Protect Your Company from Cybersquatters

It’s every company’s nightmare: You own a trademark and discover that someone else has purchased it as a domain name. What’s worse, the “cybersquatters” want you to pay a large sum just to get the name back. You’re worried about what some strangers might do to your company’s good name.

Cybersquatting is the practice of registering, trafficking in, or using a domain name with the bad faith intention of profiting from the goodwill of a trademark that belongs to someone else. It generally involves the illegal speculation in well-known domain names with the intent of exploiting them or selling them back to their legitimate owners.

There is some legal relief. Under a U.S. federal law known as the Anti-Cybersquatting Consumer Protection Act (ACPA), you can win your domain name back. Or you can initiate arbitration proceedings under a program operated by the Internet Corporation of Assigned Names and Numbers (ICANN).

Cybersquatting is possible because the registries that sell domain names operate on a “first-come, first-serve” basis. They don’t check to see whether a domain name belongs to someone else before it’s issued. The registrant has the responsibility to make sure that the domain name does not infringe or violate someone else’s rights.

The ACPA was passed during the waning days of the Clinton Administration in response to an epidemic of cybersquatting. The law places great emphasis on the principle that cybersquatters have “bad faith to profit” by commercially using a domain or selling it back to its rightful owner.

But in one case, a court found that the company that makes Gallo wines was a victim of cybersquatting despite the fact there was no attempt to sell the domain or commercially exploit it.

In the case, the defendants acknowledged that they engaged in domain name speculation through Spider Webs Ltd., which is based in Texas. They acquired more than 2,000 names, including 300 of them associated with well-known business trademarks like oreocookies.com and firestonetires.com.

One of the defendants admitted that “ernestandjuliogallo.com” was valuable due to the goodwill that Gallo developed in its name.

After Spider Webs refused Gallo’s requests to transfer the domain name, Gallo filed suit. A short time later, Spider Webs used the disputed domain name to publish “The Whiney Winery” Web site that was critical of Gallo. But the site did not commercially exploit the domain.

The defendants didn’t appeal the district court’s ruling that Gallo’s trademark “Ernest & Julio Gallo” is famous and distinctive. Instead, the defendants argued for reversal on the grounds that they did not act with “bad faith intent to profit” under the ACPA.

In a well-reasoned opinion, the appeals court upheld the lower court decision, despite the complete lack of commercial activity. The court concluded that seven of the nine statutory factors set forth in the law favored a finding of bad faith, based in part on the fact that the defendants:

• Were admittedly engaged in the business of selling domain names.
• Failed to use the domain name until after the lawsuit was filed and then used the domain name to host a Web site that disparaged E&J Gallo Winery.
• Admitted that they hoped the plaintiff would contact them to provide services.
• Prevented Internet users from reaching the plaintiff through the domain name.

The defendants argued that their activities were protected by the First Amendment, parody and fair use defenses. The court disagreed, concluding that a First Amendment right to express opinions on a Web site doesn’t include making such views at the site of a domain name that is identical to a third party’s registered trademark.

The court found that the defendants’ registration and use of the domain name violated the Texas Anti-Dilution Act, as well as the ACPA. The judge noted that other courts have found that preventing a trademark owner from identifying its goods and services on the Internet constitutes dilution. (E&J Gallo Winery v. Spider Webs Ltd, 5th Circuit, No. 01-20333)

The decision was a victory for trademark owners. In addition to a $25,000 award in statutory damages, the court stated that the actions of Spider Webs put Gallo “at risk of losing business and of having its business reputation tarnished.”