Appeals Court Reverses & Allows Suit Against Verisign To Go To Trial: This Is A BIG Deal

A lawsuit was filed in 2005 over the no bid, VeriSign contract, with ICANN which gave VeriSign a monopoly to administer the .com and .net registries., by the Coalition for ICANN Transparency (“CFIT”).

Today the United States Court of Appeals for the Ninth Circuit,  reversed the lower court, and allowed the case to proceed against VeriSign, in the case of: CFIT v. VERISIGN, INC.

The court lays out the case history very well in easy to read form.

“”””CFIT’s complaint endeavored to state claims against VeriSign under Section 1 of the Sherman Act and under California’s counterpart, the Cartwright Act, for conspiracy in restraint of trade in connection with the terms of the .com and .net contracts’ pricing and renewal provisions. In essence, CFIT sought to show that the prices were artificially high and that the renewal provisions wrongfully restrained competition for successor contracts.

“””The complaint also alleged that VeriSign’s conduct in obtaining the anti-competitive provisions constituted monopolization of the .com and .net registration markets.

“””In addition, the complaint sought an injunction against VeriSign’s proposed service for registration of expiring domain names, on the ground it constituted an attempted monopolization of that allegedly separate market.

“”The lower court,  dismissed the action with prejudice for failure to state claims under state or federal law in connection with either the .com or the .net contract.

“”It held that CFIT had not sufficiently alleged that either the terms of the contracts or VeriSign’s conduct in obtaining the contracts amounted to antitrust violations. The court also held that CFIT failed sufficiently to allege that a market for expiring domain names existed separate and apart from the market for newly registered domain names.

“”In this appeal, CFIT contends that the district court failed  to appreciate the seriousness of the allegations of anti-competitive conduct and that, in rejecting the existence of a separate market for expiring domain names, the district court improperly relied on already outdated authority from earlier in this young century.

“””The appellate court ruled in favor of  CFIT, at least with respect to the claims challenging the terms and award of the .com contract and asserting the existence of a separate market for expiring domain names. We therefore reverse.””””

“”CFIT has adequately plead the existence of a conspiracy between VeriSign and ICANN, and that VeriSign had the intent to restrain trade when it entered into the .com contract.”””

The case will now go back to the district court where it should be heard on its merits.

It appears that ICA’s amicus brief was the critical factor in gaining the reversal and remand.

From the opinion:

“Moreover, amicus in this case, the Internet Commerce Association (“ICA”), points out that when Smith and Weber were decided, “the present expired domain name market barely existed,” and that today’s conditions were “unanticipated only a few years ago.”

“Here CFIT’s complaint alleges that every word in the English language is already registered as a domain name, and that desirable domain names can be difficult to come by. On appeal, our understanding of the distinct role and value of expiring domain names has also been significantly aided by the explanation provided by the ICA. As cogently explained by ICA, expiring domain names often carry with them a history of established web traffic and advertising support; when such names do expire, they “still maintain much of [their] prior inbound traffic,” making them more valuable than domain names that have never before been registered. The district court, of course, did not have the benefit of briefing by amicus. With the benefit of this aid to our understanding, we are not prepared to affirm the district court’s ruling that no separate market exists. We therefore reverse and remand for further proceedings.”

Bret A. Fausett, Esq represented the CFIT.

If the VeriSign contract is found to be in violation of the federal and state anti-trust acts and other laws, it could open the contract, to run the .com and .net registries, for  open bidding, with all interested parties, resulting in a much lower, registration and renewal cost for all domain holders.

Yes This is A BIG deal.

Comments

  1. says

    “…expiring domain names often carry with them a history of established web traffic and advertising support; when such names do expire, they “still maintain much of [their] prior inbound traffic,” making them more valuable than domain names that have never before been registered.”

    Mike, correct me if I’m wrong, but, instead of lowering renewal rates, wouldn’t this language lend itself more to supporting an argument for lifting renewal registration caps on dotCom?

  2. MHB says

    David

    I agree with you that particular language could be used to support the argument for lifting price caps.

    However price caps are not in issue in that case.

  3. says

    It’s a positive developed, as we’ve long argued that the com/net contracts, and indeed all of the ones that include presumptive renewal language (including .org) are anti-competitive. There should be regular tenders for the registry contracts, just like any other procurement contract.

    We must temper our expectations, though, as VeriSign has excellent lawyers. However, at a minimum the discovery of documents and depositions should provide months or years of entertainment value. And God-willing we might one day see competitive tenders for com/net/org !

  4. says

    A credible argument could only be made for lifting price caps generally on .com if there was effective competition against it, which there is not now and which will not exist any time soon no matter how many new gTLDs are introduced. It is simply too ingrained in mass consciousness at present. As for differential pricing between domains on the same gTLD, permitting that would be allowing a monopoly provider to tax the economic success of domains.

    Operating a registry is a ministerial service. You get a contract to run a secure and accurate database. The contract should provide sufficient profit to assure quality performance but should be periodically tested in the marketplace through competitive rebid to prevent price gouging.

  5. Cartoonz says

    @D “If they would allow 2 or 3 registries for .com/.net those subjects would compete and .com might cost only $3″

    For each extension, there can only be one registry.

    But the argument for $<$3 Registry prices is very valid.

    The problem is, ICANN doesn’t care about OUR bottom line anymore, only their own – to wit, the current new gTLD proposals…

    The original goal was mandated that the Registry should make a REASONABLE profit over what it truly costs to maintain the database. Verisign is grossly ignoring this, with the blessing of ICANN. Verisign basically held ICANN hostage to get this contract too… remember the lawsuit? Me thinks Verislime is in a bit of trouble now…..

    Put the Registry out to bid, but make damned sure it isn’t “who pays ICANN the most money” but rather who can do it reliably at the least cost to the consumer.

  6. MHB says

    D

    During the last contract negotiations with VeriSign, Godaddy.com expressed interest in bidding for the .com/.net registries and publicly stated that they would be willing to do it for around $3 per domain, instead ICANN refused to allow any other companies to bid and gave the contract to VeriSign for 6 years, allowing them to raise prices 7% a year, compounded (although inflation is running less than 1%), in 4 of the 6 years, and gave them a presumptive renewal right after the contract expires in 2012, assuming on the same terms.

    So if the contract was opened for bidding, as if of course should have been from the get go, you would see a permanent roll back of rates for the exact same service.

    ICANN isn’t going to do squat for domain holders, which is why we need US oversight that we saw this week in congress and this case to proceed to trial.

    If the plaintiff’s are successful in this, you will see every large class action law firm in the country running around looking for for people to represent for back over paid fees.

  7. says

    Cartoonz is correct that there can only be on registry operator for a gTLD. That makes it a classic “natural monopoly” and the two means that are generally employed to avoid price gouging by such a monopoly are price regulation or periodic competitive market testing through contract rebid, or some combination thereof. Neither is employed for .com; in fact the contract allows for price increases in some years without any justification. As for the presumptive renewal clause, the way it’s written VeriSign would almost have to deliberately want to lose the contract to ever have it put up for rebid in 2012 or any time thereafter — so it is a perpetual monopoly. To analogize to real property, it is as if one landlord owned every scrap of land on Fifth Avenue and if you didn’t like his pricing you could move to the Bronx (no offense to the Bronx, just trying to make a point).

    As for next steps on the lawsuit, VeriSign has very deep pockets filled with excess profits from the registry contracts so expect them to drag this out as long as possible given the stakes for them –and then to argue at some point that the gTLD space has fundamentally changed so as to diminish their market power (not that this would excuse past misconduct, regardless of its truth). On the other hand, going to trial will allow for discovery of previously unseen documents, and there may be a chance to get some examination of this deal by the new Administration’s antitrust lawyers, who are already a lot more active than those of the former regime.

  8. Jon Schultz says

    Phil, I don’t think VeriSign should be criticized for “excess profits” or “misconduct” if they have been operating within the letter of the law or ICANN-established regulations. We can certainly seek to change those laws or regulations, but I think moralistic finger-pointing tends to be counterproductive. For example, we domainers are very happy to be able to buy domains for $10 and sell them for $10,000 or more, so I think we need to be careful about accusing others of greed lest the finger be pointed back at us.

  9. MHB says

    Jon

    Its the position of CFIT that VeriSign has NOT been operating within the law, actually violating the Federal and State anti-trust laws for one.

    Read the entire opinion of the court that is referenced in the post, they layout the arguments quite well.

    VeriSign is a monopoly so the rules must be different for them, than for you.

    If you register or renew a .com or .net you are paying VeriSign, you have no choice.

    If you want to buy an aftermarket domain and the guy wants $10K for it, you can elect to buy it, or find another cheaper alternative.

    With VeriSign you have no such choice

  10. says

    I must respectfully disagree, Jon.

    I am not being moralistic, but economic and legalistic (noting of course that the law should be rooted firmly in economic reality and morality). The very heart of the CFIT litigation is a charge that VeriSign has been operating .com under a contract secured by violating the law, and that ICANN set aside its responsibilities to registrants and registrars in exchange for disposing of the litigation brought against it by VeriSign in exchange for a multi-$million payment (and there is no dispute that they received those funds).

    ICA supported the CFIT appeal because we believe that VeriSign is reaping excess profits exceeding an estimated $1 billion over the five year course of the current .com registry contract, in comparison to what the base price and allowable increase provisions would have been in any contract arrived at through the proper course of competitive bidding. This would be true even if VeriSign was the winning bidder, as they were for the .net contract, where the base price was $4.25, not the $6 for .com — pricing for .com should be lower, in the $3-4 range, given the much larger number of domain registrations and accompanying economies of scale (and there were bidders out there willing to operate the registry at that price level, had they been allowed to compete for it). This is not to say that we approve of the lack of price caps in and the presumptive renewal provisions of the .net contract, but these are problems related to ICANN’s misplaced priorities.

    As for misconduct, the 9th Circuit Court of Appeals just held that CFIT’s allegations of “predatory and harassing” activities that accompanied the state and federal lawsuits brought against ICANN by VeriSign to prevent a competitive rebid of the .com contract are, if proved, sufficient to sustain a finding of activities to create and perpetuate a monopoly in violation of U.S. antitrust law. That is the illegal misconduct I alluded to, and it has to do with fact, not morality. If the District Court goes on to find that the evidence supports those allegations it will find conduct that was illegal — whether it was immoral I leave to the individual readers of The Domains to decide.

  11. Jon Schultz says

    Thanks, Mike and Phil, for pointing out more of the facts. My impression, then, that Phil was accusing Verisign of greed, as opposed to illegality, was apparently mistaken.

  12. MHB says

    Maik

    Personally I think the stock will move higher from here.

    The final judgment on this lawsuit, as bad as the potential outcome could be is years away, plus appeals time.

    Investors reaction is short lived in this type of situation.

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