Donuts has sued ICANN in an attempt to block the auction of the .web gTLD this Wednesday.
The gTLD portfolio registry filed a lawsuit in California on Friday, seeking over $10 million in damages and a temporary restraining order to stop the auction going ahead.
The complaint alleges breach of contract, negligence and unfair competition and seeks a court declaration that the covenant not to sue signed by all new gTLD applicants is unenforceable.
According to Donuts, ICANN breached its duties by not fully investigating the allegation that rival .web applicant Nu Dot Co has undergone a change of control and has a new, wealthier owner.
NDC is the only applicant in the eight-strong .web/.webs contention set that refuses to resolve the contest privately.
A private auction would enrich all losing applicants to the tune of many millions of dollars.
By forcing a “last resort” ICANN auction, NDC has ensured that ICANN will be the only party to benefit from the auction proceeds.
Last-resort auction funds are placed in a separate ICANN account, currently worth over $100 million, which will be spent according to a currently undecided policy created by the ICANN community.
But Donuts’ complaint strongly implies that ICANN is forcing the auction to go ahead because it stands to benefit financially.
Donuts repeats the allegation from its recent joint Request for Reconsideration with Radix that NDC should be forced to disclose to ICANN, via a gTLD application change, the names of its alleged new directors.
It cites again a redacted email from NDC director Jose Ignacio Rasco which talks about fellow listed director Nicolai Bezsonoff no longer being involved with the application but that “several” new directors were.
It adds a quote about Rasco talking about “powers that be”, which Donuts takes to mean he is answering to someone else.
NDC is not listed in the lawsuit, which focuses on ICANN’s obligations under the new gTLD program application contract.
Donuts alleges, for example, that ICANN has a duty to fully investigate whether NDC has indeed changed directors.
ICANN’s Board Governance Committee said last week that ICANN staff had talked to and emailed Rasco about the allegations. Donuts says it should have at least talked to Bezsonoff too.
Donuts also claims that ICANN is not allowed to go ahead with a last-resort auction while there are still outstanding “accountability mechanisms” — including the RfR, which has not yet been formally closed out by the full ICANN board.
The lawsuit also reveals that Donuts simultaneously filed a complaint using ICANN’s less legally formal Independent Review Process, though documentation for that is not yet available.
ICANN’s most recent statement on .web, which just confirms that the .web auction will go ahead this coming Wednesday, was also posted on Friday. It’s not clear if that was posted before or after ICANN became aware of the lawsuit.
All new gTLD applicants had to agree not to sue ICANN when they applied, but Donuts argues that this is unfair and unenforceable.
DotConnectAfrica has had some success with this argument, though Donuts does not cite that case in its own complaint.
There’s been some speculation about the motives of Donuts and others in trying to delay the auction.
The lawsuit will not force NDC into a private auction, but it might buy Donuts and the other applicants more time to consider their strategies.
I’m getting into speculative territory here, but if NDC’s strategy is to win the .web auction as a Trojan horse for its alleged new owner, perhaps revealing the identity of that new owner would make it less likely to insist on a last-resort auction.
If NDC’s alleged new owner has a time-sensitive need for the revenue .web could bring (which could be the case if, for example, the owner was Neustar) perhaps the prospect of a long lawsuit and IRP case could make it more likely to accept a private auction.
If the alleged new owner was revealed to be Verisign — a company more likely than most to acquire .web simply in order to bury it — perhaps that revelation could spur remaining applicants into pooling their resources to defeat it.
It it was a big tech firm from outside the domain industry, perhaps that would strengthen Google’s resolve to win the auction.
That’s all just me talking off the top of my head, of course.
I have no idea whether or not NDC even has new backers, though its behavior in avoiding private auction goes against character and certainly raises eyebrows.
The Donuts complaint, filed as its subsidiary Ruby Glen LLC, can be read here (pdf).
The new gTLD .web seems set to go to auction next week after ICANN rejected an 11th-hour delay attempt by two applicants.
ICANN’s Board Governance Committee said yesterday that there is no evidence that applicant Nu Dot Co has been taken over by a deep-pocketed third party.
The BGC therefore rejected Donuts’ and Radix’s joint attempt to have the July 27 “last resort” auction delayed.
Donuts and Radix had argued in a Request for Reconsideration earlier this week that Nu Dot Co has changed its board of directors since first applying for .web, which would oblige it to change the application.
Its failure to do so meant they auction should be delayed, they said.
They based their beliefs on an email from NDC director Jose Ignacio Rasco, in which he said one originally listed director was no longer involved with the application but that “several others” were.
There’s speculation in the contention set that a legacy gTLD operator such as Verisign or Neustar might now be in control of NDC.
But the BGC said ICANN had already “diligently” investigated these claims:
in response to the Requesters’ allegations, ICANN did diligently investigate the claims regarding potential changes to Nu Dot’s leadership and/or ownership. Indeed, on several occasions, ICANN staff communicated with the primary contact for Nu Dot both through emails and a phone conversation to determine whether there had been any changes to the Nu Dot organization that would require an application change request. On each occasion, Nu Dot confirmed that no such changes had occurred, and ICANN is entitled to rely upon those representations.
ICANN staff had asked Rasco via email and then telephone whether there had been any changes to NDC’s leadership or control, and he said there had not.
He is quoted by he BGC as saying:
[n]either the ownership nor the control of Nu Dotco, LLC has changed since we filed our application. The Managers designated pursuant to the company’s LLC operating agreement (the LLC equivalent of a corporate Board) have not changed. And there have been no changes to the membership of the LLC either.
The RfR has therefore been thrown out.
Unless further legal action is taken, the auction is still scheduled for July 27. The deadline for all eight applicants (seven for .web and one for .webs) to post deposits with ICANN passed on Wednesday.
As it’s a last resort auction, all funds raised will go into an ICANN pot, the purpose of which has yet to be determined. The winning bid will also be publicly disclosed.
Had the contention set been settled privately, all losing applicants would have made millions of dollars of profit from their applications and the price would have remained a secret.
NDC is the only applicant refusing to go to private auction.
The applicants for .web are NDC, Radix, Donuts, Schlund, Afilias, Google and Web.com. Vistaprint’s bid for .webs is also in the auction.
The RfR decision can he read here (pdf).
Donuts and Radix have filed an “emergency” appeal with ICANN in an attempt to get the forthcoming auction for the .web gTLD delayed.
The companies, both of which have applied for .web, say they have evidence that one of their rival bidders recently changed ownership without telling ICANN, in breach of application rules.
The move follows speculation, which we reported last week, that Nu Dot Co is now being controlled by a major legacy gTLD registry player such as Verisign.
The evidence for the the change of ownership comes to light for the first time in the RfR. It’s an email from Nu Dot Co director Jose Ignacio Rasco to Donuts dated June 7. It reads:
Nicolai is at NSR full time and no longer involved with our TLD applications. I’m still running our program and Juan sits on the board with me and several others.
“Nicolai” is Nicolai Bezsonoff, who is listed as an NDC director in its .web application. NSR is presumably Neustar, where Bezsonoff went to work when it acquired .CO Internet.
“Juan” is Juan Calle, the third NDC director, CEO, and former CEO of .CO Internet.
Donuts and Radix believe that Bezsonoff’s departure and the apparent appointment of the unnamed “several others” as NDC directors gave NDC the obligation, under Applicant Guidebook rules, to inform ICANN of the changes.
The Guidebook states:
If at any time during the evaluation process information previously submitted by an applicant becomes untrue or inaccurate, the applicant must promptly notify ICANN via submission of the appropriate forms. This includes applicant-specific information such as changes in financial position and changes in ownership or control of the applicant.
(With that in mind, one wonders whether the acquisition of .blog at auction was strictly legit).
Donuts and Radix now want ICANN to delay the “last resort” auction, which is currently slated for July 27, and “conduct a thorough and transparent investigation into the apparent discrepancies and/or changes in NDC’s .WEB/.WEBS application”.
NDC is believed to be the only one of the eight .web/.webs applicants to be refusing to settle the contention set via a private auction, where the losers get an equal share of the winning bid.
If the set goes to ICANN’s last-resort auction, ICANN gets all the cash.
The final price of .web could easily be in the ball park of $50 million, so each applicant stands to lose several million dollars if the July 27 auction goes ahead as planned.
Radix and fellow .web applicant Schlund had previously written to ICANN to request the delay, but were rebuffed in a letter last week.
The decision outlined in that letter is what the new RfR challenges.
RfRs have a long track record of being dismissed by ICANN’s Board Governance Committee, very often because the requester has not supplied ICANN with any new information with which to change its mind.
That’s a risk here, too, given that ICANN seems to have been in possession of the Rasco email since June 22, before decision to go ahead with the auction was made.
However, that decision seems to have been made by ICANN staff. An RfR makes sure it gets the attention of the ICANN board of directors.
Donuts has made an investment in Netki, a company focused on digital wallets used in Bitcoin and other e-money systems.
Netki’s service is designed to make it easier to locate the wallets Bitcoin users use when they send and receive money, which are usually gibberish strings of around 34 characters.
The company service, when integrated into wallet providers’ offerings, converts these impossible-to-remember strings into easy-to-understand domain names.
An example given by Netki on its web site is the wallet name 1CpLXM15vjULK3ZPGUTDMUcGATGR9xGitv, which can instead be rendered as wallet.BruceWayne.rocks.
The company seems to make its money from end users by selling domain names with a higher mark-up than you’d usually expect. A .com via Netki is $20.99, for example.
It offers scores of TLDs, both generic legacy, new, and ccTLD, many of which are in the Donuts stable.
The size of the investment was not disclosed.
It’s the second investment to be announced from Donuts Labs. In May, it invested in “geofencing” startup GeoFrenzy.
Rightside has rebuffed Donuts’ semi-hostile takeover attempt for its portfolio of gTLD registry contracts.
The question now is: will Donuts up the offer from the $70 million already on the table?
In a pre-markets statement today, Rightside said the offer “undervalued” the assets.
CEO Taryn Naidu is quoted as saying:
After thoughtful evaluation, Rightside’s Board has determined that Donuts’ proposal significantly undervalues Rightside’s Registry assets. We believe Donuts’ proposal is an opportunistic attempt to acquire Rightside’s valuable portfolio of domain extensions with an undervalued price and in a manner that would not be in the best interests of Rightside shareholders.
The company reckons its gTLDs will be bringing in $50 million to $75 million in revenue a year in the next three two five years, which would represent substantial growth over current levels.
It made $2.6 million from the registry business in the first quarter this year.
Donuts’ offer could be considered “opportunistic” given that there’s some shareholder dissatisfaction with Rightside’s success rate with new gTLDs today.
Activist investor J Carlo Cannell and Uniregistry CEO Frank Schilling, both of whom own small but significant chunks of Rightside, have called on the company to get rid of some of its under-performers.
By announcing the offer publicly — apparently after months of private offers — Donuts might have been trying to capitalize on this unrest.
But pissed-off investors don’t necessarily want these gTLDs sold off cheap.
Rightside has 40 new gTLDs. A $70 million offer equals $1.75 million per gTLD. That’s fair way below the average sale price for gTLDs at ICANN auction, which is $7 million (or $3 million if you take the median).
Will Donuts now increase its offer, or back away?