Anita Ramasastry

What's a Domain Name Worth? The Sex.com Auction is Stopped, as Creditors Try to Maximize the Name's Value

By ANITA RAMASASTRY
Wednesday, April 7, 2010

Just last month, one of the world's most infamous domain names, sex.com, was up for auction, with bidders required to bring a $1 million certified check just to place a bid. Even so, the auctioneer claimed that there was considerable interest.

One interesting alternative suggestion came from People for the Ethical Treatment of Animals (PETA), which proposed that the domain name, rather than being auctioned, be donated to PETA. PETA claimed that males who consume meat, eggs and dairy products may suffer from sexual side effects, which the organization could highlight via a web presence. But its suggestion did not prevail.

Ultimately, the auction – scheduled for March 18 – was postponed after the domain name's owner, Escom, was forced into bankruptcy proceedings by its creditors, who initiated an involuntary bankruptcy filing in California.

There may still be a sale of the sex.com domain name, but now, creditors will have time to ensure that any sale is fair, and to maximize the value of the asset.

In this column, I will discuss the procedures by which creditors were able to force Escom into bankruptcy, and explain why I believe this decision was in the best interest of all of Escom's creditors.

The Battle Over One of the World's Most Famous – and Expensive – Domain Names

Sex.com, a so-called "top-level domain name," is probably one of the most valuable domain names in the world. It has the potential to be used by companies to market a range of lucrative products and services, including Internet and other pornography. Indeed, the current site appears to link to a variety of adult-related or sexual sites and/or offer content related to similar themes. Moreover, the domain name is very easy to remember, and many Web surfers may type it into their browsers out of sheer curiosity, just to see what will appear – further increasing its potential value, as the site may not need as much advertising as others might in order to succeed.

Gary Kremen, founder of Match.com, first registered sex.com in 1994. He then spent several years embroiled in legal battles with adult entertainment mogul Stephen Cohen over the site's ownership. Escom subsequently acquired the domain name from Kremen – reportedly paying somewhere between $12 million and $14 million. Escom's creditor DOM Partners helped finance the deal, and when Escom failed to make its loan payments, DOM acquired the rights to the domain name per their agreement. The domain name had served as security for DOM's loan to Escom, so when Escom failed to repay the loan, it had to surrender the domain name to Escom – much as a homeowner might turn over his house to the bank in the event of default.

Then, at the end of March, DOM announced plans to sell the site at auction to the highest bidder. To continue the real estate analogy, this would be the rough equivalent of a foreclosure sale.

But there was a wrinkle: Escom had other creditors as well. And the auction was scratched after three of those creditors filed an involuntary Chapter 11 bankruptcy petition against Escom in the U.S. Bankruptcy Court in California's Central District. The creditors – Washington Technology Associates, iEntertainment Inc., and AccountingMatters.com – claim that Escom owes them more than $10 million.

Why A Bankruptcy Is Likely to Be Fairer to All Creditors than An Auction

Domain name experts say that sex.com is worth between $14 million and $18 million, but estimates suggest that, had it been sold at auction, it might have gone for only about $6 million. The huge gap between the estimated real worth of sex.com, and the likely result of an auction shows that creditors may well do better in bankruptcy than they would have had the auction gone forward.

Here's how this type of bankruptcy – called Chapter 11 – works: First, a petition is filed with the federal bankruptcy court serving the area where the debtor has a domicile or residence. A voluntary bankruptcy petition would be filed by the debtor. But an involuntary petition – the kind at issue here – is filed by creditors that must meet certain requirements.

An involuntary bankruptcy petition creates an automatic stay – freezing the proceedings temporarily, and barring any seizure or disposition of the debtor's assets. Here, the automatic stay was the reason that the auction had to be cancelled.

Under federal bankruptcy law, a company typically has 20 days to respond to an involuntary bankruptcy petition. If Escom or others contest the current filing, for example, the court will conduct a trial to determine whether the statutory requirements for the entry of an order for relief have been met. To prevail, the petitioners must establish that they are sufficient in number, type of debt, and amount of debt to fulfill the law's requirements, and that the debtor is generally not paying its undisputed debts as they become due.

Generally, the filing of an involuntary bankruptcy petition is an extreme action and one that may affect an alleged debtor's credit rating and public reputation as well as impact its ability to carry on its daily business operations. In this case, the impact was immediate: The sale of the company's crown jewel and main asset, its domain name, was halted.

Ideally, the effect of the bankruptcy will be that the domain name will be sold for a figure much higher than that which the auction would have yielded, so that all creditors' claims may be satisfied to the extent possible. But no matter what occurs, it will be interesting to see who ends up with this valuable and salacious domain name.


Anita Ramasastry, a FindLaw columnist, is the D. Wayne and Anne Gittinger Professor of Law at the University of Washington School of Law in Seattle and a Director of the Shidler Center for Law, Commerce & Technology. She has previously written on business law, cyberlaw, computer data security issues, and other legal issues for this site, which contains an archive of her columns.

Ramasastry is currently on leave from the University to work for the federal government. The views expressed in this column aresolely those of Ramasastry in her personal capacity anddo not necessarily represent the views of any of her employers, past or present.

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