Yesterday, as Bret noted first, the IAB has responded to ICANN's earlier request regarding the technical legitimacy of Verisign's recent IDN "launch". As expected, the answer coming back from the IAB is hardly flattering to Verisign.
In reporting these developments, "The Register" asks "what, if any, powers ICANN has relating to this kind of service". The answer to this is actually quite clear. From a layman's perspective, if Verisign has violated the terms of their Registry Agreement with ICANN then ICANN can seek compliance of their agreement as per the terms of section II-14 of their agreement, take the dispute to arbitration per 11-15 or ultimately move to terminate the agreement per II-16.
The problem is that the IAB doesn't come out and say whether or not Verisign has violated the terms of their contract because this isn't within their purview. They have stated on what basis Verisign doesn't conform to the various relevant specifications, but the problem is that they aren't directly required to adhere to any of the relevant specifications that the IAB notes. According to Section 4 of Appendix C to the .com Registry Agreement between Verisign and ICANN, Verisign is only compelled to abide by the implications of RFC 1034, 1035 and 2182 in the operation of their names servers.
It gets more complicated from here. For instance, the IAB notes that Verisign is in violation of RFC 2308 which describes negative caching of DNS records. RFC 2308 updates RFC's 1034 and 1035, but it isn't clear whether this would count as a violation of Verisign's contract.
Further complicating the matter is Leslie Daigle's role as chair of the IAB. Rather than attempting to manage the conflict as The Register implies she is attempting to do, it would be completely appropriate, nay nessecary, that she publicly declares her conflict on this matter and steps aside for the purpose of this dispute if ICANN requires further involvement from the IAB. Without impugning her motives thus far, this is what she should have done in the first place.