When Porn Tycoons Meet Internet Sultans: the Triple-X Saga

In 2000, the young Internet Corporation for Assigned Names and Numbers (ICANN) decided to “enlarge cyberspace” by adding new generic top level domains (gTLDs) such as .biz, .museum, .pro, etc.

Such an initiative would have created new business opportunities for web entrepreneurs, simultaneously increasing ICANN’s revenues. Indeed, new internet extensions lead to profitable cyber-lands to be exploited; on the one hand by cyber-entrepreneurs and on the other hand by ICANN which earns fees from approving the creation of new TLDs, new registry operators (i.e. the entities which manage the database of all the domain names registered in a TLD) and new registrars (i.e. the entities that manage the reservation of Internet domain names), and charges registries and registrars fixed annual fees as well as per-transaction fees.

As soon as ICANN decided to create new “portions” of cyberspace, the ICM Registry applied for the creation of a new adult-content-dedicated internet extension: the .xxx top level domain. And here is where the story begins.

The .xxx saga: “If at first you don’t succeed, try, try, and try again!”

The first application of ICM was rejected by ICANN which argued that the adult content diffusion was not to be considered as an indispensable need for the internet community.

However, in 2004, ICM re-applied in order to create a new “sponsored gTLD”, supported by the International Foundation for Online Responsibility (IFOR) according to which ICM represented a “significant portion of the adult-entertainment community”. This application was also rejected, probably because ICANN realised that IFOR was not exactly an impartial sponsor, having been created by ICM itself in order to plead its cause.

In spite of these refusals, ICM launched an intense lobbying activity that persuaded ICANN that its application had wide support from the adult-entertainment community and, in 2005, ICANN authorised a preliminary negotiation aimed at defining the new triple-x extension. However, due to firm opposition from several governmental entities represented in ICANN’s Governmental Advisory Committee (GAC) – and, particularly, because of the veto posed by the US Department of Commerce – ICANN again rejected ICM’s request.

ICM decided to challenge this decision, filing an Independent Panel Review, the non-binding quasi-arbitral process offered by ICANN in order to review its decisions. Indeed, it is right and proper to recall that, although ICANN’s attributions look like public regulatory power, ICANN is not a governmental agency and, therefore, its action is not subject to judicial review. Indeed, the Independent Panel Review was created to enhance ICANN’s accountability, thus ensuring that ICANN’s activity stays within the bounds delineated by the articles and bylaws.

ICM’s final attempt proved successful. Indeed, the majority of the Independent Review Panel stated that, in light of ICANN’s 2005 positive decision with regard to the creation of the .xxx extension, ICANN could not withdraw and the .xxx gTLD should have been established.

Hence, in March 2011, ICANN approved the .xxx TLD and signed a registry contract with ICM, according to which ICM was entitled to manage the triple-x extension for “a minimum of ten years” whilst, at this period’s expiration, the contract should have been “renewed subject to an obligation to negotiate certain terms in good faith”.

…to be continued

If ICANN and ICM thought that the consecration of their will in the .xxx registry contract would have been the last chapter of the .xxx saga, they may have committed hubris.

Indeed, in November 2011, Digital Playground Inc., an adult-movie company based in California, and Manwin Licensing International (Manwin), a porn mogul based in Luxemburg, filed an action against ICANN and ICM, alleging various violations of Section 1 and 2 of the US Sherman Antitrust Act.

Manwin and Digital Playground argue that ICANN and ICM harmed competition in two different markets linked to the .xxx domain registry services. The first is a “defensive registration market” whilst the second is an “affirmative registration market”.

With regard to the defensive registration market, according to the plaintiffs, “owners of trademarks, owners of domain names in other TLDs and owners of other name rights [are obliged to]purchase domain names in the .xxx TLD […] to protect their names from loss of goodwill, prevent consumer confusion, or prevent association with adult entertainment”. That could indeed be considered as a form of racket on domain names operators, which are forced to defensively register .xxx addresses to protect their reputation.

At the same time, with regard to the affirmative registration market, the plaintiffs have argued that “there is a serious danger that ICM will establish and monopolize such a distinct market because of the unique association of the ‘xxx’ name with adult content”.

Furthermore, it should be noted that, despite the fact that ICANN’s Articles of Incorporation foresee that “the Corporation shall operate […] through open and transparent processes that enable competition and open entry in Internet-related markets”, no competitive procedure has been adopted to award the .xxx registry contract, nor has any been foreseen to renew the contract that will be renegotiated with ICM when it will come to its expiration.

At this point, one may ask the following question: can ICANN – which defines itself as a “private, non-profit technical coordination body” committed to “Ensuring accountability, transparency and the interests of global Internet users”[1] – be subject to US antitrust law? Or, should it be deemed immune from antitrust law liability as a state actor[2]?

The nature of ICANN’s activity

It is right and proper to recall that, although ICANN has been designed to be a global decision-making entity operating in an independent fashion from national sovereigns, ICANN’s juridical status is that of a US private corporation, established under Californian non-profit law.

Hence, although it is charged with global regulation attributions, ICANN is subject to both California and US federal laws. To this latter extent, it has to be highlighted that ICANN may be subject to antitrust law should its activities be considered being of a commercial nature.

On August 14^th, this latter point was made explicit by the Central District of the California District Court which ruled that “the identity of a defendant as a nonprofit or charitable organization does not immunize that organization from antitrust liability”. To this extent, U.S. District Judge Philip S. Gutierrez reiterated that “ICANN granted ICM the sole authority to operate the .xxx TLD. In return, ICM agreed to pay ICANN money. This is “quintessential” commercial activity and it falls within the broad scope of the Sherman Act”[3].

Judge Gutierrez could not have been more explicit. ICANN’s activity with regard to the establishment of new internet extension is commercial. Ergo, any registry contract awarded by ICANN can be subject to US jurisdiction to adjudicate over antitrust violation.

However, it should be remarked that ICANN’s activities have a global range and there are ICANN offices also out of California, i.e. in Brussels and in Sydney. Hence, one should not exclude a priori that antitrust lawsuits may have pertinence also on a European or Australian level.

The decision

Once the commercial nature of ICANN’s was clarified, Judge Gutierrez found that, on the one hand, “Plaintiffs have failed to adequately plead the affirmative registration market [because]an adult content website registered in the .com TLD is an adequate economic substitute for an adult content website registered in the .xxx TLD” whereas, on the other hand, they “have adequately pled a relevant market for defensive registrations […] because the only way to block a name in the .xxx TLD is to register a name in the .xxx TLD”.

Such a decision is indeed relevant in light of the impact that it may have on the recent internet-expansion programme undertaken by ICANN, which is aimed at creating hundreds of new generic top level domains (gTLDs).

In fact, although Judge Gutierrez partly granted the motions to dismiss filed by ICM and ICANN, he allowed the plaintiffs to pursue their antitrust claims, making it clear that ICANN cannot be considered as immune from antitrust law, as ICANN argued by claiming a luck of engagement in “trade or commerce.”

Lastly, it should be noted that ICANN seems to have predicted the outcome of the Manwin affair. In fact, ICANN is carefully avoiding the same mistakes it committed during the .xxx saga and the first steps of the New-gTLD Programme seems to have been organised in order to foster the participation of all the interested bidders in a fairly competitive fashion – as long as they are able to pay the $ 185,000 entrance fee.

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[1] See:  Affirmation of Commitments by the United States Department of Commerce and the Internet Corporation for Assigned Names and Numbers 9.1 (Sept. 30, 2009), available at http://www.icann.org/en/about/agreements/aoc/affirmation-of-commitments-30sep09-en.htm

[2] The state- actor thesis has been developed by Michael Froomkin. See: Michael Froomkin, Wrong Turn in Cyberspace: Using ICANN to Route Around the APA and the Constitution, 50  DUKE  L.J. 17, 113-124 (2000)

[3] See : Manwin Licensing International S.A.R.L., et al. v. ICM Registry, LLC, et al., CV 11-9514 PSG (JCGx), August 14, 2012.