Names and Contracts, and will change the contact information at the Registrar as directed by Lender.

Host will, as administrative contact, implement such security measures as necessary to ensure that third parties cannot affect the Domain Names contact information at the Registrar.

Lender will, on exercising its rights with respect to the Domain Names and/or Contracts or the internet connection under the security interest, assume Obligor’s payment responsibilities under the Contracts.

This Agreement shall remain in effect until you are notified in writing by Lender that this Agreement, or the Lender’s security interest in the Account, is terminated.

Sample Host Letter


This Agreement shall bind the successors and assigns of the parties.

This Agreement may be amended only in a record authenticated by all the parties.

This agreement shall control over any conflicting agreement between you and us. This agreement shall be governed by the internal law of the State of New York and shall be construed as a sealed instrument under such law.

Please acknowledge your agreement to the foregoing by signing in the space provided below.

Very truly yours,

Acknowledged and Agreed:[HOST]By(Title)Address

Attention:

[LENDER]By(Title)[Address]

Sample Host Letter


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