NeuLevel will have to convince a court that 53,000 disputed domain names are being issued fairly before it can issue them

NeuLevel has found itself in a tricky situation with its customers and channel, following yesterday's ruling by a Los Angeles court that the roll-out of the .biz top-level internet domain could constitute an illegal lottery. Speculation has already begun that NeuLevel could face additional lawsuits from class-action attorneys representing registrants and possibly from the company's own channel.

As anticipated, Judge Anthony Mohr handed down a preliminary injunction against the company, preventing it from going live with about 53,000 domain names. Applicants for all the cool-sounding big-money names, like show.biz and travel.biz, are affected, as are somewhere between 80 and 500 companies that resell .biz names.

NeuLevel has also been instructed to put $3m in the court's trust, to cover the possibility that it will have to make 1.5 million refunds of domain name applications. The preliminary injunction means not that it has been judged to have acted illegally, but that the civil law suits against it have a likelihood of success when the case goes to full trial about six months from now.

NeuLevel chief executive Doug Armentrout said in a statement: "While we are disappointed with the Court's decision and the impact it will have on some .biz applicants, we strongly believe that the process we've set forth and developed in conjunction with the ICANN is the most fair and equitable way to distribute domain names. We fully intend to pursue this matter in the courts and will work to resolve these issues as quickly as possible."

At the beginning of August, NeuLevel was sued by class-action attorneys acting on behalf of potential .biz registrants, with an individual named David Smiley as the representative plaintiff. A second suit, on behalf of ePrize LLC, was filed last month. The plaintiffs seek an injunction and damages against what they allege is a lottery, illegal in California and most US states. NeuLevel denies any wrongdoing.

The company's roll-out of .biz worked like this. First, there was an intellectual property claims phase, where trademark holders could stake a claim to a domain based on their mark, without actually registering it. Second, an "applications" period opened, where anybody could apply for any name. When an application clashed with an IP claim, the idea was that NeuLevel would manually sort out the dispute.

The applications period is what caused the controversy. Unlike other TLD roll-outs, such as that operated by Afilias with .info, NeuLevel decided to take all the applications for names from its dozens of registrars, pool them, then randomly select one applicant to be allowed to register any disputed name.

Applicants were allowed to make multiple applications, which is one of the reasons Smiley thinks it constitutes an illegal lottery, as one could increase one's chances by paying for more applications. Some registrars even explicitly referred to the process as a "lottery", and applications as "tickets".

NeuLevel, which is basically a wholesaler, charged its registrar retailers $2 per application, but the registrars typically resold them for about $5 each. Many of these registrars also have large reseller networks comprising hundreds of companies. So NeuLevel finds itself in the situation where if it is legally obliged to refund its applicants' $2, its registrars will likely have to refund another $3 on top of that. It is possible that some registrars could find grounds to sue NeuLevel for this lost money.

Spokespeople for VeriSign and Register.com, the two largest domain name registrars by market share, declined to comment on the injunction or if they would take any action as a result. Both companies, along with about 600 other registrars and resellers, are named in the Smiley complaint, as is the Internet Corporation for Assigned Names and Numbers (ICANN).

Judge Mohr said ICANN, which supports NeuLevel, is not doing anything wrong, and is not covered by the injunction. He also asked the plaintiffs to post a $1.6m bond to cover NeuLevel's legal expenses if it wins at trial. Trial is expected in about six months, to give the plaintiff's lawyers time to track down all the 500-odd poeple it names as defendants.

NeuLevel's Armentrout said the company will be contacting all its affected customers shortly. He said: "More than 80 percent of the domain names applied for during the .biz domain name application process are unaffected by this decision and will be 'live' by October 23rd."

The preliminary injunction covers a class of domain referred to in court as "Class 2b". Class 1 names were names where there was a single application for a single name, and thus the element of chance was not involved. Class 2a were names were there were multiple applications for a single name from a single applicant. Names in both of these groups are allowed to go live as planned.

Class 2b names are names where there are multiple applications submitted by multiple applicants. For example, 20 people may have submitted 20 applications each for a name like show.biz. About 53,000 names, a small but significant ercentage of the total applications, fit into Class 2b. There were 1.5 million applications for these names, or about 28 applications per name on average.