Ninth Circuit Finds Refusal To Transfer Website Domain Registered In Good Faith Can be Bad Faith “Use” For Purposes of the Anti-Cybersquatting Consumer Protection Act

In DSPT Int’l, Inc. v. Nahum, 624 F3d 1213, 97 USPQ2d 1022 (9th Cir. 2010), DSPT International, Inc. (DSPT) is a clothing designer, manufacturer and importer.  Paulo Dorigo, owner and founder of DSPT, hired Lucky Nahum, who was a friend of Dorigo, to help launch EQ, a new brand for DSPT.  Dorigo and Nahum set up a website in 1999 for EQ, and Nahum’s brother was to design and produce the website “http://www.eq-Italy.com” in order to display DSPT clothing under the EQ brand.  Nahum, who exclusively working for DSPT, registered the website domain name under his personal name, for a cost of $25 USD.

As use of the internet as a commercial market place increased, by 2005, the website served as DSPT’s catalog through which customers could select and order designs 24 hours a day.  DSPT would notify customers about new offerings shown on the website, and DSPT salespersons would direct retailers to the website to solicit retail orders through the online catalog.  However, the relationship between Dorigo and Nahum had deteriorated by 2005, and Nahum’s contract with DSPT was due to expire on August 31, 2005.

Dorigo offered Nahum a new contract, however, Nahum had found employment with a DSPT competitor.  As of the beginning of October, 2005, the DSPT website became inactive, and the URL www.eq-Italy.com displayed a screen providing customers with Nahum’s personal email address.  Apparently, Nahum was holding on to the website as bargaining leverage against what he believed were unpaid funds due to him, as he told his new employers that he modified DSPT’s website “in order to get Equilibrio [DSPT’s older brand] to pay him funds that were due to him.”  DSPT attempted to get the website from Nahum, but was unsuccessful.  Accordingly, DSPT’s sales for the end of 2005 were abysmal, and DSPT took on expenses to contact customers explaining the situation, and to remove the website name from stationary and other company identifiers.  DSPT further sued Nahum for cybersquatting and trademark infringement.

At the conclusion of the trial for cybersquatting, the jury found that “EQ” and “Equilibrio” were valid DSPT trademarks.  The jury further found that Nahum “registered, trafficked in, or used” the www.eq-Italy.com website domain, and that the name infringed on DSPT’s trademarks.  Additionally, the jury also found that Nahum committed the acts in bad faith intended to bring Nahum profits from DSPT’s mark.  In the same trial, Nahum had counter-claimed for payment of commissions, but the jury found that DSPT did not violate the contract with Nahum, and that nothing was owed to Nahum.  Nahum renewed motions for judgment as a matter of law, remittitur, and new trial, but the district court denied Nahum’s motions, whereupon Nahum appealed the court’s decisions.

The U.S. Court of Appeals, Ninth Circuit reviewed the District Court’s decisions.  With respect to cybersquatting, the Circuit Court noted that “[t]he Anti-Cybersquatting Consumer Protection Act [ACCPA] establishes civil liability for “cyberpiracy” where a plaintiff proves that (1) the defendant registered, trafficked in, or used a domain name; (2) the domain name is identical or confusingly similar to a protected mark owned by the plaintiff; and (3) the defendant acted “with bad faith intent to profit from that mark.””

Nahum argued that the ACCPA did not apply to his actions because the statute only applies to those that register well known trademarks as domain names and attempt to profit from the registration by selling it back to the trademark holder or by diverting business from the trademark holder.  Nahum stated that he did not attempt to profit from the registration because he only used a website name that he registered in good faith as leverage against DSPT for money he claimed was owed to him, which was not an action that was covered under the ACCPA.  As support, Nahum cites a Sixth Circuit decision stating that “[t]he paradigmatic harm that the [ACCPA] was enacted to eradicate [was] the practice of cybersquatters registering several hundred domain names in an effort to sell them to the legitimate owners of the mark.”  Lucas Nursery & Landscaping, Inc. v. Grosse, 359 F.3d 806, 810 (6th Cir. 2004).  However, the Circuit Court stated that Nahum’s arguments are mistaken, because “the statute, like so many, is written more broadly than what may have been the political catalyst that got it passed.”

The Circuit Court went on to distinguish Nahum’s actions at the time of registering the website, and his later actions in using it as leverage against DSPT.  The Circuit Court stated that “[t]he statute says “registers, traffics in, or uses,” with “or” between the terms, so use alone is enough to support a verdict, even in the absence of violative registration or trafficking.”  As per the ACCPA requiring bad faith, the Circuit Court noted that the ACCPA’s statutory factors include actions such as Nahum’s use of the website domain name for leverage, and quoted Lahoti v. VeriCheck, Inc., 586 F.3d 1190, 1202 (9th Cir. 2009), which stated that “[e]vidence of bad faith may arise well after registration of the domain name.”

Furthermore, the Circuit Court looked to the jury instructions, which listed nine factors for “bad faith” derived from the ACCPA, and which Nahum did not challenge.  The Circuit Court noted factor number VI, and stated that “[t]hat factor notes that it is “indicative” of a “bad faith intent to profit” from the mark if the person offering to transfer domain name to the owner of the mark has never actually used or intended to use the domain name for bona fide sales of goods.”  The Circuit Court went on to state that “it does not matter that, as the jury concluded, Nahum’s claim for unpaid commissions was meritless, because he could not hold the domain name for ransom even if he had been owed commissions.”  Because Nahum stated to both DSPT and to his new employer that he intended to return the domain name to DSPT only after he got the money he believes he was owed, such was evidence of “intent to profit” as defined under the ACCPA.

With respect to the trademarks, Nahum argued that the website domain name was not a distinctive mark, and that there was no evidence which a jury could rely upon to conclude such, and that it was not confusingly similar to DSPT’s mark “EQ.”  The Circuit Court stated that Nahum’s first point was meritless because DSPT used the mark “EQ” and because DSPT used Italian fashion connections as a marketing factor.  DSPT did not register the “EQ” mark, however, the Circuit Court concluded that DSPT’s commercial use of the mark since 1999 in the fashion industry made the mark a common law trademark.  As per the website domain name not being confusingly similar to the mark “EQ,” the Circuit Court stated that a jury could reasonably believe that it was confusingly similar.  The Circuit Court noted that a jury could find that Nahum’s use of the website domain name, after he had left DSPT, could confuse retailers that had previously used the website to view DSPT’s catalog.

The Circuit Court went on to address damages, because Nahum argued that there was insufficient evidence to support an award of $152,000 USD.  The Circuit Court noted that the burden of proof as to damages lies upon the wronged party, and that the nature of the proof depends on the circumstances.  Additionally, the Circuit Court stated that “[i]n the circumstances of this case, precision in the calculation of damages is neither necessary nor possible.  Nahum’s wrong made it impossible to know with any precision what DSPT’s sales would have been had he not committed his wrong.”  The Circuit Court looked to DSPT’s expenses in rebuilding the website, $32,000 USD, and DSPT’s approximate lost profits of $240,000 USD, and stated that a jury looking at financial statements and considering other inferences could find $120,000 USD as a reasonable approximation of DSPT’s lost profits.  Thus, with the cost of rebuilding the website being $32,000 USD, the Circuit Court found that damages of $150,000 USD was not unreasonable.

Thus, the Circuit Court affirmed the District Courts rulings in denying Nahum’s motions for judgment as a matter of law, remittitur, and new trial.  Consequently, the jury’s finding that Nahum was guilty of violating the ACCPA because he attempted to hold website as ransom or leverage against a trademark holder, even though Nahum had registered the website domain name in good faith.

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