Home / Blogs

Smells like Cybersquatting? How the UDRP “Smell Test” Can Go Awry

This article is adapted from a presentation given at the WIPO Workshop in Geneva on October 12, 2022.

Can a Panel’s Sense of Smell Differentiate an Investor from a Cybersquatter?

The UDRP has the form of a substantive Policy, but it operates as a “smell test”.1 If the evidence smells bad, the panel will likely order a transfer. If it doesn’t, the panel won’t.

An aim of this article is to help improve UDRP panels’ sense of smell when it comes to differentiating between domain name investors and cybersquatters. I will provide some insight into the business of domain name investing that I hope will be helpful to UDRP panelists in making more accurate inferences in disputes involving investors.

The Policy is intentionally broad to allow the panelists discretion to identify various forms of bad faith.2 The examples of bad faith provided in the Policy are non-exclusive. Panelists, in practice, are empowered to declare as bad faith any behavior they perceive as such. This gives panelists tremendous discretion and power to declare any behavior they disapprove of to be bad faith. A registrant’s right to his or her domain name often rests on nothing more solid than whether a certain panelist sniffs the evidence and does not like the smell.

A challenge for panelists is that domain name investors can be difficult to distinguish from cybersquatters. At times, we both attempt to sell, at a profit, domain names that are similar to existing trademarks.

What is it that differentiates a domain name investor from a cybersquatter? A domain investor deals in domain names that have inherent appeal, and therefore value, independent of any trademark use. A cybersquatter, on the other hand, registers a domain name solely because the domain name is similar to a specific trademark to siphon off some of the value created by the trademark owner.

The Policy doesn’t offer much help in distinguishing legitimate domain name investing from cybersquatting. The Policy in 4(b)(i) prohibits registering a domain name “primarily for the purpose” of transferring it to the trademark holder at a profit. Yet “primarily for the purpose” is a vague and highly subjective criterion.

Panelists, at times, will draw inferences as to “willful blindness” and from “high asking prices” to find that an investor acquired a domain name “primarily for the purpose” of selling it to the Complainant and is, therefore, a cybersquatter. These inferences are often unjustified and result from a lack of understanding of the business of domain name investing. I’ll share some insights about domain name investing in the hope that it offers readers a better understanding of the business.

My Experience as a Domain Name Investor

Twenty-five years ago, while researching how to register a domain name for an online column about stock market investing, I stumbled across a mention of domain name investing. It made intuitive sense that attractive domain names would appeal to companies looking to establish a presence online. Yet when I checked the availability of various dictionary-word dot-com domain names, they were all taken, even back in 1997. Though an inauspicious beginning, this started me on the path of domain name investing.

Up until that time, I had worked in junior level positions at the U.S. Department of Commerce and then at Fannie Mae, a very large quasi-governmental mortgage financing company, where I earned a Master of Business Administration (MBA) degree. Yet I knew that I did not want to spend the rest of my career working in the bureaucracy of large organizations. Fortunately, domain name investing became a path to running my own business and to financial independence. That possibility is what attracts many others to domain name investing.

Since domain name investors own appealing domain names, we are often dragged into UDRP disputes. The cheapest, fastest way for a company to obtain a desirable domain name may be to accuse the investor of cybersquatting. If the company can persuade the panel that the investor registered the domain name to target the company’s trademark, then the panel will award the domain name to the company at no cost to them.

I have been a respondent in over 20 UDRP disputes. When the UDRP first went into effect in late 1999, there was great uncertainty as to how it would affect domain name investing. In early 2000, I was involved in one of the first UDRP complaints involving a dictionary-word domain name, craftwork.com. The panel unanimously denied the complaint finding that “craftwork” is a descriptive term and that I had registered the domain name without knowledge of the complainant’s trademark. This was reassuring.

I, therefore, felt confident that I would prevail when the next UDRP complaint arrived later that same year on the crew.com domain name. The complaint was brought by J. Crew, the recently bankrupt clothing store chain. The majority of the panel ordered the transfer of crew.com to J. Crew despite a powerful dissent. The majority concluded that speculation in domain names is not permitted when the domain name corresponds to a registered trademark and where the registrant has no demonstrable plan to use the domain name.3 While, fortunately, the perspective of the dissenting panelist is now the prevailing view,4 losing the crew.com domain name due to certain panelists adopting an overly expansive view of trademark rights made clear that a poorly implemented UDRP puts at risk the business and livelihood of domain name investors. This awareness spurred me to spend the next 20 years advocating for changes to improve the quality of UDRP decisions.

I’ve been a member of the Board of the Internet Commerce Association (ICA), the trade association for the domain name industry, since 2010. My company, Telepathy, Inc., is a member of ICANN’s Business Constituency. I write frequently about the UDRP, including several articles published on CircleID that were co-authored with Zak Muscovitch, the ICA General Counsel, as well as other articles.

For the past couple of years, I have participated, along with several UDRP panelists and practitioners, on a weekly call hosted by UDRP scholar and panelist, Gerald Levine, where UDRP practice issues and decisions are discussed. I have attended WIPO UDRP workshops in Geneva and New York City. I publish RDNH.com, a listing of all identified RDNH decisions and UDRP.tools, a searchable database of over 80,000 decisions from four UDRP providers that also offers a detailed report on each UDRP panelist.

Panelists are the Heart of the UDRP

The quality and fairness of the UDRP as a Policy ultimately depends upon those who serve as panelists. Fortunately, the majority of UDRP panelists are conscientious and fair-minded. Erroneous decisions, while concerning, are relatively rare.

That is a testament to the diligence and the seriousness with which most panelists take the responsibility entrusted to them. It is also aided by WIPO devoting considerable resources to offering workshops on UDRP practice issues and to developing the Jurisprudential Overview to foster greater consistency in application of the UDRP.

Fanciful Domain Names

An investment grade domain name is any domain name that appeals to a domain name investor and that an investor believes can be sold at a profit to a willing buyer (who has no current trademark rights).

Are MONVY.com and QEIDO.com investment quality domain names?

A Swedish domain name investor and naming consultant thought so. He found these domains appealing so he registered them for his portfolio. It turned out that he was right. Both of those domain names were purchased by start-ups (somewhat to my surprise). Monvy.com is now in use for a cash flow management site and QEIDO.com is a brand for a Spanish medical equipment company.

The classic understanding of investment quality domain names, a view reflected in section 2.1 of the WIPO Jurisprudential Overview 3.0, is that they are based on “acronyms, dictionary words, or common phrases”. Yet this is too limited.

An estimated 10 million domain names are held for investment. The vast majority are fanciful, made-up domain names like monvy.com and qeido.com. Only a small percentage are dictionary-word domain names or acronyms.

Fanciful names are quite appealing as business identities.5 As the heart of the business of domain name investing is to provide appealing business identities in the form of domain names, the bulk of many domain investors’ portfolios consist of attractive fanciful domain names.

In the recent nobli.com decision, Panelist Andrew Christie recognized this reality in finding that the universe of investment grade domain names “may also extend to made-up phrases.” He is correct.

Zak Muscovitch offers an excellent commentary on the Nobli.com decision in a recent UDRP Digest. For anyone who does not yet subscribe, the UDRP Digest is a free weekly newsletter published by the ICA providing a summary and in-depth commentary on the most notable recent UDRP disputes.

Pricing

Legitimate domain name investing is an unusual business. The critical thing to know about domain name investing is that in a good year, a typical domain name investor will sell only about 2% of the domain names she holds.

Far from being glamorous, it is a very time-intensive and tedious business. As is said about professional poker players, “it is a hard way to make an easy living”. Competition for appealing domain names is global and intense.

For an investor to earn a reasonable profit on the time and capital committed, the investor must set an asking price that is far higher than their acquisition cost for any individual domain name. Only in this way can the very small percentage of domain names that sell each year generate sufficient revenue to make it a viable business. As a rule of thumb, an investor will usually be willing to commit $1000 to acquiring a domain name only if she believes that it can sell for between $5,000 to $20,000 or more.

Making Well-Informed Inferences

We now have a better understanding of how expansive the universe of investment grade domain names is and that it primarily consists of fanciful domain names. We also have a better understanding of the domain name investment business model, especially that due to the very low sell-through rate it requires setting asking prices far higher than the acquisition cost. We can now use this understanding to make more accurate inferences as to what actually constitutes bad faith behavior by a domain name investor.

Some panels may find bad faith on the part of a domain name investor due to applying the concept of willful blindness. A panel may find that a conscientious investor ought to have discovered the complainant’s trademark while doing due diligence on the disputed domain name, such that knowledge of the trademark can be imputed to the investor. That the investor then proceeded to register and to offer the domain name for sale can lead to an inference that the investor was therefore targeting the complainant’s mark in bad faith.

Domain name investors find the concept of “willful blindness” applied to non-famous marks to be troubling. That a domain name is similar to a trademark does not mean it is targeting the trademark. Trademark rights are limited in scope and geography. There is high demand for brand identities and a limited number of appealing terms such that many marks are shared among several different non-infringing users. An investor can sell a domain name that may be similar to an existing trademark to a new entrant that will then become yet one more company sharing a similar mark.

As Gerald Levine states, “‘Willful blindness’ is a convenient substitute for clear thinking”.6 By applying the principle of willful blindness, a panelist sets the expectation that a domain investor should search not only national but also global trademark databases and then be able to interpret the results—or should simply avoid registering any domain name that is similar to a mark that appears in the search results. The panelist is in effect saying that a domain name that may have widespread appeal to many buyers is off-limits and effectively grants the Complainant a global monopoly on a term that is non-distinctive and not exclusively associated with the Complainant. It means that an investor can be found guilty of bad faith where no bad faith exists simply if they identify and register an appealing domain name that meets their investment criteria. Where no targeting and diversion of commerce exists, the Complainant is not being harmed by not owning a domain name today that it did not own yesterday.

Similarly, I often read decisions in which a panel infers bad faith from an asking price.7 Perhaps the investor only paid $1,000 for the domain name but is now asking $20,000. A panel may find that this means that the domain name is only “worth” around $1000 and that to set an asking price of $20,000 is compelling evidence that the investor is targeting the value of the Complainant’s goodwill. But it isn’t. As we saw, setting an asking price at this multiple of the acquisition cost is often required to enable the investor to have a chance at earning a reasonable profit from this capital and time-intensive business.

As colorfully expressed by Michael Cyger, the founder of DNAcademy8

Michael Cyger @MichaelCyger / 6:21 AM ยท Oct 14, 2022 Oct 14

This isn’t to say that the asking price can never be used to support an inference of bad faith as one data point within a larger context. There are extreme situations where the respondent sets an exorbitant asking price in the tens of millions of dollars for a domain name such as with Lambo.com, that only have substantial value to one company and where the respondent can offer no reasonable explanation9 for setting such an asking price. Yet relying on the asking price set by a domain name investor as the primary rationale for drawing an inference of bad faith targeting will usually lead a panelist astray.10

Panelists ought to be cautious when drawing inferences from an asking price. Panelists are not domain name pricing experts. Assumptions about reasonable markups based on knowledge of the profit margins of retail stores that turn over their inventory several times a year do not apply to the business of domain name investing. If an investor has a legitimate interest in an appealing domain name, then she is free to ask whatever price the market will bear and the market will respond.

The Burden on Respondents from Speculative Complaints

A lack of familiarity with the business of domain name investing can lead to inaccurate inferences which can then result in unjustified transfers. Unjustified transfers in turn can encourage speculative complaints, which impose a burden on innocent respondents.

Although unethical,11 a business may consider it a smart business decision to file a meritless complaint in the hopes that a panel will award them an undeserved transfer of valuable domain name.12

The burden created by speculative complaints is well illustrated by the UDRP’s history with three-letter dot-com domain names, which regularly resell for hundreds of thousands of dollars. Obtaining one for free through a UDRP complaint would be a huge windfall.

Of the 80 disputes on three-letter dot-com domain names in the past decade (since January 1, 2012) where cybersquatting was alleged,13 77 were denied. Reverse Domain Name Hijacking (RDNH) was found 20 times. Of the three decisions where the complaint was accepted, two (ado.com and imi.com) were challenged in court and overturned at the cost of hundreds of thousands of dollars and one (ehf.com) is still pending in court and I believe was wrongly decided. Even disregarding the costs of the court cases, the direct and indirect costs imposed on the respondents to defend themselves from these baseless UDRP complaints reaches into the millions of US dollars. That at most one (and in my view, none) of the 80 disputes alleging cybersquatting filed against three-letter dot-com domain names since 2012 is meritorious gives a sense of how the UDRP encourages covetous complainants to try their luck with speculative complaints and of the burden this places on innocent registrants.

Investing Free from Interference from Overreaching UDRP Panels

While domain name investing may not be a prestigious business, it is a legitimate business and offers a valuable service. In some ways, you could view domain name investors as functioning either as scrap dealers - - or as high-end antique stores. We bring liquidity to an otherwise illiquid market. We are ready buyers when a domain owner wants a quick sale. We offer buyers a wide selection of readily available domain names at variety of price points, when it would be very difficult for a buyer to assemble such a selection on their own.

Domain investors want to be able to operate as any regular business does—to invest in appealing domain names, to let market forces determine pricing, and to be able reach out to potential buyers without putting our domain names in jeopardy due to certain panelists finding that such everyday purchasing, pricing and marketing practices are evidence of bad faith.

To recap, throughout the history of the UDRP, domain name investors have been subjected to unjustified inferences of bad faith by panelists who have a poor understanding of the business of domain name investing. When a domain name investor independently, and credibly, identifies a domain name as appealing and matching her investment criteria, it is not bad faith for the investor to register the domain name and to offer it for sale. The concept of willful blindness applies primarily to famous marks. Otherwise, it serves to conjure bad faith out of thin air by imposing a non-existent duty on domain name investors to research global trademark databases and to avoid any non-distinctive and inherently appealing terms that may be found there.

The universe of domain names that domain name investors are permitted to invest in is not limited to dictionary or acronym domain names. Most domain names held for investment are fanciful or invented terms that the investor finds appealing. In the absence of other evidence, that a fanciful domain name offered for sale by a domain name investor happens to be similar to a mark that is in use by some company somewhere in the world is not compelling evidence that the domain name investor identified and registered the domain name to target the mark holder in bad faith.

Panels also make unjustified inferences of bad faith based on the asking price. That an investor paid $1,000 for a domain name does not mean that the domain name is “worth” $1,000, such that asking far more could be reasonably inferred to be a bad faith targeting of the mark holder’s goodwill. Domain name investing is in some ways like panning for gold. When an investor happens to have registered a handful of domain names that appeal to buyers, those little nuggets of gold must cover all the time and money spent on the whole operation. Since so few domain names sell, and since domain name investing is so time and capital intensive, an investor will ask what the market will bear, which can be twenty times or more higher than the acquisition cost.

The UDRP is Not Well Suited to Adjudicating Disputes Involving Domain Name Investors

As domain name investors claim a legitimate interest in our domain names, this raises the question of the suitability of the UDRP for resolving such disputes. The second ICANN staff report on implementing the UDRP from 1999 describes the UDRP as a “minimalist” policy, its mandate “narrow” and suitable only for a “small, special class of disputes.” Further, “the Policy relegates all ‘legitimate’ disputes to the courts” as not suitable for a “streamlined administrative dispute-resolution procedure.”

The Policy was not developed with domain name investors in mind, the guidance applicable to domain name investors is vague and subjective, and the factually intensive disputes between two parties claiming a legitimate interest in the domain name are not well suited to such an abbreviated procedure.

UDRP panelists are given the difficult task of adjudicating disputes involving domain investors under the UDRP. Discretion and restraint on the part of panelists is required to achieve a just result.

I hope this review is helpful in offering a better understanding of the business of domain name investing and that it can assist UDRP panelists in making better informed inferences when adjudicating disputes involving domain name investors.

By Nat Cohen, President, Telepathy, Inc.

Filed Under

CircleID Newsletter The Weekly Wrap

More and more professionals are choosing to publish critical posts on CircleID from all corners of the Internet industry. If you find it hard to keep up daily, consider subscribing to our weekly digest. We will provide you a convenient summary report once a week sent directly to your inbox. It's a quick and easy read.

I make a point of reading CircleID. There is no getting around the utility of knowing what thoughtful people are thinking and saying about our industry.

VINTON CERF
Co-designer of the TCP/IP Protocols & the Architecture of the Internet

Comments

Comment Title:

  Notify me of follow-up comments

We encourage you to post comments and engage in discussions that advance this post through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can report it using the link at the end of each comment. Views expressed in the comments do not represent those of CircleID. For more information on our comment policy, see Codes of Conduct.

Related

Topics

Domain Names

Sponsored byVerisign

Cybersecurity

Sponsored byVerisign

IPv4 Markets

Sponsored byIPv4.Global

Brand Protection

Sponsored byCSC

Threat Intelligence

Sponsored byWhoisXML API