Internet Domain The Fourth Circuit recently reviewed a claim under the Latham Act for the promotional efforts undertaken by Defendant to market its new .xyz domain.

Plaintiff sold internet domain names and operates .com and .net top-level domains. In 2014, Defendant, a competitor, then launched “.xyz,” a new top-level domain, and began registering domain names ending in .xyz. As part of its marketing, Defendant and its CEO made statements touting the popularity of the domain and stating that there was a scarcity of desirable .com domain names.

Plaintiff sued Defendant and its CEO, alleging that those statements violated the Lanham Act’s false advertising provisions. As is customary in Lanham Act suits, Plaintiff conducted a consumer survey to support its claims. The survey tested consumer reaction to Defendant’s self-promoting statements about its registration numbers and, according to Plaintiff, demonstrated that consumers understood Defendant’s references to “registrations” to signify actual consumer “purchases,” rather than .xyz registrations given away.

The district court granted summary judgment to Defendant, holding that Plaintiff didn’t establish the elements of a Lanham Act claim. The court held that Plaintiff presented “no evidence to show that consumers were influenced by the statements” in question, having chosen not to test the materiality in its consumer survey. Nor, the district court held, could Plaintiff show that any of Defendant’s statements actually deceived consumers, as required under the Act, pointing again to shortcomings in Plaintiff’s survey evidence. Plaintiff appealed.

Circuit Judge Pamela Harris, writing for a panel of the Fourth Circuit, explained that the Lanham Act prohibits the “false or misleading description of fact, or false or misleading representation of fact, which . . . in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities[.]”

Plaintiff argued that Defendant created a false picture of consumer demand that was intended to drive up .xyz sales to internet domains and website owners. Defendant responded that its registration numbers were true; that it had no obligation to separate out registrations arising from a legitimate commercial promotion; and that as the district court found, Plaintiff’s consumer survey evidence failed to establish that consumers were misled by Defendant’s numbers. The Fourth Circuit agreed with the district court that Plaintiff failed to establish yet another Lanham Act element—that it suffered an injury flowing directly from the challenged statements—and said it could affirm the grant of summary judgment to Defendant on that ground alone.

To recover damages under the Lanham Act, the Court of Appeals said, Plaintiff must show not only false advertising by Defendant, but also that its statements caused Plaintiff actual damages. As far as Defendant’s self-promoting statements, Plaintiff claimed that Defendant’s fake “gold rush” directly diverted sales from Plaintiff’s .net registry to Defendant’s new .xyz domain. Plaintiff relied on its damages expert, who opined that Defendant’s statements “sapped” Plaintiff’s profits by redirecting registrations away from Plaintiff’s .net registry. Relying on the claim that Defendant’s false statements were why consumers signed up for .xyz domains, the damages expert also suggested that Plaintiff was entitled to disgorgement of Defendant’s profits.

Exercising its gatekeeping function under Daubert, the district court excluded the damages expert’s report, leaving Plaintiff with no evidence of injury from the diversion of sales. Citing Daubert, the district court concluded that the damages expert’s methods were “questionable” and that her conclusions were not reliable, primarily because the damages expert’s analysis failed to distinguish between “correlation” and “causation.” The Fourth Circuit agreed.

The damages expert concluded that Plaintiff lost approximately $527,000 in profits as a result of the .xyz registrations diverted from .net. To arrive at that figure, she identified a decline in registrations on the .net domain between June 2014 and May 2015, which is the time during which Defendant made the allegedly false statements at issue. She then attributed to Defendant a percentage of those lost registrations, based on .xyz’s market share of the new top-level domain market. Multiplying that percentage by what would have been Plaintiff’s profits on the lost registrations, the expert arrived at her figure for lost profits. The expert followed a similar approach to calculating potential disgorgement damages, starting with the total registration fees Defendant collected during the relevant time period and subtracting various costs to find the total profits Defendant earned as a result of its alleged misrepresentation.

The Fourth Circuit held that the damages expert’s analysis suffered from what it identified as a “fatal flaw” in calculating Lanham Act damages. It assumed rather than demonstrated that every .xyz registration during the relevant time period was the result of Defendant’s allegedly false statements. The damages expert’s report didn’t show anything other than a temporal link between Defendant’s statements and the drop-off in .net registrations. This “correlation wasn’t enough under the Lanham Act, where the plaintiff bears the burden of proving a “causal link between actual damages and the defendant’s actions, Judge Harris held.

The damages expert did suggest that Defendant’s profits during the time period in question were “at least in part due to the alleged false and misleading advertising,” and opined that participants in the domain-name market view registration numbers as a measure of demand, so that inflated registration figures like Defendant’s were likely to entice market participants. However, the expert’s analysis didn’t quantify such an effect beyond establishing a temporal connection.

The Court found that Defendant’s statements appeared to have had limited potential to influence the domain-name market, particularly at a time when hundreds of new top-level domains were clamoring for attention in a newly competitive market.

In sum, the district court didn’t abuse its discretion in excluding the damages expert’s report, and Plaintiff didn’t establish that Defendant’s statements regarding registration numbers were causally linked to damages in the form of diverted registrations. For that reason, Plaintiff couldn’t prevail on its Lanham Act claim with respect to Defendant’s self-promoting statements. The Fourth Circuit affirmed the district court’s grant of summary judgment.

 

 

Verisign v. XYZ.com LLC, 2017 U.S. App. LEXIS 2264 (4th Cir, February 8, 2017)