Ninth Circuit Applies California law to Domain Name Ownership Dispute and Remands for Determination of Whether “Innocent Purchaser” Defense Applies — CRS Recovery, Inc. v. Laxton

[Post by Venkat]

CRS Recovery, Inc. v. Laxton, 9th Cir. (April 6, 2010).

Background: Mayberry registered rl.com through Network Solutions in 1995. At the time, mat.net was also registered to him. Mayberry provided dale@mat.net as the email address for the registrant and administrative contacts. The mat.net domain name ultimately expired and was later registered by Li Qiang. Qiang – who the court notes is probably judgment proof – receives an email (at dale@mat.net) from Network Solutions relating to rl.com. Qiang then transfers rl.com to himself and then sells rl.com to Barnali Kalita, an Indian citizen, who later sells rl.com to Laxton, the defendant below.

[Keeping your registration information current is common sense, but if there’s ever a case that illustrates the importance of it, this is definitely one of them!] [Eric’s addition: the Meyerkord v. Zipatoni case really highlighted this point IMO]

Once Mayberry realizes that he has lost control of rl.com he tracks down the current registrant, which happens to be Laxton, and requests that Laxton transfer the name back to Mayberry. Laxton – having just spent significant resources prevailing in a WIPO domain name proceeding brought by Ralph Lauren – understandably declines. Mayberry sues, and the trial court grants Mayberry summary judgment and orders the domain name transferred back to Mayberry. The trial court concludes, over Laxton’s objection, that California law applies. On appeal, the Ninth Circuit affirms that California law applies, but remands for a determination of whether theft or fraud resulted in the original loss of the domain name. If Laxton obtained the property from someone who obtained title by fraud, the “innocent purchaser” defense comes into play, and Laxton cannot be held liable for conversion.

The Ninth Circuit Beats Up on Umbro: The key threshold question addressed by the court was whether California law or Virginia law applied. Mayberry, a citizen of Virginia, argued that California law, and not Virginia law should apply. Although Laxton was a citizen of California, he argued that Virginia law should apply because the domain name was “located” in Virginia. (Here’s a post discussing Office Depot v. Zuccarini, a recent Ninth Circuit case which looked at where creditors can levy against domain names.) Laxton also argued that Virginia law should apply, because Virginia law provided for a different outcome:

Laxton argues that a garnishment case from the Supreme Court of Virginia, Network Solutions, Inc. v. Umbro . . . holds that domain names are contract rights under Virginia law.

The Ninth Circuit rejects Laxton’s argument, abrogating (or at least drastically minimizing the applicability of Umbro), noting that “Umbro tells us only about how Virginia law treats domain names in garnishment actions . . . Umbro does not compel the conclusion that Virginia considers domain names to be contracts rights for purposes of conversion suits . . . .” This is nice to see, since (as discussed in a previous post talking about whether creditors can levy against domain names) Umbro is often mistakenly cited for the proposition that domain names are not property.

Innocent Purchaser Defense: The court next discusses whether Laxton can be held liable under California law. The common law rule provides that Laxton assumes the risk of whether the domain name had good title; however, this is subject to an “innocent purchaser defense.” The innocent purchaser defense allows an innocent purchaser who lacked notice of any underlying improprieties to escape liability for conversion where the vendor procured the goods in question through fraud. The key question is whether the underlying transfer to Qiang was procured through fraud or whether it was just mere theft. The court concludes that it’s unclear from the record as to whether Qiang procured initial transfer of rl.com through fraud or theft.

Did Laxton Abandon the Domain Name: The Ninth Circuit also breathes life into an argument which the district court treated as a throwaway argument. The court notes that it’s not so clear that “Mayberry’s failure to change the contact information . . . [does not constitute] an affirmative abandonment of his rights to the domain.” A dissenting Judge Noonan takes issue with the majority’s abandonment argument, likening it to a position where a plaintiff who throws away a bank statement containing bank account information is deemed to have abandoned the underlying bank account.

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This is an interesting case which illustrates the downside of Kremen v. Cohen, the Ninth Circuit case which found that domain names are property which may support a conversion action. The factual scenario and the court’s ruling here, leaves domain name purchasers in a tricky situation. They will have a tough time determining whether they have clean title. It didn’t seem like Laxton, the purchaser here, did anything wrong. He even testified that he checked the WIPO domain name ruling records prior to the purchase to see if the domain name he purchased was subject to a dispute. It wasn’t. Nevertheless, he’s being put in a situation where he may be liable for conversion and have to return the domain name. It’s easy to say that purchasers have to conduct due diligence and obtain adequate representations from sellers, but this factual scenario illustrates why, in practice, that’s not always feasible. A blemish to the title that goes back several transactions can be particularly difficult to ferret out. Obviously, given the existence of multiple judgment proof-looking defendants, someone is going to be out some money.

The prospect of multiple state laws coming into play to determine the ownership of domain names with disputed title is also worrisome.

[Eric’s addition: Venkat’s post reinforces the weakness of the WHOIS database as a record of chain of title. I’m not aware of a way to see archival versions of a WHOIS record; the database only shows the most current record. Compare other government-operated databases for recording property title, where it’s possible to see the chain. I wonder if WHOIS should make it possible to see a chain of records as well? UPDATE: this tool offers historical WHOIS information for a fee. That’s useful, but I think the info should be treated equivalent to a public record and searchable for free.]

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