Judge says agreement not to sue is enforceable.
Judge Percy Anderson of the U.S. District Court, Central District of California has granted (pdf) ICANN’s motion to dismiss in a lawsuit brought by a subsidiary of new TLD company Donuts.
Donuts filed a lawsuit because it was upset that Verisign was bankrolling another applicant’s bid for the domain. Donuts believed that the applicant, Nu Dot Co, had undergone changes that required updating information with ICANN prior to the auction.
Verisign and Nu Dot Co decided they would not participate in a private auction for the domain, and instead requested an ICANN auction of last resort. With a $135 million winning bid, the losing auction participants would have received about $25 million each in a private auction assuming the same result.
But new TLD applicants agreed to not sue ICANN. Donuts argued to the court that this covenant not to sue was unenforceable because it was void under California law and unconscionable.
California law doesn’t permit covenants not so sue if it is to exempt someone from fraud, willful injury or violation of the law. The court determined that that wasn’t the case here.
With regards to being unconscionable, the judge ruled:
…the nature of the relationship between ICANN and Plaintiff, the sophistication of Plaintiff, the stakes involved in the gTLD application process, and the fact that the Application Guidebook “is the implementation of [ICANN] Board-approved consensus policy concerning the introduction of new gTLDs, and has been revised extensively via public comment and
consultation over a two-year period,” militates against a conclusion that the covenant not to sue is procedurally unconscionable.
Percy also wrote:
Without the covenant not to sue, any frustrated applicant could, through the filing of a lawsuit, derail the entire system developed by ICANN to process applications for gTLDs. ICANN and frustrated applicants do not bear this potential harm equally. This alone establishes the reasonableness of the covenant not to sue. As a result, the Court concludes that the covenant not to sue is not substantively unconscionable.
The judge also noted a different decision in DotConnect Africa Trust’s lawsuit against ICANN, and stated:
The Court does not find persuasive the preliminary analysis concerning the enforceability of the covenant not to sue conducted by the court in DotConnectAfrica Trust v. ICANN.
Jon Nevett, Donuts co-founder and Executive Vice President, released this statement:
Donuts disagrees with the Court’s decision that ICANN’s required covenant not to sue, while being unconscionable, was not sufficiently unconscionable to be struck down as a matter of law. It is unfortunate that the auction process for .WEB was mired in a lack of transparency and anti-competitive behavior. ICANN, in its haste to proceed to auction, performed only a slapdash investigation and deprived the applicants of the right to fairly compete for .WEB in accordance with the very procedures ICANN demanded of applicants. Donuts will continue to utilize the tools at its disposal to address this procedural failure.