Coal. For Icann Transparency Inc v. Verisign Inc

• Decision Date: 05 June 2009
• Docket Number: No. 07-16151.,07-16151.
• Citation: 611 F.3d 495
• Parties: COALITION FOR ICANN TRANSPARENCY, INC., a Delaware corporation, Plaintiff-Appellant,v.VERISIGN, INC., a Delaware corporation, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

611 F.3d 495

COALITION FOR ICANN TRANSPARENCY, INC., a Delaware corporation, Plaintiff-Appellant,v.VERISIGN, INC., a Delaware corporation, Defendant-Appellee.

No. 07-16151.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Dec. 8, 2008.

Filed June 5, 2009.

Amended July 9, 2010.

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Bret A. Fausett, Los Angeles, CA, for the plaintiff-appellant.

Ronald L. Johnston, Los Angeles, CA, for defendant-appellee.

Dennis M. Hart, Washington, DC, for amicus curiae Internet Commerce Association.

Appeal from the United States District Court for the Northern District of California, Ronald M. Whyte, District Judge, Presiding. D.C. No. CV-05-04826-RMW.

Before MARY M. SCHROEDER, A. WALLACE TASHIMA and WILLIAM A. FLETCHER, Circuit Judges.

ORDER

The opinion filed on June 5, 2009 is hereby amended.

The petitions for rehearing and rehearing en banc are otherwise DENIED, and no further petitions for rehearing will be accepted.

OPINION

SCHROEDER, Circuit Judge:

This appeal is about whether the plaintiff, Coalition for ICANN Transparency, Inc., using antitrust statutes drafted in the late 19th century, has successfully stated claims in connection with the administration of the Internet domain name system, so essential to the operation of our sophisticated 21st century communications network.

The district court ruled that the plaintiff failed. With the benefit of extensive briefing, collegial discussions and amicus participation on appeal from other players in the domain name system, we hold that the plaintiff has stated claims under both Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1-2. We reverse and remand for further proceedings.

I. Overview

Plaintiff Coalition for ICANN Transparency (“CFIT”) is an organization composed of participants in the Internet domain name system (“DNS”), including website owners. The heart of the IT industry is located in the Silicon Valley, which lies within the Northern District of California. CFIT filed its complaint in 2005 in the Northern District against defendant VeriSign, the corporation that acts as the sole operator of the “.com” and “.net” domain name registries.

VeriSign operates each registry pursuant to a contract with the Internet Corporation for Assigned Names and Numbers (“ICANN”), a non-profit oversight body that coordinates the DNS on behalf of the United States Department of Commerce. Pursuant to these contracts, VeriSign receives a certain price for registering each domain name. It is not disputed that there can only be one operator for each domain name registry at any one time. Therefore, the only viable competition can take place in connection with obtaining a new contract after expiration of the old one. The .com agreement entered into by ICANN and VeriSign in 2006, after no competitive bidding, provides that the price of domain names can increase by seven percent over four of the six succeeding years. The .net agreement, which was entered into as a result of competitive bidding, contained price caps that were set to expire on December 31, 2006, leaving no limitation on the price that could be charged for .net names. Each contract has a presumptive renewal provision.

CFIT's complaint endeavored to state claims against VeriSign under Section 1 of the Sherman Act and under California's counterpart, the Cartwright Act, for conspiracy in restraint of trade in connection with the terms of the .com and .net contracts' pricing and renewal provisions. In essence, CFIT sought to show that the prices were artificially high and that the renewal provisions wrongfully restrained competition for successor contracts.

The complaint also endeavored to state claims under Section 2 of the Sherman Act, alleging that VeriSign's conduct in obtaining the anti-competitive provisions constituted monopolization or attempted monopolization of the .com and .net registration markets. In addition, the complaint sought an injunction against VeriSign's proposed service for registration of expiring domain names, on the ground it constituted an attempted monopolization of that allegedly separate market.

The district court, after some discovery and several opportunities for CFIT to amend the complaint, dismissed the action with prejudice for failure to state claims under state or federal law in connection with either the .com or the .net contract. It held that CFIT had not sufficiently alleged that either the terms of the contracts or VeriSign's conduct in obtaining the contracts amounted to antitrust violations. The court also held that CFIT failed sufficiently to allege that a market for expiring domain names existed separate and apart from the market for newly registered domain names.

In this appeal, CFIT contends that the district court failed to appreciate the seriousness of the allegations of anti-competitive conduct and that, in rejecting the existence of a separate market for expiring domain names, the district court improperly relied on already outdated authority from earlier in this young century. We now agree with CFIT, at least with respect to the claims challenging the terms and award of the .com contract and asserting the existence of a separate market for expiring domain names. We therefore reverse.

II. The Players

Plaintiff CFIT is a non-profit corporation composed of DNS stakeholders, including domain name registrars and owners of domain names (registrants). CFIT alleges that its members, including both registrars and registrants, have an interest in ensuring that conditions in the domain name registration market remain fair and competitive.

ICANN is a nonprofit corporation that was created in 1998, in response to a policy directive of the Department of Commerce, to administer the domain name system on the Department's behalf. ICANN is charged by the Department of Commerce with selecting and entering into agreements with registry operators such as VeriSign. ICANN was named as a defendant in CFIT's original complaint and in its First Amended Complaint, but CFIT dropped ICANN as a defendant in the Second Amended Complaint, from which this appeal arises. It seeks to maintain claims only against VeriSign.

Defendant VeriSign is a corporation that, through its contractual relationship with ICANN, acts as the sole operator of the .com and .net domain name registries. This means that VeriSign manages the definitive databases of registered .com and .net domain names. VeriSign has held this position since 2001, prior to which its predecessor-in-interest, Network Solutions, Inc. (“NSI”), managed the databases.

III. Nature and Terms of the Agreements

VeriSign has been the sole operator of the .com and .net registries since 2001, when it entered into two separate agreements with ICANN (the “2001 .com Agreement” and the “2001 .net Agreement,” respectively). Those agreements supercede ICANN's previous agreements with NSI. The 2001 Agreements imposed on VeriSign a price cap of $6 per year for registration, renewal, or extension of any domain name. Each of the 2001 Agreements contained a renewal provision that allowed ICANN to place the contract up for competitive bidding upon its expiration.

When the 2001 .net Agreement expired in 2005, there was a competitive bidding process that resulted in the selection of VeriSign's bid. VeriSign entered into a new agreement with ICANN (the “2005 .net Agreement”). Before the 2001 .com Agreement was due to expire in 2007, however, VeriSign and ICANN agreed to extend it with a new contract (the “2006 .com Agreement”). Both the 2006 .com Agreement and the 2005 .net Agreement provide for automatic renewal upon expiration unless a court or arbitrator issues a final order finding VeriSign to be in breach of the Agreement, and VeriSign fails to cure the breach. The 2006 .com Agreement also increases the maximum price VeriSign can charge for domain name registrations. The previous contract's $6 cap was maintained until December 31, 2006, but the new contract provides that cap may be increased seven percent per year in four of the following six years. The 2005 .net Agreement does not contain an express price increase provision. Its price cap of $4.25 per domain name expired on December 31, 2006, leaving no cap in its place.

IV. CFIT's Claims

CFIT's complaint included claims under Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 & 2. CFIT sought to state a Section 1 claim, for conspiracy in restraint of trade, in connection with the pricing and renewal provisions of both the 2005 .net Agreement and the 2006 .com Agreement. CFIT claimed that VeriSign and ICANN conspired to restrain trade by setting prices for VeriSign's registry services that were substantially above the prices that would result from a competitive market. Moreover, CFIT alleged that VeriSign and ICANN violated Section 1 by imposing a presumptive renewal provision in both the 2006 .com and 2005 .net Agreements, all but ensuring VeriSign's continued market dominance by reducing or eliminating competition for successor contracts.

CFIT's first claim under Section 2 was for monopolization and attempted monopolization of the .com and .net markets. CFIT alleged that VeriSign engaged in improper and predatory conduct, including financial pressure, vexatious litigation, and negative press coverage, in order to induce ICANN to enter into agreements with terms that unlawfully favored VeriSign. CFIT claimed that VeriSign eventually settled its allegedly vexatious suit against ICANN by offering to pay ICANN a multi-million dollar fee in exchange for favorable terms in the 2006 .com and 2005 .net Agreements, thus doing away with any competition for the next contract.

CFIT's second claim under Section 2 concerned the existence of a separate market for expiring domain names. Expiring domain names are names that have fallen back, or are about to fall back into the registry database as a result of nonrenewal by their current owners. CFIT alleged that expiring domain...