No. 97-2412 (TFH)




Memorandum Opinion

Pending before the Court is plaintiffs' motion for a preliminary injunction. Plaintiffs have asked the Court to enjoin defendants from spending any funds contained in or allocated to the "Intellectual Infrastructure" fund. After considering the submissions of both parties and the arguments made before the Court on January 16, 1998, the Court will grant plaintiffs' motion.

I Parties and Plaintiffs' Motion

Plaintiffs in this case are a group of two individuals and four companies, each of whom has registered a domain name for use on the Internet. Plaintiffs have filed a motion for certification as a class, to represent the class of all such registrants. That motion is not yet ripe for decision.

Defendant National Science Foundation ("NSF") is an independent agency of the United States government. Among its other responsibilities, it is involved in regulating the Internet. Defendant Network Solutions, Inc. ("NSI"), is a private company that entered into a cooperative agreement with NSF. Under the terms of that agreement, which is scheduled to expire later this year, NSI manages and maintains the registry of domain names.[Endnote 1]

Plaintiffs' Complaint, which contains eleven counts, alleges that defendants have entered into an illegal arrangement, whereby NSI, under the authority of NSF, holds a monopoly over the registration of domain names. Plaintiffs allege that, pursuant to this monopoly, NSI has illegally collected fees from prospective registrants of domain names. Plaintiffs' motion for preliminary injunction, however, focuses only on one part of those fees -- the portion allocated for deposit in the Intellectual Infrastructure Fund ("Fund"). Plaintiffs contend that the forced contribution to the Fund is an illegal tax, and they ask that defendants pay restitution for collection of that tax. In the present motion, plaintiffs ask the Court to enjoin all expenditure of those funds, pending a resolution of the claim on its merits.

II Factual Background

Defendant NSF maintained the registry of domain names from the 1980's until 1993. In 1993, NSF awarded NSI with a contract to maintain the registry for five years, with the possibility of a short extension. The award was made through a cooperative agreement, after a competitive bidding. The contract called for NSI to operate on a "cost-plus-fee" basis, which meant that NSI received reimbursement for its costs, plus a fixed fee that represented the company's profit. Under this original contract, the costs and fees were paid by NSF out of its operating budget; users did not have to pay any fees or taxes to register or to maintain domain names.

In September of 1995, NSF and NSI entered into an amendment of that contract. This amendment eliminated the "cost-plus-fee" method of compensation. In its place, it permitted NSI to charge fees for the registration and maintenance of domain names, which meant that, for the first time, users had to pay to register and maintain their domain names. The amendment set the fees at $100 to register and at $50 for annual renewal.[Endnote 2] Since 1995, NSI has been solely responsible for collecting these fees.

The amendment did not contemplate that NSI would keep the entire fee as reimbursement for costs and profit, however. Instead, NSI keeps 70% of each fee[Endnote 3] for itself and places the remaining 30% into the Intellectual Infrastructure Fund. That 30% contribution is commonly known as the "Preservation Assessment." NSI is responsible for maintaining the Fund, but the government directs the expenditure of monies from the Fund.

As of September 30, 1997, the Fund contained at least $37 million. In October of 1997, Congress passed the Department of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act, Pub. L. No. 105-65, 111 Stat. 1344 (1997), which authorized an expenditure of $23 million on the "Next Generation Internet" program. The Next Generation program is aimed primarily at upgrading the Internet infrastructure, improving the speed and accuracy of information delivery, and increasing access for schools. It is a safe presumption that the money for the project will come out of the Intellectual Infrastructure Fund.[Endnote 4]

As of today, NSF has not begun to spend any of the Next Generation funds. However, there is no legal impediment to these expenditures, and NSF could begin funding the program at any time.[Endnote 5]

III Standard for Decision

The standard for preliminary injunctions is dictated by Federal Rule of Civil Procedure 65(a). Under that Rule, the Court may grant preliminary injunctive relief if the moving party demonstrates (1) that it is likely to succeed on the merits of the claim, (2) that it will suffer irreparable harm if not granted injunctive relief, (3) that other parties will not suffer substantial harm, and (4) that the public interest is served by an injunction. Washington Metropolitan Area Transit Comm'n v. Holiday Tours, Inc., 559 F.2d 841, 842-43 (D.C. Cir. 1977). The standard is essentially a balancing test; this means that the Court examines each requirement in light of the others to determine whether an injunction would be proper. Id. at 843.

IV Success on the Merits

Plaintiffs assert that the Preservation Assessment is an illegal tax, and that defendants should ultimately be compelled not only to cease collecting these taxes, but also to refund monies already collected. In the present motion, plaintiffs merely ask the Court to freeze the fees already collected,[Endnote 6] and to prevent their expenditure until the Court has reached a decision on the merits.

Plaintiffs show a substantial likelihood of success on the merits. It is undisputed that only Congress has the power to levy taxes. U.S. Const., Art. 1, Sec. 8; National Cable Television Ass'n., Inc. v. United States, 415 U.S. 336, 340 (1974); Bell Atlantic Telephone Cos. v. Federal Communications Commission, 24 F.3d 1441, 1445 (D.C. Cir. 1994). Thus, since NSF levied the Preservation Assessment, it would be illegal, if it is a tax on domain registration.

Plaintiffs can prevail on the merits only if they demonstrate two things. First, plaintiffs must show that the Preservation Assessment is a tax, which NSF cannot oppose, and not a mere regulatory fee, which NSF can legally impose. Second, they must demonstrate that Congress has not ratified the tax, so that its collection is no longer illegal.

A. Character of the Assessment

There is no litmus paper onto which the Court can drop a regulatory assessment such as this one, hoping to see whether the paper comes up blue for tax or pink for fee. However, other courts have suggested several criteria that are useful for the Court's consideration.

The Supreme Court and other courts have defined a tax as a payment which is arbitrarily imposed for some public purpose, whereas a fee is payment for a voluntary act, such as requesting a permit, that goes to defray the expenses of regulating that act. National Cable, 415 U.S. at 340; Williams v. Motley, 925 F.2d 741, 743 (4th Cir. 1991); United States v. Maryland, 471 F.Supp. 1030, 1036 (D.Md. 1979); In Re Farmers' Frozen Food Co., 221 F.Supp. 385 (N.D. Cal. 1963).

Other courts have focused more specifically on the benefits conferred by an assessment. These courts held that a payment is a tax when it confers no special benefit on the payee, or when the assessment is intended to raise general revenue; in contrast, a fee gives the payee value for payment, in the form of defraying the regulatory expenses necessary to keep certain services active. See Cumberland Farms, Inc. v. State of Maine, 116 F.3d 945, 946-47 (1st Cir. 1997); United States v. River Coal Co., Inc., 748 F.2d 1103, 1106 (6th Cir. 1984); Butler v. Maine, 767 F.Supp. 17, 19 (D. Me. 1991).

Finally, some courts have looked at the service provided by the agency, in exchange for the regulatory assessment. These courts held that the assessment may be a tax if it is not fairly tied to both the value received by the payee and to the cost of the service to the agency. See Massachusetts v. United States, 435 U.S. 444, 464 (1978); United States Shoe Corp. v. United States, 114 F.3d 1564, 1571 (Fed. Cir. 1997). Because the payee did not receive a benefit commensurate to the value of the assessment, or because the agency charged in excess of its costs and expenses, these courts held that the assessment was a tax.

Plaintiffs have made a substantial showing that the Preservation Assessment can be considered a tax under any or all of these formulae. There is no dispute that the assessment is involuntary -- it is automatically charged to every domain registration.[Endnote 7] Since there is no dispute that the Preservation Assessment exists to pursue general, public internet projects and goals, plaintiffs have made a strong showing that the assessment is collected for a public purpose, and not to defray defendants' regulatory costs. Finally, defendants admit that the cost of providing the initial registration service is only $70; the additional $30 paid is the Preservation Assessment, which exceeds the cost of regulation by nearly 50%.[Endnote 8] For these reasons, plaintiff has demonstrated a substantial likelihood that the Preservation Assessment is a tax that was not imposed by Congress.

B. Ratification

Even if the Preservation Assessment is an illegal tax, it still might not violate the Constitution. Unlike the Supremacy Clause of the Constitution -- which, among other things, bars states from collecting certain taxes from the federal government -- Article I, Section 8, does not bar taxes absolutely. It merely requires that Congress, not some other authority, impose the taxes. Thus, if Congress imposes a tax, it is legal under Article I, Section 8. Similarly, if Congress later ratifies a tax, it is proper under the Constitution, even though the Congressional ollection of the tax. United States v. Heinszen, 206 U.S. 370, 390 (1907); Canisius College v. United States, 799 F.2d 18, 25 (2d. Cir. 1986), cert. denied, 481 U.S. 1014 (1987). Therefore, if Congress ratifies the Preservation Assessment, its collection is legal; even the past collection of monies is retroactively legal.

Congress has addressed the issue of the Preservation Assessment, if only indirectly. In the Department of Veterans Affairs and Housing and Urban Development and Independent Agencies Appropriations Act, Pub. L. No. 105-65, 111 Stat. 1344 (1997), Congress authorized NSF to expend up to $23 million on the President's Next Generation Internet project. The House and Senate Reports indicate that Congress implicitly directed that these monies be withdrawn from the Intellectual Infrastructure Fund.

Defendants argue that this Act represents a Congressional ratification of the Preservation Assessment. However, there are two reasons why the Act cannot, on its own, effect a ratification. First, ratification is a legislative function, and it is well recognized that Congress does not normally legislate through appropriations bills. See e.g., National Audubon Society v. Andrus, 442, F.Supp. 42, 45 (D.D.C. 1977). Thus, while Congress could effect a ratification through an appropriations bill, it can do so only if it clearly states its intention to do so. Associated Electric Coop. v. Morton, 507 F.2d 1167, 1174 (D.C. Cir. 1974), cert. denied, 423 U.S. 830 (1975).

Second, and more importantly, it is clear that legislation can effect a ratification only if Congress clearly recognizes the unauthorized tax and specifically states that the tax is ratified. For example, the legislation at issue in Heinszen effected a valid ratification of taxes collected by the military in the Philippines only because the statute recognized that the taxes had been illegally collected, and because Congress stated that those taxes "are hereby legalized and ratified." See Heinszen, 206 U.S. at 381.

In the present case, Congress has not ratified the Preservation Assessment. Indeed, the appropriations act cited by defendants never even mentions the assessment or the Intellectual Infrastructure Fund by name. Congress may have intended to grant NSF the authority to collect the assessment, but it has not effected a legal ratification.

There is no debate that, if Congress wishes to authorize collection of the assessment, at any time, it may ratify this collection through a clear recognition of the tax and through specific ratification language, as described in Heinszen. However, Congress has not yet chosen this path.

C. Conclusion

Therefore, plaintiffs have demonstrated that they have a substantial likelihood of eventual success on the merits of these claims. They have made a significant showing that the Preservation Assessment is an illegal tax. Furthermore, they have shown that Congress has not yet ratified that assessment. Therefore, plaintiffs have made a substantial showing that defendants may have collected, and may currently be collecting, the assessment illegally.

V Balance of Harms

In addition to considering plaintiffs' likelihood of success on the merits, the Court must also consider the irreparable harm that plaintiffs face if denied an injunction, the potential harm to defendants if they are enjoined, and the public's interest. The Court finds that plaintiffs face some potentially irreparable harm, that defendants face little harm, if any, and that the public's interest would not be substantially affected by an injunction.

A. Plaintiffs' Irreparable Harm

Plaintiffs are seeking, among other things, the return of the monies they have paid into the Intellectual Infrastructure Fund. As of today, defendants have not yet expended any of those funds, but they are authorized by Congress to spend up to $23 million at any time. Plaintiffs would indeed face irreparable injury, if defendants spent that money and were unable to pay a judgment.

Defendants argue that, even if they spend from the Intellectual Infrastructure Fund, they could pay any judgment, either out of the NSF operating budget or out of the federal government's judgment fund. However, plaintiffs have raised a substantial issue that NSF might not have available money in its budget and that an award in this case might not be compensable from the judgment fund. Therefore, there is a real possibility that defendants may, in essence, be judgment proof, if they spend the Intellectual Infrastructure money. Therefore, plaintiffs have shown at least some potential for irreparable injury.

B. Defendants' Harm

In contrast, defendants face no harm whatsoever. Defendant NSI is merely the caretaker for the Preservation Assessment Fund, therefore, it has no interest in what happens to the money. Defendant NSF also has no tangible interest in the money; it may only spend the funds at the direction of Congress, for purposes specified by Congress. Therefore, NSF is not harmed by a delay in the expenditure of these funds.

C. The Public Interest

The public may have some interest affected by an injunction. Congress and the President determined that the Next Generation Internet project would serve an important public interest and directed NSF to spend up to $23 million on that project. An injunction in this case would most likely delay any expenditure on that project until a final determination on the merits.[Endnote 9] This would effect some harm on the public.

However, the harm to the public is merely a delay in implementing the project, and the overall harm occasioned by such a brief delay would likely be minimal. Furthermore, the public has some additional interest that the courts prevent agencies from circumnavigating the Constitution and imposing illegal taxes. Therefore, the Court finds that the public interest does not weigh against an injunction.

VI Conclusion

Under the Holiday Tours standard, the Court is directed to consider plaintiffs' likelihood of success on the merits of their claim, the irreparable harm plaintiffs face if not granted injunctive relief, the harm that defendants will face if enjoined from action, and the public interest served by an injunction. Holiday Tours, Inc., 559 F.2d at 842-43. As the Court has described above, it finds that these factors weigh in favor of granting injunctive relief. Plaintiffs have demonstrated that they have a very substantial likelihood of success on the merits of this claim. Furthermore, while plaintiffs face potentially irreparable harm, defendants face no harm at all. Finally, the public interest will not be substantially affected by an injunction, which will at most delay expenditure on the Next Generation Internet project. For these reasons, the Court will grant plaintiffs' motion for preliminary injunctive relief.

An order will accompany this opinion.

February 2nd, 1998
Thomas F. Hogan
United States District Judge

1/ Domain names are the alphanumeric monikers that ease the use of the Internet. Computers are linked on the Internet by "IP addresses," which are each composed of a long string of numbers. Each computer or user has a unique number, so that information can be directed to a specific destination, by using the IP address. The domain name is a more accessible, more memorable, occasionally catchy, title that can be attached to an IP address. However, domain names must be unique, to avoid confusion in delivery. Therefore, there is a need for a registry of name, to prevent duplication.

2/ The fee for initial registration also covered the maintenance of the name for the first two years.

3/ That comes to $70 of each initial registration and $35 of each annual renewal.

4/ The statute does not mention the Fund by name, but there is no dispute that Congress intended it to be the source of money for the Next Generation project.

5/ NSF has, however, agreed to refrain from spending on this project until the Court has issued its decision on plaintiffs' motion.

6/ The Preservation Assessment is comprised entirely from these fees, and has not other sources of deposit.

7/ Domain registration is a voluntary act; however, this does not render the Preservation Assessment voluntary, because the assessment is not really a charge for registration, but is instead a payment above and beyond the cost of the registration itself. See e.g., Williams v. Motley, 925 F.2d at 743; River Coal, 748 F.2d at 1106.

8/ There is a similar disparity in the yearly renewal fees, $35 of which go to cover costs, with $15 going to the assessment.

9/ Of course, an injunction would not actually bar spending on the Next Generation project, but would only bar spending out of the Preservation Assessment Fund. Defendant NSF would remain free to spend money from other sources on the project. However, the pleadings suggest that if funding for the Next Generation project does not come from the Preservation Assessment Fund, it will not come at all.




Civ. No. 97-2412 (TFH)





For the reasons stated in the Court's Memorandum Opinion, it is hereby

ORDERED that plaintiff's motion for a preliminary injunction is

GRANTED; it is further

ORDERED that defendants are enjoined from crediting, spending, obligating, or using any of the money collected for, placed into, or taken from the "Intellectual Infrastructure" fund account, pending final adjudication of this matter.

February 2nd, 1998
Thomas F. Hogan
United States District Judge