Law and technology

The Select Committee examining the proposed Patents Bill has recommended that software patents be excluded from patentabilty (full report, 1.6MB PDF):

We recommend amending clause 15 to include computer programs among inventions that may not be patented. We received many submissions concerning the patentability of computer programs. Under the Patents Act 1953 computer programs can be patented in New Zealand provided they produce a commercially useful effect. Open source, or free, software has grown in popularity since the 1980s. Protecting software by patenting it is inconsistent with the open source model, and its proponents oppose it. A number of submitters argued that there is no “inventive step” in software development, as “new” software invariably builds on existing software. They felt that computer software should be excluded from patent protection as software patents can stifle innovation and competition, and can be granted for trivial or existing techniques. In general we accept this position.

It is great to see the committee has accepted the core arguments put forward by a range of submitters (including myself) and rejected the opposing views put forward against those arguments. The mention of open source is significant and quite likely the first time it has directly influenced policy.

The actual proposed amendment implementing the ban is straightforward:

15(3A) A computer program is not a patentable invention.

The committee has not attempted to define “computer program”, which is sensible and consistent with the use of that term in the Copyright Act 1994. The amendment is not wide enough that it will necessarily prevent someone attempting to dress up what would otherwise be a software patent application as a business method patent. But it will be highly effective in most cases, and should prevent the worst examples of software patents granted (or threatened) overseas from being replicated in New Zealand (e.g. 1-click).

The House will need to vote on the proposed changes to the Bill.

The committee also discussed embedded software:

While the bill would provide adequate incentives for innovation, however, we are aware of New Zealand companies who have invested in a significant number of software-related inventions, involving embedded software.* We sought advice on the approach
taken in other jurisdictions such as the United Kingdom and the United States, and whether legislation that would enable “embedded software” to be patentable might be practicable. After careful consideration we concluded that developing a clear and definitive distinction between embedded and other types of software is not a simple matter; and that, for the sake of clarity, a simple approach would be best. We received advice that our recommendation to include computer programs among the inventions that may not be patented would be unlikely to prevent the granting of patents for inventions involving embedded software.

Software in any form would likely be caught by the proposed section 15(3A), but the final sentence of the above quote reflects the fact that it will not be possible, or practical, in many cases to separate the embedded software from an invention. It is important to note that the proposed Bill does not expressly endorse embedded software patents, but as with business method patents each application will need to be assessed on its merits.

The Law Commission has released its latest report on privacy law, Invasion of Privacy: Penalties and Remedies. This report (part 3 of 4) specifically deals with matters such as surveillance, interception of communications, and criminal and civil law.

A key recommendation is that “the tort of invasion of privacy recognised in Hosking v Runting should be left to develop at common law”. It is worth remembering that the Hosking case was only decided in 2004, and then only by a 3-2 judge majority – a very clear reminder that privacy law in this country is still in its most formative stages.

The recommendation to leave privacy law “to develop at common law” is the equivalent of kicking for touch – and in the circumstances, the only realistic option for the Commission. It is clear that much of the “real” privacy issues that will affect New Zealanders on an everyday basis will not be decided by New Zealand’s courts or the government. Rather, where Europe and the US go, New Zealand will have to follow. The increasingly connected nature of the world makes it futile to attempt to chart a different course. And in any case, there are benefits in following the lead of others, with far greater resources and innovation, in this area.

Another recent report, this time from the European Union, highlights just how far advanced Europe is, compared to New Zealand at least, in defining and developing privacy rights. With the terribly exciting name “Study on Online Copyright Enforcement and Data Protection in Selected Member States” (PDF), the report examined 6 EU states (not including the UK) and tells us:

• “IP addresses are generally considered to be personal data” and therefore subject to privacy laws.
• “IP addresses are generally considered to be traffic data, which means that they may only be processed in a limited number of circumstances and for specific purposes (such as billing, invoicing, etc.), and that consent is generally required to process them for other purposes (such as online copyright enforcement).”
• “ISPs cannot store IP addresses for the specific purpose of online copyright enforcement (except in France, where retention for the purpose of making information available to the judicial authorities or to the Hadopi Commission [not dissimilar to NZ's s92A] is allowed).”
• “The processing of IP addresses by ISPs to pass on infringement warning notices is generally prohibited or subject to strict restrictions (e.g., in France if the Hadopi Act is complied with).”
• “The general monitoring of P2P networks by right holders resulting in the creation of a database of potential copyright infringers is usually prohibited.”
• “The disclosure of P2P users’ identities by ISPs to right holders for civil enforcement is generally restricted by data protection law. “

This is a level of detail and analysis not yet seen in New Zealand. Of course, privacy law around the world is a rapidly developing area of law, policy and social issues (e.g. see my post Changing expectations of privacy). The EU report itself acknowledges that “many of the legal concepts and questions examined have not been the subject of authoritative decisions by courts or data protection authorities” (such as NZ’s Privacy Commissioner). But the decisions, policies, research and jurisprudence being developed in the EU will ultimately determine (or at least, strongly influence) the direction New Zealand takes.

Discussions at Foo Camp are under the Chatham House Rule (not to mention FriendDA), so generally what happens at Foo Camp stays at Foo Camp. However, it’s okay to share your own thoughts on a session you ran. So here are my points from a session I co-presented at this year’s Kiwi Foo Camp, “Clearing the path for Employee Ownership”:

• New Zealand companies want to be able to offer employee share ownership. Employee share schemes are an established part of industries (including the IT sector) in other countries. They are recognised as having a number of benefits, such as encouraging employee retention with minimal (if any) cash-flow cost to the firm.
• However, in New Zealand they are not common. New Zealand law does not encourage employee share ownership. In fact, New Zealand law puts a number of obstacles in the way of a small business trying to set up a scheme.
• The law that makes it difficult (or tries to make it difficult) for dodgy finance companies to rip off “mum & dad” investors, the Securities Act 1978, is unfortunately the same law that makes it difficult for small companies to set up employee share schemes.
• The Securities Act 1978 is outdated, complicated, and has been heavily amended over the years into its current messy state. Also, much of the detail is not found in the Act itself, but in myriad regulations with obscure names. This makes it hard for the average business person to do their own research and understand the various rules.
• There is no “safe harbour” provision, with bright-line tests and plain-English requirements, to enable companies to efficiently implement employee share schemes. In fact the opposite is the case.
• There are a number of tax disincentives and complications, for businesses and employee shareholders. Other countries have introduced tax advantages for employee share schemes.
• It would be a simple change for the Government to fix these problems and create an environment where employee share schemes are encouraged. There is a review underway as part of the Capital Markets Taskforce which may result in a new Securities Act being developed, but the review had not looked at incentivising employee share schemes. Furthermore, while the report discusses introducing clearer, broader exemptions in certain areas, given the great recession and the finance company collapses, it is possible there will be a tightening, rather than a loosening, of the overall regulation currently in the Act. What effect this will have on employee share schemes waits to be seen.
• This again reflects the problem of having employee share schemes governed by the same protective, prescriptive rules as actual offers of securities to the public, which are in reality very different.
• A simple solution would be to clearly separate the rules for offers of securities to the public from the rules for employee share schemes, with the latter being significantly streamlined.This could possibly be done in a separate act from any new Securities Act.

The Law Commission has published its report on name suppression. On the issue of name suppression on the internet it makes one recommendation:

Where an Internet service provider or content host becomes aware that they are carrying or hosting information that they know is in breach of a suppression order, it should be an offence for them to fail to remove the information or to fail to block access to it as soon as reasonably practicable. [7.16]

With regards to hosts, this is largely the status quo. It is less clear what an ISP that is “carrying” suppressed information is supposed to do. It would be impractical and ineffective, for example, to require ISPs to block access to sites it didn’t host. Of course, once a suppressed name has been communicated beyond our shores, any restrictions imposed by New Zealand law ceases to have any effect. If a major sports star had name suppression in New Zealand, and it was reported by Australian newspapers, would every ISP in New Zealand be expected to block access to those Australian websites?

The report’s findings on internet issues are brief, and don’t quite grasp the essential difficulties that the internet presents to the name suppression regime.  It states:

Where information as to the identity of someone appearing before a court is already in the public domain, it will not generally be appropriate to grant name suppression. The law will not undertake an exercise in futility, which would bring its own authority and processes into disrepute. [3.65]

Yet in many recent cases involving name suppression, that is precisely what has occurred. Twitter, Facebook and other local and international web sites are routinely used to blithely report (or more often, speculate on) the identity of the individual. An invariable side effect is the gross defamation of innocent persons unlucky enough to fit some “non-identifying” criteria not covered by the suppression order. There is every reason to think this phenomenon will become more and more common. In fact, the application of a suppression order, in many cases, simply has the effect of causing more speculation and breaches of the order – a manifestation of the Streisand effect.

The report noted that name suppression is generally more readily available in New Zealand than in Australia or the United Kingdom. One interesting statistic which the report did not appear to have considered, however, is how effective name suppression orders (in high profile cases) have been. Anecdotal evidence as well as personal experience suggests they are increasingly ineffective.

If the law is not to permit exercises in futility, this issue may need to be revisited again before long.

From October, the UK will be restricting access to the residential addresses of company directors on new registrations (and optionally for existing registrations).

At present – as in NZ – directors must disclose their residential addresses, although – unlike in NZ – a director may apply to have that information restricted on the grounds of possible attack. Soon, residential addresses will become “protected information” by default – only disclosable to credit reference agencies and certified authorities. There will also be an option to hide the residential address from even those authorities.

The change is apparently in response to increased privacy concerns and threats of violence against directors.

In New Zealand, the law requires that company directors disclose their residential address (e.g. section 215 of the Companies Act 1993 among other sections). There is no provision for withholding an address. Interestingly, our Companies Act also requires that founding shareholders provide a residential address (section 12(2)(c)), but not subsequent shareholders (section 87 only refers to “the latest known address” which, in the case of a person, could be a non-residential postal or even electronic address. Many companies I have dealt with and managed use a non-residential person-shareholder address).

It is probable that New Zealand will eventually go the way of the UK, although there has not been any call for it yet. Australia has a provision for suppressing directors’ residential addresses which would also be a possible model to adopt.

Is this a good idea? It depends on the purpose of showing a director’s residential address. Why do we really need to know that information? If the answer is to serve documents on a director, that can be easily achieved by allowing directors to be served:

1. At an alternative “address for service” specified by the director (the new UK model); or
2. At the company’s “address for service” which all companies must have anyway.

Provided we have one of the above options, the residential address isn’t really needed and should be able to be suppressed. This would be consistent with the UK and Australia, and also the approach under the Electoral Act 1993. The electoral roll is open for public inspection (though not electronically) and can be used to find a residential address, but with the ability for individuals to request suppression under section 115.

The Privacy Commissioner has guidelines suggesting a model similar to Australia’s, allowing suppression on request, although for some reason its report does not mention the Companies Act at all.

In the meantime, all company records including director addresses are open to full public inspection. Is there some other reason why it should stay? Openness and transparency are always good things, but if it is not necessary to disclose this personal information, should we?

The proposed reformulation of s 92A of the Copyright Act, which gives the Copyright Tribunal the responsibility for deciding if users should have their internet access terminated, is a much improved proposal over the original. The key problem with the original, poorly drafted and poorly thought-out proposal was that it put the responsibility of whether or not to terminate, on the ISP. This would have been unfair to every ISP caught in the middle of a dispute between their customer and any number of third parties (who, in the case of international copyright holders, would most likely be legally represented).

The new proposal removes that responsibility from ISPs. It gives the responsibility to the Copyright Tribunal, which has (or will have) the necessary expertise and resources to deal with complaints. As a state agency, it is bound by the Bill of Rights Act 1990, which guarantees natural justice (s 27(1)). Its decisions are subject to judicial review (s 27(2)). The proposal to allow the Tribunal impose fines (quite different from “damages” that a Court could award) means that a person who is fined (even for a modest amount) could not be sued in Court for the same infringement (in addition the proposal is that the Tribunal have exclusive jurisdiction of s 92A matters) . Tribunal members are, to some extent at least, accountable to the democratically elected Government. It has statutory reporting obligations.

This not only solves the primary complaint about the original proposal, it should (subject to some changes – see below) also provide strong procedural safeguards for the web-surfing public.

So why is there still fuss about the new proposal?

A central complaint of the original proposal – the unfair burden it put on ISPs, and the real potential for “guilt by accusation” that followed – has now been resolved. The focus of critics has now shifted to the purportedly “disproportionate punishment” of terminating an internet account and the assault on “human rights” that entails.

The Creative Freedom Foundation’s position remains that termination is “disproportionate punishment“. Similarly, Keith Davidson of InternetNZ is reported as saying of the new proposal: “the termination of a household or business internet account is simply out of proportion to the alleged offence”.

How can termination be “out of proportion” to an offence that hasn’t happened yet? How can termination be “out of proportion” given the 3 stage, 3 month process, the first step of which requires notification and a right of reply and the right to mediation? How can termination be “out of proportion” when an ISP would be within its contractual rights to terminate a user’s account without notice for any number of reasons, which may or may not be less serious than copyright infringement?

The “human rights” line of argument also misses the point. Internet access through a particular ISP is not a human right. Every ISP in New Zealand provides their service subject to terms and conditions, including prohibiting copyright infringement. If you breach those terms and conditions (or your ISP believes you have), they may terminate your account. ISPs can impose whatever (lawful) terms and conditions they like. Most ISPs even reserve the right to change those terms and conditions at any time without your knowledge.

The revised proposal does not stop a terminated user from immediately signing up with another ISP. In fact it does not even stop a terminated user from opening a new account with the same ISP. It does not ban a person from the internet. The human rights argument falls flat.

Don’t get me wrong – there is a global war being fought by the major IP rights holders over the future of intellectual property and human rights are certainly one of the many factors at stake. The issue of software patents in this country (which should be banned) is one small battlefront in that war.

The difficulty, as I see it, is that some critics of s 92A (and critics of copyright/IP in general) only see the issue in terms of the big, wealthy, multinational companies suing mothers of young children for millions of dollars for sharing US$24 worth of music. Through my work as a lawyer, I have recently witnessed a situation where a semi-retired New Zealand man had spent many years painstakingly creating certain written works. For the past couple of years he had managed to make a reasonable amount of money selling these works to hobbyists in his particular field – not enough to live on, but enough to pay for his hobby and help him in his pending retirement. All that changed when one particular individual – lets call him Mr X – publicly (and illegally) republished all of those works online for free. Mr X admitted doing so, but refused to take the works down, claiming that in his view authors didn’t deserve copyright in these sorts of works, and they should be freely shared with everyone. Obviously, this was devastating to the New Zealand man. While in this particular situation Mr X’s website was hosted overseas, a s 92A-style notice-and-takedown procedure would have provided a reasonably efficient first-step remedy against this blatant theft and destruction of one man’s years of hard work and creative effort by someone ideologically opposed to the idea of copyright.

There is no doubt that heavy-handed, excessive enforcement has backfired and been a PR disaster for major rights holders. It is precisely that “overkill” that the ISP account termination approach seeks to alleviate, and that the revised s 92A proposal provides a reasonable balance against. Whether this is the “thin end of the wedge” remains to be seen – no doubt for some it is the first step in a larger strategy – but misrepresenting the current situation as a human rights issue is (at best) jumping at shadows.

The new proposal is obviously not yet complete. Whether or not the final proposal does turn out to be “fair, efficient and workable” as Policy Proposal Document promises remains to be seen. Some specific areas that need to be addressed are:

1. Protection against the making of frivolous, vexatious or bad-faith (e.g. abuse of process) complaints (this sort of protection is a good way of dealing with the false complaint issue).
2. Onus and standards of proof (the Policy Proposal Document talks about the balance of probability – which is usual for civil actions – but more detail on the types of permissible evidence will be important).
3. Clarification over who a “subscriber” is in a shared-access environment.
4. Requiring the Tribunal to take into account the rights of other users of the particular internet account in question.
5. Clarification over the status of non-ISP organisations caught by the Copyright Act’s very wide definition of “ISP” under the new proposal.
6. Clarification of jurisdiction (territorial limits, maximum fines, matters that may be taken into account, etc).

Submissions to the Select Committee on the Patents Bill closed on 2 July 2009. My submission on software patents is here:

• Select Committee Submission (PDF)
  

This submission is deliberately “narrow”. The current hearing is the 3rd stage of a review that’s been going on for 9 years, and the Patents Bill, introduced by the former Labour-led government has already had its 1st reading in the House by the current National-led government. It appears unlikely that the Committee will consider major changes to the Bill at this stage. There had been concerns expressed earlier in the process about leaving controversial issues such as software patents to the final stage of the review (which is when a Select Committee review occurs). However, that is the current situation.

Therefore, the Committee should be given very tight, focused, narrow reasons to change the Bill to exclude software patents (as opposed to broad and wide-ranging reasons). Much of the debate focuses on democracy/human rights, free expression, economic/anti-competitive issues, “unfair” tactics by multinational corporations, trade issues, etc. In my view, the committee will not want to get anywhere near those sorts of issues at this late stage. I have no doubt that attempting to tie all of those concerns in with software patents will make the whole issue “too hot to handle” and the committee will simply kick for touch and maintain the status quo.

At this stage the Committee will most likely:

1. Want to do as little work as possible to finish the review; and
2. Avoid any potential political risks for a Bill with bipartisan support (i.e. not rock the boat).

I have deliberately focused on two specific points: the purpose of the Patents Bill, and the apparent legislative incompatibility of the language in the Bill. These are issues that Select Committees are comfortable looking at. If it can be shown that there is a problem/inconsistency with the actual Bill itself (e.g. purpose is inconsistent with operation), they are much more likely to make a change to the Bill than on grounds that requires the Committee to take what they may see a bold step.

I did not mention TRIPS, partly because of time constraints, but it is a valid issue and I have seen a couple of good submissions on that point.

It is also important to suggest an amendment that is very specific and “safe” for the Committee (or more probably the Parliament Counsel Office) to introduce without introducing “regression errors” into the Bill at this late stage. My proposal is to add the following clause:

15 (6) An invention is not patentable to the extent it is implemented in software.

It will be interesting to follow progress.

Software patents are once again in the news in New Zealand as part of the long-awaited review of the Patents Act 1953. I don’t deal with the filing of patents in my work as a lawyer. Filing patents is a specialist field usually handled by specialist firms, with staff who have qualifications in relevant fields (electronics, engineering, chemistry, biochemistry, etc). But everyone in IT needs to be aware of the threats to innovation posed by software patents.

There has been so much written on this subject (though I have yet to read anything much in favour of them) that I will only add a few brief comments to the debate.

Patents have never been considered inherent rights of inventors. They must be applied for and granted by the state subject to specific terms. They are limited in scope, duration and availability. As was once taught in Form 5 History, the origin of patents in our legal system was the “monopolies” granted by the Kings and Queens of England. After various abuses and reforms (some by way of the English Civil War), the modern system of patents emerged. The economic rationale of granting limited patents was to encourage innovation by protecting the investment made in creating those innovations. By and large, this system worked well over several centuries and could, in fact, be shown to have encouraged many key innovations. In other words, the system worked.

Enter software patents. These can be shown to have the opposite effect (or at least have the likelihood of that) – discouraging innovation, or in some cases attempting to shut down innovation altogether. Software patents operate to limit the possible uses of an infinitely configurable device – the computer. Virtually all computer programs, except the most basic, low-level electrical systems, rely on implementing processes and functions to manipulate and configure a computer to produce a desired result. With software, there are no physical constraints as to how the functions and processes could be used, merged, integrated, or otherwise hacked. The result is an unfettered ability to innovate. This can include, where permitted, freely adapting or integrating someone else’s code to create an entirely new program (the basis of open source software).

Should this ability to innovate be blocked – possibly at a fundamental level – by the fact that someone else has patented the manipulation or configuration of a computer in a particular way? To do so is contrary to the current purpose and rationale of patent law. Software patents have a clear tendency to limit the innovations which may be derived from computers, for economic purposes. Patent law is not intended to protect commercially valuable intellectual property (although that is a valid economic effect). It is intended to encourage innovation. When the opposite result is occurring, it is time to either change the law to correct its operation (by banning software patents), or acknowledge the problem and redraft the law in light of a changed purpose of protecting commercially valuable intellectual property. The stated purpose of the Government’s review is:

“to ensure that [the New Zealand patent regime] continues to provide an appropriate balance between providing adequate incentives for innovation and technology transfer while ensuring that the interests of the public and the interests of Maori in their traditional knowledge are protected.”

Software patents are an international issue. Successive Governments here and overseas make endless statements about “embracing the digital age” to acheive a “high value economy”. Whether the software patent problem is fixed – and soon – will be an early test of their commitment to that cause.

Should software developers be liable for their code? While the EU is currently debating this question as part of a proposal to extend consumer guarantee laws to cover to software, New Zealand has had such a law in place for over 5 years.

Since 2003, the Consumer Guarantees Act 1993 (NZ’s primary “consumer protection” law) has specifically included software in the definition of “goods“. This means that software developers (as “manufacturers”) must provide the same consumer warranties as makers of physical goods. At first, this does not seem too surprising. After all, why should a customer not have these rights when they buy software for domestic use? If the Consumer Guarantees Act applies to computer hardware, why not the software that comes with it?

Among the warranties that the Consumer Guarantees Act imposes on software developers:

1. A guarantee that the software is of “acceptable quality” (what this means will depend on the circumstances – it is highly improbable that software would need to work perfectly to be of “acceptable quality”);
2. A guarantee that the software will comply with any description provided by (or with the consent of) the developer (this could include statements on the developer’s website or in a manual);
3. A guarantee that the developer will take ensure there are “facilities for repair of the goods” (i.e. fix the software – this is an example of the Act, which was intended for physical goods, sometimes requiring awkward interpretation and a small amount of artistic license to accommodate scenarios involving software)

The above rights are only the consumer’s rights against the developer. Consumers have additional rights against the supplier (e.g. in the case of commercial/retail software, the shop where you bought it), and the supplier will usually be the first point of redress. For consumer (i.e. non-business) purposes, the Consumer Guarantees Act cannot (in most part) be contracted out of, and it is an offence to attempt to do so.

While the extension of the Consumer Guarantees Act to apply to software passed without much fanfare, the EU’s proposal to do the same thing has created some small controversy. The EU proposal has been criticised by the Business Software Alliance, representing major software makers including IBM, Apple and Microsoft. The BSA has stated:

“Digital content is not a tangible good and should not be subject to the same liability rules as toasters… Unlike tangible goods, creators of digital content cannot predict with a high degree of certainty both the product’s anticipated uses and its potential performance.”

These are valid concerns. The unique nature of software makes it inappropriate to simply apply “faulty product” rules that apply to physical goods. As software is entirely intangible, it only “exists” within a virtual environment. The software developer cannot necessarily control the hardware, drivers, libraries, settings and other parts of the environment that their code needs to run properly. If their software does not work correctly, who determines if it is actually a bug in their software, or a bug or malfunction or misconfiguration in some other part of the environment? And who says it’s a bug – it may be a feature request!

Of course, virtually all software has genuine bugs and vendors / maintainers are usually very open about them; such is the nature of software development. Patches and updates are commonplace, and a consumer could certainly not reasonably complain if they fail to keep their system up to date.

But where a product does have a significant bug, is it reasonable for the consumer to have legal rights under the Consumer Guarantees Act against the developer? Opponents are not against having some consumer rights for commercial consumer software. The concern is that a poorly drafted law (such as an amendment like that made in New Zealand to the Consumer Guarantees Act) may force software developers to, in effect, support other companies’ software and hardware, and continue to provide support for obsolete products (either their own or someone else’s).

The amendment to our Consumer Guarantees Act in 2002 gained little attention and, to date, has had little known impact on software developers. This is partly because New Zealand is a relatively small market for the (mainly) US-based software vendors. More importantly, New Zealand does not have an established “class action” legal process. In a recent New Zealand case the Court of Appeal noted its concerns at the “lack of development” in this area, and proposed a law change to improve the situation. By contrast, in Europe and in the US, class action lawsuits have proven lucrative for consumers “harmed” by a product – and very costly for manufactures. An amount of damages multiplied by (potentially) millions of consumers equates to serious money.

Another interesting angle is the impact on open source development. Under the Consumer Guarantees Act, the fact that software is provided for free by a non-commercial body is irrelevant – the Act still applies. It is hoped that if the EU proposal moves ahead, this is not the case. In 2007, key Linux kernel hacker Alan Cox appeared before the House of Lords to argue that open source developers should not be liable for their code. Given that much more open source development occurs in EU nations than most other places, the impact could be significant.

If the EU proposal moves ahead, the extent to which it impacts software developers – commercial and open source – will take some time to be seen.

Last week’s Fair Go raised an old IT law issue. The item involved a faulty car bought by auction on Trade Me. The seller was a commercial car yard. Inevitably (as it was on Fair Go), the car broke down shortly after purchase, and the owner sought legal advice on whether she had any rights against the car yard under the Consumer Guarantees Act 1993 (CGA).

The legal advice was that the Consumer Guarantees Act did not apply, as the Trade Me sale was a sale “by auction”, and therefore not covered by the Consumer Guarantees Act (because goods bought at auction are not covered by that Act – see section 41). However, the question of whether an online auction is legally an “auction” for the purposes of the Consumer Guarantees Act has still never been before the Courts. The answer matters for 2 reasons:

1. If it is not an “auction” in the eyes of the law, then consumers who buy goods at a Trade Me sale (under the bidding model) will be covered by the CGA when buying items such as cars, from dealers via Trade Me.
2. If it is an auction, then consumers will not be covered by the CGA.

The main legislation regulating auctions in the Auctioneers Act 1928. This act does not actually define what an “auction” is, but it does define “sell by auction” from which a definition of “auction” can be logically derived. While the definition of “auction” in the Auctioneers Act cannot be applied to the term “auction” in the Consumer Guarantees Act, it is still relevant when determining whether or not a Trade Me sale is an “auction”.

Trade Me takes a fine position on the Auctioneers Act. It has long maintained that it is not subject to the Auctioneers Act (which it would be if it “sold goods by auction”):

“We provide a venue for buyers and sellers to meet. The Auctioneers Act doesn’t apply to us.” – NZ Herald

This view is echoed (though not in exactly the same terms) in Trade Me’s terms & conditions:

“… even though some of the services are being referred to as an auction, Trade Me is not an auctioneer (whether under the Auctioneers Act 1928 or otherwise)”

But such statements do not affect whether or not the Auctioneers Act actually does apply. The Act defines “sell by auction” to include:

the selling of property of any kind, or any interest or supposed interest in any property, by outcry, by the auctioneer saying “I’ll take” and commencing at a higher figure and going to a lower figure … or any other mode whereby the highest, the lowest, or any bidder is the purchaser … or where there is a competition for the purchase of any property or any interest therein in any way commonly known and understood to be by way of auction

“Outcry” is defined as “any request, inducement, puff, device, or incitement made or used by means of signs, speech, or otherwise in the presence of not less than 6 people …”.

In its report Electronic Commerce Part Two, the New Zealand Law Commission assumed (at paragraph 96) that the words “by outcry” in the definition of  “sell by auction” applied to the entire definition (it referred to the only known case on the matter where the judge appeared to imply, but did not decide, that an auction must be “by outcry”). The Commission therefore considered that the relevant enquiry was whether an electronic auction was “by outcry” (paragraphs 98-99).

However, there does not appear to be any reason (and none was given) why the words “by outcry” must apply to the entire definition 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.

It may be possible to quibble over specific aspects of an online sale process to try to avoid falling with the catch-all part of the definition, but the broad and inclusive nature of the definition and the rule of giving legislation a “fair, large and liberal construction” (which still applies under the Interpretation Act 1999 – see Combined Rural Traders Society Ltd v Batcheler, 12 February 2009) and a purposive approach means that Trade Me is indeed “selling by auction” and is therefore subject to the Auctioneers Act 1928.

Therefore the definition clearly applies to Trade Me on two grounds:

1. It applies under the “any other mode” definition.
2. It applies because a bidding-sale on Trade Me comfortably fits the description of “a competition for the purchase of property in a way commonly known and understood to be an auction”. In fact, Trade Me’s website (and its terms and conditions) refer to its sales as “auctions” dozens of times.

However, this is where practical problems arise. Not surprisingly, a law passed in the 1920s could not have foreseen the advent of “automated auctions” such as we commonly have now. It would simply not make sense for Trade Me and other online/computerised auction systems to be subjected to rules formulated decades ago and premised on a traditional, physical auction process. To do so would be detrimental to the development of e-commerce in this country (not to mention internationally embarrassing).

Fortunately, the relevant Government agencies have taken a pragmatic approach to all this and not attempted to impose outdated regulations upon online auctions (to the understandable chagrin of the Auctioneers Association, whose “bricks and mortar” members are subject to the 1928 Act regulations). The Consumers Institute’s view is that the Act should not apply to online auctions, but that the Consumer Guarantees Act should.

Returning to the question of whether Trade Me bidding sales are “auctions” for the purposes of Consumer Guarantees Act, the most likely answer is yes, for the following reasons:

1. The common usage of the term “auction” today surely includes online auctions.
2. There is nothing in the Consumer Guarantees Act to suggest that the exclusion for goods sold at “auction” does not extend to goods sold by that method over the internet.
3. An online auction such as Trade Me clearly falls under the Auctioneers Act 1928, at least in theory (which for reasons of statutory interpretation is likely to be relevant to the question).

Therefore consumer goods bought from a dealer / retailer on Trade Me or a similar online auction site, using a bidding model, will not be covered by the Consumer Guarantees Act. However, this means that Sale of Goods Act 1908 does apply. While often not considered, this Act can provide a consumer with some limited remedies in certain events.

Successive Governments have flagged an overhaul of New Zealand’s consumer laws (and conducted various research and reviews to that end), and the current Government has signalled that it will progress this. With the huge growth in online commerce and the challenges that raises, it is hoped that the changes will strike an appropriate balance between maintaining robust consumer rights and facilitating open, free and competitive e-commerce in an international marketplace.