The sex.com legal battle has created confusion as to whether a domain name is an intangible property, according to a report issued today by DomainMart.

On April 20, 2004, sex.com announced a settlement of their legal battle with VeriSign over the domain name sex.com. And last July, the US 9th Circuit Court of Appeals ruled that Gary Kremen had property rights to the stolen domain name sex.com and that Network Solutions (then owned by VeriSign) was liable and subject to the tort of conversion for transferring ownership without proper authorization.

“Contrary to common belief, neither the settlement nor the ruling, makes domain names intangible property,” says Alex Tajirian, President and CEO of DomainMart. “Legal classification of property falls under the jurisdiction of individual states. Property rights are established through either a state’s Supreme Court decision under the common law or through a statute approved by state legislators. A Federal Court decision is a possible interpretation of a state high court’s future decision,” adds Tajirian.

Although the terms of sex.com’s settlement were not disclosed, unofficial reports suggest that it was in excess of US$15 million. Due to lax controls over transfer of domain-name ownership, Tajirian recommends that domain-name buyers and sellers use an escrow service to ensure proper and timely transfer of title and sale proceeds.

Battle Background: Gary Kremen registered sex.com in 1994 through the registrar Network Solutions. At the time, Kremen was doing business as Online Classifieds, Inc.

After a period of a year, during which sex.com web site was inactive, a man named Stephen Cohen decided to steal the potentially lucrative domain name. All he had to do was send a letter written on Online Classified letterhead to Network Solutions requesting transference of ownership.

According to reports, Cohen then launched an Internet pornography Web site based on sex.com, but by the time Kremen was aware of the theft, Network Solutions refused to change the registration back without a court order.

Kremen ultimately sued Cohen and Network Solutions, which was allegedly responsible for negligence since the registrar had not attempted to verify the forged letter that had served as the basis for the domain-name conversion. However, it now appears that Cohen simply picked up the phone, asked for and was granted the sex.com domain name immediately. This was at a time when the wait for domain-name-ownership transfers was over four weeks. Network Solutions made no attempt to verify Stephen Cohen’s entitlement to sex.com – of which there was none.

In September 2002, the U.S. Court of Appeals for the 9th Circuit approved a $65 million award in Kremen v. Cohen. But by that time Cohen had skipped off to Tijuana, Mexico, and would not comply with the judgment's orders.

During the same ruling, the claim against Network Solutions was rejected based on the fact that a private company (in this case the sole registrar for domain names) is immune from civil suit in cases where it negligently handled a domain name.

Kremen then petitioned the Ninth Circuit Court of Appeals. Last July, the Appeals Court ruled that Gary Kremen had property rights to the stolen domain name and that Network Solutions, then owned by VeriSign, was liable and subject to the tort of conversion for transferring ownership without proper authorization.

The Appeals Court majority noted that the state Supreme Court had ruled as far back as 1880 that intangible property -- represented, in that seminal case, by a stock certificate -- could be converted. Judge Gerard Kosinski said in his written opinion that it is clear from the 1880 case, and many lower-court rulings since then, that a domain name is property that can be converted and thus Network Solutions had liability.

On April 20, 2004, sex.com announced a final settlement with VeriSign. Although the terms of the settlement were not disclosed, unofficial reports suggest that it was in excess of US$15 million.