Tuesday, August 21, 2012

Internet Registry, ICANN Could Face Liability Over .XXX Domain

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

The Internet Corporation for Assigned Names and Numbers (ICANN) and an entity that won ICANN's approval of a new ".XXX" top level domain (TLD) and of its designation as the registry overseeing that domain could have violated federal antitrust law by allegedly suppressing or eliminating competing bids for the original .XXX TLD registry contract and any renewals of that contract, the federal district court in Los Angeles has determined. Though an invalid relevant market pleading required dismissal of an attempted monopolization claim, and no cause of action existed for "conspiracy to attempt to monopolize," a motion for dismissal of other claims brought under Secs. 1 and 2 of the Sherman Act was denied.


As an initial matter, an assertion by ICANN--a non-profit public benefit corporation charged with operating the Internet's domain name system--that it was exempt from potential antitrust liability on the basis that it did not engage in trade or commerce was rejected. The transactions entered into between ICANN and the aspiring registry operator amounted to the quintessential sort of commercial activity that fell within the broad scope of the Sherman Act, the court stated. Even aside from its collection of fees under the contract, ICANN's activities played an important role in the commerce of the Internet, and its actions could exert a restraint on that commerce.

Relevant Markets

An alleged market for blocking services and defensive registrations in the .XXX TLD could constitute a valid relevant product market, the court held. The complaining companies, owners and licensors of a large portfolio of adult-oriented website domain names and trademarks, sufficiently alleged the existence of such a market, as there was no reasonable substitute for defensive registration services. The only way to block a name in the .XXX TLD was to register that name. A contention by the defendants that each domain name would be its own individual market was precluded by a precedential finding that confirmed a market of expiring domain names.

However, a second alleged market--for affirmative registrations of names within TLDs connoting or intended for adult content—did not constitute a valid relevant product market. The plaintiffs failed to allege why other currently operating TLDs were not reasonable substitutes to the .XXX TLD for hosting adult entertainment websites. Given that one of the plaintiffs' own sites, which carried a .com address, was the most popular free adult video website on the Internet, it appeared from the face of the complaint that an adult content website registered in the  .com TLD was an adequate economic substitute for an adult site registered in the .XXX domain.

Sufficiency of Pleadings

The defendants engaged in anticompetitive and predatory conduct in violation of federal antitrust law through their alleged: 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 the defending registry. This latter delegation was allegedly carried out for the purpose of allowing the registry to institute even less competitive sales and pricing terms in the future. While competitive bidding was not required under the Sherman Act, concerted action to eliminate such bidding for a contract was an actionable harm. Likewise, concerted action to restrain trade by imposing prices higher than market rate and under conditions hostile to competition was an antitrust violation where the unilateral charging of higher prices would not have been.

Moreover, the averment that the defending entity mounted a coercive campaign to force ICANN to approve the .XXX TLD and give it the registry contract could have been unlawfully predatory. At the very least, the misrepresentation of support from adult entertainment companies, the generation of fake comments in support of .XXX, the submission of misleadingly edited videos and photos, the non-disclosure the certain celebrity supporters of .XXX were paid by the entity, and the creation of a supposedly independent sponsoring entity amounted to sufficient allegations to establish improper, anticompetitive conduct under judicial precedent, the court decided.

The August 14, 2012, decision in Manwin Licensing Int'l S.A.R. L., et al. v. ICM Registry, LLC, et al., Case 2:11-cv-09514-PSG-JCG, CD Cal., will appear at (CCH) 2012-2 Trade Cases ¶78,009.

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