What's in a (Domain) Name?
Web Addresses as Loan Collateral

Jacqueline Lipton
Lecturer and Associate Director
Banking Law Centre, Faculty of Law
Monash University
[email protected]
 

(The author would like to thank Ms Becky Batagol, Research Assistant, Faculty of Law, Monash University, and Mr John Swinson, Senior Associate, Mallesons Stephen Jaques, with their assistance in the preparation of this article. All views expressed and any mistakes or omissions are those of the author.)

Abstract

Historically, financiers have been able to utilise most names and marks associated with a business as loan collateral under a standard mortgage or charge. However, the Internet poses new problems in this respect. It has now become the case that an easy to recall Internet domain name will usually add significant value to a business operating over the World Wide Web. However, as such names are not 'property' in the strict legal sense, they are theoretically not available to financiers as loan collateral. This article considers whether it is possible for a financier to take any form of security, or 'quasi-security' over a business' Internet domain name.

This is a Refereed Article published on 13 April 1999.

Citation: Lipton J, 'What's in a (Domain) Name? Web Addresses as Loan Collateral', 1999 (2) The Journal of Information, Law and Technology (JILT). <http://elj.warwick.ac.uk/jilt/99-2/lipton.html>. New citation as at 1/1/04: < http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1999_2/lipton/>

1. Introduction: What is a Domain Name?

Although the technical attributes of Internet domain names are quite complex, certainly to lawyers untrained in information technology, the layman's understanding is somewhat simpler. A domain name is basically a mnemonic, or plain English, expression connected to a numeric Internet Protocol (or 'IP') address by the relevant domain name registration authority[ 1 ].

This may be easier to understand by way of example. If a company wants to do business on the World Wide Web (the 'Web'), it needs to set up a Website. This site must have an IP address, assigned originally by the Internet Assigned Numbers Authority ('IANA')[ 2 ]. An IP address is an electronic address on the Internet which is identified by a series of numbers, such as 123.45.678.90. Anyone interested in browsing a Website can find the relevant site by reference to these numbers.

However, as it is much easier to remember an alphabetical address than a numeric address, Internet domain names were developed. These are mnemonic strings of letters that are mapped on to the relevant IP address through a Domain Name System ('DNS'). It is much easier to remember a domain name such as < www.microsoft.com > than its corresponding numeric IP address.

There are various 'levels' of domain name used on the Internet. All domain names consist of a Top Level Domain ('TLD'), such as '.com' or '.au', and a Second Level Domain ('SLD'), such as 'Microsoft' in the above example. Additionally, there can be third and fourth level domains, and so on.

In order to obtain a domain name, it is necessary to apply to the registration authority responsible for registering the desired TLD; for example, Melbourne Information Technologies Pty Ltd ('Melbourne IT'), is currently responsible for registering names under the '.com.au' TLD[ 3 ], while Network Solutions, Inc, in the United States is responsible for the '.com' TLD[ 4 ]. Most jurisdictions allocate domain names under a TLD which corresponds closely to the name of the jurisdiction; for example, '.au' for Australia. However, the United States has never allocated its domain names with the suffix '.us'. It has, instead, registered names under more generic TLDs such as '.com', '.org', 'edu' and '.net'. Thus, United States registrations under the generic TLDs have become the most sought after names on the Internet, as they are regarded as more 'international'.

Although an entity can register more than one domain name, each name can only be registered by one entity at a time. Thus, even if there are many business entities in the world with the same or similar trading names, only one of them can register a particular domain name. One example is the name 'ms.com' which was originally registered to Morgan Stanley in the United States. This meant that the Microsoft corporation had to rely on 'microsoft.com' as 'ms.com' was already taken. Such eventualities have created significant difficulties in the international application of trade mark laws. This is because one registered domain name might easily correspond with one or more registered trade marks across a number of jurisdictions[ 5 ].

Where a business registers a domain name which is easy to remember in connection with the business, this will assist in bringing custom to the relevant Website. This is increasingly the case as more and more entities put business and other materials on the Web. The more material there is on the Web, the more difficult it is, and the longer time it takes to locate information through the use of Search Engines, even with the more sophisticated ones. Whereas some years ago, a search of a particular term may have called up ten or twenty sites, now the same search could produce ten to twenty thousand relevant sites as use of the Internet for business and personal reasons increases exponentially from year to year.

However, if a person can easily guess at, and remember, a relevant Website, he or she can get straight to the site without having to rely on search engine technology. To find Microsoft's site on the Web, it is fairly easy to guess that it is probably 'microsoft.com' and it is also fairly easy to remember even if it has not been 'bookmarked'. In this way, a mnemonic domain name can be very valuable to a business.

2. Property in Domain Names?

The issue of property rights in domain names becomes relevant to secured financing in situations where the value of a particular business may hinge significantly on its Internet presence and associated domain name. This will increasingly be the case in the global information age. In the past, businesses seeking loan finance have often been in a position to provide collateral in the form of physical plant and equipment in the relevant jurisdiction. However, as trade and, commensurately, finance, become more borderless and businesses deal less in physical commodities than in intangibles such as goodwill, know-how and software, financiers will have to seek out and protect the intangible value of a business as security for a loan. A significant part of such protection will likely be an attempt to gain some sort of security over the relevant domain name as a significantly valuable part of a business operating over the Internet[ 6 ].

Security over an Internet domain name may not be as easy in practice as it perhaps should logically be. This is because domain names are not, strictly speaking, considered to be 'property' at law so it is not possible simply to take a standard form charge over a domain name, granting an equitable proprietary interest in the name to the lender in question.

The original conception of domain names by the registration authorities was that they would be equivalent to a personalised telephone number. They serve as alphabetical identifiers of a particular entity's contact details, but they do not, in and of themselves, belong to the holder in a proprietary sense. Network Solutions describes a domain name in terms of a contractual licence between itself and the registrant, for the registrant to use the name in question in accordance with its online service contract[ 7 ].

As a corollary, it is not possible for a domain name to be transferred directly between businesses entities without going through the relevant registering authority. To transfer the registration of a '.com' registration from one entity to another, the entities must comply with the formalities required by Network Solutions. This involves the execution and lodgment of a notarised Registrant Name Change Agreement ('RNCA') with Network Solutions. These must be sent by courier or postal mail with appropriate certification to allow Network Solutions to have appropriate documentation under which to end its contractual relationship with the initial registrant and enter into a substitute service contract with the transferee[ 8 ].

Despite the view of most registering authorities that domain names are not property, there are those who believe that domain names should be so regarded and that the rules on transfer should be, and are likely to be, liberalised in the future:

Regardless of the practical position on transferability, people operating on the Web have taken to treating domain names as a species of asset that can be effectively traded, even if they are not accorded the strict legal status of property:

This leads us to two conclusions: (1) if the general business community worldwide is trading in Internet domain names, however they may be legally characterised, it should be possible for financiers to use them as a form of collateral or 'quasi-collateral'; and, (2) if there is still some question as to whether domain names are legally 'property', it may not be prudent for lenders to attempt to take standard forms of security over them.

Clearly, possessory securities such as liens and pledges will not be available in this context. Additionally, charges and mortgages are unadvisable until the proprietary status of domain names is clarified. A purported mortgage or charge over a domain name will be worthless while such names are not legally considered to be property capable of giving rise to legal and equitable proprietary interests for the purposes of such arrangements. It is necessary for lenders seeking to take some form of security over an Internet domain name to consider alternatives. The remainder of this paper deals with some possible strategies.

3. Issues for Financiers

3.1 Value of the Domain Name

When considering taking security, or, perhaps more accurately, 'quasi-security' over an Internet domain name, the financier must first consider both the value of the domain name to the business in question and the potential value of the domain name to other businesses. This is because the financier needs to work out what might ultimately happen in the event of default under the loan. It is likely that either the financier will appoint an administrator, receiver and / or manager to the business in question, or it may wish to foreclose on individual valuable assets of the business and sell them to an interested third party to recoup its losses.

Under the former scenario, it will need to ensure that, amongst other things, it has the right to use the domain name in question. Under the latter it will need to ensure that it has the right to sell the domain name, and it will need some indication of the value of the domain name in the relevant market. A more generic name, or a name which could relate to a number of businesses entities, say, with similar trading names, will be more valuable as a saleable commodity of the business than a name specific to the borrower business. As with a significant amount of intellectual property, there can be situations in which a particular item is specifically valuable to one particular business, the borrower, without actually having any particular value in the relevant market. This is a practical issue of which lenders should be aware.

The first question to ask, when considering a security strategy in respect of a domain name, is to ascertain the value of the name both to the borrower business and to the market generally. This may not always be an easy task in practice. The borrower may be asked to provide some evidence from customers and competitors if possible as to the inherent attraction of the name. In some jurisdictions, it may also be possible to seek records from the relevant domain name registration authority as to the number of other entities, if any, that have expressed interest in registering the name in question.

3.2 Rights to the Domain Name

If the financier is satisfied that there is sufficient value in the domain name to warrant further action, it is necessary for the financier to take some form of 'interest' in the name. This cannot be an equitable proprietary interest under a standard charge document because domain names are not necessarily regarded as property at law or in equity as noted above. It seems that, at least for the present, financiers will have to rely solely on contractual undertakings by the borrower. Financiers will therefore have to consider the types of contractual undertakings they will seek from borrowers in respect of registered Internet domain names. They will also need to examine strategies to prevent third party interests in the names from arising in priority to those of the financier where possible.

Presumably, as with personal property securities, lenders will want to ensure that the borrower does not give anyone else any rights to or interest in the name without the consent of the lender. This can be done by way of a 'negative pledge' clause. It would presumably provide that the borrower will not transfer the name to another entity or apply for deletion of the registration of the name without the lender's consent. There may be additional sanctions set out which would apply in the event that the borrower took such a course of action without the lender's consent. These could include the grant of further security to the lender, or an indemnity for any loss suffered by the lender as a result of the breach of the clause.

There are clearly difficulties with each of these options. If further security were to be granted on breach of the clause, there might be the practical problem that the borrower really had nothing further to give as security. If it had significant amounts of tangible security to give, it may not have needed to rely on security over its domain name in the first place. Further, there is the other practical issue of where the assets in question are located. Internet businesses may exist physically in one or more jurisdictions that are completely divorced from the jurisdictions from which they seek most of their custom and even from where their financier is geographically located.

Creating automatic security in assets in a jurisdiction where the financier does not operate may create both legal and practical difficulties for the financier relating to registration and enforcement, particularly in light of potential private international law issues as to which jurisdiction's law should govern the security. Under such an option, the financier may have to consider inserting an appropriate choice of law clause in the relevant documentation to cover such eventualities.

Even within the one jurisdiction, there are legal problems with such a course of action. In some jurisdictions, an agreement to give security on default under the clause in question would be regarded as an agreement to create a mortgage or charge and may attract registration and stamp duty consequences[ 11 ].

On the other hand, if no further security were to be granted, the sanctions for breach of the clause would be merely contractual and may not be of much use if the borrower has become impecunious and unable to satisfy a contract judgment. There is also the associated risk of the lender having no recourse against a bona fide third party transferee of the relevant name without notice of the lender's interest. It may therefore additionally be wise to seek personal guarantees from directors of businesses operating on the Internet, or from any associated entities.

However, with some smaller independent businesses, this option may not be of much use either if the officers of the business are impecunious and there are no associated entities. The cost of these risks may ultimately need to be built into such arrangements as a sort of underwriting system across the loan portfolio. Alternatively, it may be possible for a lender to have access to insurance to cover such risks, which again may impact on the cost of lending.

This is one of the potential paradoxes of the electronic market place. Internet trading provides smaller businesses with a more 'level playing field' with larger traders. However, it detracts from the use of tangible security in support of loans, raising risks to lenders and ultimately the cost of finance. This, in turn, potentially impacts negatively on the smaller players, or forces them to rely on equity, as opposed to debt, finance[ 12 ].

A prudent lender may seek additional undertakings with respect to a domain name; for example, a contractual undertaking that the borrower will indemnify the lender or provide additional security, in the event that the lender ever loses the name. This could occur in the event of, say, a trademark dispute in respect of the name if a court decides that another entity has a better right to the name and orders its transfer to that other. Obviously, any such undertakings would again be in the form of standard negative pledge clauses and would attract the difficulties dealt with above.

3.3 Transfer on Default

Ultimately a financier will need to ensure that there is some mechanism in place for transfer of the name to it, or a third party nominated by it, in the event of default under the loan. In general, there are several mechanisms by which this might be achieved. However, each method is subject to relevant specifications laid down by the domain name registration authority in question. It is therefore necessary for financiers to familiarise themselves with the registration and transfer requirements of the relevant authority before drafting the contract with the borrower.

There are two obvious ways in which a financier, or any entity for that matter, can take control of another entity's domain name: (1) by taking control of the entity to which the name is registered; and, (2) by organising an indirect transfer of the name under procedures set out by the relevant registration authority[ 13 ]. Neither of these methods will involve the creation of a proprietary interest in the name.

Additionally, some more complex strategies may be available. The name in question could be transferred to the financier and then licensed by the financier to the borrower business. This will only work if it can be done in accordance with the rules of the relevant registration authority. It would be unlikely to work for a name with the suffix '.com.au'. This is because the relevant registering authority, Melbourne IT, requires domain names to be directly derived from the name of the organisation applying for the domain name [ 14 ]. If the name in question was to be directly derived from the name of the borrower business, which intended to use it, it would not be likely to match the name of the financier in question. If the name matched the financier's business name, in line with the application criteria, it would be unlikely to be of much use to the borrower.

A variation on this approach would be for the name to be transferred to a holding company with an appropriate corporate name, set up by the borrower. The name could then be licensed back to the borrower by the holding company. The financier would take a charge over all the shares of the holding company. This arrangement has been regarded as equivalent to the financier taking security over the domain name itself[ 15 ].

The easiest option for a financier is probably that of taking control of the borrower business and thereby automatically gaining control of the relevant domain name on default. This is a simple matter of ensuring that there are sufficient powers to do so under a standard mortgage or charge document. Most such documents in respect of the assets and undertaking of a business will include powers to appoint an administrator, receiver and / or manager on default. Where such a document has been executed, there should not be a problem with the domain name.

The second option, relating to a bare transfer of the domain name on default either to the lender or its nominated entity, is a matter of contract. It would require the insertion of a clause into the relevant loan documentation providing that on default the borrower business would take all steps required by the relevant registration authority to transfer the name to the relevant party. It appears that such transfers take place relatively regularly under various TLDs and it is simply a matter of the parties in question familiarising themselves with the necessary transfer steps. These might be expressly set out in detail in the relevant documentation. However, the clause in question should also include some more general language in case the processes in question ever change. Also, it must be kept in mind that such an arrangement will operate purely in contract, leaving the lender vulnerable to the risk of losing out to bona fide third party transferees.

Again, this second option will perhaps not be particularly useful in relation to all jurisdictions. As noted above, in relation to the '.com.au' names, these names can only be registered to entities which have a similar business name. However, it is difficult to see why an entity without a similar business name would want the relevant domain name unless it planned to engage in some 'cyberpiracy'; that is, taking control of the name in order to try to sell it to another entity with an appropriate business name for profit. Clearly, the financier itself could not take a transfer of a '.com.au' domain name unless it coincidentally had a similar business name itself. It would have to find an interested buyer with a similar name or incorporate an entity with a similar name to take the transfer.

Arguably, the 'holding company' strategy (above) is a preferable way of effectively transferring rights in a domain name to a financier without attracting the contractual risks and associated practical difficulties inherent in a bare default transfer agreement. However, if there is no reason for the financier to avoid taking a general charge over all assets and undertaking of the business in question, this is the preferable option which, properly drafted, will ensure the financier's rights to the domain name on default.

In all cases, the financier should also ensure that it has taken security over any associated registered trade marks that may be owned by or licensed to the borrower. Otherwise, it may find the domain name valueless on the market. If the borrower retains associated trade mark rights, there is always a risk that a subsequent registrant of the domain name in question will find itself subject to an action for breach of the mark through use of the name[ 16 ].

3.4 Future Domain Names

It is clearly possible to take security over many forms of future property, such as future book debts and future benefits under a trust. A floating charge is the obvious mechanism through which future assets and undertaking of a business can fall within a security arrangement. Is it possible to take any form of security over future-acquired domain names of a borrower which, as noted above, are not really 'property'?

Again, parties to a loan can formulate their own contractual stipulations in relation to future-registered domain names. An example might be that a borrower undertakes to give a financier first option on the transfer of any domain names that the borrower registers in the future. Such an undertaking might also include a provision that exercise of the option by the financier would be conditional on there having been a default under the relevant loan. Alternatively, the borrower could agree to enter into a holding company arrangement (above) with the lender in respect of any future-acquired domain names.

However, operating in contract as they will, each of these arrangements will not eliminate the risk of the financier ultimately losing out to a bona fide third party without knowledge of the lender's interest. To give the lender some comfort, indemnities could be sought from the borrower and / or its related entities and officers to cover such an eventuality. Additionally, financing costs could be adjusted appropriately in respect of such risks as suggested above.

Again, the financier with a general floating charge over all assets and undertaking of the borrower's business will not face such difficulties. Any domain names later registered to the borrower would automatically devolve on the financier if it took control of and / or ultimately sold the entire business entity. Obviously, this does not eliminate the risk of a domain name registered after execution of the charge being onsold to a transferee during the course of the loan. However, provided that borrower remains solvent throughout the relevant period, this should not be a serious issue for the lender. This is how floating charges operate in practice in respect of all assets and undertaking of the borrower's business.

4. Conclusion

The fact that Internet domain names cannot be classified as 'property' in the strict legal sense has brought with it some dissatisfactions amongst the Internet business community. Notwithstanding the fact that they are regarded as contractual licences between a registration authority and a registrant, they are coming to be traded on the market as if they are property. The ultimate resolution of the issue as to when and whether such business 'assets' will or should achieve the status of property is beyond the scope of this article. However, the issue is, and will continue to be, of relevance to financiers seeking to take security or 'quasi-security' over intangible, and increasingly electronic, business assets in the new global information age.

The above discussion shows that there are a number of ways in which financiers can work within the current framework relating to Internet domain names to take security or 'quasi-security' over them. Several of the mechanisms by which this can be done will ultimately rely on contractual undertakings and the underlying creditworthiness and good faith of the borrower.

Financiers wishing to avail themselves of the mechanisms described in this article will have to do so in the context of the rules set out by the relevant domain name registration authority and will need to be alive to the potential impact of idiosyncrasies peculiar to the relevant system. Financiers likely to engage in such financing should also consider monitoring changes to the domain name registration and transfer system as a whole, at least in respect of the most highly sought after TLDs, such as '.com'.

The possibility of taking some form of security or 'quasi-security' over domain names is only one of the issues that may arise as financiers are increasingly faced with loan applications from entities the assets of which are largely intangible and electronic. Such lenders will need to develop strategies for dealing with such items in general or risk losing a potentially significant source of custom.

Footnotes

1 . For a more detailed discussion, see, for example, Fitzgerald, B., Gamertsfelder, L. and Gulliksen, T., 'Marketing Your Website: Legal Issues Relating to the Allocation of Internet Domain Names' (1998) 21(2) University of New South Wales Law Journal (available at < http://www.austlii.edu.au >, 20 November 1998); Yee, K.K., 'location.location.location: a Snapshot of Internet Addresses as Evolving Property' (1997) 1 The Journal of Information, Law and Technology (available at < http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1997_1/yee/>, 12 October 1998).

2 . In the early days of the Internet, IANA assigned all IP addresses to entities wanting to set up an Internet Site. Subsequently, IANA has assigned batches of IP addresses to various Internet Service Providers and other authorities in different jurisdictions, which then assign them to applicants in the relevant jurisdictions.

3 . See Melbourne IT's information site, < http://www.ina.com.au > (24 November, 1998).

4 . See Network Solutions' Website, < http://www.internic.net > (24 November, 1998). For links to authorities responsible for registering TLDs in other jurisdictions, a good summary is to be found at < http://www.igoldrush.com/country.htm >, 25 March 1999.

5 . Although a detailed discussion of trade mark disputes is beyond the scope of this paper, interested readers should see, for example, Fitzgerald et al, note 1; United States Department of Commerce, 'Management of Internet Names and Addresses' (Docket Number 980212036-8146-02, 5 July 1998); Nathenson, I.S., 'Showdown at the Domain Name Corral: Property Rights and Personal Jurisdiction Over Squatters, Poachers and Other Parasites (1997) 58 U. Pitt L. Rev 911 (available at http:www.pitt.edu/~lawrev/58-4/articles/domain.htm); Waelde, C., 'Is the Dam About to Burst? An Analysis of Domain Name Disputes in the UK' (1997) 2 The Journal of Information, Law and Technology (available at < http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1997_2/waelde/> Murray, A.D., 'Internet Domain Names: The Trade Mark Challenge' (1998) 6(3) International Journal of Law and Information Technology 285.

6 . For a further discussion of the impact of the global information economy on finance, see, for example, Keegan, D.P., 'The Virtual Countinghouse: Finance Transformed by Electronics' (Chapter 7 in Leebaert, D. (ed), 'The Future of the Electronic Marketplace' (1998) The MIT Press: Cambridge, Massachusetts).

7 See Network Solutions' Standard Form Service Agreement (available at < http://www.networksolutions.com/legal/service_agreement.html >, 25 March 1999). In relation to '.com.au' domain names, see also Hourigan, P, 'Domain Names and Trade Marks: Disputes from an Australian Perspective' (Chapter 7 in Fitzgerald, A, Fitgerald, B, Cook, P and Cifuentes, C (eds), 'Going Digital: Legal Issues for Electronic Commerce, Multimedia and the Internet' (Prospect Media, New South Wales, 1998)), p77.

8 . Ibid.

9 . Yee , see note 1.

10 . Hayward, E., 'Surviving the Domain Name Business' (available at < http://www.igoldrush.com >, 20 November 1998). See also Waelde, note 5; Elson, J., 'A Domain Name Success Story' (available at < http://www.igoldrush.com/feat8.htm >, 24 November 1998).

11 . See, for example, Allan, D., 'Negative Pledge Lending - Dead or Alive? How to Re-Invent the Mortgage' [1990] 8 Journal of International Banking Law 330; Stone, J.B., 'The 'Affirmative' Negative Pledge' [1991] 6 Journal of International Banking Law 364; Han, T.C., 'The Negative Pledge as a 'Security' Device' [1996] Singapore Journal of Legal Studies 415.

12 . This was the option favoured by one of the earliest Internet success stories, amazon.com, the Internet bookshop which has now branched into videos, CDs and software. It relied on equity capital as opposed to loan finance. See, for example, Bloomberg News, 'Amazon.com Splits Stock 3-for-1' (available at < http://www.news.com >, 20 November 1998).

13 . See, for example, Melbourne IT, 'Frequently Asked Questions' (available at < http://www.ina.com.au/help/faqans.htm >, 15 August 1998).

14 . See 'Country Domain Names - Filing Requirements - Australia' (available at < http://www.igoldrush.com/country_names_a.htm >, 24 November 1998).

15 . Swinson, J., 'Security Interests in Intellectual Property' in Wappett, C. and Allan, D., Securities Over Personal Property , Butterworths, Sydney, 1999, 121, at 161-162.

16 . There have been a number of cases to date in various jurisdictions, though none in the secured finance context, where plaintiffs have successfully sought injunctions to prevent another entity using and / or retaining registration of a domain name where it might infringe the plaintiff's registered trade mark rights. See, for example, Oggi Advertising Ltd v McKenzie & Ors (unreported, 2 June 1998, High Court of New Zealand, Auckland Registry, Baragwanath J); Harrods Ltd v UK Network Services Ltd (unreported, 9 December 1996, High Court of the United Kingdom, Chancery Division, Lightman J); ITV Technologies Inc v WIC Television Ltd (unreported, 28 November 1997, Federal Court of Canada, Docket T-1459-97, McKay J); Marks & Spencer plc v One in a Million Limited [1998] FSR 265.