February 01, 2017 Features

Transactional Insurance in the Sale of Internet Addresses

By Richard A. Blunk

Growth of the Internet was originally based on three assumptions. First, each device connected directly to the Internet would be assigned a globally unique number—an Internet address—in order to operate. Second, the 4.3 billion addresses made available pursuant to Internet Protocol version 4 (IPv4 addresses) would be sufficient to accommodate the generally accepted rate of adoption and use of the Internet. Third, five Regional Internet Registries (RIRs)—serving North America, Europe, Asia-Pacific, Latin America, and Africa—would manage the issuance of the balance of the IPv4 addresses. Subject to select technological innovations, the first premise is generally true today. The other two assumptions, however, have proven to be grossly incorrect.

Internet Address Inventories Are Depleting

Specifically, the Internet of Things, social media, and the never-ending demand for mobile access increases the global dependence on readily retrievable data and email communication at a much more rapid pace than originally predicted. Internet Protocol version 6 (IPv6) could provide another vast supply of Internet addresses, but its global adoption has been extremely unsatisfactory.1 As a result, the continued growth of the Internet remains constrained by the availability of IPv4 addresses, which most now acknowledge was never, and will not be, sufficient to continue to support the current trajectory of Internet growth.

RIRs have tried a variety of initiatives to address differing regional Internet address adoption rates, but with limited success. As a result, they continued to run out of the IPv4 addresses originally issued to them at different rates, and their respective inventories have been, or will very soon be, totally depleted.

The failure of the second and third foundational assumptions, then, has led us to today, where current and reasonably anticipated demand far outstrips technologically available supply.

Ongoing demand continues to vary across the RIRs while more and more companies around the globe need more and more Internet addresses. At the same time, more and more companies have come to view their excess Internet addresses as property that they wish to monetize. Traditionally, such market-clearing transactions were consummated through an RIR, but in doing so, the company that needed more Internet addresses had to expressly agree that it only acquired a revocable license to use those addresses from the clearing RIR, not ownership.

Birth of the Gray Market for Selling Internet Addresses

That all changed in March 2011 when Microsoft paid the Nortel bankruptcy trustee $7.5 million for a large bundle of Internet addresses.2 These particular IPv4 addresses, however, had not been issued by, or ever involved in a transaction cleared through, any RIR. These so-called “legacy IPv4 addresses” were “sold” at an $11.25 per legacy IPv4 address purchase price.

This seminal transaction was based on the belief that those legacy IPv4 addresses were intangible property—property that could be bought and sold without needing to accept the limited rights granted under the RIR revocable license approach. As a result, the “gray market” in the sale of legacy IPv4 addresses was born.

Various organizations, such as the National Science Foundation, and other commentators have embraced this same approach with differing levels of enthusiasm. Opponents, including the RIRs, of course, have voiced strenuous objection. Nonetheless, many other blocks of legacy IPv4 addresses have been sold in several other noteworthy bankruptcies and other transactions at prices ranging from $9 per address to $15 per address.3

Legacy IPv4 Addresses Are Difficult to Value

The terms of most gray market transactions, unlike such early bankruptcy purchases, are not publicly available. Therefore, it is very difficult to accurately determine the “average” price for legacy IPv4 addresses, a task rendered even more difficult because the transaction price may vary significantly depending on the several highly technical features in the subject addresses.

One commentator has concluded that roughly 1.9 billion IPv4 addresses—or approximately 44 percent of the entire original 4.5 billion IPv4 address pool—are legacy IPv4 addresses that may be transferred via this gray market.4 In an attempt to adjust for inherent technological differences and the increasing shortage of supply, some have claimed that $15 is the “average” market price for a legacy IPv4 address. Mathematically, then, the overall value of the current gray market has been estimated to be as high as $8 billion—a large market to be sure, which may even increase in size as the current supply and demand imbalance intensifies. The continued value of legacy IPv4 addresses also seems assured because the implementation of IPv6 will still require the use of IPv4 Internet addresses due to technological incompatibility between those two protocols.

Gray market transactions have been structured in a number of different ways, such as options, rights of first refusal, long-term leases, letters of agency, and assignable purchase and sale contracts. Others are based on installment payments, phased delivery, seller or third-party financing, and the issuance of credits to the seller to offset the purchase of other unrelated services from the buyer.

Due diligence efforts to confirm the seller’s “title” to the subject legacy IPv4 addresses are clearly an important aspect in evaluating each potential gray market transaction. Many gray market participants rely on the registries maintained by the RIRs, even though these registries are frequently incorrect and out of date. Other purchasers may rely on specific technologies. But regardless of the approach taken, title is frequently a muddled issue.

If this due diligence is incorrect and another party has a superior claim to the subject legacy IPv4 addresses, the buyer may have legal recourse against the seller for a breach of any applicable representations and warranties. A separate cause of action might also be brought against the seller’s lawyer or the IPv4 broker if they delivered written opinions at closing. But these options—both individually and in combination—are generally insufficient to redress the loss of those legacy IPv4 addresses to a party with a better claim.

Insurance as a Possible Solution

Seasoned corporate and real estate transactional lawyers will quickly suggest the use of insurance as a possible solution to this shared concern. In corporate acquisitions and sales, for example, the seller may provide representations and warranties regarding title and other key points that can be supported by so-called “representations and warranties” insurance. Similarly, all substantial real estate purchase, sale, or related financing transactions require the use of title insurance in which the insurer agrees to defend the purchaser’s title to the transferred property subject to the express exclusions and other coverage-limiting provisions contained in the policy.

Unfortunately, there is no currently available insurance product that provides similar protection in the sale of legacy IPv4 addresses. This void is quite curious because the availability of corporate and real estate insurance products has, at least in part, enhanced the willingness and ability of counterparts to close deals involving those two separate asset categories.

Like these two existing coverages, a legacy IPv4 address insurance product would not be an absolute confirmation of title transfer or an unequivocal statement that the purchaser now has the exclusive right to license or use those addresses. But even if it only enables the purchaser to pass on a portion of the title or exclusive registration risk to a well-funded, independent source that is in the business of paying off on bad bets, this is a substantial step forward in addressing those key areas of due diligence concern.

As in the case of any new insurance product, interested prospective carriers would need to address a variety of procedural issues before writing this coverage. Evaluating the carrier’s cost and methodology to validate this opportunity, developing underwriting protocol, and addressing market issues would be important. But even after careful analysis of all of the available data, the first insurance company to write this type of coverage would incur all of these preparatory expenses before it learns whether the gray market will purchase this assurance at a price necessary for the carrier to recoup these new product startup costs while still earning an appropriate risk-adjusted rate of return.

The scope of actual coverage will also require thoughtful analysis on several key points. For example, would the policy only cover losses after a court has issued a final ruling that the insured is not entitled to use or register the covered addresses? Could the carrier satisfy its obligations to the insured by paying the insured the “market price” of those legacy IPv4 addresses less the policy’s deductible and, if so, how is that “market price” to be determined? What exclusions from coverage will be acceptable to the gray market, and are they sufficient to appropriately limit the carrier’s coverage? On this point, prudent carriers will focus on items such as global changes in the governance of the Internet, intentional acts of the insured, the insured’s prior knowledge of specific defects in title to the subject legacy IPv4 addresses, and the effects of precoverage security interests in the subject addresses.

It would seem logical, then, that the gray market would embrace the willingness of a well-financed, independent third party to provide this type of title or of an exclusive right to register the applicable legacy IPv4 addresses at an “acceptable” price. Interested carriers must resolve a number of key, and somewhat novel, challenges in providing such coverage. Nevertheless, this new type of product may ultimately become as critical to consummating transactions involving legacy IPv4 addresses as title insurance is to real estate deals and representations and warranties policies are to corporate deals. ◆


1. See IPv6 Adoption Visualization, Akamai, https://www.akamai.com/uk/en/our-thinking/state-of-the-internet-report/state-of-the-internet-ipv6-adoption- visualization.jsp (last updated Dec. 30, 2016).

2. See Matt Rosoff, Microsoft Just Bought 600,000 Internet Addresses for $11 Each, Bus. Insider (Mar. 24, 2011), http://www.businessinsider.com/microsoft-just-bought-600000-internet-addresses-for-12-apiece-2011-3.

3. For example, 65,534 IPv4 addresses were sold for $12 per address (a total price of $786,432) when Borders Books went out of business. Scott Hogg, How to Buy (or Sell) IPv4 Addresses, GTRI (June 18, 2015), http://www.gtri.com/how-to-buy-or-sell-ipv4-addresses.

4. Ernesto M. Rubi, Property Rights in IPv4 Numbers: Recognizing a New Form of Intellectual Property, Bus. L. Today (Nov. 19, 2012), http://apps.americanbar.org/buslaw/blt/content/2012/11/article-04-rubi.shtml.

Richard A. Blunk

Richard A. Blunk (rblunk@thermopylaeventures.com) is managing director and general counsel of Thermopylae Ventures, LLC, a Dallas-based alternative investment firm with interests in alternative litigation finance, cybersecurity, database interoperability, fire retardants, inbound foreign investment, Internet addresses, mezzanine finance, sale of vocational rehabilitation equipment, sports medical technology, and Texas real estate. A version of this article was originally published in October 2016 on Dallas Innovates .