The American Registry for Internet Numbers asserts three primary propositions for the sale of a debtor’s interests in its Internet Protocol (“IP”) Numbers. 1 Members of the Bankruptcy Bar would be well-advised to consider a broader and more informed assessment of the state of the bankruptcy law with regard to IP Numbers. In a recent commentary on the ARIN article, Syracuse University Professor Milton Mueller puts it thus: “The advice will not help IP sellers maximize their value; it is designed, instead, to help ARIN preserve its monopoly on brokering the transfer market….The article attempts to persuade sellers and buyers into attaching legal conditions onto the sale, conditions that only serve ARIN’s interests.” See IGP Blog, available at http://blog.internetgovernance.org/. 2 The article includes two “Attachments”: Attachment A – Additional Information Regarding the Delegation of Authority From the U.S. Government to ARIN; and Attachment B – ARIN’s Role in Setting Policy, as Affirmed by Courts and Regulators. 3An “IP Number” is a binary (“0s” and “1s”) number, 32 bits long, which is referenced as a decimal equivalent for ease of use (i.e.: 131.94.128.2). The total individual numbers is 2^32 power, or 4,294,967,296 unique numbers, and for simplicity, these IP Numbers are referred to in “blocks.” (i.e., /24, /16, /8, etc.). The numbers are portable and usable worldwide, and in that respect they are fungible and similar to any other commodity. IP version 4 is a component protocol in the “TCP/IP” family of protocols. (See RFC 790 and 791). Once an IPv4 Number is assigned by an ISP (e.g. Verizon) to a specific “host” on the Internet (e.g. a cell phone), the IPv4 number becomes an IPv4 “address”. At that point in time, the number is a unique identifier on the worldwide web for the end host. Those three propositions are: (1) debtors, trustees and their counsel should notify the American Registry for Internet Numbers (“ARIN”) 4The ARIN article describes the role of ARIN in allocating IP Numbers. ARIN has no cooperative agreement with any branch or agency of the Federal government. ARIN has no written agreement with the Internet Corporation for Assigned Names and Numbers (“ICANN”). ARIN is a voluntary association, organized under the corporate laws of the Commonwealth of Virginia, and later qualified as a tax-exempt business league, much like a chamber of commerce, under Section 501(c)(6) of the Internal Revenue Code. On the other hand, ICANN, under the clear language of its contract with the Department of Commerce and in accordance with Federal Acquisition Regulation, does have actual authority over IP numbers. pre-sale and submit to ARIN’s contractual requirements, policies and guidelines; (2) the debtor has no ownership interest in these IP numbers and the Numbers should not be considered an asset of the estate; and (3) that there is “an unbroken chain from the government to ARIN with respect to the management, allocation, and policies relating to IP Numbers.” 5ARIN Article, Attachment A. It is our position that each one of these propositions decreases the value of the estate’s asset. Indeed, the recognition of IPv4 number property rights is both an unavoidable legal reality and a beneficial matter for debtors, trustees and their counsel.
I.
All IPv4 Numbers Are Not the Same
Essential to an understanding of these propositions is an explanation of the two kinds of IPv4 Numbers. Indeed, not all IPv4 Numbers were created equal.
a
. The First Kind of IPv4 Number
Of the total number of IPv4 Numbers (4,294,967,296), approximately 44%, or 1,895,825,408 Numbers, were distributed informally, beginning in the 1980s, when the Internet was basically a research project. Large blocks (e.g., 16,777,216 IPv4 Numbers at a time, or so called “/8 blocks”) were given away to members of the American military-industrial-university complex: MIT, Stanford, Hewlett Packard, Atlantic Satellite Network, GE, Halliburton, Department of Defense, etc. The list of these large block recipients is publicly available at the IANA website. 6Available at http://www.iana.org/assignments/ipv4-address-space/ipv4-address-space.xml. That distribution, in North America, was done by simple template application. There was no contract, no consideration (monetary or otherwise), and no formal terms and/or conditions. The entities that distributed the initial IPv4 Numbers were under written contract or written cooperative agreement with the United States Government. For example, from 1993 until late 1997, Network Solutions, Inc. made available these IPv4 Numbers as part of its duties under its Cooperative Agreement with the National Science Foundation (“NSF”). 7Cooperative Agreement No. NCR-9218742. For a more complete discussion of these facts, See Mueller, M. “Scarcity in IP addresses: IPv4 Address Transfer Markets and the Regional Internet Address Registries” (2008) available at http://internetgovernance.org. Because of the lack of legal framework surrounding these initial IPv4 Numbers, their current owners/holders are under no contractual restrictions on use, alienation, sale, transfer, or even non-use. These IPv4 Numbers are referred to as “Legacy Numbers”, and they are extremely valuable –connectivity to the Internet itself would be impossible without one of the numbers. 8On April 26, 2011, U.S. Bankruptcy Judge Kevin Gross for the District of Delaware issued an 11-page Order authorizing the sale and transfer of all of Nortel Networks, Inc.’s 666,624 Legacy IPv4 Numbers to Microsoft, Inc. for $11.25 per Number, or approximately $7,500,000. The Nortel case is fully briefed infra. The point of relevance for bankruptcy trustees and their counsel is that distribution of these IPv4 Numbers predates the existence of non-profit organizations, such as ARIN 9As the Internet protocols began to be widely adopted, over the years, three IP Number “Registries” arose: one in Europe – RIPE (April 1992), one in Asia – APNIC (1992); and more to the point, ARIN – North America (Dec. 1997). Now, there are two more: one in South America - LACNIC (Nov. 2002), and one in Africa – AfriNIC (Feb. 2005). See also Mueller, M. Regional Address Registries, Governance and Internet Freedom, (2008), available at http://internetgovernance.org., which, beginning in 1998, started to distribute additional blocks of numbers under a different, second method of allocation.
b
. The Second Kind
of IPv4 Number
So called “non-Legacy” IPv4 Numbers are “contract-based.” ARIN, as a source of IPv4 numbers for North America from the beginning of 1998, by virtue of some of its contracts with end-users (i.e., organizations to whom ARIN has issued numbers), asserts that it can require the holders of those IPv4 Numbers to abide by the terms of the various versions of its distribution contracts with them.
In a dispute, whether ARIN would choose to enforce the contract and whether that contract would be held to be enforceable in a federal or state court is unclear. 10See Rubi, Ernesto M. “The IPv4 Number Crisis: The Question of Property Rights in Legacy and Non-Legacy IPv4 Numbers”, 39 AIPLA Q.J. Volume 4 (Fall 2011). The current form of the ARIN agreement, known as a Registration Service Agreement (“RSA” Version 10.2) is found on ARIN’s website. 11Available at https://www.arin.net/resources/agreements/rsa.pdf. Of particular relevance to bankruptcy trustees and their counsel is Paragraph 9 of the current incarnation of the RSA. It states: “Applicant acknowledges and agrees that the number resources are not property (real, personal, or intellectual) and that Applicant does not acquire any property rights in or to any number resources by virtue of this Agreement or otherwise.” 12Id. Research to date has not yielded when and under what pertinent notice or authority, if any, ARIN first included such limitations. As late as RSA Version 4 (November 22, 2002), however, the Property clause did not yet exist. This language effectively provides ARIN the private-law right to revoke the asset. Additionally, the RSA attempts another private law abrogation of as-yet undetermined rights by including in its Paragraph 11, entitled Bankruptcy, a similar “no title or property interest” recital as that found in Paragraph 9.
II.
ARIN
’s Lack of Authority over
Legacy Holders
ARIN itself does not believe that transfers of legacy numbers are subject to ARIN policies, and it further acknowledges that there is no written contract between ARIN and legacy holders. 13ARIN article, Page 3.
The sworn Declaration 14Declaration of Raymond A. Plzak in Support of Motion to Clarify/Modify, executed on June 7, 2006 and filed on June 8, 2006, in the matter of Kremen v. Cohen, Civ. Case No. C-98-20718 JW (USDC ND CAL) (Document 1162). and Supplemental 15Supplemental Declaration of Raymond A. Plzak in Support of Motion to Clarify/Modify, executed on October 2, 2006, and filed on March 19, 2007, in the matter of Kremen v. Cohen, Civ. Case No. C-98-20718-JW (USDC ND Cal) (Document 48-14). Declarations of Raymond Plzak, then the President and CEO of ARIN, acknowledge that position and reiterate that there is no agreement between ARIN and legacy holders. These federal court filings, prepared by Mr. Stephen Ryan (then at Manatt, Phelps & Phillips, LLP), make clear that ARIN has “no control over” Legacy Numbers. Mr. Plzak states:
“Like other ‘legacy’ address holder’s issued resources before ARIN began, ARIN has never had an agreement with [the Legacy IPv4 Number holder] that would give [ARIN] authority over those specific resources…In my first Declaration, I carefully described why some resources in the Netblock were never within ARIN’s control because they were issued before ARIN began its corporate existence.” 16See Supplemental Declaration, p. 7, at 13-14 (emphasis added).
These Declarations clearly supplement and corroborate the fundamental point that Legacy IPv4 Numbers are legally different from the contract-based Non-Legacy IPv4 Numbers. Because the method and authority under which IPv4 Numbers were initially distributed makes an enormous difference to the character of the asset, debtor’s counsel should take care to properly characterize the nature of the asset (i.e., legacy vs. non-legacy) so as to assign a fair value to the numbers they possess.
III. ARIN’s Current Guidelines Likely Harm the IPv4 Number Asset’s Value
Although ARIN’s current guidelines suggest it, no case law or statute stands for the legal proposition that a prospective buyer and/or seller of IPv4 Number assets need notify ARIN in advance of a Legacy IPv4 Number sale. ARIN’s “approval” need not legally be tied into the sale or transfer process and debtor’s counsel need not include in sale or transfer agreements any language conditioning the transfer of IPv4 numbers on ARIN’s policies. Additionally, although ARIN policies recommend that sale or transfer documents expressly state that sellers have the right to use the IPv4 Numbers ‘subject to ARIN’s policies’ and that a seller may transfer rights to purchasers only pursuant to the terms and conditions set forth in ARIN’s transfer policies no legal authority exists for such recitals. ARIN asserts Legacy IP Numbers are not subject to traditional property rights. This position, however, runs counter to ARIN’s own actions through the declaration of its corporate officers in sworn testimony and has been explicitly rejected by the most significant pronouncement from the Bankruptcy bench regarding the value and sale of legacy IPv4 Numbers.
I
V
.
The Nortel Bankruptcy Sale
The seminal bankruptcy law case dealing with a sale between two private parties of Legacy IPv4 Numbers is In re Nortel Networks, Inc. et al., D. Del. Case No. 09-10138/10-53065 (KG) (2010). There, Addrex, 17“Addrex” refers to Addrex, Inc., the brokerage firm that arranged the sale for the seller, Nortel Networks, Inc. Addrex’s website can be found at http://www.addrex.net. a third party which Nortel retained to assist it with the marketing to potential buyers of Legacy IPv4 Numbers, brokered an agreement for the sale of over 666,000 of these Numbers to Microsoft, Inc. Indeed, Nortel, Addrex, Microsoft and other interested buyers acted outside of ARIN’s purview. Only “a
fter the announcement [of the sale] were NNI and Microsoft contacted by ARIN….” 18Transcript of Proceedings Before the Honorable Kevin Gross, United States Bankruptcy Judge, In Re: Nortel Networks, Inc. et al., Case No. 09-101138/10/53065 (KG), April 26, 2011, p. 35.
The seller in In re Nortel (NNI), had in its possession Legacy IPv4 Numbers and, as such, had no contractual or other legal relationship with ARIN as to the Numbers themselves. Nortel, through Addrex, offered these large Legacy blocks for sale and a number of potential purchasers presented offers which Nortel evaluated and selected according to its own criteria. ARIN did not file any Objection or other pleading in the matter other than to make an appearance of counsel.
The record also shows that counsel for Nortel discussed how, after the sale transaction, ARIN and Microsoft (the buyer) came to a private agreement, the specifics of which have never been disclosed:
“… ARIN and they [Microsoft] reached resolution through the signature of a side agreement between them called an LRSA which Nortel is not a party to.…We would probably disagree whether ARIN has standing to make arguments before this Court or the scope of its jurisdiction and power over these particular addresses, but those aren’t issues for today or they are issues necessary to decide the motion and the agreement and order as amended.” 19Id. at 36.
The reference here to an “LRSA” or “Legacy Registration Services Agreement” brings to the forefront a contractual vehicle devised by ARIN through which Legacy IPv4 Number owners would disclaim any property rights appurtenant to Legacy IPv4 Numbers, with the goal of completing the process of “regularization of the Included Number Resources” – language which remains ambiguous in the current LRSA versions. 20Legacy Registration Services Agreement, available at https://www.arin.net/resources/agreements/legacy_rsa.pdf. To that end, the LRSA, just like the RSA, includes the key Paragraph 9, entitled No Property Rights. 21Id. at Paragraph 9.
Debtors-in-possession and trustees will find that their fiduciary duties conflict with a contractual provision such as that found on the LRSA (as well as the RSA). 22In re Integrated Resources, Inc., 147 B.R. 650, 659 (S.D.N.Y 1992) (A fundamental principle of bankruptcy law and the debtor’s duty with respect to sales of property of the estate is to obtain the highest price or greatest overall benefit possible for the estate.) Here, although the record shows that Microsoft and ARIN entered into an agreement post-sale, only ARIN and Microsoft know whether it is a “standard” LRSA. If Microsoft did indeed sign the standard LRSA, it would likely operate to disclaim any property rights Microsoft may have over the very asset purchased for $7,500,000 from NNI [Nortel].
I
V.
Debtor
s Own
Legacy IPv4 Numbers and
Consequently,
Legacy Numbers Are Asset
s
of the Estate
The Nortel court’s Order language is the clearest expression from the bench yet that Legacy IPv4 Number users hold in their hands the proverbial bundle of property rights which American jurisprudence identifies as synonymous with full ownership. The Order is not the first of its kind. Other bankruptcy Orders have implicitly permitted the sale of IPv4 Numbers as an asset of debtors. 23In re Cable & Wireless USA, Inc., et al., D. Del., Case No. 03-13711/03-13712 (CGC) (2004). The Nortel Order specifically states, in its findings of fact and conclusions of law, as follows:
“The Seller has the exclusive right to use the Internet Numbers and the exclusive right to transfer its exclusive right to use the Internet Numbers. Such exclusive rights to use and transfer, together with Seller’s other legal and equitable rights in and to the Internet Numbers, if any, are referred to herein collectively as the “Seller’s Rights.”
(emphasis added). Additionally, the Order, in adopting the Asset Sale Agreement, dated March 16, 2011, 24The Asset Sale Agreement includes in the definition of “Sale Order” that “(ii) the Legacy Number Blocks are property of NNI’s bankruptcy estate….” between Nortel and Microsoft implicitly ratified the language of the Agreement regarding the existence of property rights. At the hearing on the motion to approve the sale, the Court concluded with the following statement: “the marketing process was certainly full and sufficient…the price is fair and reasonable and…the transaction is one at arm’s length. And on that basis, I will grant the motion.” 25Supra, n. 21, at 40.
ARIN and its counsel may argue that to the extent the court did not have before it the issue of whether property rights existed or not in IPv4 numbers, the Order’s precedential effect is limited. However, as evident from the record, in Nortel an asset was sold for substantial value, free and clear of all “liens, claims, encumbrances and interests,” without objection 26In the Nortel matter, the ARIN article alludes to a “filing” made by Industry Canada, which is “in accord” with ARIN’s belief the IPv4 Numbers, in general, are not to be considered property. (Attachment B to the ARIN article.) The ARIN article unfortunately fails to note that the letter, authored by an Assistant Deputy Minister for Strategic Policy Sector, Industry Canada, was promptly withdrawn. , with the presence of a “good faith” purchaser within the meaning of section 363(m) of the Bankruptcy Code … entitled to the protections afforded thereby.” 27See Order (I) Authorizing and Approving the Sale of Internet Numbers Free and Clear of All Liens, Claims, Encumbrances and Interests; (II) Authorizing and Approving Entry Into A Purchase and Sale Agreement; (III) Authorizing the Filing of Certain Documents Under Seal; and (IV) Granting Related Relief, In re Nortel Networks Corp. at 7-8, 426 B.R. 84 (Bankr. D. Del. 2010) (No. 09-10138). Thus, the normal rights attendant to property - rights of use, transferability and exclusivity - were in fact present.
V.
Conclusion
Bankruptcy trustees and debtors’ counsel (and for that matter, creditors’ counsel) should be wary of advice which encourages them to “avoid references to the estate’s ‘ownership’ of the IP Numbers…” – an assertion incompatible both with case law and the real world experience of major industry players. Private and public actors alike agree that IPv4 numbers have enormous present value. The recent case of In re Nortel only further cements that point, and provides helpful insight to the market mechanisms and pricing of IPv4 Numbers. The age of property rights in IPv4 numbers has undoubtedly arrived.
