The online classifieds advertising technology outsourcing company went on to become one of the most popular communities and networking sites on the Internet. "Gary founded the firm after identifying opportunities for online personals service, now branded Match.Com. He wrote the company business plan, then raised $1.3 million from venture capitalists and private investors, and later assisted in raising $7.5 million from leading corporate partners..." Kremen was also a founder of Los Altos Technologies, Inc. (LAT), a leader in UNIX security.
He has also become a leading and sought-after speaker on Internet marketing and development. More importantly and in terms of the history of sex.com, he is considered to be a leading authority on issues pertaining to intellectual property law and the Internet. Furthermore, he has invested in more than 50 companies.
4. The Sex.com saga
The legal battle surrounding sex.com began on May 19, 1994, when Kremen registered the domain name sex.com with Network Solutions. One year later he discovered that his extremely valuable domain name had been fraudulently transferred to a known felon, Stephen Michael Cohen. Against legal and financial odds, Kremen sued to regain the domain and was eventually successful on 11/27/00.
The legal battle to regain Sex.com was lengthy and intense and involved Kremen having to use various lawyers. He was eventually successful through the expertise of attorney Charles Carreon. (Kremen v. Cohen,2003).
In brief, Stephen Cohen fraudulently obtained the domain name sex.com by submitting fake transfer letters to the domain registrar Network Solutions, now owned by VeriSign.
He also forged of a signature to do this. Cohen in effect took advantage domain name registration process which was not as formal and controlled as it is today.
Cohen pretended to be authorized by Kremen to order Network Solutions to transfer the name of the registrant of the sex.com domain name over to his company. Cohen used a phony letter from a non-existent executive at Kremen's company, Online Classifieds, authorizing transfer of Sex.com to Cohen. The letter was written and signed by a "Sharon Dimmick," identified as the president of Online Classifieds.
Cohen saw the potential for this domain name and using forged documents persuaded Network Solutions to transfer the name sex.com to him. "Network Solutions took the letter at face value and transferred the name to Cohen who proceeded to turn 'sex.com' into a lucrative online porn empire."
Kremen therefore undertook legal steps to recover the domain name. However, this way to be an extremely difficult and time consuming task. At first Cohen claimed that he had obtained the domain legally from Online Classifieds. This was to result in a five-year legal battle, which was to place extreme strain, especially financially, on Kremen.
In 2000 Kremen was successful and "...Network Solutions was ordered to return the domain to Kremen and Cohen was ordered to pay $25 million into court."
Kremen also was to receive a further 40 million for lost earnings. The court ordered Cohen to hand over profits from his use of sex.com; invoking the constructive trust doctrine and California's "unfair competition." (Unfair competition statute TA Kremen v. Cohen, 45 Fed. Appx. 746, 2002 WL 2017073 (9th Cir. 2002).
This was by no mean the end of the ordeal for Kremen. Cohen found numerous ways of not paying the amount owing to Kremen. Among the methods that he used were the following. They included "....refusing to allow assessment of his business - providing false information or none at all, declaring most of his companies bankrupt and illegally moving assets out of U.S. jurisdiction." Cohen fled to Mexico but was eventually arrested by the authorities.
These events did not solve the issue of Kremen's outstanding payments and financial problems, as well as the loss of earnings. Consequently, Kremen began legal proceedings against Network Solutions for breach of contract and conversion.
However this claim was dismissed by the court in May 2000. The court's rejection was guided by the decision of the district court which held that rejection was based on the view that domain names were not subject to conversion because domain names were intangibles and were not merged into a document as required the Restatement (Second) of Torts. The court ruled that."..since the registration was free, Kremen had no contract with Network Solutions, and that the doctrine of conversion (dealing improperly with another's property) did not apply because domain names are not tangible property."
The district court granted summary judgment in favor of Network Solutions on all claims. (Kremen v. Cohen, 99 F. Supp.)
It held that "...Kremen had no implied contract with Network Solutions because there was no consideration: Kremen had registered the domain name for free. Id. At 1171-72. It rejected the third-party contract claim on the ground that the cooperative agreement did not indicate a clear intent to grant enforceable contract rights to Registrants. "
Kremen appealed against this decision. The result was to be the eventual success for Kremen in this long legal battle. In a unanimous decision the Ninth Circuit Court of Appeal stated that "...a domain registrar could be held liable under the theory of conversion for transferring a domain name without authorization." (Kremen v. Cohen, 337 F.)
This was an extremely important decision for a number of reasons and set a precedent for later legal issues relating to online property and copyright infringements. In terms of Kremer's claim this meant that VeriSign could now be held liable to Kremen for improperly transferring the domain. The case was remanded to the trial court on this basis and in March 2004, "... VeriSign ended the legal action and paid Kremen an undisclosed sum, believed to be around $20 million."
It should be noted that the case was eventually won and decided on the grounds of conversion and the right of property. The other aspects that Kremen had presented as part of his claim against Network Solutions were thrown out by the court. These comprised the following arguments.
A that the transfer violated Network Solution's cooperative agreement with the National Science Foundation - the government contract that made Network Solutions the '.com' registrar; that he had a property right in the doman name and that Network Solutions was guilty of conversion and... that Network Solutions was a 'bailee' of his domain name and liable for 'conversion by bailee'.
The Appellate court had agreed with the district court that the contract claims made by Kremen against Network Solutions were without merit. " Kremen had argued that although NSI had no written contract with him, his registration of the domain nonetheless created an implied contract. The 9th Circuit rejected this theory, because NSI received no consideration in exchange for registering Kremen's domain name."
It was however on the grounds of conversion alone that Kremer's actions against Network Solutions were successful. " the Court of Appeals overruled the decision of the District Court, but only in relation to the claim based on conversion."
In the process Kremen has incurred "...$5 million in legal fees, a mountain of money that included not only his last dollar at one point, but the last dollars of investors who had agreed to help bankroll the litigation in return for a share of sex.com if and when it was ever recovered. "
The importance of the decision by the Court of Appeals in overruling the previous decision was that it established the status of intangible property in the law. There was also the clarification of the U.S. Restatement (Second) of Torts; which stated that tangible property should be represented or "merged" in a document. This was adjusted in the case of Kemen's appeal.
The Court indicated that had it been necessary to do so, it would have found that conversion applies to every species of personal property, without any 'merger' requirement. However, in this case, there was a relevant document: the Domain Name System, or DNS - the distributed electronic database that associates domain names like sex.com with particular computers connected to the Internet.
Consequently, an outcome of the court decision was that,."..the regulation of domain names might be more appropriately done by statute."
In summary the entire case turned around the issue of what determined property in legal sense and whether "...a domain name is a species of "property" susceptible to conversion."
Judge Kozinski, of the 9th Circuit agreed "...that domain names are such a species." He also stated that "...intangible property could be subject to conversion and that no association with a tangible document was necessary.
Kremen v. Cohen, 9th Cir., Kremen v. Cohen, 9th Cir., No. 01-15899).
The significance of the sex.com case is evident from the above discussion. It not only clarified the issue of intangible property but also showed another possibly even more important aspect. This aspect is related to the character and life of Gary Kremen. The determination and persistence with which Kremen pursued his legal and just right to the domain name has served as an inspiration to many online entrepreneurs.