Trademarks, Cybersquatting, Contracts… Did you know?

Jason Shinn is an Internet and e-commerce attorney, licensed in Michigan,  practicing on behalf of online businesses and entrepreneurs.  His website can be found at EbusinessCounsel.com.  Jason agreed to answer some questions as they relate to the domain industry.

Mike:  Tell me a little about yourself and your practice.

Jason:  I’ve been practicing law since 2001 and an overview of my professional experience is available here. In brief, however, my professional and personal interests focuses on the issues that entrepreneurs, start-ups, emerging and established companies commonly face. A significant amount of my legal experience and practice focuses on e-commerce and Internet law, securing non-patent intellectual property (IP), structuring key agreements such as software and web development, licensing, terms of use, affiliate agreements, and employee technology use policies. I’m also an experienced trial attorney having litigated these and other issues before judges and juries in state and federal courts. I’m a life-long Michigan resident and contrary to how my state may be portrayed, there is no place I would rather live and work. I do both with my wife and our three rescue dogs.

Mike:  What are some of the largest mistakes you have seen website owners make?  Is it “on site” issue with the terms and conditions, privacy policy, etc. or offline issues with contracts or other areas?

Jason:  My experience is that conducting business over the Internet or otherwise having an online presence makes for the most challenges for website owners. This is because once your website is up and running, you are literally present anywhere and everywhere someone access your site. And the amount of regulation concerning online content is increasing – from endorsements of products and services on blogs or related medium to obligations on what information may be collected from visitors to websites and what happens if that information is compromised. So at any given moment you have potentially a collision of a number of different legal issues ranging from state law, U.S. federal law, regulatory law, laws of other countries, and Internet specific law. If not properly dealt with, this collision may result in horrific wreckage for a website owner to clean up, leaving little to nothing to salvage from the original endeavor.

Having said this, offline issues can equally derail one’s business objectives. But it is my experience that offline issues tend to be more easily managed because the number of “moving parts” is considerably less. What I mean by this is that the parties are generally limited to the website owner and a website designer. Also, the laws are often limited to contractual matters, which provides a website owner  more of an opportunity to address on favorable terms.

Mike:  Those in the domain industry buy, sell, and develop domain names for profit.  Some of the deals are large and others are small.  Is there ever a time when it’s acceptable not to have some type of written agreement?

Jason:  Certainly from my perspective of maintaining job security I would say that if a transaction is worth entering into then it is always recommended for the parties to have a written agreement in place prepared by a competent attorney (please read this statement with a hint of humor). But as your question suggests, the reality is that domain name transactions run the spectrum from small to large and such legal resources are not always available to properly protect every transaction along this spectrum. At a minimum, however, a written agreement signed by both parties is going to generally be better than no agreement. The challenge, however, is taking into consideration all of the applicable legal areas and then coming up with an agreement that accomplishes the goal of the parties, while protecting your investment. In this regard, Warren Buffet once noted that his firm was “prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk.” (Berkshire Hathaway Annual Report, 2006). Similarly, to properly evaluate whether you should have legal counsel to structure the domain name transaction, it is best to realize that each transaction – regardless of the size – is an investment of resources, e.g., time, money, opportunity costs, etc. And while your investment may not be equivalent to $6 billion, it is still important to evaluate the spectrum of possible outcomes on your investment, including an optimistic outcome, a middle-of-the-road outcome, and a pessimistic outcome. At that point, you can assess whether your investment is worth protecting by maximizing the chance for a positive outcome or eliminating (or at a minimum, reducing) the chance of a negative outcome.

Mike:  What suggestion would you have to a domain name owner faced with an accusation of trademark infringement?

Jason:  Generally a trademark infringement claim will begin with a “cease and desist letter” that is sent by the party’s attorney asserting their trademarks have been infringed upon. Normally these letters demand certain actions to be taken and threaten a lawsuit if such actions are not promptly taken. Certainly receiving such a notice can be simultaneously frustrating and upsetting. But choosing the right response to a cease and desist letter is critical to limit legal expenses and liabilities. That response, however, must be made in consultation with legal counsel because the risks are too high and the area of law is too complicated to make an informed decision without counsel.

Topics you should be prepared to discuss with your counsel include, (i) Steps you should take to preserve information relating to the claimed infringement in the event litigation is filed to avoid sanctions for lost information; (ii) Whether you have available insurance to cover the prospective defense, damages, or both involved in the claim; (iii) Whether you have available remedies against other parties, such as a supplier who contractually guaranteed or represented that no products provided to you would infringe the rights claimed in the cease and desist letter; and (iv) The impact of removing the allegedly-infringing products on your revenue. If sales of these products are low, then dropping the product to avoid a lawsuit may make the most cost-effective sense. But it is critical that if settlement is the route chosen that the party claiming infringement agrees in writing to release all claims for damages against you arising out of the infringement. Otherwise, the party claiming infringement may conceivably sue for past damages even if the alleged infringement ceased. But again, these topics should be discussed with counsel.

Mike:   What are some other areas to beware of from a legal perspective when purchasing domain names?

Jason:  If you were purchasing a house you would want to know as much about the seller and the history of the house, e.g., when it was built, past accident history, ownership history, its location, and the neighbors. Conceptually, buying domain names are no different. Ideally, the transaction should be made in consultation with legal counsel as there are a number of areas that will need to be covered and important, specific contractual language sellers and purchasers will want to include in their agreement.  But a few topics to consider include:

The selling party: It is important to know who you are transacting with, what is the seller’s history and reputation in the industry?

Expired domain name: A domain does not expire on its expiration date and there is a process by which an expired domain name becomes available. Accordingly, it is important to know where the domain name is in the expiration process. You don’t want to purchase an expiring domain name only to find out it has been redeemed prior to complete expiration.

Is the domain name a registered trademark? It is important to realize that even though the domain may have expired or is being sold to you the prior owner of that domain name may have a legal trademark to the name. Your purchase, therefore, may be later subject to forfeiture and expose you to other damages.

Miscellaneous Technical Issues: Make sure as part of the purchase that the domain name registration is “unlocked” or you obtain all information and pass codes needed to unlock the domain name. Many registrars have “locking” features for domain name registrations, which prevent fraudulent transfers. It is also important to have all authorization codes so the name can be transferred to another registrar. The acquiring party will normally need the authorization code to initiate the transfer process. It is important that in any domain name transaction the registrant and administrative contact email addresses are active so that any transfer request sent to those addresses can be read and responded to in a timely manner. Going back to your earlier question as to whether a written agreement is necessary, addressing these technical areas should be appropriately covered in a written agreement or an addendum to that agreement.

Mike:  What is the legal definition of cybersquatting and is that different from owning and selling domain names?

Jason:  Cybersquatting is defined in a federal statute called the Anti-Cybersquatting Consumer Protection Act (Cybersquatting Act), which became effective in 1999. Cybersquatting generally refers to obtaining a trademark associated domain name for the purpose of benefiting from the association with the mark. This statute imposes liability on a person who registers, traffics or uses a domain name is identical or confusingly similar to a distinctive mark (including a personal name that is protected as a mark) or that dilutes a famous mark, and who has a bad faith intent to profit from the domain name. Remedies for a violation of this act include actual or statutory damages, from $1,000 to $100,000 per domain name, and court ordered forfeiture, cancellation, or transfer of the domain name. Attorney fees may also be recovered under certain circumstances where the defendant acted willfully in bad faith. Further, the Internet Corporation for Assigned Names and Numbers (ICANN) requires that all registrants to comply with its Uniform Dispute Resolution Policy for resolving domain name disputes. Arbitrators have authority to cancel a pirated domain name or transfer it. Domain name arbitration under the UDRP does not preclude a later court proceeding.

In answering your question as to whether cyber squatting is different from owning and selling domain names, I hate to give the cliché lawyer response of it “depends.” But it really does depend on the facts and circumstances. This is because the Cybersquatting Act only applies to situations where a domain name is registered with a bad faith intent to profit from the use of a mark of another party in a domain name. The Act provides a non-exhaustive list of nine factors courts use to determine whether there is the requisite bad-faith intent for liability under the Act. One court described the application of these factors as follows: “There is no simple formula for evaluating and weighing these factors. For example, courts do not simply count up which party has more factors in its favor after the evidence is in. As explained in the legislative history of the ACPA, ‘the presence or absence of any of these [nine] factors may not be determinative.’” (Harrods Ltd. v. Sixty Internet Domain Names, 302 F.3d 214 (4th Cir. 2002) (quoting Sen. Rep. No. 106-140, at 9 (1999)).

So whether owning or selling domain names constitutes cybersquatting is going to depend upon a highly intensive analysis of at least nine factors found in the Anti-cybersquatting Act. But even if the Cybersquatting Act does not apply, a party still may be liable arising out of the registration or sale of domain names under other theories and statutes, such as trademark infringement.

Mike:  Can domain names be trademarked?

Jason:  Domain names may be trademarked if the domain names are actually used in commerce as commercial identifiers. An immediately recognizable example of a trademarked domain name is “Amazon.com.” On the other hand domain names used only as an on-line address or as a term that only serves to identify the applicant’s domain name and does not separately identify the owner’s services will generally not be eligible for trademark registration. It is important to know that registering a domain name in no way trumps federal trademark law. Thus, domain name registration does not itself confer any trademark rights on the registrant. This is also an area where it is important to consult with legal counsel to develop an appropriate trademark strategy.

Mike:  Anything else you’d like to add?

Jason:  Thanks for the opportunity to contribute to your Blog and I hope my comments and responses are helpful. Additionally, I recently began publishing a Blog, Digital Deep Dive, which focuses on News and Analysis of Internet and E-Commerce Law. In fact, my first post discussed an interesting cybersquatting claim where a website was essentially held “hostage” by a former business partner to leverage a resolution to a business dispute.

It is important to note, however, that because each reader’s situation will be unique and the law may change. Accordingly, any information provided here, on my blog, or any other resource should not be relied upon or substituted for your own consultation with legal counsel.