• Is VeriSign Abusing Its Internet Domain Dominance?
  • October 8, 2003 | Author: Clinton W. Vranian
  • Law Firm: Womble Carlyle Sandridge & Rice - Winston-Salem Office
  • Earlier this month VeriSign, Inc., the company which controls the internet domain names ".com" and ".net," launched Site Finder; a service designed to redirect users who inadvertently type a web address for which no site exists. Site Finder, like similar services provided by Microsoft, AOL, Yahoo and others, replaces the usual "404 Error" message with a list of suggested sites with similar names. Unlike these other services, however, VeriSign's position of gatekeeper and ultimate registrar of the .net and .com domain names gives it a level of control over all internet traffic using these domains.

    VeriSign's control of the .net and .com registry enables Site Finder to preempt services offered by other providers. Where, for example, a third-party service may be designed to respond to an error message notifying users that the address is unregistered, VeriSign's service can intercede by redirecting the user to Site Finder instead of returning the error message. Critics, including commentators and competitors, have been quick to complain that, through Site Finder, VeriSign is leveraging its domain name monopoly to obtain a monopoly in redirecting services.

    On September 18, one such competitor, Popular Enterprises, Inc., filed an antitrust action against VeriSign seeking damages and a preliminary injunction prohibiting the operation of Site Finder. Popular Enterprises, which claims to have 1.4 million users registered for its own propriety redirection service, has alleged that that Site Finder "essentially commandeered or 'hijacked' all of this Internet traffic for its own purpose and monetary gain."

    On one level, one wonders what, if anything, VeriSign has done wrong. As a successful private company on the leading edge of the internet revolution, VeriSign's control of the domain name registry is the result of investment and risk-taking on behalf of its principals. Having capitalized on these investments, is VeriSign obligated to forego further opportunities to the benefit of its competitors?

    It is well established that under the antitrust laws a company generally has the freedom to deal with whomever it chooses. Even where it may seem unfair, there exists no obligation to assist one's competitors. In general, this principle stems from Section 1 of the Sherman Act which prohibits a "contract, combination or conspiracy in restraint of trade." Because at least two entities are required to form a "contract, combination or conspiracy," Section 1 of the Sherman Act does not, by itself, prohibit the actions of a single entity, even where competition is affected. Stated differently, because, under Section 1 of the Sherman Act "it takes two to tango," the unilateral activity of a single firm cannot run afoul of its provisions.

    This freedom is consistent with one of the fundamental policies underlying the antitrust laws: the encouragement and preservation of competition in the marketplace. The choices a single firm makes with respect to its rivals represent the essence of competition since, in order to survive, the firm must become more attractive to consumers than its competitor. Section 1's plurality requirement tacitly recognizes that refusing to assist one's rival in this context represents nothing more than competition itself.

    Alternatively, where, instead of competing with one another, two or more firms, collaborate to restrain trade, competition is undermined. For example, suppose that, instead of engaging in a price war, two companies agree to charge the same, mutually profitable, price for similar products. If there is no third company to undercut this set price, competition has been removed from the equation. Instead of attracting consumers with lower prices, the companies will have effectively forced consumers to pay higher prices by controlling the market share of the product. This collaboration represents the type of conduct that Section 1 is designed to prohibit.

    Unilateral conduct, however, may be subject to Section 2 of the Sherman Act under certain circumstances. Section 2 of the Sherman Act addresses situations in which a single company has acquired significant market power, and uses that market power to crush competitors rather than competing on the merits of its own services or products. Stated differently, Section 2 addresses companies with monopoly power.

    In general terms, monopoly power can be understood to mean "the power to control, rather than be controlled by, a market." For example, if one hypothetical company provides all of the fuel and all of the paint for City A and City B, that company would possess substantial market power in both products. Assume that an entrepreneur perceives an opportunity to open a competing paint company in one of these cities and offers a comparable product at a lower price. The larger company, instead of competing by lowering its prices, begins refusing to sell fuel to anyone who purchases paint from the entrepreneur. Because every consumer requires fuel, the entrepreneur will soon go out of business. Under these circumstances, the larger company has violated Section 2 by using its monopoly power to control a market rather than competing on the merits of its product.

    Similarly, monopoly power can limit a company's freedom to refuse to deal with a competitor. A firm with exclusive control over a resource essential to the survival of its competitors possess market power and violates Section 2 if, instead of competing, it simply deprives competitors access to this resource. This exception to the freedom to deal with whomever one chooses is called the doctrine of "Essential Facilities."

    The leading U.S. essential facilities case is MCI Communications Corp. v. AT&T Co. In this case the Seventh Circuit found that access to telecommunications networks often is essential for competitors in related markets. Though AT&T had constructed and owned the telephone network, AT&T was nevertheless found liable under Section 2 for refusing to allow MCI to interconnect its long-distance lines to AT&T's local network. The court deemed these local lines essential facilities because they were the only direct connections to consumers and were prohibitively expensive for MCI or other competitors to duplicate.

    The MCI Court identified four elements necessary to establish liability against a powerful company under the "essential facilities" doctrine:

    • Control of an essential facility by a monopolist
    • Inability of the competitor seeking access to practically or reasonably duplicate the essential facility
    • The denial of the use of the facility to the competitor.

    As these elements suggest, the essential facilities model typically relies on the existence of both an upstream market (such as consumers of telephone service) and a downstream market (such as control of telephone lines). The dominant competitor is active in both the upstream and the downstream market whereas its adversaries tend only to operate in the downstream market. Instead of competing "fairly" in the downstream market, the dominant competitor instead endeavors "win" this market by depriving its competitors of necessary access to the upstream, or "input" market. Reliance on an upstream market is not enough to invoke the essential facilities doctrine -- even if the upstream market is governed by a monopoly. With few exceptions, all markets rely on other "upstream" markets. Manufacturers of candy rely on sugar, aluminum can manufacturers on aluminum, etc. Because search engines rely on the existence of domain names, the domain name registry market is necessarily "upstream" to the search engine market. In all of these examples, the upstream operator generally retains its ability to refuse to deal with anyone it chooses. It is only when an upstream monopolist becomes a competitor to its downstream entities that the doctrine becomes relevant.

    Prior to launching SiteFinder, VeriSign and Popular Networks were not competitors. VeriSign operated only in the domain name market which was upstream from, but not competitive with, the search engine market in which Popular Networks competed. Upon launching SiteFinder, however, VeriSign became a competitor in this market. Popular Networks argues that, instead of placing SiteFinder "in the ring" to compete with Netster and other redirection services, VeriSign "hijacked" the facilities necessary for other third-party services to properly operate by granting its own search engine, SiteFinder, superior access to VeriSign's domain name registry. Thus, by leveraging its upstream monopoly power to deprive downstream competitors of access to this resource, SiteFinder will necessarily prevail over its competitors -- whether or not it is a superior product.

    The legal debate over SiteFinder has only just begun. A host of questions will be addressed by the courts, only one of which is whether or not access to the error pages generated by a domain name registry can be considered an essential facility, before it is over. Whatever the outcome, the SiteFinder debate promises to contribute richly to the ongoing efforts to adapt the U.S. antitrust laws to the information age.