This is the 5th chapter of “How To Evaluate a Internet Property”. You can read part 1 – Financials here and part 2 – part Rate of growth here and part 3 – The Run Rate Here and part 4 – Resources here
When reading below please please please keep in mind I am not a lawyer. I am writing from my own experiences. Please seek legal advice before acting.
I originally did not included a chapter on the legal issues but after a couple conversations recently with friends about some past deals in which we were selling/buying internet properties I decided to write this part in. Also ironically about the same time my friend QuadZilla from SEO Blackhat said I should include a chapter on legal issues. It just seems to fit.
Trademark in Domain Names:
Let me tell you a little story. About 4 years ago I was presented a offer to purchase a website in the mobile space. This website was an authority with a large successful forum and tons of great original content. I inquired about the site and if it was for sale and the owner came back and said it was not actively for sale but to make a offer. I offered high 4 figures $x,xxx for the site and he countered with mid range 5 figures $xx,xxx. Now I will tell you I thought even what he countered was worth it. There was only one problem. The website contained a trademarked term. This was also about the time the dust was just settling from our battle with Nextel INC over our own sites. I debated about buying this site for a long time and ended up passing. When there is a trademarked name in the domain its such a wildcard. YES I know a lot of legal people out there are saying you can win the case even using a trademark name and I did against Nextel but it still cost me 1 year of time and over $75,000.00 in legal fees. So this site for $xx,xxx was just not worth it for me at the time. A couple years later I came in contact with a nice guy named Lee Dodd who had bought the site years back when I passed. We talked for a bit then sometime later he let me know he was making a month in profit what I had passed on for the whole site. Missed that one!
I am always very very leary to purchase domain names with trademark names in them. Especially now. Because of who I am and what I do many people watch exactly everything we do. So if we buy a trademarked domain odds are someone will blog it and it will eventually show on a companies radar… then they come here …. see I have money and could come after me for damages. These companies don’t even care about winning or losing. They have more money then I do and will force me to settle out of court and take the domain cause I don’t want to fight and be bled dry.
Another big thing is that I am located in Nebraska and am pretty much a anomaly. When companies sue you… they don’t sue you in your state they sue you in their state. So you have to get representation in their state and also appear for court dates in their state. This costs TONS and companies know it.
User generated content sites are all the rage but they are also a massive liability. When YouTube started everyone said they would never make it because of all the legal issues but they went on…. and did very well. Mostly big companies knew they had no money so all they could do was DMCA them and get the content removed. But then Google purchased YouTube and the lawsuits started coming in. This is the best example I can think of to drive home this point. If you are looking at buying a site with a lot of user generated content that could be copyrighted (lyrics, mp3s, videos, ebooks) make sure you are considering the fact that news of the *sale* could trigger a bunch of sharks now that blood is in the water.
When buying the property be very careful you do not mis represent who you are or what you are doing with the site once you purchase it. Even if it is a oral question over the phone. I recently had a friend who purchased a domain name for a few hundred dollars get sued for thousands when the seller discovered he was not using the domain for a non profit company as he had told him on the phone. Instead he was using the site for a profit site. The seller filed suit in court and my friend ending up settling for about 5x what he had originally paid for the domain. Again the person likely would not have won the case but being he had filed the case in a state across the country it would have cost him much more to defend himself then just to settle the case.
Most of the time I think people make waaaaay to big of a legal issues. Even with all this said above sometimes a legal issue is a blessing in disguise. The few times I have been dragged into court it has worked out really well for me. BUT its something you have to keep in mind when you are valuating a internet property.