Law and technology

Consumer guarantees & online auctions

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.

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.

Antivirus company McAfee has done the right thing by offering to reimburse “reasonable expenses” for home users hit by its faulty update last week. Without intending to derogate from this good gesture, it should be noted that McAfee is (arguably) simply doing what it is legally required to do.

In New Zealand, software is covered by the Consumer Guarantees Act 1993 (see my post here). If a software product (in this case, the McAfee antivirus software) is sold in a situation covered by the Act (which for home users it would be), and the software is not of “acceptable quality” (which this incident would, I think, qualify as), a consumer can seek compensation from the developer for:

“… any loss or damage to the consumer … resulting from the failure … which was reasonably foreseeable as liable to result from the failure.” (section 27, CGA)

Under this provision, what compensation could be claimed from a commercial software developer who delivered “unacceptably faulty” code? Well, it depends on several factors, but in the McAfee case it could include:

• The cost of hiring a technician to disable the faulty software;
• The cost of hiring a replacement PC while another was being fixed;
• Telephone support charges, etc.

Business-related losses, such as “lost profits” and business interruption costs, would be more difficult to prove and recover, given the “consumer” orientation of the Act and other factors, but would not be impossible. (In addition, it is often overlooked that businesses can be consumers too.) It would also be unlikely that compensation could be claimed for, say, a lost Trade Me deal due to the faulty software crashing a bidder’s computer – in most cases, such specific losses would not be sufficiently “forseeable” (to the developer) in the circumstances.

A consumer could also seek a refund for the software from the retailer (section 18(3)(a) CGA).

However, while the Consumer Guarantees Act provides a range of pro-consumer rights, in practice it can be difficult to enforce those rights – as anyone who has seen Fair Go or Target, or has tried to deal with a dodgy store-owner, will have seen. In some cases going to the Disputes Tribunal or even court may be necessary. Compensation can obtained where due, but the time and effort may deter some from doing so. Of course, a reputable business would never allow its reputation to be tarnished in this way, and ideally would proactively meet its obligations.

This is why it is good to see McAfee front-foot this situation by offering to reimburse expenses. Problems like this can and will happen from time to time with software products, and McAfee sets a good example for other software companies that face similar incidents.

Their offer does not, however, extend to business users – non-cash compensation has instead been offered for businesses. It is standard for licenses (and/or other sales terms) to exclude consumer warranties for business users. The offer of limited compensation for business users (where it is not legally required) is therefore again a welcome step, although some business users who incurred significant business interruption may be left out of pocket.

In this week’s Computerworld, I write about copyright law and computer program backups, in light of an Australian court case Racing & Wagering Western Australia v Software AG (Australia) Pty Ltd [2008] FCA 1526.

• Article: Computerworld > Read up before you backup (3 December 2009)

A recent court case (see below) has clarified (likely for the first time) the law relating to making a backup of proprietary software. The case decided that copying software to create a cold server, and occasionally testing the cold server, did not infringe copyright. The case is Australian, though the relevant provisions of our Copyright Act are essentially the same.

Making a backup copy of software is expressly permitted under section 80 of the Copyright Act 1994. However, a backup copy can only be “used” if the original is lost or destroyed (or it can be used in lieu of the original copy). One of the issues the case clarified is that the occasional testing of a backup – which is of course sensible – does not breach that restriction.

However, if the purchaser was given an express direction that a backup cannot be made, then section 80 does not apply (i.e. a backup cannot be made). It is important to note that the direction not to make backups is only effective if given before or at the time the software was acquired. If the direction/prohibition was given in a click-through licence, but the software was “acquired” before that licence was accepted, section 80 will apply (i.e. a backup can be made). However, the licence agreement could still impose various other conditions about how the backup can be used/tested.

When the Copyright Act backup provisions were drafted, most backup scenarios would have involved physical media, not a failover system (hot/cold) backup. The court decision confirms that in the absence of any pre-purchase direction (which could be a simple notice on the package or on the website the software is downloaded from), a cold server backup can be made, and (subject to the licence terms) occasionally tested. A user could not, however, rely on section 80 to set up a hot server, as this would involve “use” of the copied software beyond the extent permitted.

It was good to see the court make a well-researched and practical judgment, following a hearing that involved a number of IT experts, including disaster recovery specialists. By the way, if this all sounds like much ado about not very much, it is worth noting the software in question was very expensive main-frame based software ($1m plus per licence) which, presumably, justified the cost of going to court. It is highly unlikely that Microsoft or Apple would have a major battle over a user making a simple backup of their software! Indeed, many software houses expressly permit it.

Read my full article here:

Computer program backups and the Copyright Act (Clendons Barristers & Solicitors)

The judgments:

Primary – Racing & Wagering Western Australia v Software AG (Australia) Pty Ltd [2008] FCA 1332
On appeal – Racing & Wagering Western Australia v Software AG (Australia) Pty Ltd [2008] FCA 1526

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.