Domain Prot., L.L.C. v. Sea Wasp, L.L.C.

• Decision Date: 13 January 2022
• Docket Number: No. 20-40411 CONSOLIDATED WITH 20-40518,20-40411 CONSOLIDATED WITH 20-40518
• Citation: 23 F.4th 529
• Parties: DOMAIN PROTECTION, L.L.C., Plaintiff—Appellant, Gary N. Schepps, Appellant, v. SEA WASP, L.L.C., Defendant—Appellee, Domain Protection, L.L.C., Plaintiff—Appellee, v. Sea Wasp, L.L.C., Defendant—Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

23 F.4th 529

DOMAIN PROTECTION, L.L.C., Plaintiff—Appellant,

Gary N. Schepps, Appellant,

v.SEA WASP, L.L.C., Defendant—Appellee,Domain Protection, L.L.C., Plaintiff—Appellee,

v.Sea Wasp, L.L.C., Defendant—Appellant.

No. 20-40411 CONSOLIDATED WITH 20-40518

United States Court of Appeals, Fifth Circuit.

FILED January 13, 2022

Gary N. Schepps, Schepps Law Offices, Dallas, TX, for Plaintiff-Appellant.

Michael R. Lewis, Keller, TX, for Appellant.

Jason Paul Steed, Kilpatrick Townsend & Stockton, L.L.P., Robert Lee Sayles, Bradley Arant Boult Cummings, L.L.P., Howard Marc Spector, Spector & Cox, P.L.L.C., Dallas, TX, for Defendant-Appellee.

Before Elrod, Southwick, and Costa, Circuit Judges.

Gregg Costa, Circuit Judge:

For physical addresses, location is paramount. As the quip goes, the three most important things about real estate are location, location, location.

The same is true for internet addresses. The right domain name can draw traffic to a site, making certain names extremely valuable. Consider these astounding prices for some Fifth Avenues of e-commerce: "business.com" sold for $345 million, "LasVegas.com" sold for $90 million, and "carinsurance.com" went for almost $50 million.¹ The potential value of domain names has led to more than a decade of litigation over the ownership of the ones at issue in this case.

This latest chapter in the dispute started well for the plaintiff. It obtained some preliminary relief and then a summary judgment ruling that the defendant had violated state and federal law. But it did not end well; a jury awarded no damages. So the plaintiff appeals seeking some remedy while the defendant challenges the liability rulings. Given the mixed rulings, it is no surprise that both sides also want attorney's fees. To top things off, the district court sanctioned the plaintiff's lawyer for misconduct. We end up affirming the judgment except for the sanctions. And with three appeals arising from one lawsuit—one from the plaintiff, one from the defendant, one from the sanctioned lawyer—this case allows us to clarify when arguments should be made in responsive briefing and when they require a cross-appeal.

I.

When you type a domain name into your internet browser—say ca5.uscourts.gov for the multitudes wanting to read this opinion—and press enter, the computer brings you to the Fifth Circuit homepage. While this can happen in a flash, a lot is going on behind the scenes.

Basically, it works like this: Registered domain names are listed in a giant database, called a registry. In that registry, each domain name is matched with a "nameserver." When a computer user types a domain name into a browser, the registry connects it to the nameserver for that domain name. The nameserver then sends back to the computer the numerical internet protocol (IP) address for the domain name. One IP address for the Fifth Circuit website is 23.221.222.250. Using that address, the computer connects directly with the desired website. Once that happens, the website appears on the computer.

Nameservers play an important part in this case. For now, the important thing to understand is that their function—translating a desired domain name into the associated IP address—is a key link in the sequence that connects users to websites. As a result, someone with access to a nameserver can modify it to direct internet traffic (and therefore ad revenue) to a different website than the one actually associated with the domain name.

As for the parties before us, defendant Sea Wasp is an accredited registrar of internet domain names. A customer pays Sea Wasp to register available domain names. Plaintiff Domain Protection is one such customer; it had tens of thousands of domain names registered through Sea Wasp.

A few months into the parties' relationship, Sea Wasp learned there was litigation over whether Domain Protection had a right to those domain names. In fact, the domain names had been at the center of ownership controversy for years before our parties entered the picture.

These earlier disputes help explain how we got to where we are today. Back in 2009, litigation over these domain names began after a party breached a contract. A court-approved settlement ultimately divided the domain names between two entities. One of those entities was Quantec, LLC, owned by Jeffrey Baron.

Baron's ownership of the domain names was short-lived. After Baron failed to pay his attorneys, a court ordered his assets—including the domain names owned by Quantec—into receivership. Baron appealed. See Netsphere, Inc. v. Baron , 703 F.3d 296 (5th Cir. 2012). While Baron's appeal was pending, appellant Gary Schepps—one of Baron's lawyers who was not getting paid—helped his law school friend Lisa Katz get a job at Quantec. She too started to complain that she was not getting paid.

We reversed and remanded the receivership decision. Id. at 308–11. Still, more obstacles stood between Baron and the domain names. After the case was remanded, the district court ordered the receiver to return Quantec's assets—including the domain names—to Katz. She was to hold the domain names as Quantec's agent pending the resolution of various disputes.

But that is not what happened. Instead, Schepps and Katz formed Domain Protection as a "liquidation vehicle" to sell the domain names to pay themselves the attorney's fees and backpay they were owed. Katz was installed as the manager of Domain Protection and Schepps acted as the lawyer. Katz soon assigned Quantec's domain names to Domain Protection with the intent to liquidate them.

After the assignment, Quantec and others sued Katz to recover the domain names. In the wake of the lawsuit, a registrar named Fabulous (with whom the domain names were registered at the time) "locked" the domain names to prevent them from being sold or redirected to a different nameserver.² This lock remained in place for the next few years.

Enter at last Sea Wasp. In 2017, unaware of the ongoing ownership dispute, Sea Wasp purchased Fabulous' assets. At that time, the domain names were still locked. But at some point in early 2018, Katz unlocked them and changed the nameservers to redirect internet traffic (and ad revenue). When Sea Wasp realized the nameservers had been changed, it restored the original ones and relocked the domain names. The lock prevented Domain Protection from transferring, selling, or modifying the domain names pending the resolution of the ownership dispute.

In response, Domain Protection filed this lawsuit. It alleged that Sea Wasp had violated Title II of the Electronic Communications Privacy Act, also known as the Stored Communications Act, and the Texas Theft Liability Act. It also brought common-law claims for conversion, civil conspiracy, and tortious interference with contracts. Domain Protection sought preliminary injunctive relief, recovery of its property (control over the domain names), actual damages, and statutory damages.

The district court granted Domain Protection preliminary injunctive relief requiring Sea Wasp to unlock the domain names. The district court eventually granted Domain Protection summary judgment on liability for all its claims except tortious interference.

But at a trial on damages, a jury did not award Domain Protection anything. After the trial loss, Domain Protection unsuccessfully sought statutory damages under the Stored Communications Act.

The district court's final judgment ordered that Domain Protection take nothing and dismissed the case with prejudice. The court also refused to award either side attorney's fees. Earlier, however, the court had sanctioned Schepps $7,110.50 for deceiving the court about his financial interest in Domain Protection.

These rulings generated three appeals. Domain Protection seeks the following relief: a return of property for its conversion claim and statutory damages and attorney's fees on its Stored Communications Act claim. In its cross-appeal, Sea Wasp argues that Domain Protection lacked Article III standing to bring this suit in the first place, that the court erred in ruling that Sea Wasp violated federal and state law, and that it is entitled to attorney's fees for ultimately prevailing on the Texas Theft Liability Act claim. In addition to the parties' appeals, attorney Schepps challenges the sanctions.

II.

We start with Sea Wasp's claim that the district court lacked jurisdiction over this lawsuit.³ That is so, according to Sea Wasp, because Domain Protection did not suffer an injury sufficient to give it Article III standing to bring this suit. Lujan v. Defs. of Wildlife , 504 U.S. 555, 562, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). Its argument is essentially as follows: Because Katz did not have authority to assign the domain names to Domain Protection, Domain Protection is not the rightful holder of them and thus cannot claim it was injured by something that happened to the domain names.

Sea Wasp's argument does not go to Article III standing. By arguing that the assignment between Katz and Domain Protection was invalid, Sea Wasp is asserting that Domain Protection has no contractual right to the domain names or to claims arising out of them. Whether a party has a "contractual right to bring this suit" is not a question of Article III standing. Maxim Crane Works, L.P. v. Zurich Am. Ins. Co. , 11 F.4th 345, 350 (5th Cir. 2021) (per curiam); Cotton v. Certain Underwriters at Lloyd's of London , 831 F.3d 592, 594 (5th Cir. 2016) ; see also SM Kids, LLC v. Google LLC , 963 F.3d 206, 211 (2d Cir. 2020) ; Novartis Seeds, Inc. v. Monsanto Co. , 190 F.3d 868, 871 (8th Cir. 1999). "Contractual standing" is instead an issue of contract interpretation that goes to the merits of a claim. Perry v. Thomas , 482 U.S. 483, 492, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987) ; Maxim Crane , 11 F.4th at 350.

Looking beyond the contract context, a dispute about ownership of an asset—a frequent source of litigation—does not deprive a federal court of jurisdiction. See Webb v. City of Dallas...