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March 12, 2009

IP Alert: Upcoming Changes to Internet Domain Name System

Arnold & Porter Advisory

BIG CHANGES ARE COMING TO THE INTERNET DOMAIN NAME SYSTEM — WHAT YOUR COMPANY NEEDS TO KNOW

By Denis T. Rice and Blake J. Lawit

Internet naming is on the brink of the most significant change since its inception. The Internet Corporation for Assigned Names and Numbers, "ICANN," has adopted a program that will allow the introduction of an almost unlimited number of new generic Top Level Domains (gTLDs).1 In other words, the internet world may expand to include not just ".com" and ".net", but also countless others such as ".microsoft", ".disney", or ".fashion."

The new regime could fundamentally alter the way in which trademark owners protect and promote their marks on the Internet. Because of the short time left before the new regime takes hold, companies need to develop and implement strategies to address these changes now. Clients need to understand both the opportunities and the problems involved in navigating this "brave new world" of gTLDs.

ICANN AND THE NEW DOMAIN REGISTRY REGIME

Currently, there are 21 gTLDs, such as .com, .net, .org, .biz and .asia, and more than 250 "country code" top level domains (called "ccTLDs"), such as .in, .jp and .uk. With fewer than 300 top-level domains, the present structure of the Internet is very hierarchal: under the few hundred gTLDs and ccTLDs are millions of second-level domains which are the Internet Protocol ("IP") addresses.

ICANN's plan to introduce new gTLDs, put forward in June 2008, would, if developed, dramatically transform the structure of the Internet from a tightly hierarchal one into one with a much more horizontal shape. The plan would allow unlimited numbers of qualified applicants to self-select domain strings as top level domains and operate as their own registries. In effect, applicants would for the first time be able to appropriate their own unique spaces on the Internet.

There are two types of new gTLDs: (1) "open" gTLDs, which are available to any applicant and (2) community-based gTLDs, which are available only to applicants connected with an identifiable, pre-existing group and who are able to demonstrate a clear nexus between the group and the applied-for string.

1. Timing for Applications
A final Applicant Guidebook is expected to be released sometime in 2009. ICANN indicated at a meeting in November 2008 that it would not open the application period until four months thereafter. Just last week at its Mexico City meetings, ICANN formed a committee to evaluate complaints raised by trademark owners to its proposed procedures and report back to ICANN prior to June 2009. Accordingly, now the first application round is not expected to begin until the fourth quarter of 2009 (although further delays remain possible).

2. Fee Structure for Applications
ICANN intends that applicants for new gTLDs will bear the costs of developing and implementing the new policy. These costs are substantial. ICANN determines the fee for a single gTLD based on the number of anticipated applications; ICANN initially estimates a $185,000 application fee, assuming that it will receive approximately 500 gTLD applications in the first round. Moreover, ICANN will assess the owner of a gTLD a registry fee of at least $75,000 or 5% of the registration fees realized by the domain owner per year, whichever is greater. Applicants must also provide financial guarantees indicating that they have the resources to operate a registry for at least three years.

3. Criteria Which ICANN Proposes to Follow in its Evaluating and Selecting New  gTLDs
All applicants will undergo an "Initial Evaluation," during which ICANN first assesses (1) the applied-for gTLD string, (2) the applicant's qualifications and (3) the proposed registry services. If the applicant does not pass the Initial Evaluation, an Extended Evaluation is given. ICANN will review the gTLD string for string confusion (whether the proposed gTLD string so nearly resembles another that it is likely to cause confusion), potential to introduce instability into the Domain Name System ("DNS"), whether the applicant has the necessary technical, financial, operational capability to operate the gTLD, whether relevant government approval is required, and whether the string is contrary to generally accepted international legal norms relating to morality and public order.

4. Resolving Contentions Between Applicants Over the Same String
Where two or more entities apply for the same string, they may resolve the contention between them by three principal methods: (1) self-resolution, (2) comparative evaluation and (3) auction. Self-resolution involves mutual agreement by all but one of the applicants to withdraw from the process. Comparative evaluation applies only to community-based applications, and looks to four criteria: (1) community establishment; (2) community endorsement; (3) dedicated registration policies; and (4) nexus between the proposed string and the community in question. If comparative evaluation of competing community-based applications using the foregoing criteria fails to produce a winner, an auction on the "ascending clock" model will be used. Under this model, a low price is set at the beginning, with higher prices being announced at set intervals thereafter. Participants, who will not know each others' identities, must state at each price level whether they are in or out.

5. Bases for Third Party Objections
When ICANN has cleared an application through its initial evaluation phase and has posted the application on its website, third parties can object on one or all of four different grounds. The grounds include:

  • "String confusion," which means the string is either confusingly similar to an existing TLD (thus, an owner of the ccTLD ".in" might object to an application for a gTLD for ".india") or closely related to another pending application for a gTLD (thus, an applicant for ".car" might object to application for ".auto")
  • A "legal rights objection" based upon a legal right of the objector, e.g., infringement of a trademark
  • A "morality and public order objection," i.e., the string is asserted to violate "generally accepted norms relating to morality and public order"
  • A "community objection," where the granting of a given application is asserted to cause detriment to the community to which the gTLD relates

Separate objections are required when an objector makes objections on the same ground to multiple strings or objects on multiple grounds to the same string. Each separate objection will require a separate fee, ranging from $2,000-$8,000+ for a string confusion or legal rights objection to $70,000-$122,000+ for a morality and public order objection.

EVALUATING THE OPPORTUNITIES AND RISKS
In order to decide whether to apply for a new gTLD, companies should evaluate the potential opportunities and risks:

1. The Major "Pros" of Seeking a gTLD

  • Control and Security — The new gTLDs represent new internet real estate that can be secured and exploited. A trademark owner who registers for a gTLD in its mark will have the benefits of exclusive control over every domain name under its gTLD. Users may find that a website that has a branded gTLD trustworthy, since scammers will not be able to register domains under these gTLDs without authorization by the owner. This added control of trademark use in top level domain names could also translate into more security and less fraud with a greater ability to ward off cyber squatters and pharming attacks. 
  • Marketing Potential of Branded gTLDs — Some specialists in marketing have cited the ability of a gTLD owner to build an Internet-based "island," controlling all access and content. Since the domain owner operates or controls the registry that accepts second-level domains, an entity can ensure that only companies with whom it has advantageous commercial relationship such as channel partners, co-venturers and the like, obtain second-level domains. Marketing professionals have also predicted that the domain name system will develop into a directory of leading corporations and that Internet viewers will become accustomed to associate the top level branded sites with greater prestige and authority. 
  • Revenue Potential of Category gTLDs — Under the new regime, consumers' internet surfing habits eventually may trend toward more specific domains. For instance, consumers may become conditioned to type, for example, ".fashion" when searching for information about fashion. Thus, whichever entity owns the ".fashion" gTLD could have control over numerous valuable domains related to fashion and couture, including those of trademark owners such as Louis Vuitton, Gucci, Versace and countless others.

2. The Major "Cons" of Seeking a gTLD

  • Costs — The ICANN costs — at least $185,000 (which is non-refundable) to apply for the domain and $75,000 in annual ICANN assessments — are substantial. The owner must also devote substantial funds and internal resources to managing the domain, operating or outsourcing the registry, and promoting the new domain in order to attract users and, ultimately, advertisers. There will also be marketing costs in educating users regarding new web addresses.
  • Uncertain benefit — It is uncertain at best whether using a new gTLD will drive additional traffic to your company's websites or that consumers will value going to a branded gTLD site. It is similarly questionable whether consumers would be drawn to a category gTLD, such as ".fashion". For example, under the current gTLD regime, even though ".travel" currently exists as a domain, companies and consumers have generally ignored sites generally ignored sites with a ".travel" address, preferring to do business in the ".com" space.

A PRACTICAL "TO DO" LIST FOR COMPANIES
In any event, companies involved in e-commerce cannot afford to ignore the new gTLD regime even if they do not contemplate participating in the first round. At a minimum, any company with brands or marks of value and with at least some level of resources should:

  • Evaluate the strength of its existing trademarks, service marks, and related intellectual property
  • Working with marketing, finance, and other relevant groups within the company, determine whether obtaining a generic top level domain for the company's key brands will materially enhance product visibility and marketing, or whether the value of the entity's existing second-level domain name within the .com domain eliminates any need to register a gTLD
  • Both monitor the new comments published by ICANN and be prepared to offer comments during any further public comment periods
  • Systematically follow new gTLD applications to see if competitors apply for domains and assert objections where applications conflict with your company's valuable trademark rights
  • Identify operators of back end registries that will meet ICANN's published criteria and with whom the company might partner if it decides to seek a new gTLD
  • Identify and evaluate which other businesses and individuals might be potential second-level registrants in the company's new gTLD

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1 ICANN is an international, non-profit multi-stakeholder organization responsible for technical management and coordination of the system of Internet domain names. Its responsibilities include the unique identifiers, allocation of Internet Protocol address spaces, protocol identifier assignments, generic and country code top-level domain names system and root server system management functions.

If you have questions about any of the issues raised in this article, please contact Denis T. Rice or your usual Howard Rice attorney.

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