ICANN | ICANN's Supplemental Opposition to Preliminary Injunction | 5 October 2001

 

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ICANN's Supplemental Opposition to Plaintiffs' Motion for Preliminary Injunction in Smiley v. ICANN

(5 October 2001)


Jeffrey A. LeVee (State Bar No. 125863)
Gregory D. Schetina (State Bar No. 113568)
JONES, DAY, REAVIS & POGUE
555 West Fifth Street, Suite 4600
Los Angeles, CA 90013-1025
Telephone: (213) 489-3939
Facsimile: (213) 243-2539

Attorneys for Defendant
INTERNET CORPORATION FOR ASSIGNED NAMES AND NUMBERS


SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF LOS ANGELES

DAVID SCOTT SMILEY et al.,

Plaintiffs,

v.

INTERNET CORPORATION FOR ASSIGNED NAMES AND NUMBERS et al.,

Defendants.


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CASE NO. BC 254659

DEFENDANT INTERNET CORPORATION FOR ASSIGNED NAMES AND NUMBERS' SUPPLEMENTAL MEMORANDUM OF POINTS AND AUTHORITIES IN OPPOSITION TO PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION; SUPPLEMENTAL DECLARATION OF LOUIS TOUTON

Date: October 10, 2001
Time: 11:00 a.m.
Dept: 309

TABLE OF CONTENTS

INTRODUCTION 1
STATEMENT OF FACTS 1
ARGUMENT 2
I. THE ".BIZ" REGISTRATION PROCESS IS NOT A LOTTERY 2

II. ANY INJUNCTION WOULD NEED TO BE NARROWLY TAILORED

5
III. THE BALANCE OF INTERIM HARMS WEIGHS HEAVILY AGAINST A PRELIMINARY INJUNCTION 7
CONCLUSION 9

INTRODUCTION

In this memorandum, defendant ICANN addresses the matters raised during the oral argument conducted on September 26, 2001. As described below, ICANN believes that the facts reflected in the supplemental declarations demonstrate that the ".biz" name-allocation method, including NeuLevel's use of a $2.00 application processing fee, does not constitute an unlawful lottery under California law. This substantive flaw in plaintiffs' theory, coupled with the sharp tilt of the relative hardships-including the public interest-makes preliminary injunctive relief in this case inappropriate.

If the Court disagrees with this assessment, however, it is important that any order in this case be narrowly tailored to address only the California law claims that are before the Court. Particularly in view of the necessarily global nature of the ".biz" allocation method, at most any relief should extend to excluding California applications from the selection process, and providing for return of the application fees.

STATEMENT OF FACTS

At the September 26 hearing, the Court expressed the desire to receive additional facts on various aspects relevant to plaintiffs' preliminary injunction request. The additional facts are set forth fully in the attached declaration of Louis Touton, ICANN's vice-president, secretary and general counsel, and are summarized here.

Two important goals in introducing new TLDs are to provide for a stable start-up and to provide for protection of third-party rights (such as intellectual property rights). (Touton Dec. ¶ 7.) For stability reasons, all three of the new top-level domains (TLDs) that have been added to the authoritative root-zone file of the Domain Name System (DNS) - ".biz", ".info" and ".name" - use some form of random selection to process applications during the "landrush" phase, rather than the first-come/first-served method that is more appropriate once the initial rush is completed. (Id. ¶ 9.) ICANN has recognized that random selection has drawbacks, such as the potential for unfairness when a party submits multiple applications for the same name. (Id. ¶ 11.) But because applications are submitted through the Internet by large numbers of different parties around the world, no practical method exists for precluding all duplication. (Id.) Despite this potential problem, technical considerations compel the use of random processing of landrush applications at the introduction of a large TLD. (Id. ¶ 9.)

There is a considerably larger diversity of approaches to protecting intellectual-property rights in the introduction of a new TLD. The ".biz", ".info", and ".name" registries each use different processes for addressing intellectual property claims. The ".info" registry held a special "sunrise" registration period in which registrations were made available first to holders of registered trademarks. (Id. ¶ 14.) The ".name" registry will allow claimants to make a "defensive registration" precluding others from registering the name. (Id. ¶ 19.) For ".biz", NeuLevel established a fairly complex, multi-step process to give notice of intellectual property claims and to provide an opportunity for landrush applicants to withdraw conflicting applications. (Id. ¶¶ 15-17 & Ex. F.) The theory of the ".biz" approach to intellectual property issues is that providing all competing parties with focused information about each others' claims will tend to induce the parties to work out many of the conflicts on their own. (Id. ¶ 15.)

As explained in the Touton Supplemental Declaration, all three registries elected to charge a form of processing fee related to the particular method employed for addressing intellectual property issues. (Id. ¶ 25.) ICANN viewed NeuLevel's $2.00 application processing fee as appropriate to cover the special costs of the ".biz" notification system. (Id. ¶¶ 28-29.) ICANN posted drafts of the registry agreement that set forth the ".biz" registration process (including the fee) and, did not receive any comments that the process involved an illegal lottery. (Id. ¶ 30.) ICANN would not have agreed to any fee that was viewed as buying a chance to register a domain name, as opposed to defraying the legitimate costs of performing the various procedures required in the start-up plan. (Id. ¶ 29.)

ARGUMENT

I. THE ".BIZ" REGISTRATION PROCESS IS NOT A LOTTERY.

The ".biz" registration process is far different from the lotteries that gambling statutes are designed to prevent. In the classic lottery, an operator sells tickets, pools the proceeds, keeps a portion for himself, and awards the remainder to a lucky winner. The clear purpose of the game is speculation by the participants and profit by the operator.

Here, by contrast, NeuLevel is required to receive applications and intellectual-property claims from all who choose to submit them, uses random selection, combined with an elaborate notification-based system, to ensure fairness in the event of competing claims; NeuLevel does not even recoup its expenses of carrying out the process. The goal of this process is an equitable and reliable distribution of scarce resources, with sensitivity to third-party rights, and it does not have the attributes of a traditional lottery.

In particular, the ".biz" registration system does not satisfy the element of "consideration" because the $2.00 fee charged for each application was a bona fide processing fee intended to defray NeuLevel's expenses of performing the required processing steps.1 The special need for this fee arose from the costs of NeuLevel's unique system for addressing intellectual property claims, which required the design, testing, and implementation of a fairly complex, multi-step process. Because this system provided services to landrush applicants as well as intellectual-property claimants, it was appropriate for NeuLevel to help defray its expenses by charging a $2.00 application fee in addition to the $90.00 fee for intellectual property claims.2

A processing fee such as the ".biz" application fee does not constitute "consideration" within the meaning of the lottery law. If the substance of the transaction is the exchange of consideration for something other than a chance at a prize, the statute does not apply. See, e.g., Ex Parte Shobert, 70 Cal. 632, 634 (1886) (despite payment of additional sums to randomly selected holders of foreign government bonds, statute did not apply because "'the main feature and the substance of the transaction'" was payment in exchange for later repayment of principal and interest) (citation omitted). More specifically, the Polonsky and Daub cases establish that the "consideration" element is not met if the fee paid is for legitimate processing services. Polonsky v. City of South Lake Tahoe, 121 Cal. App. 3d 464 (1981); Daub, 257 N.Y.S.2d at 662. Where, as here, "[t]he cost of processing the license bears a fair relationship to the fee charged," the substance of the transaction is a gratuitous distribution of property to which the payment of a fee is merely incidental. Daub, 257 N.Y.S.2d at 662.

Polonsky also demonstrates that, so long as a fee covers processing costs, it is irrelevant whether expenses could have been recouped in another way. The plaintiffs in Polonsky challenged the distribution of sewer permits in 1979, when every applicant paid a fee regardless of success. 121 Cal. App. 3d at 466. Significantly, the court noted that "[t]he 1980 version of the drawing eliminates payment of a fee until after the drawing when the costs of the procedure are shared by successful applicants." Id. at 466 n.1. Even though other types of charges were possible, the 1979 application fee did not constitute "consideration" under the lottery statute because it was designed to cover notification costs. Under this authority, the Court need not consider whether the ".biz" application fee could have been avoided by imposing or increasing a different fee.

Plaintiffs attempt to distinguish Polonsky based on the assertion that multiple applications from the same applicant were not permitted. But it would have been simple to prevent multiple applications in the Polonsky situation because the pool of eligible applicants was limited to record owners of property within a sewer district. See 121 Cal. App. 3d at 466. By contrast, the ".biz" registration process was open to billions of potential applicants around the world. In such an environment, it would have been nearly if not entirely impossible to devise a system-at least at any reasonable cost-to recognize multiple applications from the same applicant. Even if a screening mechanism could have been deployed to deter most applicants, others would have found a way to circumvent the system. These practical realities preclude any suggestion that the acceptance of multiple applications undermines the bona fides of the application fee. Far from indicating an improper intent to extract profits from the distribution of domain names, NeuLevel's acceptance of multiple applications can be attributed to the absence of reasonable alternatives.

II. ANY INJUNCTION WOULD NEED TO BE NARROWLY TAILORED.

In the event that the Court disagrees with ICANN's view that the ".biz" allocation method, including the $2.00 application processing fee charged by NeuLevel, is lawful, the Court should take care to ensure that any injunction is narrowly tailored to reflect the harms, the parties, and the rights that are actually before the Court. First, relief can issue only against defendants over which the Court has jurisdiction, which at present includes none of the registrars that actually collected the application fees from the plaintiffs. Plaintiffs complain about fees, of varying (and typically unknown) amounts, that various non-party registrars and resellers, located around the world, charged to applicants, also spread throughout the world. The point is that the Court could not actually require a "refund" to consumers or other consumer remedy because the entities that have had the relationships with the businesses that made applications are not before the Court at this time.

Moreover, any remedy must be narrowly tailored to in-state conduct and to the defendants within this Court's jurisdiction. Plaintiffs seek an injunction under California's Unfair Competition Law, Business and Professions Code § 17200 et seq. (UCL). The UCL, however, does not apply "to claims of non-California residents injured by conduct occurring beyond California's borders." Norwest Mortgage, Inc. v. Superior Court, 72 Cal. App. 4th 214, 222-23 (1999).

In Norwest, the plaintiffs sought certification of a nationwide class for claims under the UCL regarding the defendant mortgage company's purchase of "Forced Placement Insurance" (FPI) for borrowers. Id. at 219-20. The putative class included at least three categories of plaintiffs: (1) California residents, (2) "non-California residents for whom Norwest Mortgage's conduct of purchasing FPI occurred in California," and (3) non-California residents allegedly harmed by conduct occurring out of state. Id. at 222. The court of appeal reversed the certification of the class as to the latter category. Invoking a general presumption of statutory interpretation, the court concluded that the UCL was not intended to regulate occurrences outside of California. Id. The court also held that, despite the defendant's incorporation and conduct of business in California, the application of California law to out-of-state conduct causing out-of-state injury would violate due process. Id. at 225-27.

Under Norwest, the claims asserted by plaintiffs in this action can apply only to a small percentage of ".biz" applications. If an illegal lottery were found here, the UCL might authorize an injunction against the acceptance of application fees and processing of applications submitted by California registrars or California registrants. However, the vast majority of ".biz" applications have no connection to California because they were submitted to NeuLevel in Virginia by registrants in other states and around the world through non-California registrars.3 The processing of these applications does not occur in California or cause harm in this state, and thus falls clearly beyond the scope of this lawsuit. Accordingly, so long as applications connected to California are excluded, the general registration and roll-out of ".biz" domain names could not properly be enjoined even if the elements of an illegal lottery were met. Even if a violation of the California lottery laws can be found, the only relief that would be appropriate would be to require that California applications be excluded from the ".biz" name allocation, and to require return of the applications fees paid by those applicants.4

III. THE BALANCE OF INTERIM HARMS WEIGHS HEAVILY AGAINST A PRELIMINARY INJUNCTION.

In ICANN's original opposition papers, it showed that the likely harm from the injunction requested by plaintiffs would far exceed the likely harm if no injunction were issued. Plaintiffs' reply is based on a statement of "Facts Relevant to ICANN's Opposition Brief" (Reply at 2-4), but these alleged "facts" must be disregarded because they are unsupported by citations to a declaration or any other source. See, e.g., Norwest, 72 Cal. App. 4th at 227 n.15. ICANN will not respond to plaintiffs' irrelevant, gratuitous, and baseless attacks. For the Court's reference, however, Mr. Touton's supplemental declaration attaches the 2000 Annual Report of the Department of Commerce's National Telecommunications and Information Administration, which describes the great strides that have been made in the joint Commerce Department-ICANN project to privatize and foster competition in the DNS. (Touton Dec. Ex. C.) ICANN also notes that it recently agreed with the Department of Commerce to extend again the term of the Memorandum of Understanding for an additional year, through September 30, 2002. (Id. 5 & Ex. B.)5

In replying to ICANN's brief, plaintiffs still do not show any interim harm to them from the registration of ".biz" names. First, plaintiffs do not deny that they can easily prevent the alleged harm from their own use of any domain names registered to them prior to the resolution of this lawsuit. Although plaintiffs make the bare assertion that "they should have every right" to use domain names in the event of registration, they do not and cannot suggest any injury from the loss of this supposed "right" to exploit something they claim is illegal. (Reply at 5.) Second, plaintiffs claim that the registration of domain names through the current process would violate an "absolute[] . . . legal right to a fair and legal process with respect to the allocation of <.biz> domain names." (Reply at 5-6.) On the contrary, if the ".biz" registration process were an illegal lottery, plaintiffs at most would have a right to the return of their application fees and to be excluded from the registration process. No authority supports, and common sense refutes, plaintiffs' position that the law incentivizes participation in illegal lotteries by providing entrants with a "legal right" to obtain the prize under an alternative system.

Finally and most importantly, plaintiffs fail to refute that substantial interim harm to defendants would flow from a preliminary injunction, even one properly limited to California activity. On this point, plaintiffs argue that new TLDs are unnecessary because existing TLDs are sufficient to support all Internet activity. (Reply at 6-7.) However, the long-standing consensus and sustained efforts of the Internet community in support of new TLDs clearly demonstrate the fallacy of plaintiffs' contention. In any event, many California businesses undoubtedly have been preparing to operate ".biz" web-sites beginning this month, and their investments cannot simply be transferred to web-sites with domain names in the existing TLDs. These businesses and their customers - members of the alleged plaintiff class - would suffer irreparable harm even from an injunction limited to California.

CONCLUSION

The ".biz" registration process does not resemble a lottery and, even assuming the presence of prize and chance, the element of consideration is absent because applicants pay only a legitimate processing fee. Even if the process were found to constitute an illegal lottery, the available remedy would be limited to NeuLevel's return of fees and cancellation of applications for California residents and non-residents who used a California registrar. Finally, because plaintiffs have failed to show any irreparable harm in the absence of interim relief, their motion for a preliminary injunction should be denied.

Dated: October 5, 2001

Respectfully submitted,

JONES, DAY, REAVIS & POGUE

By:__________________________
     Jeffrey A. LeVee

Attorneys for Defendant
INTERNET CORPORATION FOR ASSIGNED NAMES AND NUMBERS



Notes:

1. The presence of "chance" and "prize" -- the other two "lottery" elements -- also is questionable. Where, as here, the purpose of the challenged activity is distribution rather than speculation or profit, an element of randomization is a "mere processing incident and does not constitute illegality." Daub v. New York State Liquor Auth., 257 N.Y.S.2d 655, 662 (1965) (public drawing used to determine order for processing liquor license applications not a lottery). The principle applies with added force in this case because the alternatives to randomization suffer from major drawbacks.

As to "prize," plaintiffs' position depends on an exceptionally broad definition that eliminates the distinction between property and contract rights by essentially including anything of value within the concept of property. As shown in NeuLevel's previous submission, state and federal courts uniformly recognize that the rights of domain name registrants are contractual in nature. In most legal contexts, the property/contract distinction is critical. See, e.g., Network Solutions, Inc. v. Umbro Int'l, Inc., 529 S.E.2d 80, 86-87 (Va. 2000) (domain name rights not subject to garnishment because contractual in nature); see also Transworld Airlines, Inc. v. American Coupon Exchange, Inc., 913 F.2d 676, 689 (9th Cir. 1990) (restrictions on assignment did not violate public policy because rights in frequent flier coupons were contractual). Even if the Court were to conclude that contractual domain name rights constitute "property" for lottery-law purposes under the expansive definition advanced by plaintiffs, it would be erroneous to suggest that domain names constitute property in other legal contexts.

2. The ".info" and ".name" registries do not charge a fee in the same way because they employ different methods of addressing intellectual-property issues, with different costs. For ".info," intellectual-property claimants protected their rights by making "sunrise" registrations, which were processed in the same way, but prior to, all other applications. A minimum five-year term is required for these "sunrise" registrations, and special expenses also arise from specific disputes over intellectual property claims, resulting in a $295 charge for each challenge. The ".name" registry offers intellectual property owners the right to make "defensive registrations" for up to $6,000, as well as a "NameWatch" service for $50 per year.

3. The limitations of Norwest are particularly strong in this case because plaintiffs' claims of unfair competition are predicated on alleged criminal acts, and the jurisdictional provisions of the Penal Code "generally bar punishment for wholly extraterritorial offenses." Hatch v. Superior Court, 80 Cal. App. 4th 170, 197 (2000).

4. Notably, requiring California registrars and resellers to return application fees they charged presents fewer implementation problems, because those entities can be brought within this Court's jurisdiction.

5. ICANN also would like to correct some of the more egregious falsehoods in plaintiffs' reply. Contrary to plaintiffs' assertion, (Reply at 3 n.1), ICANN did not retain application fees for any of the three TLD registry proposals withdrawn from consideration. (Touton Dec. ¶ 8.) Plaintiffs also state that the public had no opportunity to comment on the ".biz" registration process after the acceptance of NeuLevel's proposal in November 2000. (Reply at 3-4.) On the contrary, ICANN posted drafts of the ".biz" registry agreement, which fully detailed the start-up plan and processing fees, in late February and early March of this year. (Touton Dec. ¶ 30.)


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