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Thursday, July 30, 2015

Court rules that domain names can be transferred at interlocutory stage

By David Stewart, Senior Associate, and Natasha Dixon, Vacation Clerk

The recent Federal Court decision in Thomas v Humantech [2015] FCA 541 shows that a court will be prepared to order the transfer of a domain name at an interlocutory stage in certain circumstances, and also provides a useful reminder of what is required by a party to satisfy an obligation to negotiate in good faith.


Background


Thomas International (TIL) is an English company that operates a business providing psychological assessments, predominately through the internet. TIL operates a central online hub in the UK that can be accessed by TIL's distributors and customers by logging into the TIL website. Since 2007, TIL's services have been distributed in Australia by Humantech (a company that was ultimately controlled by a Mr Schutte), under an agreement by which Humantech was given exclusive rights to appoint a distributor in Australia and to register domain names relating to the business.

In May 2014, after a significant downturn in sales of its services in Australia, TIL discovered that a business called Assessment Centre Technologies (ACT) was advertising products similar to its own, as well as TIL's products, through a website it operated. It appeared that ACT was re-directing business for TIL's products to ACT, thus explaining the downturn in TIL's sales. TIL also identified a second domain, thomasinternational.com.au, through which some of ACT's business was being directed. Thomas International Australia (TIA), was the registrant of that domain. The relationship between ACT and TIA was not entirely clear, other than that the same Mr Schutte was a director of both companies.

On discovering the subterfuge, TIL commenced proceedings against Humantech, TIL, ACT and Mr Schutte. Shortly afterwards, the parties met to negotiate a resolution to the dispute. The meeting ended with Mr Schutte giving signed undertakings that, among other things, he would arrange for the transfer of the TIA domain name to TIL. The undertakings stated that the obligation to transfer the domain would only become effective once TIL and Mr Schutte had acted in good faith to resolve the dispute and had exhausted those discussions, or a specified date (whichever came first).

After Mr Schutte had executed the undertakings, TIL put forward a proposal for a new licence agreement between the parties. However, Mr Schutte took the view that the proposed agreement would cause him financial ruin if he accepted it, and so instead immediately put his companies (including Humantech, TIL and ACT) into administration. He also took down the TIA and ACT websites instead of transferring them to TIL as required by the undertakings. So, TIL applied to the court for an interlocutory injunction to require Mr Schutte to comply with the undertakings, and transfer the thomasinternational.com.au domain to it.


Requirements of an interlocutory injunction


For the interlocutory injunction to be granted, TIL had to satisfy three criteria, being:
  • that it had made out a prima facie case of breach of the undertakings by Mr Schutte;
  • that the balance of convenience favoured the grant of an injunction (that is, the inconvenience or injury that TIL was likely to suffer if the injunction were refused outweighed the injury that Mr Schutte would suffer if the injunction were granted); and
  • that damages would be an inadequate remedy.


What did the court say?


Mr Schutte opposed the grant of the injunction on two grounds. First, he argued that the undertaking in relation to the domain name was unenforceable because TIL had breached its obligation to negotiate in good faith by offering a licence that would cause him 'financial ruin'. Justice Nicholas rejected this argument, and stated that TIL had not breached its obligation to negotiate in good faith merely because it had driven a hard bargain.

Mr Schutte's second argument was that the balance of convenience was not in favour of granting an injunction as it would have a catastrophic effect on the business of ACT and TIA. The basis of this argument appeared to be that granting the injunction (and therefore requiring TIA to transfer the domain name) would prevent ACT and TIA's customers from accessing the website. The court rejected this argument because the website had already been disabled by TIA at the time of going into administration, and so there would be no practical impact on customers.

In response, TIL submitted that it would suffer significant reputational damage if the injunction was not granted because consumers who had purchased the rights to use TIL's products would not be able to access its products through the TIA website. This was accepted by Justice Nicholas, who also considered that such damage may be irreparable and that damages would therefore not be an adequate remedy.

In the end, Justice Nicholas granted the injunction - but at a price. TIL had to offer undertakings to the court including that it would submit to any order for compensation to a person negatively affected by the injunction and re-transfer the domain names in the event the court so ruled at trial. It also offered a substantial amount of security.


What does it all mean?


This case shows that courts will be willing to transfer a domain name at an interlocutory stage in some circumstances. It also reaffirms the principle that a party will not be considered to have failed to engage in good faith negotiation merely because it drives a hard bargain.

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