Becoming a Top Level Domain Owner

During the first application period, ICANN will accept only 500 applications, while subsequent periods (yet to be established) will be limited to 400 applications. Overall, ICANN has ruled that no more than 1000 new gTLDs may be established per year.

The bar to entry, however, is high.

First, becoming a general Top Level Domain means having the business structure and technical capability for being a registry — that is, a company which (a) establishes policies for domain name allocation, (b) maintains a database of all the domain names registered in the new top-level domain, and (c) generates the zone files necessary to convert second-level domain names to IP addresses. (A relatively simple definition of domain name registry is available here. A second-level domain is the one immediately preceding the final dot. Thus, in “www.webtm.com,” the gTLD is “.com” and the second-level domain is “webtm”.) This won’t be something that companies can simply subcontract. Owners of the new gTLDs will be required to play an active role in managing the website addresses under its domain.

Second, becoming a Top Level Domain is expensive, time-consuming and complicated. The initial application fee is US$185,000 and further fees may be imposed during the application process as determined by ICANN. (For instance, disputes may arise between applicants who attempt to register two strings that ICANN determines are “confusingly simliar” and resolution of such disputes costs money.) Among other requirements, applicants will have to submit audited financial statements and principals will be subject to background screening to confirm eligibility based on “(1) General business diligence and criminal history; and (2) History of cybersquatting behavior.” The criteria used for criminal history evaluation are the same ones used in the banking and finance industry. Following acceptance, new TLD owners will have to sign the “New gTLD Agreement” with ICANN. They will also have to pay a fixed fee of US$6,250 per calendar quarter and transaction fees of twenty-five cents per domain names registered over 50,000.

Meeting the Concerns of Trademark Owners

ICANN estimates that the first gTLDs will come online in 2013. This raises particular concerns for trademark holders, insofar as it potentially opens new doors for cybersquatters and increases the possibility for some trademark owners, for example those whose marks are registered in a single territory, to be pre-empted by a foreign competitor using the same name. Ostensibly, applicants seeking to register gTLDs for actual registered trademarks will not be able to do so without ownership or license from the trademark owners. However, if a trademark owner does not apply for domain name protection in the first round and some applicant obtains a gTLD which is deemed to be “confusingly similar” to the registered mark, the owner of the registered mark may be prevented from later establishing a gTDL using its brand name. The problem is perhaps even more serious for trademarks with limited scopes. For example, the word “Delta” is used a trademark by many companies to designate different types of goods and services. Registration of .delta by any one of them would preclude all others from registering under that trademark.

In the hopes of minimizing the risks faced by trademark owners, ICANN plans to implement objection procedures to give trademark owners an opportunity to object to new gTLDs which are the same or confusingly simlar to the objector’s registered trademark. After the first application period closes in April 2012, ICANN will verify all applications for completeness and will release on its website the list of strings, applicant names, and other application data. At that point it will be up to trademark owners to file a “Legal Rights Objection” with the Arbitration and Mediation Center of the World Intellectual Property Organization (WIPO), a proceeding which will cost up to several thousand dollars in filing fees alone.

Preventing trademark misappropriation in second-level domain registrations inside a gTLD will be somewhat simpler, at least in the initial 60-day “sunrise” period of a new gTLD. When a new gTLDs is launched, it will be required, during that sunrise period, to search the Trademark Clearinghouse being set up by ICANN and if an intended website name matches an entry in the Clearinghouse, send a notice to both the intended website owner and the trademark holder. In addition, the new gTLD will be required to offer dispute resolution for owners of registered trademarks who object to the intended name. (The burden on the new gTLD may be substantial. In the first fifteen minutes of the “.co” gTLD, there were 100,000 applications for new websites.)

A note on the Trademark Clearinghouse: As of this date, ICANN has still not determined who the Trademark Clearinghouse service provider will be or how information will be registered with the Clearinghouse, but at the Trademark Clearinghouse Implementation-Planning Workshop held in Singapore on June 22, 2011, various participants believed that trademark information should be provided by individual trademark owners rather than obtained from national trademark registries, like the Patent & Trademark Office. For more details on these procedures, still in the planning stages, see, the “Module 3 – Objection Procedures” and “Trademark Clearinghouse” in the current version of the Applicant guidebook available here.

Whether on your company’s website, Facebook, Twitter or third party blogs, endorsements of your products are subject to FTC guidelines issued in 2009.

General Considerations, 16 CFR § 255.1

FTC rule and guidelines require that before a company publishes an advertisement of a product — and this applies to all advertising, online or off — it must have a “reasonable basis” for each claim being made about the product. Both advertisements which make claims about the efficacy of a product (e.g., “you will achieve noticeable results in a few weeks”), and statements by bloggers and consumers attesting to that efficacy (e.g., “I used the product and felt results within a few days!”) are subject to the rule.

“Reasonable basis” means that the company must have objective evidence to support each claim. For medicine, remedies, vitamins, food supplements, reparative cosmetics and diets, “objective evidence” means “competent and reliable scientific evidence,” i.e., studies conducted by qualified persons, using methods that are generally accepted as scientifically valid. Furthermore, any claim regarding the results of using a product must be based on what consumers may generally expect. The matter obviously gets quite tricky when, for example, a study reveals a wide range of outcomes, particularly with regard to varying body types, skin types, ages, etc. But the FTC guidelines provide no further guidance on what will pass the test. The onus, if the FTC comes knocking, will be on the company.

If a claim is not supported by “objective evidence,” the company must conspicuously (i.e., not in fine print) state what the “generally expected results” of the product are, but even these generally expected results must, according to the FTC, be supported by objective evidence. Testimonials from satisfied customers are not considered objective or adequate evidence to support a claim about a product. Moreover, the FTC does not distinguish between claims made (1) directly by your company; (2) via consumer testimonials which appear on your company’s websites, blogs, Facebook pages, etc., or any other website at your company’s behest; and (3) by bloggers if the blogger has been provided with the product by the company, or reviews the product at the company’s request, or receives any kind of compensation, monetary or otherwise. In all three cases, the claims must be supported by objective evidence.  Claims which are not supported by objective evidence may be considered “deceptive” by the FTC.

Rules Applicable to Consumer Endorsements, § 255.2

As noted above, the FTC makes no distinction between consumer and blogger endorsements. They carry the same burdens and are treated as statements by the company whose product is being endorsed. Where a blogger makes a claim about the efficacy or curative properties of a product, the Company may be held responsible by the FTC even if the claim appears only on the blogger’s blog. Companies must therefore be aware of what bloggers (with whom they have been in contact) write and must take steps to correct claims which are not what consumers will generally achieve and are not supported by objective evidence. The FTC, by the way, disfavors the use of disclaimers such as “the results attested to by [the endorser] are not typical” or “may not be achieved by you.” FTC cites research on these disclaimers demonstrating that they have no effect on consumer expectations. However, the FTC doesn’t rule out the possibility that such a disclaimer might be sufficient in some circumstances. It just doesn’t say what those circumstances are.

There is a further rule which companies must heed for advertisements which contain consumer endorsements. Whenever an endorser represents that s/he uses a product, the company may run the advertisement only during the time the endorser actually uses, and continues to use, that product and to have the same opinion about it. (Companies have the obligation to contact the endorser from time to time to find out.) Dated testimonials in a section devoted to consumer comments is likely the best way to sidestep this potential problem –that is, where endorsement are conspicuously dated, there is no implication that product use is either current or ongoing. Videoclips with endorsements should also be conspicuously dated. Companies should ensure that the bloggers they contact also conspicuously date their product reviews.

§§ 255.1 and 255.2 contain several examples which are useful in understanding how the rules are applied:

• A brochure for a baldness treatment consists entirely of testimonials from satisfied customers who say that after using the product, they had amazing hair growth and their hair is as thick and strong as it was when they were teenagers. The advertiser must have competent and reliable scientific evidence that its product is effective in producing new hair growth. The ad will also likely communicate that the endorsers’ experiences are representative of what new users of the product can generally expect. Therefore, even if the advertiser includes a disclaimer such as, “Notice: These testimonials do not prove our product works. You should not expect to have similar results,” the ad is likely to be deceptive unless the advertiser has adequate substantiation that new users typically will experience results similar to those experienced by the testimonialists.
• An advertisement for a cholesterol-lowering product features an individual who claims that his serum cholesterol went down by 120 points and does not mention having made any lifestyle changes. A well-conducted clinical study shows that the product reduces the cholesterol levels of individuals with elevated cholesterol by an average of 15% and the advertisement clearly and conspicuously discloses this fact. Despite the presence of this disclosure, the advertisement would be deceptive if the advertiser does not have adequate substantiation that the product can produce the specific results claimed by the endorser ( i.e. , a 120-point drop in serum cholesterol without any lifestyle changes).
• An advertisement for a weight-loss product features a formerly obese woman. She says in the ad, “Every day, I drank 2 WeightAway shakes, ate only raw vegetables, and exercised vigorously for six hours at the gym. By the end of six months, I had gone from 250 pounds to 140 pounds.”The advertisement accurately describes the woman’s experience, and such a result is within the range that would be generally experienced by an extremely overweight individual who consumed WeightAway shakes, only ate raw vegetables, and exercised as the endorser did. Because the endorser clearly describes the limited and truly exceptional circumstances under which she achieved her results, the ad is not likely to convey that consumers who weigh substantially less or use WeightAway under less extreme circumstances will lose 110 pounds in six months. (If the advertisement simply says that the endorser lost 110 pounds in six months using WeightAway together with diet and exercise, however, this description would not adequately alert consumers to the truly remarkable circumstances leading to her weight loss.)The advertiser must have substantiation, however, for any performance claims conveyed by the endorsement (e.g., that WeightAway is an effective weight loss product).

If, in the alternative, the advertisement simply features “before” and “after” pictures of a woman who says “I lost 50 pounds in 6 months with WeightAway,” the ad is likely to convey that her experience is representative of what consumers will generally achieve. Therefore, if consumers cannot generally expect to achieve such results, the ad should clearly and conspicuously disclose what they can expect to lose in the depicted circumstances ( e.g., “most women who use WeightAway for six months lose at least 15 pounds”).

If the ad features the same pictures but the testimonialist simply says, “I lost 50 pounds with WeightAway,” and WeightAway users generally do not lose 50 pounds, the ad should disclose what results they do generally achieve ( e.g., “most women who use WeightAway lose 15 pounds”).

• A skin care products advertiser participates in a blog advertising service. The service matches up advertisers with bloggers who will promote the advertiser’s products on their personal blogs. The advertiser requests that a blogger try a new body lotion and write a review of the product on her blog. Although the advertiser does not make any specific claims about the lotion’s ability to cure skin conditions and the blogger does not ask the advertiser whether there is substantiation for the claim, in her review the blogger writes that the lotion cures eczema and recommends the product to her blog readers who suffer from this condition. The advertiser is subject to liability for misleading or unsubstantiated  representations made through the blogger’s endorsement. The blogger also is subject to liability for misleading or unsubstantiated representations made in the course of her endorsement.

Material Connections, § 255.5

This section of the regulations requires that companies disclose any material fact that might influence a blogger’s opinion about the product. This applies both to compensation, the promise of compensation, employment by the company (as when an employee posts on a board anonymously, touting his company’s products) and claims that an opinion is candid when it isn’t. “Compensation,” in this context, does not need to be monetary for the disclosure requirement to be triggered. The promise of publicity or some non-monetary reward for a favorable review is also “compensation.”

Again, the FTC provides some nuanced examples:

• An actual patron of a restaurant, who is neither known to the public nor presented as an expert, is shown seated at the counter. He is asked for his “spontaneous” opinion of a new food product served in the restaurant. Assume, first, that the advertiser had posted a sign on the door of the restaurant informing all who entered that day that patrons would be interviewed by the advertiser as part of its TV promotion of its new soy protein “steak.” This notification would materially affect the weight or credibility of the patron’s endorsement, and, therefore, viewers of the advertisement should be clearly and conspicuously informed of the circumstances under which the endorsement was obtained.
• Assume, in the alternative, that the advertiser had not posted a sign on the door of the restaurant, but had informed all interviewed customers of the “hidden camera” only after interviews were completed and the customers had no reason to know or believe that their response was being recorded for use in an advertisement. Even if patrons were also told that they would be paid for allowing the use of their opinions in advertising, these facts need not be disclosed.
• An infomercial producer wants to include consumer endorsements for an automotive additive product featured in her commercial, but because the product has not yet been sold, there are no consumer users. The producer’s staff reviews the profiles of individuals interested in working as “extras” in commercials and identifies several who are interested in automobiles. The extras are asked to use the product for several weeks and then report back to the producer. They are told that if they are selected to endorse the product in the producer’s infomercial, they will receive a small payment. Viewers would not expect that these “consumer endorsers” are actors who were asked to use the product so that they could appear in the commercial or that they were compensated. Because the advertisement fails to disclose these facts, it is deceptive.
• A college student who has earned a reputation as a video game expert maintains a personal weblog or “blog” where he posts entries about his gaming experiences. Readers of his blog frequently seek his opinions about video game hardware and software. As it has done in the past, the manufacturer of a newly released video game system sends the student a free copy of the system and asks him to write about it on his blog. He tests the new gaming system and writes a favorable review. Because his review is disseminated via a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious, readers are unlikely to know that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact likely would materially affect the credibility they attach to his endorsement. Accordingly, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge. The manufacturer should advise him at the time it provides the gaming system that this connection should be disclosed, and it should have procedures in place to try to monitor his postings for compliance.
• An online message board designated for discussions of new music download technology is frequented by MP3 player enthusiasts. They exchange information about new products, utilities, and the functionality of numerous playback devices. Unbeknownst to the message board community, an employee of a leading playback device manufacturer has been posting messages on the discussion board promoting the manufacturer’s product. Knowledge of this poster’s employment likely would affect the weight or credibility of her endorsement. Therefore, the poster should clearly and conspicuously disclose her relationship to the manufacturer to members and readers of the message board.

FTC Enforcement

The FTC can subpoena companies and hold them accountable for violating FTC guidelines. It can issue cease and desist orders, require corrective advertising and impose civil penalties. By all accounts, FTC enforcement is focused on products which are ingested (particularly supplements) and products which claim to cure conditions or diseases (especially cancer). The use of consumer and blogger endorsements which make claims not substantiated by objective evidence is common practice in the health supplements and cosmetics industries, but “everybody does it” is not a defense to an FTC action.

The FTC is not particularly proactive, but responds primarily to consumer complaints. Still, any proceeding — administrative or civil — can be an expensive process and is best avoided by following the guidelines carefully and in good faith.

Grokster and Kazaa (both of which used the FastTrack protocol) and StreamCast Networks (creator of the P2P application, Morpheus) were next. Although the complaints against them were dismissed in 2003, and the dismissal upheld on appeal, in 2005 the Supreme Court found Grokster guilty. As Justice Souter wrote for the majority: “We hold that one who distributes a device with the object of promoting its use to infringe copyright, as shown by clear expression or other affirmative steps taken to foster infringement, is liable for the resulting acts of infringement by third parties.”

The Grokster decision was unanimous and the Supreme Court remanded the case to the District Court for further proceedings consistent with that decision. Seeing the writing on the wall, Grokster and Kazaa entered into settlement agreements with the plaintiffs, while Streamcast, which refused to give up, was summarily found guilty for copyright infringement. In the meantime, in December 2004, AIMster (subsequently renamed Madster) was shut down by preliminary injunction which eventually became permanent.

Throughout this period, LimeWire (which uses the Gnutella network) continued to distribute and sell its software, which became one of the most popular programs for P2P sharing. Some 58% of P2P music sharing is said to be done via LimeWire. In the wake of the Grokster decision, LimeWire maintained its innocence on the grounds that it merely provided software to be used for legitimate means. Accordingly, it amended its end-user agreement to require intended users of its software to warrant that they “will not use LimeWire for copyright infringement.”

The tactic provided LimeWire with no protection at all. LimeWire was sued in 2006. On Tuesday, May 11th, the United States District Court in Manhattan found LimeWire and its founder, Mark Gorton, guilty of copyright infringement and unfair competition. [1]

There is nothing ground-breaking about the District Court’s decision. LimeWire was damned by the facts. Among other things, the court found that:

And if that didn’t show guilty knowledge enough, LimeWire founder Gorton had taken steps to shield his assets should his company be adjudged guilty.

Although there are other P2P programs currently in use such as BitTorrent, eMule and BitComet, the decision is probably the death knell of entrepreneurial efforts to capitalize on P2P file sharing. This doesn’t mean that file sharing is dead. Far from it. Not only are P2P networks likely to continue to exist (albeit on a level not likely to attract big money investors), but there are also some 3,000,000 music blogs offering free downloads via external links to such file storage sites as Rapidshare, MegaUpload, Hotfile, FileServe, FileSonic, Zshare, narod.ru, Badongo, Mediafire and Deposit Files.  Nearly all of these sites respond to DMCA takedown notices (i.e., notices of removal pursuant to the U.S.’s Digital Millennium Copyright Act), but for days, weeks, months or years the music — virtually anything one might want to download — will be there. (If something isn’t there yet, it will be. Just wait.) And when something is taken down, it will eventually re-appear. It’s a game of whack-a-mole.

In fact, the  magnitude of infringement suggests that the music industry should explore different business models, ones that reconsider pricing and apply globally, not to mention satisfy consumer demand for better quality downloads than companies like iTunes or Amazon offer. P2P file sharing companies were easy enough targets because they were huge businesses. However, the P2P lawsuits simply made file sharing more efficient and more difficult to stop.

Footnote

[1] Because sound recordings made prior to 1972 are not protected under federal copyright law, claims of infringement on such recordings must be made under state anti-piracy and unfair competition laws, as well as federal unfair competition laws. Musical compositions contained on pre-1972 sound recording, however, are protected under federal copyright law.