Law and technology

The Government has confirmed that online peer-to-peer will be made possible in New Zealand as part of the long-awaited overhaul of securities laws. A recently released Cabinet paper says:

Peer-to-peer lenders are effectively precluded from operating in New Zealand given the regulatory regime. Licensing is intended to introduce a regulatory regime proportionate to the risks that they pose. The licensing criteria will look at the character and background of the key individuals involved, and also a limited assessment of organisational processes.

This is welcome news for what could be a niche fledgling market in New Zealand. However, as tends to be the nature with securities law, the devil may lie in the yet-to-be-determined detail.

Submissions on the Copyright (Infringing File Sharing) Regulations are due this week (27 May 2011). The key part of my submission as follows:

Response to Question 4: (“Should the suggested requirements be included in regulations? Should there be any other information requirements and why?”)

One of the most critical issues in determining whether IP infringement has occurred is proving the complainant’s rights to the IP in question. The suggested requirements do not adequately address this critical issue.

Sections 122D(2)(a) and 122E(2)(a) simply require a notice to “identify the rights owner”. Paragraph 13(e) simply proposes that a notice include “name of copyright work and name of owner of that work”. This is inadequate. Because there is no “register of copyright works”, and because of complex international IP rights management, it is generally impossible for an account holder or IPAP to confirm whether a complainant is in fact the rights owner of the relevant work.

For the complaint to have a desirable level of integrity, the complainant should be required to provide more than a mere “identification” or “description” of the work allegedly infringed. The complainant should be required to provide an affidavit confirming they are the owner of the identified work, or the duly authorised agent of the owner of the work, at the date of the alleged infringment.

This is a simple requirement, and would allow the IPAP, the account holder, and (if necessary) the Tribunal to proceed on the basis that the ostensible rights owner does in fact own (or have the necessary rights in) the work at the centre of the alleged infringing activity (in the absence of evidence to the contrary).

I therefore propose amending paragraph 13(h) of the Discussion Document requirements to read:

h. an affidavit from the rights owner that they are the owner of that work, or the duly authorised agent of the owner of the work, at the date of the alleged infringment, and to the best of their knowledge, the information provided to the IPAP is true and correct.

With all the other things on Parliament’s plate, it’s not surprising that the new Patents Bill 2010 is way down the Order Paper – at number 44 of 52 (though I see it has overtaken the Dog Control Order).

However, it seems the Government is sticking by the unanimous Commerce Committee recommendation to exclude computer programs from patentability, as confirmed to me last week by Commerce Minister Simon Power:

The Government is set to update the Companies Act 1993 to allow the use of electronic communications for certain formal notices and procedures.

Currently, the law permits shareholder meetings to be held via the following methods (Schedule 1, section 3 of the Companies Act 1993):

(a) by a number of shareholders, who constitute a quorum, being assembled together at the place, date, and time appointed for the meeting; or

(b) subject to the constitution of the company, by means of audio, or audio and visual, communication by which all shareholders participating and constituting a quorum, can simultaneously hear each other throughout the meeting.

There is no formal provision for electronic communication (although certain electronic means do meet the existing requirements). The Regulatory Reform Bill, which received its first reading recently, will improve that by allowing meetings by shareholders to be held by:

(a) being assembled together at the time and place appointed for the meeting; or

(b) participating in the meeting by means of audio, audio and visual, or electronic communication; or

(c) by [sic] a combination of both of the methods described in paragraphs (a) and (b).

Currently, notices to individual shareholders may be sent via the following means:

(a) delivered to that person; or

(b) posted to that person’s address or delivered to a box at a document exchange which that person is using at the time; or

(c) sent by facsimile machine to a telephone number used by that person for the transmission of documents by facsimile.

Again, there is no express provision for modern electronic communication such as email. It is reasonably arguable (and in practice does happen) that delivery by email falls under (a), however companies (especially those with large shareholder bases) may be reluctant to take such chances.

The option to receive notices electronically is not so much for the company’s benefit, but for the shareholders’. Accordingly, the new law does not force shareholders to accept electronic communications, but gives them the option (binding on the company):

(3A) … a shareholder or creditor may notify the company—

(a) that the shareholder or creditor wishes to receive the document by electronic means; and

(b) of the electronic address to which the document is to be delivered.

(3B) Notification in accordance with subsection (3A) may be made in respect of a particular document or documents, or in respect of all documents to be served.

(3C) The company must comply with a notification made under subsection (3A).

Note that the company must comply with the shareholder’s specified mode of electronic communication. The new law does not limit what the modes are, so in theory a shareholder could request to be sent documents via Facebook or Twitter.

This is a sensible reform, as many modern business people are far more likely to have ready access to their electronic communications, than to a document posted to a physical address.

The Electronic Transactions Act 2002 will apply to any questions over the time of dispatch and receipt.

Law firm Chapman Tripp has published an article criticising the Government’s decision to exclude software from patentability. While the article makes some valid points, it does not deal with some points fairly.

The article claims:

The [software patent] exclusion was the product of intense and successful lobbying by members of the “free and open source” software movement… In its April 2010 report to Parliament on the Patents Bill, the Commerce Select Committee acknowledged that the free software movement had convinced it that computer programs should be excluded from patentability.

I’m sure this assertion of mighty lobbying power (the ability to sway an all-party, unanimous recommendation no less) would be flattering to any professional lobbyist, let alone FOSS supporters – if only it were true (it is not evidenced in the Commerce Committee report). A range of entities made submissions against software patents, including the statutorily independent University of Otago, InternetNZ, a number of small businesses (and my independent self, I modestly add). There were also submissions the other way, though interestingly the most submissions in favour of retaining software patents were from patent attorney law firms. It is also notable that other organisations including NZICT, which is a strong supporter of software patents and engaged in heavy after-the-event lobbying, did not make any submissions on the issue.

The article adds the comment:

The Committee said that “software patents can stifle innovation and competition, and can be granted for trivial or existing techniques”. The Committee provided no analysis or data to support that proposition.

The fact that a Committee “provided no analysis or data” to support its recommendations is hardly noteworthy – that is not it’s job. Submitters provide analysis and data to the Committee, not the other way around. The material in support of the proposition is in the submissions.

The article sets up an unfair straw-man argument:

Free software proponents reckon that software should be free and, as a result, they generally oppose intellectual property rights. They say that IP rights lock away creativity and technology behind pay-walls which smother innovation. Most authors, inventors and entrepreneurs take the opposite view.

I don’t claim to know what “free software proponents’” views on all manner of IP rights are, but when it comes to software patents in New Zealand, the evidence strongly suggests that the “authors, inventors and entrepreneurs” of software (FOSS or not) are opposed to software patents (see my posts here and here). This includes major companies, including NZ’s biggest software exporter Orion Health (see Orion Health backs moves to block patents).

While the New Zealand Computer Society poll showing 81% member support for the exclusion is not scientific, it is at least indicative. In any case, opponents of the new law (mainly law firms) have consistently asserted a high level of opposition to the exclusion without any evidence to support that view.

The article leads to the warning:

If New Zealand enacted an outright ban on computer-implemented inventions we would be breaking international law. … Article 27(1) of TRIPs says that WTO members must make patents available for inventions “without discrimination as to… the field of technology…”.

The authors rightly point out that breaching TRIPs could result in legal action against the Government by another country. However, that conclusion is premised on the basis that software is an “invention”. A number of processes and outcomes are not recognised as inventions for the purpose of patent law in different countries, including mathematical algorithms and business methods. The question of whether software is (or should be) an invention was commented on by a Comptroller-General of the UK Patent Office:

Some have argued that the TRIPS agreement requires us to grant patents for software because it says “patents shall be available for any inventions … in all fields of technology, provided they are…..capable of industrial application”. However, it depends on how you interpret these words.

Is a piece of pure software an invention? European law says it isn’t.

The New Zealand Bill does not say that a computer program is an invention that is not patentable. It says, quite differently, that a computer program is “not a patentable invention”, along with human beings, surgical methods, etc.

Article 27 has reportedly rarely been tested (twice in 17 years), and never in relation to software. The risk of possibly receiving a complaint under a provision (untested) of a multilateral agreement is not new. The New Zealand Law Society notes this in its submission on the Patents Bill (which does not address software patents):

The proposal to exclude plant varieties under [the new Act] is because New Zealand has been in technical breach of the 1978 Union for the Protection of New Varieties of Plants (UPOV) treaty since it acceded to it in November 1981.

What’s 30 years of technical breach between friends? Therefore, in fairness I would add a “third way” of dealing with the software patent exclusion: leave it as it is, and see how it goes (which is, after all, what the local industry appears to want). As I wrote last year, “Pressure to conform with international norms (if one emerges) and trading partner requirements may force a change down the track, but the New Zealand decision was born of widely supported policy …”

If the ban on software patents as it currently stands does not make it into law (which is a possibility, despite clear statements from the Minister of Commerce that it will), it won’t be the end of the world. In fact, it will be the status quo. There are pro’s and con’s to software patents, and the authors are quite right that New Zealand will be going out on a limb by excluding them. The law can be changed again if need be. In the meantime, I refer again (unashamed self-cite) to my article covering the other, and much more popular, ways of protecting and commercialising software.

The Minister of Justice, Simon Power, has announced a review into the “wild west” of the internet:

It’s a bit of a Wild West out there in cyberspace at the moment, because bloggers and online publishers are not subject to any form of regulation or professional or ethical standards.

The idea of some sort of a review of how our laws “intersect” with the internet has been kicking around for a while now, but the above statement by the Minister sets a rather draconian and disconcerting tone for the review. Regulation of bloggers? Bloggers and ethics?! As for the suggestion (via the term “Wild West”) that law doesn’t apply to the internet, well that is simply incorrect.

Fortunately, the Minister curbs his enthusiasm by saying that due to the “enormous scope of this whole issue”, the review will focus on:

• How to define ‘news media’ for the purposes of the law.
• Whether and to what extent the jurisdiction of the Broadcasting Standards Authority and/or the Press Council should be extended to cover currently unregulated news media, and if so what legislative changes would be required to achieve this.
• Whether existing criminal and civil remedies for wrongs such as defamation, harassment, breach of confidence, and privacy are effective in the new media environment, and if not whether alternative remedies are available.

Of these, it is really only the third issue that is likely to have any substance. The first two points may address relatively small issues (such as extending BSA jurisdiction to online transmission of broadcast content). Beyond that, it will show how difficult – and, hopefully, undesirable – it is to “regulate” the internet much beyond where it is now. There is no prospect of any “regulation” of bloggers beyond existing laws, or of subjecting private comment to professional bodies such as the Press Council (which is not even a statutory organisation, and has no official powers).

The third issue will be where the most interest lies. There is no question that criminal and civil remedies do extend to the internet, as recent incidents such as the prosecution of a blogger for breaching a name suppression order demonstrate. But there is scope for further consideration of some of these issues.

Take harassment for example. I recently heard from two separate individuals who are the targets (allegedly) of vicious online smearing and bullying, mainly on Facebook. One of them told me that it was a deliberate campaign to wreck her marriage, and was causing enormous personal distress. Now what can be done about that? In many cases, the answer is very little. The review may be an opportunity to brainstorm and see if some solution or framework can be arrived at to allow genuine victims to get some assistance. Draconian regulation is not the answer, nor is possible, but there may be some sensible steps that can be taken.

A man has been pleaded guilty in the Queenstown District Court of intentionally accessing a computer system at the hostel he was staying at:

Schiavini had used his computer to access the wireless network at the hostel, where he was staying, and gained further access to the internal reservation system. He managed to access his own reservation, and left a message there to let the lodge know he had gained access.

At first, it sounds innocent enough – especially as the article goes on to say:

He then approached management to tell them about the security breach in their system, and told them how to fix the flaw. When management had repaired the breach, they approached him to ask if he could gain access again. He tried, but was this time unsuccessful.

Now if that was all that had happened, receiving a criminal conviction would seem harsh. However, the hostel’s website gives some important additional detail not in the news report:

In summary, he broke into our encrypted wireless network, downloaded 80Gb of ‘data’, and a copy of the our database for further study. He then decided to tell us assuming that by telling us that all would be made good.

Which puts a somewhat different light on it. As the oft-cited analogy says, just because you see someone has left their house unlocked doesn’t mean you can enter and leave a note in their bedroom to notify the owner.

Sadly many judgments are still not online in New Zealand, so we can’t read the judgment. But the charge was likely to have been under s 252 of the Crimes Act:

Accessing computer system without authorisation
Every one is liable to imprisonment for a term not exceeding 2 years who intentionally accesses, directly or indirectly, any computer system without authorisation, knowing that he or she is not authorised to access that computer system, or being reckless as to whether or not he or she is authorised to access that computer system.

Note there is no white hat or good samaritan exemption to that law – and perhaps there should be…

As a side-issue, if (hypothetically) all the man had accessed was his own information, I wonder if his lawyer might have successfully defended the charge on the grounds that he was authorised under the Privacy Act, principle 6 of which states:

Where an agency holds personal information in such a way that it can readily be retrieved, the individual concerned shall be entitled … to have access to that information.

The hostel is an “agency” under the Act, and the booking information is likely to include personal information gathered from the man. It could just be enough to escape a conviction.

The Government has released a discussion document on the “biggest shake-up of fundamental securities law in a generation”. The main act governing securities, the Securities Act, was passed in 1978 and has been in dire need of a review for some time. One proposed change of interest to the IT industry (and others) is to relax the rules on offering shares to employees. Employee share plans are often a desirable strategy for many startups. As the document notes, employee share plans:

are … used as a partial substitute for cash remuneration (especially in young, rapidly growing companies that are “cash poor”), and to foster a sense of ownership among employees and participation in the company’s management and direction.

Unfortunately, New Zealand’s existing law makes them more complex to implement than they should be, in particular for small businesses (see my post Clearing the path for employee ownership). The review will hopefully change that:

The Ministry proposes to [allow] offerings of equity and equity options to employees of all companies (listed and unlisted), up to 15% of assets or 15% of the outstanding value of securities of the same class. An additional restriction that we are considering is to require that employee share schemes are offered as part of an employment contract, and would form a single, discrete offering not integrated with any other offers. This would focus the scheme on the employment relationship and its role in remuneration rather than allowing offers to all employees for fundraising purposes.

This would be a big improvement on the current regime. In my view, the restrictions on employee share schemes should be minimal. The idea of linking share schemes to employment contracts, while potentially slightly more onerous for employers, is a sensible way of providing protection for employees. Generally, people working for a company will have a better impression of its prospects and whether or not it is “dodgy” than the public. If they are offered the opportunity, and make an informed decision to invest, the law should avoid putting roadblocks in their way.

Peer-to-peer lending

The review will also look at peer-to-peer lending. The discussion document outlines the problem:

The Ministry is told that [peer-to-peer lending] services are not practical in New Zealand because the borrower is an “issuer” for the purposes of the Securities Act and Financial Reporting Act. The Securities Act states that for a debt security the issuer is “the person on whose behalf any money paid in consideration of the allotment of the security is received”. The borrower, usually a private individual receiving a relatively small sum of money, would have to register a prospectus, produce an investment statement, and file annual audited financial reports.

Peer-to-peer lending, driven by the internet, is experiencing rapid growth in other countries. It would be very unfortunate if New Zealand does not use the rare opportunity of this review to remove undesirable barriers to this new form of finance. This is especially important given the long-term tightening of credit availability since the global financial crisis, and the possibility that peer-to-peer lending and other forms of micro-finance could provide a critical source of capital for small Kiwi businesses.

The discussion document suggests that the service provider, rather than the individual lenders, could be regulated. That would provide a large piece of the solution, but still has the potential to impose an unrealistic or uneconomic burden on the service provider. To make peer-to-peer lending really feasible, the new securities law must not lump such services (and the people who will use them) in the same class as retail finance operations. Imagine, for example, if every casual Trade Me seller, or even Trade Me itself, was required to be licensed under the Secondhand Dealers and Pawnbrokers Act. A clear exemption should be made for “casual lenders” to participate in peer-to-peer finance, and service providers should be recognised as such – intermediaries, not active participants in any financing.

The Ministry of Consumer Affairs has released a discussion document on the proposed reform of New Zealand’s consumer law. One of the areas to be addressed is online auctions. Issues include whether online auctions should be regulated in some form, and whether the Consumer Guarantees Act should apply to goods and services bought via online auctions.

Regulation of online auction

A preliminary (and, lets be honest, entirely academic…) issue raised in the document is whether online auctions are presently subject to the Auctioneers Act. The document says no, on the basis that the Act only applies to auctions “by outcry”, which is defined as 6 people being physically present:

The reference to “outcry” in the beginning of the definition [of "auction"] applies to the various different auction methods referred to in the definition.

Based on that conclusion the documents goes on to say “the Auctioneers Act definition of auction only applies to auctions where it is possible for the bidders to be physically present with the auctioneer”. I take a different view from the good people at the Ministry. As I wrote previously, in my view “outcry” is not a necessary part of the definition:

there does not appear to be any reason … why the words “by outcry” must apply to the entire definition [of auction] while the other sub-clauses of the definition are read as alternates. Furthermore, to do so would limit the final key words “or where there is a competition for the purchase of any property in any way commonly known and understood to be by way of auction.” These final words are clearly a catch-all intended to prevent anything “commonly understood to be an auction” from being inadvertently excluded by the definition.

So my view is that online auctions are currently covered by the Auctioneers Act (which, as I said, is entirely academic). However, I also noted the craziness that online auctions should be “subjected to rules formulated decades ago and premised on a traditional, physical auction process”.

The fact is that specific regulation of online auctions is not currently enforced. Nor is it not necessary. Practical enforcement would be difficult. The UK, New South Wales and Victoria (among others), get by quite well without special legislation covering online auction providers. Hopefully, our new law will clearly exempt online auctions and other forms of e-commerce from unnecessary red tape.

Consumer Guarantees Act

The reform will also address the perennial issue of whether the Consumer Guarantees Act (or whatever its replacement will be) should apply to online auctions. There is no doubt that, generally, the same rules should apply for online “buy now” sales as for bricks-and-mortar sales. But what about online auctions?

The document says that whether online auctions are presently covered by the Consumer Guarantees Act is a “grey area”. But in my view there has never been much doubt: online auctions, if they are in fact conducted as an “auction” with bids etc, are not covered by the Consumer Guarantees Act (Trade Me probably wisely leaves it open for now). However the document gives a strong indication (for a discussion paper) of the preferred view:

There would appear to be justification, accordingly, to clarify that Trade Me style auctions should not be exempted from the Consumer Guarantees Act.

That would be a very sensible proposal, and my bet is this will be an outcome of the review. There will likely be some push-back from Trade Me-exclusive dealers, but most medium/large retailers (who also operate bricks-and-mortar shops) will support it. They already have full consumer obligations for all goods and services sold in their stores and online (non-auction style). So does every corner dairy and most small mum-and-dad shops. There are too many stories of shonky internet-only dealers who are only too happy that they are exempt from the consumer protection obligations that all these other retailers have. Trade Me does a great job in helping out where it can, but the answer is simple: close this unintended loophole. And it doesn’t create more red tape – it simply levels the playing field between dealers and simplifies the consumer protection regime.

Note that the proposal is not to extend the CGA to private online sellers and auctions. As per the current law, it will only apply to sellers “in trade” – i.e. shops, retailers and dealers.

A New South Wales appeals court has ruled that downloaded software is not “goods” under that state’s Sale of Goods Act (not dissimilar to New Zealand’s act of the same name). Case link: Gammasonics v Comrad Medical Sysytems [2010] NSWSC 267. Interestingly, the ruling means that software bought over the counter would be included as “goods” (and be covered by statutory guarantees), but the same software downloaded over the internet would not be.

A while back I discussed the consumer liability of software developers in this country. In essence, New Zealand’s Consumer Guarantees Act has, since 2003, included “software” in the definition of goods, which means that (consumer) software receives the same consumer protections as other consumer goods. One thing I didn’t mention was that software is also “goods” under the Sale of Goods Act 1908. In fact, this change was implemented at the same time that software was expressly included in the Consumer Guarantees Act.

The New South Wales version of that act does not mention software, and the New South Wales Supreme Court ruled that downloaded software – not having any tangible element – could not be “goods” falling within the act. However, software provided on physical media would constitute “goods”, because the necessary tangibility is present.

This does result in an inconsistent and illogical state of affairs, but one which will soon be partially corrected. The Australian consumer protection laws (similar to New Zealand’s Consumer Guarantees Act) is soon to be overhauled, and as part of the update, software will be specifically included as “goods”.

One point of interest is that the New Zealand amendments in 2003 which expressly added “software” to the definition of goods, only added software “to avoid doubt“.  (The phrases “to avoid doubt” and “for the avoidance of doubt” are common in legal documents, although mildly controversial. I have encountered some lawyers who refuse to use it, which is a bit extreme – it’s fine if used sparingly). By adding software to the definition of goods only to “avoid doubt” (i.e. clarify the law – a common use of that phrase in legislation), parliament was saying that it considered software to be already included “goods”.

The judge in this case did acknowledge:

it is productive of injustice if consumers purchasing software in the form of CDs or DVDs, either sold in retail shops or via the internet, are protected by the statutory warranties in the Sale of Goods Act, whereas consumers who download the same software directly from the internet or from a supplier, (as was the case here), would not.

A simple law change in Australia will remedy this situation.