The Government is now accepting submissions on its reform of the Consumer Guarantees Act, which will extend standard consumer protections to online auction sites such as TradeMe. The proposed text is as follows:

Supply by auction or competitive tender under subsection (3) does not include supply of goods and services by a supplier through a competitive bidding process using an online trading facility.

This will be a welcome change for consumers, and one I expect will be supported by many retailers.

Jailbreaking iPhones deemed legal

The US Copyright Office has ruled that jailbreaking (or unlocking) iPhones or other devices does not infringe copyright law. This clears the way (for now at least) for consumers in the US to legally use third-party tools to install  “unsanctioned” apps on their devices. To date, Apple has kept a very tight grip on which apps can – and cannot – be installed on iPhones (all via its official AppStore). Jailbreaking involves removing or bypassing Apple’s built-in restrictions that prevent unauthorised apps from being installed. Apple (and others) have argued that this breaches copyright law, by bypassing DRM restrictions and unlawfully modifying their code (similar in some ways to the “technological protection measure” provisions in New Zealand’s Copyright Act 1994). Proponents claim that jailbreaking is fair use.

The matter will not end here. Given the revenue involved it is likely to be a contentious issue for years to come. The US Copyright Office is not a Court, so its ruling is susceptible to legal challenge. Also, jailbreaking is still a breach of the iPhone’s EULA:

“You may not and you agree not to, or to enable others to, … modify … the iPhone Software or any services provided by the iPhone Software …”

However the enforceability of such a provision is greatly limited, and in practice largely useless if jailbreaking software and service providers become mainstream.

s92A rolls on

IT lawyer Rick Shera blogs on the New Zealand Law Society’s submission on s92A of the Copyright (Infringing File Sharing) Amendment Bill. He notes the Society’s recommendation that the Bill “should be amended to provide the Court with the power to order that the account holder may not open an account with another ISP during the period of any suspension”. That the existing Bill does allow someone to simply get another account could be seen as a loophole – but part of the reason why I have always thought disconnection was a red herring. In any case, the Law Society’s proposed change is simply draconian.

InfoWorld has an article on lurking legal gotchas (and how to avoid them) for IT pros. Its list includes:

• Confidentiality and privacy violations
• Pornography use
• Copyright and source code violations
• “Financial shenanigans” – essentially fraud or other criminal activity.

The article is based on US law, but the above list is applicable in New Zealand. However an important distinction not made entirely clear is that between intentional (i.e. malicious) activity and accidental contravention. Also, in most cases employees who are honestly carrying out their job are entitled to be indemnified by their employer for any liability arising against them personally (subject to employment contracts and other factors). Independent contractors are generally liable for their own actions, however, and insurance is an important risk management practice for contractors.

Open source wrangling

Computerworld reports on a controversy over whether a US company has breached the GPL terms of the R statistical software (developed out of Auckland University and the original version of which I used in stage-1 stats). The company, Revolution Analytics, denies breaching the GPL. It uses the increasingly popular (but sometimes controversial) “open core” model where (for example) the core program remains licensed on open terms, but other components and add-ons are under proprietary licenses. The situation highlights the sometimes murky issue of copyright ownership, assignment and licensing in large open source projects. Another example, involving OpenOffice, is reported here.

Copyright vs Contract law

A UK government advisory board, the Strategic Advisory Board for Intellectual Property, has completed a lengthy report (182 pages, 6MB pdf) on “the relationship between copyright and contract law”. The highly academic report appears to be a last hurrah for the quango, which is to be axed. The report is based on extensive research into “creator contracts” – i.e. supply side contracts such as those entered into by authors, musicians, artists, etc – and “user contracts” – i.e. demand side contract typically involving licensing of IP to end users. A summary of the fairly impenetrable report is here.

“My decision follows a meeting with the chair of the Commerce Committee where it was agreed that a further amendment to the bill is neither necessary nor desirable.”

During its consideration of the bill, the committee received many submissions opposing the granting of patents for computer programs on the grounds it would stifle innovation and restrict competition… The committee and the Minister accept this position.

Barring any last-minute flip-flop – which is most unlikely given the Minister’s unequivocal statement – s15 of the new Patents Act, once passed, will read:

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

Lobbying

It is clear that the lobbying by pro-software patent industry group NZICT was unsuccessful, although Computerworld reports that its CEO apparently still holds out hope that “[IPONZ] will clarify the situation and bring this country’s law into line with the position in Europe and the UK, where software patents have been granted”. Hope does indeed spring eternal: the exclusion is clear and leaves no room for IPONZ to “clarify” it to permit software patents (embedded software is quite different- see below).

As I wrote earlier, it remains a mystery as to why NZICT, a professional and funded body, failed to make a single submission on the Patents Act reform process – they only had 8 years to do so – but instead engaged in private lobbying after the unanimous Select Committee decision had been made. It also did not (and still does not) have a policy paper on the subject, nor did it mention software patents once in its 17 November 2009 submission on “New Zealand’s research, science and technology priorities”. It is not as though the software patent issue had not been signalled – it was raised in the very first document in 2002. Despite this silence, it claims that software patents are actually critical to the IT industry it says it represents.

The New Zealand Computer Society, on the other hand, did put in a submission and has articulated a clear and balanced view representing the broader ICT community. It said today that “we believe this is great news for software innovation in New Zealand”.

Left vs right?

Is there a political angle to this? While some debate has presumed an open-vs-proprietary angle (a false premise) some I have chatted with have seen it as a left-vs-right issue, something Stephen Bell also alluded to (in a different context) in this interesting article.

Thankfully, it appears not. The revised Patents Bill was unanimously supported by the Commerce Committee, comprising members National, Labour, Act, the Greens, and Maori parties. It reported to Commerce Minister Simon Power (National) and Associate Minister Rodney Hide (Act). Unlike the previous Government’s Copyright Act reform, post-committee industry lobbying has not turned the Government.

What about business? NZICT apart, the exclusion of software patents has received the wide support of the New Zealand ICT industry, including (publicly) leading software exporters Orion Health and Jade, which as Paul Matthews notes represent around 50% of New Zealand’s software exports. The overwhelming majority of NZCS members support the change. Internationally, many venture capitalists and other non-bleeding-heart-liberal types have spoken out against software patents, on business grounds.

Some pro-software patent business owners might be miffed at a perceived lack of support from National or Act, perhaps assuming that software patents are a “right” and are valuable for their businesses. The reality is that only a handful of New Zealand companies have New Zealand software patents (I did see a figure quoted somewhere – will try to find it). Yes, they can be valuable if you have them but that is a separate issue (and remember, under the new Act no one loses existing patents). A capitalist, free market economy (and the less restrictive the better) abhors monopolies, and this decision benefits the majority of businesses in New Zealand. Strong IP protection is essential in modern society – including patents – (see my article “Protecting IP in a post-software patent environment“) but the extent of statutory protection when being reviewed will always come down to a perceived balance, not just for the minority holders of a patent (a private monopoly) but for the much larger majority artificially prevented from competing and innovating by that monopoly.

I have always taken pains to note, like NZCS, that there are pros and cons to software patents. And I am a fan of patents generally. Patents are good! But for software patents, the cons outweigh the pros. There are sound business reasons to exclude them. This specific part of the reform targets one specific area, has unanimous political party support (how rare is that?), and wide local business support. The last thing it can be seen as is an anti-business, left-wing policy (if it was, I’d have to oppose it!)

Embedded software

Inventions containing embedded software will remain, rightly, not excluded under the Patents Bill. Minister Power confirmed that IPONZ will develop guidelines for embedded software, which hopefully will set some clear parameters for applicants.

Software is essential to many inventions, and while that software itself will not be patentable, the invention it is a component of still may be. Some difficult conceptual issues can arise, but in most cases I don’t expect difficulties would arise. This “exception” (if it can be described as such) will not undermine the general exclusion for software patents.

• AdWords and trade marks: taking care of business, Computerworld, 15 July 2010

I know at least one New Zealand company is currently attempting to “peacefully” resolve a trade mark-AdWord situation. It could be some years, though, before a New Zealand court case emerges. The EU and Australian decisions (and a further ruling last week) are fairly orthodox (helpfully so), and there’s no reason that the same wouldn’t apply in New Zealand. In short, trading off other’s trade marks is a risky business. It can also be expensive – not just because of the possibility of being sued (which is usually a last resort and, in the scheme of things, relatively uncommon) but also due to being forced to change or abandon advertising efforts.

On a related note, for new businesses starting up, key steps before settling on a business / product / service name are:

1. Search the Companies Office for similar company names.
2. Check domain names (not just for availability but for similar names).
3. Check trade marks (again, not just for identical matches but similar ones too).
4. Check Google.

It’s a lot easier to get a “clean” name / brand at the outset than have to change it down the track.

(Disclosure: with a little help from a New Zealand law firm) New Zealand high-availability software firm Maximum Availability has won an injunction in a United States court against a US competitor that (it alleges) made false claims about MA’s products. The interim order prevents the competitor from further distributing the specific materials anywhere in the world, and requires them to send a clarification to all parties who received the information. More details are here.

YouTube defeats Viacom – a boost for NZ’s safe harbour?

A US judge has dismissed Viacom’s massive copyright claim against YouTube, saying that YouTube was protected by the “safe harbour” provisions of the US’s Digital Millennium Copyright Act. The DMCA safe harbour provisions are similar to New Zealand’s own, found in section 92B of the Copyright Act (see my Computerworld article here).

The question with safe harbour laws such as New Zealand’s and the DMCA, is at what point is does the ISP “leave the harbour”? What is the “something more” that an ISP must do to lose that protection? The YouTube case provided a perfect opportunity to test those rules. The judge said that YouTube remained in the safe harbour, despite having considerable knowledge of infringing activities:

[The judge] disagreed with Viacom’s claims that YouTube had lost the so-called “safe harbor” protection under the DMCA. Viacom … maintained Google did not qualify, because internal records showed Google was well aware its video-hosting site was riddled with infringing material posted by its users. [The judge] ruled that YouTube’s “mere knowledge” of infringing activity “is not enough.”

“To let knowledge of a generalized practice of infringement in the industry, or of a proclivity of users to post infringing materials, impose responsibility on service providers to discover which of their users’ postings infringe a copyright would contravene the structure and operation of the DMCA,” the judge wrote.

He said that YouTube had no way of knowing whether a video was licensed by the owner, was a “fair use” of the material “or even whether its copyright owner or licensee objects to its posting.”

New Zealand’s s92B is undergoing further amendment (as part of the tortuous reform process mainly centred on s92A), but the general process remains. The YouTube case is already under appeal, but whatever the final outcome, will be of interest in New Zealand due to the similar (though not identical) safe harbour provisions in New Zealand’s Copyright Act.

Judge Harvey gives NZ’s first multimedia judgment

Judge David Harvey has delivered what is said to be NZ’s first digital judgment, a 9MB PDF including embedded images and YouTube links. (New Zealand still hasn’t sorted out online publication of all judgments, but fortunately the Herald is hosting the DIA v TV Works judgment here.)

Judge Harvey is widely known as New Zealand’s most tech-savvy jurist, and uses his knowledge and interest in technology to push the odd boundary (in a judicious manner, of course). His ruling in this case is being celebrated in online circles (admittedly pro-gambling sites) and we can be grateful that Judge Harvey heard this case, as he was able to bring his understanding of not just internet technology but also online custom to bear. Let’s hope other judges follow his lead. Also, if digital judgments are now en vogue, surely it is time for e-filing?

As a point of contrast, I’m reminded of this story from a few years back:

Judge Peter Openshaw, 59, brought an Internet terror trial to a halt when he admitted he struggled to cope with basic terms like “website”. The Judge said he was completely lost by the terminology during the questioning of a witness about a Web forum used by alleged Islamist radicals. He told stunned prosecutors at Woolwich Crown Court in south east London: “The trouble is I don’t understand the language. I don’t really understand what a website is.”

In short, a customer had engaged an engineering firm to produce designs for an industrial machine. Unfortunately the terms of the engagement were unclear, and a dispute arose (some years later) between the customer and the engineering firm as to who actually owned the designs. The customer claimed that because it had commissioned those works, and provided an implied agreement to pay for them, and the designs were made pursuant to that commission, it (the customer) owned the copyright, by virtue of the commissioning rule. The engineering firm denied there had been a commissioning as defined in the Copyright Act, and that it therefore remained the owner of the designs.

The Court noted the orthodox position that:

Whether a work is “commissioned”; what the scope of that commission is; and the date on which the commission arises are all necessarily questions of fact in each case.

And it offered the following sage advice:

Patently, the better practice is to have a written agreement, and software developers and purchasers would be well advised to see that sound industry contracting procedures are put in place.

The critical issue was whether or not the customer had agreed to pay for the works – a requirement of the commissioning rule. Normally, payment (or an agreement to pay) is not in question, but was complicated in this case by the engineering firm claiming that it had provided a “free design service” in order to attract new customers. Because the designs had been provided for free, it claimed, the customer had not agreed to pay for the work and there could not have been a “commissioning” as defined in the Copyright Act.

The Court of Appeal rejected the engineering firm’s argument (which had been accepted in the High Court). It said that the engineering firm had offered “free design” on the basis that it would get to do the subsequent manufacturing work (which wasn’t free), and this was sufficient to create an intended-to-pay commissioning. The Court said it was “everyday commercial sense” that such an arrangement would be regarded as two parts of the same deal, and the customer had “agreed to pay” for the design work as part of the overall design-and-manufacture arrangement. It would be artificial to divide the “free design” and the subsequent intended manufacturing into two separate transactions. The Court therefore ruled that the copyright in the works was owned by the customer.

This is a useful case that demonstrates a pragmatic and commercially realistic substance-over-form approach to what was a murky factual situation. But, as the Court noted, these very costly disputes are easily avoidable by having a simple, appropriate agreement in place.

While any improper or irregular dealings with something as important as land titles is a serious matter, is the integrity of the Landonline system – or the concept of e-dealing for land titles generally – called into question based on one, or even several, such incidents? No – at least not before a proper comparison with the rate of mistakes/problems/fraud under the old system before such a comparison is made.

There were of course occasional issues with old, paper-based land title system. It is too early to tell if the new system (which was only fully phased-in in 2009) is, statistically, more or less secure than the old system. In the meantime, the Registrar-General of Land, Robbie Muir, has defended the new system, making the point that an electronic register is more secure than the old paper-based one:

[The old system had] the potential for forgery and the land registry did not have reliable means of verifying the authenticity of land owners’ signatures or establishing that proper identity checks had been undertaken.

Muir is right. The reality is that modern technology is usually far superior to an “ink and paper” equivalent. Technology can implement mathematically-verifiable encryption and validation methods to confirm certain transactions and events have occurred. The idea that mashed-up pieces of wood stained with ink provides superior integrity and efficiency to a well-designed electronic system is quaint, but plainly wrong. Of course, the key requirement in the previous sentence is “well-designed”. A system with crucial flaws may be completely insecure. Replacing a good paper-based system with a poor electronic one is a recipe for disaster.

Technology is, and for a long time yet will be, subjected to a double standard when compared with a non-technical equivalent. For example, there are thousands of instances of mail stolen from letterboxes, mail-rooms and post offices each year. Generally, none of this is particularly newsworthy. However, if an ISP has some emails “stolen” by a hacker or staff member, it would likely be reported. In the same vein, credit card fraud is common in the physical world, yet often reported with alarm if the same thing happens online.

The recent incident with the e-dealing system highlights this. As Robbie Muir points out:

Given the large volume of land transactions registered each year, there will inevitably be isolated cases where things go wrong. The same was true of the paper-based system. However, under the Landonline system it is possible to quickly establish what has occurred and who is responsible.

Some lawyers I know or have dealt with – young and old – remain curiously uncomfortable, and even suspicious, of email, electronic data, online dealings, and the like. On several occasions I have had lawyers refuse to correspond by email supposedly because of “problems previously encountered” with this new-fangled technology. So I send them emails, and they reply with snail-mail and faxes (yes, in 2010).

A particular hang-up is the occasional insistence on “originals”. Back in the days when important documents were drawn up by hand (really important documents were on goatskin parchment), it was fairly obvious what was the original document, and what was a copy. The need for requiring an original was clearer. And when there is a piece of paper, it is usually easy to tell whether it has been physically signed, photocopied, or had a computer printed signature applied. But with electronic files, concepts such as the “original document” quickly lose meaning, as does the need for an “original” and signing at all. However, a suitable “original” (if insisted upon) can usually be made by printing off a file and signing it. Whether this is necessary at all – other than for “ceremonial” purposes – is questionable.

It comes down to the perceived comfort of having a piece paper – something physical that can be put into a folder and filed in a filing cabinet. But the reality is that digital documents and digital signatures are capable of achieving a much higher level of security than a signature.

The court ruled that the “machine or transformation” test was not the only criteria for determining patentability, but that there should not be “broad patentability” of business methods. Lower courts could continue developing limiting criteria. It upheld the lower court’s decision to reject Mr Bilski’s attempt to patent a method of financial hedging. But it left many questions, and some confusion, by not giving clear guidance on what’s patentable and what’s not.

Some comments:

Forbes.com:

The practical effect of the Bilski ruling will be limited, lawyers said, but it will definitely mean more lucrative patent litigation.

New York Times:

There were high hopes that the Supreme Court would clear things up in the mushy, litigation-filled realm of patents on methods of doing business.  [Bilski] was anything but a landmark decision. Still, there was a clear message for patent trolls, patent brokers and licensing companies, patent lawyers and lobbyists: Play on!

“The court is certainly not shutting the door on business method patents, as some thought it might,” said Josh Lerner, a patent expert at the Harvard Business School. “This preserves a fair amount of ambiguity.”

Patently-O:

Although not rejected by the majority opinion, it is clear that the broad “useful, concrete, and tangible result” test is dead. That test is conclusively rejected by what I term the Anti-State-Street Majority — a majority created by the combining the two concurring opinions in Bilski and their five-justice majority. The result is that the scope of patentable subject matter is certainly narrowed from its 1998 high-water-mark.

Glyn Moody:

So, the long-awaited US Supreme Court ruling on Bilski vs. Kappos has appeared – and it’s a mess. Where many hoped fervently for some clarity to be brought to the ill-defined rules for patenting business methods and software in the US, the court instead was timid in the extreme. It confirmed the lower court’s decision that the original Bilski business method was not patentable, but did little to limit business patents in general.

AP:

Scott Bain, lawyer for The Software & Information Industry Association, said the decision “preserves a delicate but important balance.” “It keeps the door closed to patenting mere abstract ideas, which many ‘business method’ patent applications have been,” he said. “But just as importantly, it affirms the continued viability of patenting useful software applications, which will allow software companies to continue in their role as a driver of economic growth.”

Nature:

For those who were looking to the Supreme Court to provide clarity on a contentious issue, however, the court’s limited ruling was a bitter disappointment. “The decision is incredibly unhelpful,” says Steven Bauer, head of litigation at the law firm Proskauer Rose in Boston, Massachusetts. “Nothing in their decision can be used to decide what’s patentable or not.”

The decision had potential ramifications for New Zealand companies who have (or hope to get) business method patents. If such patents were unavailable in the US, the value of having them in NZ and other countries could be somewhat undermined. Unfortunately, though, the recent New Zealand patent law review also didn’t address business method patents in much detail, and it will probably be many years, if ever, before the NZ Appeal Court or Supreme Court hears a similar case. The net result for all is the status quo, and business method patents will remain murky for some time.

It also will not affect the ongoing software patent debate in this country, which is also somewhat up in the air.

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.

It is too early to tell whether the reported comments of Ministry of Economic Development officials represent Government policy. If they do, it would represent a significant change from the Government’s earlier position as stated publicly by senior Ministers and MPs following the Select Committee report.

It would not be a major surprise, though, for the final bill to be substantially “tweaked”. The proposed exclusion came as a surprise to many, including some who had submitted in favour of it. The fact is there is not a large “anti-software patent vote”, and the Government is not going to upset too many people (relatively) over such an arcane technical issue. For those reasons, the proposal was always susceptible to lobbying.

The suggestion is that the ban might be scaled back to the lesser, “somewhat restricted” position of the European Union – the MED’s view being that if something is patentable in the EU it should be patentable here. There is merit in that suggestion, although in the US and the EU software patents are contentious and somewhat in flux themselves.

Whatever the final outcome is – banned, allowed, or restricted – it is hoped it will at least provide clarity for the market (and not just opporunities for lawyers!). Many of the alleged problems with the current system arise from uncertainty and loopholes. The new law is an opportunity to establish a clear framework for the future. It is also hoped that an explanation for any departure from the Select Committee’s unanimous report (if indeed that occurs) is provided.