Kremen v. Cohen

Internet entrepreneur Gary Kremen (who later founded Match.com and Clean Power Finance) registered the domain name sex.com with Network Solutions for a nominal fee in 1994. At the time he did not develop a website under that name, and instead decided to focus on building a business at Match.com.^[1]

Stephen M. Cohen, who had recently completed a prison sentence after being convicted of fraud, envisioned that a website called "sex.com" could generate significant advertising revenues. When Cohen found that the domain name had already been registered by someone else, he embarked on an effort to acquire it fraudulently.^[2] In 1995, Cohen sent a letter to Network Solutions claiming to be a representative of Kremen's company and falsely stating that Kremen had been fired from the firm. Cohen in turn suggested that Network Solutions transfer ownership of the sex.com domain name to himself, because Kremen had apparently abandoned his ownership and Cohen now (supposedly) represented the owning firm.^[3]

Network Solutions took Cohen's fraudulent letter at face value, and did no due diligence to find errors in Cohen's reasoning or to contact Kremen to verify that he had abandoned the domain name. Network Solutions then transferred ownership to Cohen. When Kremen learned of the ruse and contacted Network Solutions, he was told that the transfer was complete and he was no longer the rightful owner of the domain name.^[1]

Cohen then developed a website called sex.com and quickly generated millions of dollars in revenues.^[3] In 1998 Kremen filed suit against both Cohen and Network Solutions for fraud.

The case was first heard at the District Court for the Northern District of California.^[4] Kremen contended that Cohen and Network Solutions had violated several provisions of contract law, including breach of contract, breach of fiduciary duty, negligent misrepresentation, and conspiracy to convert ownership of property. Network Solutions requested summary judgment, claiming that it had been deceived by Cohen and had no responsibility to Kremen.^[4]

The district court determined that Network Solutions had not committed fraud because as the provider of a basic service to register domain names upon request, there had been no actual contract when Kremen originally registered sex.com. This also absolved Network Solutions from fiduciary responsibility toward Kremen. On the matter of conspiracy to convert the ownership of property, the district court noted that, at the time, there was no settled law on whether a domain name was an item of intangible property that could be stolen. That question was rendered moot by this interpretation. Finally, as a party that was allegedly deceived by Cohen's fraudulent actions, Network Solutions had not committed negligent misrepresentation itself. Thus, the company's request for summary judgment was granted and it was absolved from direct responsibility for the fraud committed against Kremen.^[4]

In a separate proceeding, the district court ruled that Cohen had committed fraud, and rendered his ownership of sex.com to be void because he had acquired the domain name via a fraudulent letter to Network Solutions. Based on calculations of revenues that Kremen could have made if he had developed his own website called sex.com, he was awarded $40 million in compensatory damages and another $25 million in punitive damages.^[2][5]

Cohen appealed the district court ruling in which he was ordered to pay damages to Kremen, but his request was rejected by the Ninth Circuit in 2003 and he was again ordered to pay Kremen the grand total of $65 million.^[6] Meanwhile Kremen, despite winning a substantial monetary award against Cohen, appealed the district court ruling in which Network Solutions was absolved of liability.