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The real world of property laws and liability applies to the virtual world of the Internet, the U.S. Court of Appeals for the 9th Circuit ruled late last month. A three-judge panel unanimously held that Network Solutions Inc. can be held liable for handing over ownership of the lucrative sex.com domain name — which Internet entrepreneur Gary Kremen claimed was his property — to ex-con Stephen Cohen, a fugitive who once proclaimed himself the king of online smut. “Negligent or not, it was Network Solutions that gave away Kremen’s property. Kremen never did anything,” Judge Alex Kozinski wrote in his opinion. “It would not be unfair to hold Network Solutions responsible and force it to try to recoup its losses by chasing down Cohen. This, at any rate, is the logic of the common law, and we do not lightly discard it.” Joining Kozinski in the decision in Kremen v. Cohen were Judge M. Margaret McKeown and U.S. District Judge James Fitzgerald, sitting by designation. Cohen and Kremen were on a collision course from the day Cohen sent a forged letter to Network Solutions (now VeriSign Inc.) — which at the time was the exclusive “postmaster” of Internet addresses — asking the company to reassign the rights to the domain to Cohen. “Despite the letter’s transparent claim that a company called ‘Online Classifieds’ had no Internet connection, Network Solutions made no effort to contact Kremen,” Kozinski wrote. Kremen never developed sex.com. Cohen, aided by a growing interest in online pornography, turned it into a popular — and lucrative — Internet destination. Kremen sued Cohen and Network Solutions in federal District Court in San Jose. U.S. District Judge James Ware sided with Kremen, ruling that Cohen owes him $65 million in compensatory and punitive damages. Although Kremen received Cohen’s expensive home in the San Diego resort community of Rancho Santa Fe, he hasn’t received any money. The profits from sex.com are believed to be in an offshore account, while Cohen’s exact whereabouts are unknown — he fled while the case was pending. Kremen’s lawyers had argued that Network Solutions had committed the tort of conversion. Network Solutions had said the tort required the transferring of tangible property, saying the domain name didn’t qualify. “I think the case is very significant,” says Kremen’s lawyer, James Wagstaffe of San Francisco’s Kerr & Wagstaffe. “It is maybe the first case that applies traditional property law to the Internet.” Ware dismissed the case against Network Solutions, saying its role was “purely ministerial” and that holding it liable could impede the growth of the Internet. The July 25 ruling was hailed by the Electronic Frontier Foundation, the online rights advocacy group. “The Internet is a gigantic engine of democracy and free speech for many people, and now that engine, basically, has a warranty,” EFF staff attorney Jason Schultz says. Kremen did not have to pay for registering sex.com, so the panel denied his claim that Network Solutions was guilty of a breach of contract. But registrants now must pay to maintain domain names, seemingly making that portion of the ruling obsolete. Schultz says that the long-term implications of the case, if any, are not clear. Domain registration is handled by several companies, most of which require contracts barring legal action by domain holders. “One thing I would definitely encourage people to do is read those contracts,” Schultz says. For Wagstaffe, winning on conversion grounds is important — contract law doesn’t support punitive damages, while the tort of conversion does. Wagstaffe says Ware will have to decide whether Network Solutions can be assessed the $25 million in punitive damages levied on Cohen. Last year, a San Francisco Bar Association panel of arbitrators voided a purported agreement between Kremen and a lawyer he hired early on in the case. The agreement would have entitled the lawyer to 15 percent of the $65 million judgment. Jason Hoppin is a reporter at The Recorder, the American Lawyer Media newspaper in San Francisco.

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