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Did Uniregistry over-sell the auction antitrust risk?

Kevin Murphy, March 20, 2013, Domain Registries

Uniregistry’s revelation that it believes private auctions to resolve new gTLD contention sets may be illegal — based on its talks with the US Department of Justice — has caused widespread angst.

Following yesterday’s news, some commentators — some interested — questioned the company’s motive for revealing that Justice had declined to give private auctions a clean bill of health under antitrust law.

Others wondered whether Justice had been given the full facts, whether it had understood the new gTLD program, and whether Uniregistry had accurately reported Justice’s advice.

Given that yesterday’s piece was straight news, I figured it might be good to delve a little deeper into the situation and, yes, indulge in some quite shameless speculation.

What is it that Uniregistry is saying?

Here’s the argument, as I understand it.

“Bid-rigging” is illegal in many countries, including ICANN’s native US, where the Department of Justice prosecutes it fairly often, securing billions of dollars in damages and sometimes criminal sentences.

More often than not, it seems, the prosecutions are related to government contracts, where agencies are looking for a company to carry out a job of work for the lowest possible price.

Bid-rigging emerges when contractors decide among themselves who is going to win the contract. If two contracts are up for grabs, two companies may agree to submit separate high-ball bids so that they can guarantee getting one contract each.

This, of course, inflates the price the government agency pays for the work. There’s no true competition, so prices are artificially high, harming the tax-payer. That’s why it’s illegal.

The ICANN new gTLD program is a bit different, of course.

First, ICANN isn’t a government agency. While it has quasi-governmental powers, it’s a private corporation. Second, it’s looking for high bids, not low bids. Third, it doesn’t care if it doesn’t see any money.

There can be little doubt that private auctions technically harm ICANN, because the winning bidder’s money would be divided up between applicants rather than flowing into ICANN’s coffers.

Uniregistry seems to believe that a new gTLD applicant signing a private auction agreement — basically, competitors agreeing to pay or be paid to decide who wins a contract — that takes money out of ICANN’s pocket could be considered illegal collusion.

But ICANN has stated regularly that it prefers applicants to work out their contention sets privately, explicitly endorsing private auctions and/or applicant buy-outs.

ICANN, it seems, doesn’t care if it is harmed.

According to Uniregistry, however, that doesn’t matter. Its view, following its conversations with Justice, is that what ICANN says is completely irrelevant: the law’s the law.

As the company said yesterday:

the Department emphasized that no private party, including ICANN, has the authority to grant to any other party exemptions to, or immunity from, the antitrust laws. The decision means that the Department of Justice reserves its right to prosecute and/or seek civil penalties from persons or companies that participate in anti-competitive schemes in violation of applicable antitrust laws.

In other words, just because it’s very unlikely that ICANN would start filing antitrust suits against new gTLD applicants, the DoJ could feasibly decide to do so anyway.

Why would it do so? Well, consider that the thing ICANN is auctioning is a spot in the DNS root server, and the root server is ultimately controlled by the US Department of Commerce…

ICANN may not care about the money, but the thing it is selling off “belongs” to the United States government.

That’s the argument as I understand it, anyway.

Isn’t this all a bit self-serving?

Uniregistry’s press release and DI’s blog post yesterday were met with disappointment (to put it mildly) among some new gTLD applicants, auction providers and others.

They noted that Uniregistry had no documentary evidence to back up information it attributed to Justice. Some accused DI of reporting Uniregistry’s statement without sufficient skepticism.

It seems to be true that the company has not been a big fan of private auctions since the concept was first floated.

Uniregistry has applied for 54 new gTLDs, the majority of which are contested. Its main competitors are Donuts, with 37 contention sets, and Top Level Domain Holdings, with 21.

Who wins these contention sets depends on who has the most money and how much they’re prepared to pay.

Unlike Donuts, Uniregistry hasn’t gone to deep-pocketed venture capital firms. It’s reportedly funded to the tune of $60 million out of CEO Frank Schilling’s own pocket.

And unlike TLDH, which is listed on London’s Alternative Investment Market, Uniregistry doesn’t have access to the public markets to raise money. It seems to be better-funded, however.

Donuts raised $100 million to fund its new gTLD ambitions. It’s more than Schilling claims to have put into Uniregistry, but Donuts has spent much more on application fees.

Donuts is involved in 307 applications, many more than Uniregistry’s 54.

The money remaining for auctions is also spread much thinner with Donuts. It’s also in 158 contention sets, more than three times as many as than Uniregistry’s 45.

Private auctions arguably benefit Donuts because, depending on the auction model, it could reinvest the money it raises by losing an auction into a future auction. Its VC money would last longer.

The same logic applies to all applicants, but it becomes more of a pressing issue if you’re on a tight budget or have a large number of applications.

Uniregistry may have calculated that it stands a better chance of winning more contention sets against Donuts and TLDH if its competitors don’t get the chance to stuff their war chests.

Of course, Uniregistry could have simply refused to participate in private auctions in order to force an ICANN auction in its own contention sets. All new gTLD applicants have that power.

But by publicizing its antitrust concerns too, it may have also torpedoed private auctions for some contention sets that it’s not involved in.

That could limit the amount of money flowing from losing auctions to its competitors.

Another theory that has been put forwards is that Uniregistry went public with its Justice conversations — over-selling the risk, perhaps — in order to give its competitors’ investors jitters.

That might potentially reduce the capital available to them at auction, keeping auction prices down.

So did Uniregistry stand to benefit from playing up the risk of antitrust actions against new gTLD applicants? Probably.

Does it mean that its interpretation of its Department of Justice conversations is not completely accurate? Ask a lawyer.

DoJ says new gTLD private auctions might be illegal

Kevin Murphy, March 19, 2013, Domain Registries

Companies hoping to resolve their new gTLD contention sets via private auction are about to get a rude awakening: according to the US Department of Justice, they might be illegal.

Portfolio applicant Uniregistry, the company founded by domainer Frank Schilling, said today that the DoJ has told it that:

arrangements by which private parties agree to resolve gTLD string contentions solely to avoid a public auction present antitrust issues.

The company contacted the department last October to get a “business review” decision, basically asking the DoJ for an assurance that it would not be prosecuted if it participated in a private auction.

The DoJ refused to give that assurance.

Uniregistry counsel Bret Fausett told DI that private auctions might be seen as “bid rigging”, an illegal practice in which competitors fix the awarding of contracts.

Schilling said that Uniregistry asked the DoJ for its advice because “we don’t want to go to jail”.

According to the company:

On March 18, 2013, Uniregistry was informed that the Department of Justice has declined to issue a business review of various private gTLD contention resolution mechanisms. In making its decision, the Department emphasized that no private party, including ICANN, has the authority to grant to any other party exemptions to, or immunity from, the antitrust laws. The decision means that the Department of Justice reserves its right to prosecute and/or seek civil penalties from persons or companies that participate in anti-competitive schemes in violation of applicable antitrust laws.

New gTLD applicants are now being advised to consult their own lawyers before participating in a private auction.

The news will come as a huge blow to companies such as Right Of The Dot and Cramton Associates, which have been at the forefront of pushing the private auction concept to applicants.

It’s also going to be a massive blow to any company that had banked on getting a pay-off to withdraw their applications following a private auction.

The benefit of private auctions — over the ICANN-managed auctions of last resort — is that the losing applicants get a share of the winning applicant’s winning bid.

In an ICANN auction, all the money goes to ICANN, which has promised to use to money to fund worthy causes.

Uniregistry has issued a press release on its talks with the DoJ here (pdf).

Del Monte v Del Monte is the first new gTLD trademark objection

Kevin Murphy, March 15, 2013, Domain Registries

Two companies trading under the name Del Monte are involved in the first-to-be-revealed Legal Rights Objection, over the .delmonte gTLD, under the new gTLD program.

The World Intellectual Property Organization revealed the LRO — expected to be the first of many — this evening.

The applicant for .delmonte is a subsidiary of Fresh Del Monte Produce, Inc. The objector is Del Monte Corp.

Both companies are primarily known for canning fruit. According to Wikipedia, Fresh Del Monte was spun off from Del Monte in 1989 and continues to have a licensing arrangement to use the brand.

The deal apparently doesn’t extend to playing nicely over gTLDs, however.

Del Monte does business at delmonte.com, while Fresh Del Monte lives at freshdelmonte.com.

Legal Rights Objections allow trademark owners to challenge gTLD applications that look too much like their marks. It looks like Del Monte has a pretty good case, on the face of it.

At-Large votes to object to .health gTLD bids, but Afilias gets a pass

Kevin Murphy, March 15, 2013, Domain Policy

ICANN’s At-Large Advisory Committee has voted to object to three of the four applications for the .health gTLD.

Afilias, which is one of the applicants, will not receive an ALAC objection. By a single vote, ALAC decided not to go after its application.

Fourteen of the 15-member ALAC panel voted on Tuesday. For DotHealth LLC’s bid, the yes/no/abstain vote was 8/3/3; dot Health Ltd’s was 10/3/1, and Donuts’ was 10/3/1.

Afilias managed to get one extra “no” vote (its result was 7/4/3). so with only 50% of the voters voting “yes”, the motion to object failed.

The ALAC did not vote on .健康, which means “healthy” or “wellness” in Chinese, despite earlier indications that it would.

The identities of the voters and the way they voted does not appear to have been revealed.

The objections will be of the Community or Limited Public Interest variety, and paid for by ICANN.

Healthcare-related gTLDs are already the most controversial of those being applied for.

Each .health bid received four Governmental Advisory Committee Early Warnings late last year, and earlier this week the Independent Objector’s list of 24 objections was dominated by medically oriented strings.

Amazon and Google hit as Independent Objector files 24 new gTLD objections

Kevin Murphy, March 13, 2013, Domain Registries

Alain Pellet, the new gTLD program’s Independent Objector, has filed 24 official objections against new gTLD applications.

Five of its 13 Community Objections are against dot-brands that have geographical meanings — Amazon’s .amazon and three translations, an outdoor clothing maker’s bid for .patagonia and a Mumbai cricket team’s application for .indians.

Other recipients are the two applications for .charity and the one for the Chinese translation .慈善.

Every other objection is related in some way to health.

The remaining six Community Objections target .med, .health, .healthcare and .hospital bids.

Limited Public Interest Objections have also been filed against the four .health applications, .healthcare, the four .med bids and the one .hospital.

That’s right, the .hospital and .healthcare applications, both filed by Donuts subsidiaries, have been hit twice.

Donuts is not the only one: Google’s .med bid has a Community Objection and a Limited Public Interest objection too.

The reasons for the objections do not appear to have been published yet.

The objections stand to delay each of the target apps by about five months, according to ICANN’s timetable.

The full list of IO objections can be found here.