Tech law update 30 July 2010

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.

Law reform for online auctions

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.

There is debate as to whether online Trade Me style auctions are true auctions of the type intended to be exempted from the Consumer Guarantees Act because they do not meet the definition of auction in the Auctioneers Act. For instance people are not actually physically present for the online auction which is a key component of the “outcry” which is required under the definition of an auction in the Auctioneers Act. As noted, however, the Consumer Guarantees Act does not define auction by reference to the Auctioneers Act, so whether Trade Me style auctions are “auctions” for the purposes of the Consumer Guarantees Act is a grey area, open to interpretation.There is debate as to whether online Trade Me style auctions are true auctions of the type intended to be exempted from the Consumer Guarantees Act because they do not meet the definition of auction in the Auctioneers Act. For instance people are not actually physically present for the online auction which is a key component of the “outcry” which is required under the definition of an auction in the Auctioneers Act. As noted, however, the Consumer Guarantees Act does not define auction by reference to the Auctioneers Act, so whether Trade Me style auctions are “auctions” for the purposes of the Consumer Guarantees Act is a grey area, open to interpretation.

Trade Me, but don’t defame me

A defamation lawsuit against an eBay buyer who left negative feedback has received comment from New Zealand defamation experts:

“The law is no different if someone writes it online or in a newspaper” – William Akel of law firm Simpson Grierson.

“People get away with an awful lot online and it’s been going on for a while but I haven’t seen a flood of complaints. We don’t live in a litigious environment.” – David Campbell of Campbell Law.

Victoria University defamation expert Professor Bill Atkin said the online community should remember “the wisest course is often the cautious one”.

This is good advice, although people should not be afraid to state (non-recklessly) their genuine honest opinions. Free speech is protected in New Zealand via two laws. First, section 14 of the Bill of Rights 1990 (an unsatisfactory piece of legislation) states:

Freedom of expression: Everyone has the right to freedom of expression, including the freedom to seek, receive, and impart information and opinions of any kind in any form.

Second, section 10 of the Defamation Act 1992 allows a defence of honest opinion. However, this is not completely unrestricted and generally requires that:

  • The opinion is based on true facts;
  • The comments must be reconisable as opinion; and
  • The opinion is genuinely held.

Two important facts about the eBay lawsuit are:

  1. The alleged defamatory comment was: “Bad seller, he has the ethics of a used car salesman“.
  2. The buyer’s listing said “We cannot give you any guarantees and must offer it on an as-is, where-is basis only”.

It will remain to be seen whether the claim succeed, bearing in mind that defamation law in the US is relatively restricted.

Possibly the buyer’s mistake was to comment too broadly on the seller’s ethics. It can be safely assumed he is expressing his opinion on that point, but such a broad statement is open to allegations of defamation. Of course feedback comments are supposed to be very brief, but if the buyer had taken a little more care the situation would likely have been avoided. For example, the buyer could have said “I was very misled by this seller’s listing.”  That would be much more difficult to attack because it is a comment on the buyer’s own feelings, not a sweeping accusation of dodgy ethics.

In the case of Trade Me / eBay feedback, it will also be interesting to see whether a defence of consent (section 22 Defamation Act 1992) could protect (or limit) otherwise defamatory feedback. When users buy or sell on auction sites, they know that feedback will almost always be given. Users know the purpose of the feedback is to share trading experiences – good, bad or neutral. A user could not reasonably claim that they never expected an upset trader to post critical feedback as “their side of the story”, whether based on correct or incorrect facts. Responding to critical comments is also provided for and expected.

It is also worth noting, in the eBay case, that the plaintiff (the seller) is a Miami lawyer, and the defendant claims to have spent USD$7,000 fighting the $15,000 suit. In the highly litigious United States (where even a dry-cleaned pair of trousers can turn into a $67 million lawsuit) this is relatively small. In New Zealand, which is not litigious, in most cases it would probably be completely uneconomic for an occasional, sole trader to make a defamation claim. The best first step in the case of unfair or defamatory conduct would be to contact the website in the first instance. Trade Me has policies on feedback on its website.

Online auctions and the Consumer Guarantees Act

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 purchaseror 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.