Court Uses Case Of CFIT Vs. Verisign To Hammer ICM’s & ICANN’s Motion To Dismiss Manwin Claims

A federal court made a ruling in the case involving Manwin, the owner of YouPorn.com, brought against ICM, the operator of the .XXX extension, and ICANN the non-profit organization which gave ICM the contract to operate the .XXX TLD ICM.

The ruling involved ICM & ICANN’s motion to dismiss the case.

Bottom line ICM & ICANN got two of the 2 of the 6 cause of actions thrown out but the court let the case continue on 4 of the 6 claims.

The court cited time and time again throughout its ruling the federal court decision in the case brought by the Coalition for ICANN Transparency, Inc. (CFIT ) vs. Verisign, Inc., 611 F.3d 495 (9th Cir. 2010) in which the court rejected Verisign’s motion to dismiss the case in which CFIT alleged that the no bid contract granted by ICANN to Verisign violated among other things the Sherman Antitrust Act.  You can read our post on the ruling on the Verisign case here which we knew was a big win for the plaintiffs.

So in the Manwin case the court summarized ICM’s & ICANN’s Motion to Dismiss:

“Defendants move on various grounds to dismiss the First Amended Complaint. ICM requests dismissal of all five causes of action for failure to allege (1) an antitrust injury, (2) a conspiracy between ICM and ICANN to restrain trade or monopolize a relevant market, and (3) anticompetitive or exclusionary conduct by ICM. For its part, ICANN argues for dismissal because (4) ICANN does not engage in trade or commerce, (5) ICANN acted unilaterally did not conspire with ICM, (6) Plaintiffs fail to identify relevant markets, and (7) the Third Cause of Action for conspiracy to attempt to monopolize does not exist under the Sherman Act.”

“Section 2 of the Sherman Act imposes liability on “[e]very person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations.”

“For a Section 2 monopolization claim, a plaintiff must establish (1) possession of monopoly power by defendant in a relevant market, (2) predatory conduct, and (3) causal antitrust injury.”

“A conspiracy to monopolize claim requires (1) the existence of a combination or conspiracy to monopolize, (2) an overt act in furtherance of the conspiracy, (3) the specific intent to monopolize, and (4) causal antitrust injury.”

“And an attempted monopolization claim requires (1) specific intent to control prices or destroy competition, (2) predatory or anticompetitive conduct, (3) a dangerous probability of success, and (4) causal antitrust injury.”

“Defendants move on various grounds to dismiss the First Amended Complaint. ICM requests dismissal of all five causes of action for failure to allege (1) an antitrust injury, (2) a conspiracy between ICM and ICANN to restrain trade or monopolize a relevant market, and (3) anticompetitive or exclusionary conduct by ICM.”

“For its part, ICANN argues for dismissal because (4) ICANN does not engage in trade or commerce, (5) ICANN acted unilaterally and did not conspire with ICM, (6)  Plaintiffs fail to identify relevant markets, and (7) the Third Cause of Action for conspiracy to attempt to monopolize does not exist under the Sherman Act.”

“The Court will address these seven arguments for dismissal in turn. Ultimately, the Court finds, with two exceptions, that the First Amended Complaint adequately pleads antitrust claims. The first exception is the Third Cause of Action for “conspiracy to attempt to monopolize,” which is not a recognized cause of action. Second, the Court finds insufficient the allegations of a relevant market for affirmative registrations of names within TLDs connoting or intended exclusively or predominately for adult content. The insufficiency of this market requires the dismissal of the Third and Fifth Causes of Action.
By its terms, the Sherman Act applies to monopolies or restraints of “trade or commerce.”

“The Court finds the transactions between ICANN and ICM described in the First Amended Complaint are commercial transactions. ICANN established the .XXX TLD.”

“ICANN granted ICM the sole authority to operate the .XXX TLD.”

In return, ICM agreed to pay ICANN money.

“This is “quintessential” commercial activity and it falls within the broad scope of the Sherman Act.”

“An antitrust plaintiff must “identify the markets affected by [a defendant’s] alleged antitrust violations.” Big Bear Lodging Ass’n v. Snow Summit Inc., 182 F.3d 1096, 1104 (9th Cir. 1999). ”

“The plaintiff must allege “both that a ‘relevant market’ exists and that the defendant has power within that market.”

“Plaintiffs allege two different relevant markets.:

“1. Defensive Registration Market

“The first market is for blocking services and defensive registrations in the .XXX TLD or in other words, these owners seek to prevent others from using their names in the .XXX TLD.”

“ICANN argues this is not an appropriately defined market. ICANN Mot. 22:1-23:12. ICANN contends the market fails because there is no market for all .XXX defensive registrations.”

“The Court finds this argument is foreclosed by VeriSign.”

“In VeriSign, the plaintiff alleged a market of “expiring domain names.” VeriSign, 611 F.3d at 501. “Expiring domain names are names that have fallen back, or are about to fall back into the registry database as a result of non- renewal by their current owners.”

“The defendant argued this market was insufficient because each expiring domain name would be its own market, and there was no such thing as a market for all expiring domain names. ”

“Accordingly, Plaintiffs have adequately pled a relevant market for defensive registrations.”

“2. The second market described by Plaintiffs is for affirmative registrations of names within TLDs connoting or intended exclusively or predominately for adult content.”

“Plaintiffs posit that through “network effects” the .XXX TLD could attract more and more providers of adult content and consumers of adult content, until a point is reached when .XXX is the exclusive purveyor of adult content on the internet.”

“The Court finds Plaintiffs have failed to adequately plead the affirmative registration market. Plaintiffs have not alleged why other currently operating TLDs are not reasonable substitutes to the .XXX TLD for hosting adult entertainment websites.”

On the issue of Antitrust Injury the court ruled:

“The Ninth Circuit has identified four requirements for an antitrust injury: (1) unlawful conduct, (2) causing an injury to the plaintiff, (3) that flows from that which makes the conduct unlawful, and (4) that is of the type the antitrust laws were intended to prevent.”

“Plaintiffs allege that Defendants harmed competition in the market for .XXX TLD registry services by suppressing or eliminating competing bids for the original .XXX TLD registry contract and any renewals of that contract.

“The resulting no-bid contract contains unfavorable prices and sales terms that Plaintiffs allege would not exist in a competitive market.

“Under the Ninth Circuit’s VeriSign decision, these are adequate allegations for antitrust injury.”

“In VeriSign, the plaintiff alleged very similar harm to competition through a conspiracy to eliminate competitive bidding for a domain registry contract and a conspiracy to limit competition for renewal of the contract. The elimination of “competition itself” is “precisely the type of allegation required to state an injury to competition.”

“In addition, the Ninth Circuit held that allegations of “higher prices for registration of domain names, and potentially lower-quality services” were sufficient to plead harm under the Sherman Act. Id. at 503. In accord with VeriSign, the Court finds Plaintiffs have adequately stated antitrust injuries.”

“Plaintiffs assert ICANN and ICM agreed to the following anticompetitive and predatory conduct: suppression of competition for the initial .XXX registry contract and renewal of that contract; preclusion of other adult content TLDs; setting above market prices and output restrictions; and delegating ICANN’s sales and pricing authority to ICM for the purpose of allowing ICM to institute even less competitive sales and pricing terms in the future.”

“The Court finds, once again, that these allegations are sufficient under VeriSign. ”

“While VeriSign confirmed that competitive bidding is not required under the Sherman Act, “concerted action between co-conspirators to eliminate competitive bidding for a contract is an actionable harm.”

“Plaintiffs have alleged just such conduct.”

Like the ruling in the Verisign case, this federal court is allowing the claim to move forward.

Of course in the Verisign case the plaintiff’s ran out of money against a public company with over $1 Billion in the bank at the time.

As we noted back when this case was filed, if the court rules against ICM and ICANN it could well jeopardize the entire new gTLD program.

We will continue to follow this case with much interest.

 

 

Comments

  1. says

    Not only could it jeopardize the entire new gTLD program, it could reignite the debate about the anticompetitive monopoly registry contract that VeriSign enjoys for dot-com.

    The CFIT lawsuit got settled, without a final court ruling. Perhaps an enterprising attorney will decide to take on VeriSign/ICANN again, or the US DOJ anti-trust division will finally act to force a competitive tender for the dot-com contract.

  2. Michael H. Berkens says

    George

    Technically the Verisign case was “settled” in the real world the Plaintiff simply ran out of money against a company that had $1B+ in the bank.

    We can debate the Verisign contract all we want, I think the only answer to the problem would be congressional action or DOJ

  3. BrianWick says

    This is a statement that .XXX does stand on its own. But extending it to .shop or whatever – I won’t be sitting on the edge of my chair.

    And George – Yes – the flood gates could be opening – Can you imagine an anti-trust settlement with .com owners and Verisign/ICANN ?

  4. says

    Wasn’t Frank Schilling part of CFIT? Actually, he was, see:

    http://www.sec.gov/Archives/edgar/data/1014473/000119312511136038/d8k.htm

    “On May 11, 2011, VeriSign, Inc. (“Verisign” or the “Company”) entered into a Settlement Agreement and Mutual Release (the “Agreement”) with the Coalition for ICANN Transparency, Inc. (“CFIT”), CFIT’s members, iRegistry Corp., Name Administration, Inc., Linkz Internet Services Corp., World Association for Domain Name Developers, Inc., Targeted Traffic Domains, Inc., Bret Fausett, Howard Neu and Frank Schilling (collectively “the CFIT Parties”) (the “Parties”), that resolves the litigation initiated by CFIT against the Company.”

    I find it hard to believe that “running out of money” is the entire story, when just a year later UniRegistry.com invested 8-figures in new gTLDs.

  5. says

    “The Court finds the transactions between ICANN and ICM described in the First Amended Complaint are commercial transactions. ICANN established the .XXX TLD.”

    “ICANN granted ICM the sole authority to operate the .XXX TLD.”

    In return, ICM agreed to pay ICANN money.”

    There goes ICANN’s entire “ICANN does not engage in trade or commerce” argument.

    Regardless of the outcome of the Manwin case, ICANN can no longer hide behind that argument as immunity to being sued.

    This could have major ramifications on the gTLD program going forward.

    Brad

  6. Michael H. Berkens says

    George

    Really?

    You think Frank should have spent $60 Million of his own money to fight this suit?

    Yes Frank was funding that case but it wasn’t Frank’s case to fund entirely and I think he was beyond frustrated that large portfolio holders, larger than him, Namemedia, Oversee and others that own 1,000,000 or more domains would not participate in the suit.

    George I mean its not whether Frank had the money to fund the entire suit.

    Would you fund this suite yourself for the benefit of all when you the only one funding it?

    Frank owns 400K domain so that $3.2 Million at $8 a domain with a 7% increase its $224K a year.

    So throwing a few million at it made sense over the long haul but he would be crazy to spend $60 million dollars fighting something that might only save him $2.5 Million over 10 don’t you agree?

  7. says

    ICANN’s argument that it “does not engage in trade or commerce” is laughable to start with.

    This coming from an organization that just collected almost $400M for essentially nothing in return.

    Brad

  8. Michael H. Berkens says

    Brad

    I didn’t want to go to deep in the opinion but ICANN tried to use a case involving the Human Society as to say the funds it collects where contributions and ICANN uses those funds for a charitable purpose.

    Here is what the court said:

    “In arguing it is not subject to antitrust laws in this matter, ICANN leans heavily on the Ninth Circuit’s decision in Dedication & Everlasting Love to Animals v. Humane Soc’y of the United States, Inc., 50 F.3d 710 (9th Cir. 1995) (“DELTA”).

    “In DELTA, the Ninth Circuit held “[f]idelity to the language of the statute and its interpretation by the Supreme Court forbids extension of the Sherman Act to charitable fundraising never envisaged as trade by the common law.” Thus, the activity of the Humane Society in soliciting donations was not trade or commerce under the Sherman Act.

    “ICANN’s reliance on DELTA fails because the activities of ICANN set forth in the First Amended Complaint are not solicitations of donations”

  9. BrianWick says

    You only get as much justice as you can afford :)

    Business is not about making money – it is all about mitigating your loses – i.e. legal AND legal fees

  10. says

    Mike: I didn’t say that Frank Schilling had any obligation to fund the lawsuit. I just said that it’s not credible to say that they “ran out of money” — they certainly had the money, but just made the choice to spend it on new TLDs instead.

  11. Michael H. Berkens says

    George

    No he didn’t choice to spend it on new gTLD’s he made a business decision that it made no sense to solely fund $10 Million or more to fight a billion dollars company with no guarantee of success to save $200K a year.

  12. says

    Mike: You made my point for me. It’s one thing to make a “business decision”. It’s an entirely different thing to suggest one “ran out of money” — in the latter case, it’s *not* a decision at all.

  13. Michael H. Berkens says

    George

    And on the issue of that no one else stepped up to the plate to fund the suit including yourself?

    I love people who want to tell other people how they should spend there money and how much to spend.

    Also your assuming all of frank’s money would have gotten the case through the courts, years of appeals, I’m not that sure.

  14. says

    Mike: I was never asked (indeed, the public was not even told who was behind CFIT for a long, long time — VeriSign had to make a motion and the court eventually ordered that CFIT disclose its members), but that’s beside the point.

    My only point was that it’s not credible to say they “ran out of money.”

  15. Paul says

    “Plaintiffs posit that through “network effects” the .XXX TLD could attract more and more providers of adult content and consumers of adult content, until a point is reached when .XXX is the exclusive purveyor of adult content on the internet.”

    So .XXX is a joke, it’s doomed, it’s worthless, it’s nothing compared to .COM, yet Manwin states the aforementioned?! Manwin is concerned .XXX could take over all adult content online? If that isn’t the biggest ENDORSEMENT of .XXX I don’t know what is. I own a few .XXX domains and Manwin is only making me feel more confident that I can successfully develop them all. Manwin will lose. Why? Because it’s the pot calling the kettle black. They’re afraid of competition. They want to monopolize the online adult market. So they’re attempting to sue the competition out of existence. They will not succeed. There’s big money backing .XXX. Manwin isn’t going to bully ICM Reg out of existence. Let it all drag out in court. I feel confident ManWIN will lose.

  16. Philip Corwin says

    @Mike — I agree that this ruling could be a big deal with significant potential implications for the new gTLD program.

    The court relied heavily on the CFIT v VeriSign case (in which an amicus brief filed by ICA describing the secondary domain market played a material role in reviving after an initial District Court dismissal for supposed failure to state an antitrust claim) in reaching the conclusion that ICANN is subject to antitrust law in regard to gTLD registry contracts (while the VeriSign case was later dismissed by mutual consent, but the 9th Circuit Court of Appeals decision stands as precedent).

    Since every gTLD is a natural monopoly as there can be but one registry operator, and because defensive registrations are an aspect of every gTLD, the decision, if upheld on appeal, could subject ICANN to multiple antitrust lawsuits against new gTLDs. The issues raised in such litigation could range from the fairness of the application evaluation and decision process (especially determining the final outcome by auction, which defers to economic clout rather than other more subjective factors, including competitive effects) and the inherent recognition that there will be defensive registrations through such elements as the creation of the TMC database and the sunrise registration period for new gTLDs.

    That doesn’t mean that ICANN will lose any of the potential lawsuits – but it could mean that litigation delays the launch of one or more gTLDs, and raise issues that put the legal standing of the overall program into question.

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