The importance of the internet and the role that e-commerce plays in a company’s business have increased significantly over the past few years with many successful companies operating predominantly, some even exclusively, from online platforms. Online sales in the UK retail sector are expected to grow by 16.2% this year to £52.25m and online retailers such as Alibaba, are now offering an extensive range of products from Chilean blueberries, New Zealand lamb and live Canadian lobster. For a company to trade effectively online it must have a website, the address of which is referred to as the domain name. Domain names are now so intrinsically linked to the operation of companies, to their goodwill and to their revenue that they have the potential to be, and often are, of substantial value to the registrant companies. It follows then that such a valuable asset should form ideal security for banks and financial institutions that provide finance to companies in exchange for security over the domain names. However, the true ownership of a domain name and the type of rights therein are more complicated than they may first appear. Is a domain name a property right?

The domain name will need to be registered with an accredited registrar for the relevant top-level domain (e.g. com, org, gov), of which there are several in each country operating under their own guidelines. Each domain name can only be registered by one entity at any one time. This doesn’t particularly assist us in determining whether registration of a domain name gives rise to property rights or indeed, whether a domain name can be regarded as property at all.

The uncertainty surrounding the nature of a domain name is illustrated by the contrasting views expressed within the US judiciary. One judgment suggested that it is comparable to a street address listing, merely being a mechanism to describe something’s location. By implication, this rejected any attribution of proprietary features. On the other hand, it has been advocated that the registration of a domain name can be properly viewed as a licence or a sui generis property right of some kind. The Ontario Court of Appeal has supported the proposition that domain names are a new type of intangible property. Without any express UK authority, the position here remains unclear and one can only hope that the issue will arise for determination before one of the higher courts in the near future.

Think of any major company and then think of its domain name – there is a good chance it includes its company name somewhere in its domain name(s).  It is easy to see the value in having a domain name so similar to the company name or associated with its trade marks but it must also be noted that generic domain names can be just as valuable. In fact, the list of the world’s most expensive domain names contain generic entries such as “clothes.com” (sold for $4.9m in 2008), “beer.com” (sold for $7m in 1999) and “shopping.de” (sold for $2.8m in 2008).  As such a potentially valuable asset, it is likely that lenders will increasingly seek to take security over a borrower’s domain name as part of the overall security package.  The question that arises therefore is how can the lender ensure that it obtains good security?

So what?

Given the uncertainty as to whether the registrant of the domain name holds any transferable property rights, a prudent lender would not rely solely upon a charge or mortgage to secure its lending. Lenders should look to additional methods of taking security over domain names:

  • Lenders could consider obtaining a transfer of the domain name from the registrant company to them (pursuant to the normal methods of trading in domain names) then enter a contractual agreement with the registrant company allowing it to nominate the IP Address to which the domain name points. This option bypasses the problems arising from the ambiguous nature of domain names. However, in some jurisdictions, such as Australia, the registration authorities require there to be a “close and substantial connection” between the name of the registrant company and the domain name. Obviously this will not be satisfied if the registrant company transfers the domain name to the lender. Additionally, the lender may, for any number of reasons, not wish to be the registrant of the domain name.
  • Lenders could seek to impose contractual obligations on the registrant company that trigger on default or insolvency such that the domain name is transferred to the lender. However, such obligations must comply with the terms of the initial “licence” between the borrower and the relevant registration authority. Lenders must also be wary of falling foul of the anti-deprivation provisions of insolvency law and, depending on the circumstances, it may be that the domain name, on its own, is of no significant value by that stage if other intrinsically linked assets (trademarks, goodwill etc.) of the borrower have been acquired by other creditors (see further below).

In taking security, in any form, over domain names lenders should ensure any security documents include a negative pledge clause to prevent third parties from subsequently seeking to obtain security over the same domain name without the prior consent of the lender.

A final point that lenders should consider is that although the domain name may be of significant worth to the registrant company it does not necessarily follow that the domain name will have the same value to a third party. The lender should assess the marketability and value of the domain name independently from the registrant company. In order to maximise the marketability and value of the domain name further, lenders should ensure they also take the necessary security over any registered trade marks associated with the domain name as otherwise they may potentially be left with a domain name that they cannot use without infringing a trade mark owned by a third party.

There are a multitude of problems that may arise and must be considered when a lender considers taking security over a domain name. This article does not purport to address all of those issues or all the finer aspects of those issues but highlights some of the complexities.  In summary, legal advice should always be sought when taking security over domains.