Verisign Loses False Advertising Lawsuit Against XYZ

InternetVerisign, a provider of .com domain names, sued XYZ, the provider of .xyz domain names. Verisign complained that its competitor engaged in false and misleading advertising that disparaged the .com brand. The district court decided the case against Verisign. The United States Court of Appeals for the Fourth Circuit recently affirmed the district court’s judgment.

Top-Level Domains

A top-level domain is the portion of a domain name that follows the last dot in a website address. For example, .com is the top-level domain of freeadvice.com.

Top-level domains are authorized by the Internet Corporation for Assigned Names and Numbers (ICANN). Top-level domains sometimes serve to categorize websites. For example, the top-level domain .org is often used by organizations while a business might use .biz. However, those are examples of generic top-level domains that can be used by anyone, unlike .gov or .edu.

While the “com” in .com stands for commercial, .com is a generic top-level domain and many websites that end in .com are not commercial. It is by far the most popular top-level domain, with over 100 million registered domain names. An astonishing 96% of all the words in the dictionary are used in .com domain names.

Verisign, Inc. operates the .com and .net top-level domains. It is also a wholesale seller of .com and .net registrations. Website owners pay a fee to registrars to obtain the right to use a domain name. That fee consists of the wholesale price charged by Verisign plus the markup added by the registrar.

The explosion of websites, and the difficulty of finding a website name that hasn’t already been taken, encouraged the creation of other generic top-level domains, such as .name and .info. Beginning early in this century, ICANN agreed to authorize those and many other top-level domains to enhance competition and consumer choice.

The Top-Level Domain Dispute

In 2014, ICANN authorized the use of .xyz as a generic top-level domain. It was launched by XYZ.COM, LLC. The CEO of XYZ is Daniel Negari.

Negari established XYZ as a competitor to Verisign. To attract business, Negari and XYZ warned customers of the scarcity of desirable .com names. They also boasted of the popularity of the .xyz top-level domain.

Taking offense at XYZ’s marketing claims, Verisign sued XYZ for violating the Lanham Act, a federal law that prohibits unfair competition. Verisign claimed that XYZ violated the law by engaging in false or deceptive advertising and that Verisign’s business suffered as a result of those unlawful actions.

The district court entered summary judgment against Verisign. It decided that the undisputed facts demonstrate that XYZ did not violate the Lanham Act. Verisign appealed.

Alleged Violations

The Lanham Act prohibits false or misleading representations of fact in commercial advertising. Verisign claimed that XYZ “used deceptive statements about its registration numbers and popularity to manufacture an unwarranted ‘gold rush’ for .xyz domains.”

Verisign complained that XYZ gave away domain name registrations in order to boost the apparent popularity of the .xyz domain, thus creating “a false picture of consumer demand.” Verisign commissioned a consumer survey to prove that most consumers would believe that XYZ’s self-promoting statements about its registrations meant paid registrations, rather than registrations that were given away for free.

Verisign also complained that XYZ falsely disparaged the .com domain by asserting that all the good names were taken. For instance, Negari said in an interview with NPR that the “only thing that’s left is something with a dash or maybe three dashes and a couple of numbers in it.” XYZ also claimed that “99% of all registrar searches today result in a ‘domain taken’ page” and advertised that it is “almost impossible to find the domain name that you want.”

Court Rejects Complaint About Self-Promotion

The district court found that XYZ’s statements about the number of registrants to .xyz domains were literally true. While Verisign argued that the number is misleading because it does not distinguish between purchased domains and those that were given away for free, the district court concluded that Verisign’s consumer survey failed to establish that consumers were actually misled.

The Court of Appeals agreed that Verisign failed to present evidence of a Lanham Act violation, but for a different reason. Even if Verisign could establish that XYZ’s self-promotion was deceptive, the Court of Appeals concluded that Verisign failed to show that those statements caused it any economic or reputational harm.

Verisign attempted to prove that purchasers of .com domains were diverted to .xyz domains as a result of XYZ’s statements. However, the district court disallowed Verisign’s expert testimony to that effect because it was based on a questionable methodology that resulted in unreliable conclusions. The Court of Appeals agreed with the district court that the expert used a correlation to prove causation. The expert attributed every .xyz registration to the allegedly deceptive statements. While there was a drop in .com registrations during the rise in .xyz registrations, the expert offered no evidence to show that the former was caused by the latter.

In fact, relatively few individuals were even aware of XYZ’s self-promotional statements, given the limited audience that listened to Negari’s NPR interview or that read the XYZ blog where the statements were made. The limited potential to influence consumer opinion, combined with the lack of evidence that the statements actually harmed Verisign, convinced the appellate court that Verisign could not prevail on its claim that XYZ violated the Lanham Act by inflating its registration numbers.

Court Rejects Complaint About .com Disparagement

XYZ contended that telling consumers that it would be nearly impossible “to find the [.com] domain name you want” was puffery. While businesses may not usually make false or misleading statements, they are permitted to exaggerate if consumers would likely recognize an exaggeration for what it is. Businesses are also entitled to express opinions, and XYZ contended that its statements were either opinions or puffery.

The Court of Appeals found no fault with saying that “99% of all registrar searches today result in a ‘domain taken’ page” because even Verisign admits that the statement is true. Verisign offered no evidence that the true statement was misleading to customers.

The Court also noted the Lanham Act only applies to false or misleading statements of verifiable facts. The Court decided that XYZ’s statement about the impossibility of finding the .com name “you want” was a statement of opinion. Whether an anonymous “you” will be unable to find the domain name “you want” is not a verifiable fact, and “impossible” is so clearly an exaggeration that it stands only as a “blustery assertion” about the value of available .com names.

Finally, the Court concluded that Negari’s statement that only “a dash or maybe three dashes and a couple of numbers” were available as domain names constituted obvious puffery that could not confuse or mislead consumers. Concluding that XYZ engaged in puffery or expressed opinions or both, the Court agreed that XYZ did not violate the Lanham Act.

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