POSTED BY Alexander D. Schultheis
There are a number of legal scholars who take the position that intellectual property (IP) is not that much different from real property. Thus, many of the same ownership rights that exist in property law are advocated for in the realm of IP. It seems reasonable from an objective viewpoint that a domain name is the property of the firm that owns it. Thus, much like property sold at a bankruptcy auction to pay off creditors of the firm, it seemed reasonable that IP assets, too, should be sold if necessary to relinquish debts a firm might owe, including a domain name. But a United States District Court recently reasoned otherwise in Alexandria Surveys, LLC v. Alexandria Consulting Group, LLC, U.S. Dist. LEXIS 160595 (E.D. Va. 2013), holding that domain names are not in fact the property of a judgment debtor under Virginia state law, and are thus not part of the debtor’s bankruptcy estate.
The decision reversed an order of the Bankruptcy Court for the Eastern District of Virginia, which ordered the domain name of Alexandria Surveys, LLC (“Surveys”) to be sold at auction to pay off its creditors. At the auction, Alexandria Consulting Group, LLC (“ACG”) purchased the domain name, as well as Surveys’ phone numbers. Surveys appealed this decision to the District Court for the Eastern District of Virginia, arguing that the domain name and phone numbers sold to ACG were not property of the debtor, and therefore could not be sold by the bankruptcy trustee as part of its bankruptcy estate.
Federal bankruptcy law defines property of a debtor’s estate as “all legal and equitable interest of the debtor in property as of the commencement of the estate.” 11 U.S.C. § 541(a)(1). However, with no specific provisions in the Bankruptcy Code addressing telephone numbers or web domain names, it has largely been left to the courts to define the boundaries of whether or not these items may be sold by a trustee as debtor property to satisfy its judgment creditors. Confounding the debate further, the circuits have split as to whether telephone numbers are property of a debtor’s estate. The Fourth Circuit has not addressed this issue on its own yet. However, the Supreme Court has weighed in on this question, and stated that state law determines the boundaries for property interests that a trustee may distribute to creditors in a bankruptcy proceeding. Butner v. United States, 440 U.S. 48, 49 (1979).
With this law in mind, Surveys cited the Virginia Supreme Court’s decision in Network Solutions, Inc. v. Umbro International, Inc., 529 S.E.2d 80 (Sup. Ct. Va. 2001), which held that a judgment debtor has no property right in its telephone numbers and web addresses. In that case, the Virginia Supreme Court reasoned that “a domain name registrant acquires the contractual right to use a unique domain name for a specified period of time” and is thus “the product of a contract for services” because neither the telephone numbers nor web addresses exist separately from the services which created them. Network Solutions, 529 S.E.2d 86-87. ACG rebutted this argument by distinguishing Network Solutions as a garnishment proceeding, not a bankruptcy proceeding. But the District Court rejected this argument, following the Virginia Supreme Court’s reasoning that telephone numbers and web addresses are not separate from the contracts that service providers offer to make them functional. Additionally, the trustee did not assume the executory contracts that Surveys had with Cox Communications, so even if Surveys had an IP interest in the domain address and the telephone numbers, it was rejected by the trustee.
The District Court’s ruling highlights an important philosophical underpinning to certain types of IP: those which are contracted for are treated no differently than executory contracts, should a bankruptcy arise and the debtor not list said contracts on their bankruptcy schedule (something Surveys did not do in this case). While some IP scholars may disagree with this ruling on the grounds that the web address and the telephone numbers should be sold to ACG as “property” of the estate, irrespective of whether it is listed on the schedule, web addresses and telephone numbers are not the same as owning other types of IP, such as a copyright or a patent. For these forms of IP, the individual holder normally obtains ownership of the property without having to contract for its use with another party. Instead, it is granted by the federal government through an application process whereby the applicant demonstrates they have met the statutory requirements to receive protection for their work. In this case, however, the District Court, and more appropriately the Virginia Supreme Court (on whom it relied) correctly noted the contractual nature of providing web domain services and telephone numbers.
This one key difference marks the outcome of this case, one which the U.S. District Court for the Eastern District of Virginia properly arrived at in its reasoning. It remains to be seen what happens with IP assets in bankruptcy proceedings in the 21st century, as this is still a developing area of law. But the lesson is clear: For bankruptcy purposes, IP that is contracted for, in a non-assigning manner, is not property of a debtor’s estate, if state law says it is not, and the trustee is bound by such a determination.
