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Domain Name Hijacking

Keith Sharfman —  6 November 2006

Dan Solove over at Concurring Opinions reports on an insidious practice that unfortunately has become increasingly common: domain name hijacking.

Here’s how it works. The original owner of a popular website fails to renew its domain name prior to the expiration of the owner’s entitlement. An opportunistic “hijacker” then purchases the name and offers to sell it back to the original owner for a tidy sum. The original owner is then left with an unhappy choice: pay the hijacker off, or set up shop under a new domain name with the loss of traffic that such a switch inevitably entails.

The latest victim of such a hijacking scheme is Crescat Sententia, a popular blog that used to be located at http://www.crescatsententia.org/ but now has been forced to move to http://www.crescatsententia.net/.

Dan suggests that domain name hijacking of this sort may well be characterized as copyright infringement. But because the case for copyright protection isn’t clear cut, he wonders if there are other legal protections too.

Here’s my suggestion for another theory of liability: intentional interference with prospective economic advantage. The elements of that tort–(1) an economic relationship between the plaintiff and some third person containing the probability of future economic benefit to the plaintiff; (2) knowledge by the defendant of the existence of the relationship, (3) intentional acts on the part of the defendant designed to disrupt the relationship, (4) actual disruption of the relationship; and (5) damages to the plaintiff proximately caused by the acts of the defendant–all seem to be present here. The original website has an economic relationship with its existing readers or patrons; the hijacker knows about this relationship; the hijacker intentionally acts to disrupt the relationship by acquiring the domain name; the loss of the domain name actually disrupts the relationship by shutting down the old site without indicating where a new site, if any, is located; and the original owner is thereby damaged.

As matter of policy and economics, there isn’t any positive social value associated with domain name hijacking. Indeed, once transaction and switching costs are considered, the conduct actually entails social losses. One would therefore hope (or perhaps a la Posner even dare to predict) that the common law would forbid and deter such conduct. Applying the tort of intentional interference with prospective economic advantage would do just that. And so even if the copyright case against domain name hijacking isn’t airtight, the common law should come to the rescue.

Hijackers beware!

Espresso Exclusivity?

Keith Sharfman —  25 September 2006

Belvi Coffee and Tea Exchange cannot be serious. The firm is suing Starbucks for exclusive dealing in the Seattle and Bellevue, Washington real estate markets.

The suit alleges that Starbucks has leased real estate at above-market prices in exchange for commitments by the landlords to exclude other coffee shops from the building.

Let’s take Belvi’s allegations at face value and assume that Starbucks has a 73% share of the U.S. coffee shop industry, even though such a narrow product market definition seems implausible, given that Starbucks and other coffee shops compete for customers with many other types of shops, lounges, and restaurants. People buy coffee (and many of the other products that Starbucks sells) in all sorts of places besides coffee shops. Dunkin’ Donuts sells coffee and cake. So does McDonald’s. So does pretty much every diner and restaurant in the country.

But as I say, let’s take Belvi’s allegation of a 73% market share at face value. So what? The issue in this case is not whether Starbucks has monopoly or market power in the coffee shop market. That’s not in the least bit relevant. What matters is whether Starbucks has market power in real estate. And there’s not even an allegation of that here, much less any evidence.

Nothing stops Belvi from opening up as many shops as it wants to in any neighborhood where Starbucks is located, and if Starbucks charges too much people could always swing on over to Belvi. Surely it isn’t necessary for Belvi to be located in the very same building as Starbucks in order for Belvi to compete. (Has there ever been an antitrust case involving a retail industry in which the relevant geographic market is defined as a single building? I’m not aware of any.) Suppose that instead of leasing Starbucks owns the building. Would antitrust law require Starbucks to lease space to its competitor? That doesn’t seem very likely. A building isn’t an “essential facility” like a railroad track whose owner may be compelled to deal with a competitor. If outright ownership would entitle Starbucks to refuse to deal, why should an exclusive lease be treated any differently? It’s hard to see what would make an exclusive lease different from an outright sale.

Note the plausible procompetitive justification for the exclusivity that Starbucks obtains through these leases. Starbucks probably does lots of market research when deciding where to locate its stores. Why must Starbucks allow Belvi to free ride on that research?

If Starbucks had gotten an entire neighborhood to agree not to lease to other coffee shops, I could see Belvi’s point. But so long as Starbucks lacks the power and anyway has done nothing to prevent Belvi from locating next door, the case seems ludicrous and ought to be dismissed.

When teaching antitrust as I am this fall, a time always comes during the semester when I need to give my students an example of a merger whose implications for competition are so obviously adverse that the antitrust authorities would surely seek an injunction against the merger under Section 7 of the Clayton Act. My favorite example of this type of transaction has always been a completely unrealistic and therefore highly instructive hypothetical merger between the two leading U.S. automakers, Ford and GM.

With today’s reports that each of the two firms is discussing a potential collaboration with Nissan and Renault and that a three-way alliance is also being considered, I’ll now have to rethink my hypo.

Analysts have been quick to emphasize that a full-blown merger between GM and Ford is not in the cards and that the only thing being considered is some type of joint venture whose antitrust implications are being analyzed carefully. But why not think about a straightforward merger?

Sure, each firm has a substantial (if declining) share of the U.S. market (GM has about 25% and Ford has about 18%) such that a merger between the two firms would result in a more than sufficiently large increase in the industry HHI to create a presumption of illegality under the U.S. Merger Guidelines. But perhaps the firms could realistically offer a number of arguments to rebut that presumption.

First, GM’s many difficulties in the past year could plausibly justify treating GM as a “failing firm” for purposes of applying the Merger Guidelines, which subject the acquisition of such firms to less scrutiny than the same transaction would receive in better times. If there’s anything to the claim that analysts have been making over past year that GM is facing serious insolvency risks, then the failing firm strategy might really be worth a try.

An additional way to cast the merger in a more favorable light would be to argue that the relevant geographic market for cars in this day and age is not the U.S. or even North America but rather the world. Other products such as computer software are thought of in this way. And while cars (and car parts for local assembly) are more costly than software to transport intercontinentally, the principle is the same: firms in both industries compete with each other all over the world. GM and Ford have much lower shares of the world market than of the U.S. and North American markets. So if the world market were considered the relevant one, the merger would seem less threatening to competition.

A final point perhaps worth emphasizing is industry trends. It matters more for competition where market shares are likely to be in the future than where they are today. And both firms’ market shares have been in steady, long-term decline over the last few decades (albeit with an occasional uptick every now and then). The popular cars of even the near-term future are likely to be those that are hybrid or that do not rely on gasoline at all. And in these markets, Ford and GM are not major players–both take a back seat to Toyota and Honda. That being the case, Ford and GM might argue from a dynamic perspective that a merger between them, while no doubt resulting in some consolidation in old technology markets, would nevertheless enhance rather than harm competition in hybrid and electric cars — the innovation markets of the future. Current market share data thus may not express accurately the true underlying competitive reality.

It should be noted that all of these arguments could also potentially be made in support of a more limited proposed joint venture between the two firms. And of course, depending on how the venture proposal is structured, additional arguments might also be available.

All of this analysis is really beginning to make me worry about the future utility of that old GM/Ford hypo. Who knows? Perhaps I had better switch to Coke and Pepsi!

My friend Anna Ivey (former Dean of Admissions at the University of Chicago Law School and author of The Ivey Guide to Law School Admissions: Straight Advice on Essays, Resumes, Interviews, and More (Harcourt, 2005)) has recently started a new blog devoted to the topic of university admissions with a particular focus on the fields of law and business.

Anna is one of the brightest minds in the admissions game, and this blog will likely be of great value both to students and administrators who are trying to stay ahead of the curve. Anna’s motto? “It’s your life. Choose wisely.”

Stay tuned for what is likely to be some great content from Anna in the weeks ahead.

Law & Liturgy

Keith Sharfman —  14 September 2006

I love Ethan Leib’s interesting idea of reading the legal pronouncements of Jewish liturgy in light of later legal developments–and vice versa.

Ethan suggests creatively that an allusion to the liturgy of Yom Kippur (the Jewish day of atonement) may be found in Cardozo’s famous opinion in Jacob & Youngs v. Kent: “The willful transgressor must accept the penalty of his transgression. . . . The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement for his wrong.”

Jacob & Youngs is a contracts case and its reference to transgression and atonement reminds Ethan of the familiar vow nullification formula of the Kol Nidre prayer, whose hallowed words (as translated here by Birnbaum) are, at least cantorially speaking, the high water mark of the Yom Kippur synagogue service: “All personal vows we are likely to make, all personal oaths and pledges we are likely to take between this Yom Kippur and the next Yom Kippur, we publicly renounce. Let them all be relinquished and abandoned, null and void, neither firm nor established. Let our personal vows, pledges and oaths be considered neither vows nor pledges nor oaths.”

Casting Cardozo in a liturgical light is certainly a new twist. Ethan wonders “What kind of law can contemplate the routine nullification of promises year after year? Probably not one based on promissory liability at its core.” Ethan defends the nullification doctrine of the Kol Nidre prayer on the ground that it “applies only to promises made with oneself or with god, not standard commercial promises made between people.” But let me suggest an additional, perhaps less apologetic and somewhat broader defense that is consistent with modern contract theory.

If you look at the Kol Nidre text closely you’ll see that it’s not a renunciation of past promises but is rather written prospectively and concerns next year’s promises rather than this year’s. Judaism’s vow nullification service is in essence a public warning not to rely too heavily on any future promises that the penitent might make but fail to fulfill in the coming year. If you think about it, it’s a pretty clever device to defeat future reliance claims on future commitments that might be breached. Why did you rely on me?, the penitent can argue. Didn’t you hear my anticipatory renunciation of this promise last Yom Kippur? And if you didn’t actually hear it, why shouldn’t the public character of the Kol Nidre service operate as constructive notice?

Kol Nidre has a powerful psychological effect on the faith community that utters it, which perhaps accounts for an exagerated theological significance that is otherwise difficult to explain. By offering and accepting a prayer of mutual prospective renunciation, members of the faith community in effect become morally bound to waive all future promissory claims against other members and maintain a prospective posture of mutual reciprocal forgiveness. Perhaps someone should offer such a prayer at the start of faculty meetings!

Today’s Israeli newspapers have an interesting story about a multibillion dollar antitrust suit that an Israeli manufacturing firm has brought against Israel’s three major banks. The complaint alleges that the banks price colluded on rates, charging identically in five distinct rate categories: a uniform prime rate always 1.5% above the central bank’s; a uniform risk premium of 3%; a uniform 3.5% extension premium; a uniform credit allocation fee of 1.5% per quarter; and uniform quarterly management fees of NIS 150.

Not being an expert in Israeli antitrust law, I cannot confidently predict an outcome in the case. I can say, however, that such allegations would have a tough time succeeding here in the U.S. An individual bank’s position in world capital markets is very similar to the position of a single gas station in the world market for oil. Both are classic “price takers” in the sense that neither can affect the world price by its own behavior. It is not surprising that banks who pay the same price for capital would charge the same fee for it, just as it is not surprising for adjacent gas stations to charge the same price per gallon. Such pricing behavior may well be the product of competition and is hardly evidence of collusion. Firms operating in competitive markets can ill afford to charge more than their competitors.

To be sure, the banking industry is heavily regulated both here and in Israel, and thus banks in both countries may well be earning supracompetitive profits. But the abnormally high profits engendered by regulation are not forbidden by antitrust, which condemns only the anticompetive behavior of private actors and not the actions government.

A hopeful sign in the case is that Israel’s antitrust authority has not signed on. The sophisticated lawyers who work there, many of whom have studied at American law schools, are well aware of the difference between price collusion and price leadership. Hopefully the Israeli courts that are hearing this case will understand this too.

Chief Judge Easterbrook

Keith Sharfman —  30 August 2006

Deven Desai at Concurring Opinions discusses an interesting article on law.com reporting that my old boss, Judge Frank Easterbrook, will soon become Chief Judge of the Seventh Circuit. Interestingly, the article suggests, and the judge in an interview confirms, that not very much about the Seventh Circuit is likely to change. The court is already performing at an exceptionally high level, and a sensible goal for any incoming chief judge would be in the main to stay the course. That said, the article does suggest that there may be a few incremental changes in the years ahead, including the possibility of having some district judges serve on appellate panels.

I have closely watched the work of the Seventh Circuit for a decade and am confident in predicting that whatever administrative innovations end up being adopted in the next seven years, the main thing for those outside the circuit to watch for will remain the outstanding and influential opinions that the fine judges on the court continue to produce in case after case.

I’m confused about something.

What are the capabilities of the Lebanese army? Is it capable of dealing with Hezbollah or not?

Till now, the Lebanese position has been: we have not been able to comply with our obligation under UN Security Council Resolution 1559 to disarm Hezbollah because our army is too weak to do the job. So don’t blame us for Hezbollah’s actions.

Now, however, the Lebanse government is suddenly offering to use 15,000 Lebanese troops to keep Hezbollah at bay if only Israel would withdraw.

If it’s true that the Lebanese army is able to handle Hezbollah, then why didn’t it disarm Hezbollah before the current conflict began? And if the Lebanese army really can’t handle Hezbollah, then isn’t the current offer to use the army basically worthless?

Whatever the Lebanese army’s capabilities really are, it seems hard to fault Israel for its skepticism about the Lebanese offer and for insisting on dealing with Hezbollah itself and not withdrawing until a multinational force is in place.

Kudos to Josh for pointing us to Judge Posner’s fascinating and on the whole quite favorable review of Steven Shavell’s Foundations of Economic Analysis of Law.

Posner’s most interesting statement in the essay may well be:

“It is curious but true that, although economics is intellectually more sophisticated than law and though there is—recognition of this point is close to the heart of economic analysis of law—a considerable isomorphism between law and economics, no one, however bright, who is not a lawyer can get the law quite right. Law is like a language that you have to be a native speaker of to speak correctly.”

This ties in to our discussion a few months ago about whether law has primacy in the “law and economics” discipline. Posner captures here very well what I was then trying to say about economists who lack legal training. You can be the greatest economist in the world, but you won’t be able to describe the law with complete depth and precision if you never went to law school.

For this reason, I remain convinced that the best place to study and do research in law and economics is at a law school and not in an economics department. If Shavell had stayed in an economics department and never come to HLS, I doubt that it would have been possible for him to make the enormous contribution to L&E that he has made.

Cramer on Sirius/XM

Keith Sharfman —  3 August 2006

A few weeks ago I suggested here that a merger between the two satellite radio firms, Sirius and XM, would not necessarily be as much of an antitrust problem as Sirius CEO Mel Karmazin seems to think.

Now market analyst Jim Cramer has weighed in on the issue and encouraged Karmazin to have Sirius do a hostile takeover of XM. While Cramer’s heart is in the right place, his suggestion that the merger would allow Sirius to “raise its prices, dictate its auto prices and get into retail with a vengeanceâ€? is not likely to help the deal succeed.

The extensive antitrust discussion that we had here a few weeks ago was all about why the deal would *not* enable Sirius/XM to raise its prices. As we pointed out then, these firms face extensive competition from other media, especially terrestrial radio, and therefore antitrust regulators need not be concerned about prices increasing in consequence of the merger. The benefits of the deal would rather be to reduce costs and improve product choices, particularly for consumers who would like one-stop access to proprietary content from both firms (e.g., someone who is a fan both of baseball, which XM carries, and football, which Sirius carries).

If Cramer is right that the deal would cause prices to increase, then there is more of an antitrust issue here than we thought.