Read the brief case summary below, "Government Contracts and Third-Party Beneficiaries." Kremen also alleged that NSI had breached an implied-in-fact contract with him, but the court dismissed this claim. Why would the court hold that no contract existed between Kremen and NSI? Was a required element for a valid contract lacking?

 

Government Contracts and Third-Party Beneficiaries

 

Government entities often contract with private organizations to provide certain services to the public. Are those who benefit under such contracts intended beneficiaries? This question came before the court in a case involving a person who had registered a domain name with an organization that had contracted with the federal government to provide domain name registration services.

 

THE DOMAIN NAME CONFLICT

 

In 1994, in the early days of the Internet (as a public surfing/shopping vehicle), domain names were free for the asking. At that time, Network Solutions, Inc. (NSI), was the sole registrar of domain names. NSI had a contract with a federal government agency stating that NSI had the primary responsibility for "ensuring the quality, timeliness, and effective management" of domain name registration services.

Gary Kremen, seeing what he felt was a great opportunity, registered the name "sex.com" with NSI. Unfortunately for Kremen, Stephen Cohen also saw the potential of that domain name. Cohen, who had just gotten out of prison for impersonating a bankruptcy lawyer, knew that Kremen had already registered the name. That fact, however, in the words of the court, "was only a minor impediment for a man of Cohen's boundless resource and bounded integrity." Through forgery and deceit, Cohen succeeded in having NSI transfer the domain name to his company. When Kremen later contacted NSI, he was told that it was too late to undo the transfer. Kremen then turned to the courts for assistance.

 

THE LEGAL ISSUES

 

Kremen sued Cohen, seeking as damages the substantial profits that Cohen had made by using the name. The court held in Kremen's favor and awarded him millions of dollars in damages. Kremen could not collect the judgment, however, because Cohen had disappeared—after first transferring large sums of money to offshore accounts. Kremen then tried to hold NSI responsible for his losses by alleging, among other things, that he was an intended third-party beneficiary of NSI's contract with the government. He claimed that because NSI had not "effectively managed" its duties, as it was obligated to do under the contract, his domain name had been wrongfully transferred.

 

Was Kremen an intended third-party beneficiary of the contract? When the case ultimately reached the U.S. Court of Appeals for the Ninth Circuit, the court held that Kremen was not an intended third-party beneficiary of the contract. The court noted that a third party can enforce a contract if the contract reflects an "express or implied intention of the parties to the contract to benefit the third party." The court emphasized, however, that when a contract is with a government entity, a more stringent test applies for a third party to be an intended beneficiary, the contract must express a clear intent to benefit the third party. If it does not express this clear intent, then anyone who benefits under the contract is regarded as an incidental beneficiary and, as such, cannot sue to enforce the contract.