THE COMPUTER L A W A N D SECURITY REPORT 6 CLSR

EXAMPLES OF RECENT INVESTIGATIONS

Product counterfeiting has been described as the 'Boom Industry of the Eighties' and certainly in recent years the sophistication of the fraud has reached alarming proportions.

Cheap imitation cosmetics, razor blades and ball point pens were always the 'stock in trade' of the shady street trader. Similar products purporting to be 'as sold by' or 'manufactured for' a reputable High Street retailer did from time to time cause local minor irritations.

Now however, spurious copies of well known car parts, leisure wear, sports goods, electrical appliances and hand tools are common place.

Following highly successful operations involving leisure wear, cosmetics and cassette tapes there has recently been a national response to the problems facing the Video Cassette Industry. In my own authority a team of specially trained officers visited every known retail outlet and Seized over £100 ,000 counterfeit or pirated tapes. Fines in respect of resulting prosecutions totalled over £30,000.

PIRACY OF COMPUTER SOFTWARE

There is no doubt that as soon as any new idea, system, product or commercial enterprise appears on the market, someone somewhere will immediately explore the possibility of stealing the cream, Indeed, the very reason that the intellectual property laws of patents, trade marks and copyright were passed was to protect the rights of those who research and develop new ideas.

Unfortunately, law and its enforcement is rapidly becoming unable to keep pace with technological advance, and no more so than in the field of computer software. There ar~ perhaps three main areas of piracy, viz:-

(a) Counterfeiting Where a software program is deliberately counter- feited and sold ostensibly in the name of the original manufacturer/processor, with the obvious creaming off of profit.

(b) Pi racy/Copyi ng Where genuine programs are copied using either

professional equipment or joining up two home computers/recorders in a 'back to back' situation. Thus one person can borrow a program from a club, make himself a copy and have a £1 0 program for the price of a blank.

(c) Idea Stealing Where original ideas and methods are used to produce idential or similar programs.

Legally, of course, as has been mentioned previously there are remedies in both the civil and criminal courts. The problem is in the detection of offences to secure enforcement of these remedies. It is reasonably easy to detect counterfeit and copies software on sale in retail or wholesale outlets, but what is nigh impossible is to detect the private copies, be it a single user or an organised club. However, the trading standards service, ever mindful of its role in protecting consumers against counterfeiting or piracy, and owners of intellectual property against economic loss, is making investigations into these problems. Enquiries have been made into counterfeit games said to be compatible with computers, switching labels and methods of identifying counterfeit or copied tapes. In a recent article by Roland Rowell, of West Midlands Trading Standards Department, it was revealed that in a 20 month period, in the UK, there were 811 prosecu- tions under the Copyright Act, with a further 474 charges taken into consideration, (mainly audio and video cassettes) resulting in fines and costs totalling well over £Y2 million, and at least seven custodial sentences. By co-operation with the software protective organisation FAST, and with producers and manufacturers it is to be hoped that progress can be made. It must also be recognised that incumbent upon manufacturers and the owners of copyright to use their own computer knowledge and technical expertise to put security stops on their product to prevent counterfeit or piracy. By producers making it harder to copy and by enforce- ment officers making it harder for retailers to sell or hire, then perhaps the problem can be contained within acceptable parameters. Robert V. Wright, Chief Consumer Protection Officer, South Yorkshire County Council.

COMPUTER CONTRACTS AND CONSUMER LAW

Computer disputes are becoming commonplace. When a new computer system breaks down or proves unsuitable, few businesses can afford to write their misfortunes off to experience. But what are the prospects of success for a disillusioned computer user who contemplates suing his suppliers ? Whether through ignorance or lack of negotiating muscle, computer users frequently sign standard form contracts which lean heavily in favour of the supplier. It is often only after the new system has been installed and found to be wanting that they read all the small print, which is likely to contain sweeping exclusions of - or limits t o - legal liability. An "entire agreement

clause', for example, may purport to nullify all promises and assurances made by the salesman during negotiations. The contract may exclude warranties of merchantable quality and fitness for purpose altogether or limit them to a wholly inadequate period of 90 days. A dissatisfied customer may be able to rely upon the Unfair Contract Terms Act 1977, which is the cornerstone of modern consumer protection law. Even in the context of commercial contracts, the Act subjects exemption clauses to the "requirement of reasonableness' i.e. they must be fair and reasonable in all the circumstances.

Schedule 2 of the Act provides guidelines for the application of the reasonableness test. Where relevant,

MARCH - APRIL THE COMPUTER LAW A N D SECURITY REPORT

the court should have regard to a variety of factors, including the strength of the parties' bargaining positions and whether the system was manufactured, processed or adapted to the customer's special order.

Mackenzie Patten Case

The importance of the Act for computer users emerges clearly from the case of Mackenzie Patten ~ Co. v. British Olivetti Limited (unreported, 1 l th January 1984). A small firm of London solicitors acquired an office computer from Olivetti but never used it, because it failed to live up to expectations. The High Court held that the salesman's statements about the capabilities of the equipment constituted 'collateral contractual warranties' which were broken by the supplier. This was because the equipment was not suitable for the solicitors' needs or for operation by the designated members of staff, did not perform all the functions promised and the suppliers were not in a position to provide the necessary training and help.

The principle of "caveat emptor' was therefore brushed aside. Olivetti's reliance upon an 'entire agreement clause' in the contract and a couple of stringent exclusion clauses was equally to no avail. The entire agreement clause was irrelevant because it referred to 'the sale of equipment' and what actually occurred was a leasing transaction. Olivetti therefore paid the penalty for using inappropriate standard form contract wording. The judge also decided that the exemption clauses failed to meet the requirement of the reasonableness test prescribed by the Unfair Contract Terms Act. Unfortunately, there is currently some uncertainty about the extent to which the Act applies to computer contracts containing a software element. This is because the Act does not cover contracts which relate to the creation or transfer of intellectual property rights. Consequently, software contracts are often prepared on the basis that they will be unaffected by the restrictive terms of the Act.

Non-contractual solut ions

A dissatisfied computer user may have rights of redress, quite apart from a possible claim for breach of contract. Even if the specific problem concerning software does not apply, it will often be necessary to explore the other legal options because even where there is a major computer breakdown, a claim for breach of contract may fail to succeed, e.g. if the supplier is effectively covered by reasonable exemption clauses or does not even have a contractual relationship with the computer user. Typically, the latter case will arise where the system is acquired on a lease from a finance house, which has previously acquired the equipment from the computer company. In that event, the customer's remedy will be against the finance house, which is likely both to lack computer expertise and to include stringent exemption clauses in its lease contracts. All too often, computers are acquired on the terms of standard form leasing agreements which were originally intended to apply to goods of a very different nature. The terms of such leases are unlikely to reflect the reality of the computer

acquisition and few lessees have the foresight to procure warranties from the original supplier. In practice, therefore, if the system breaks down, the right to sue the computer company for breach of contract will be vested not in the customer, but in the finance house. The luckless customer may, however, have a claim against a computer company whose salesman has been guilty of misrepresentation. Once a representation (i.e. a statement of fact, past or present) has been made, it will normally be treated as continuing in effect until the contract is concluded. The customer must show that the misleading information influenced him in his decision to enter into the contract, although it is not necessary for the misrepresentation to be the sole reason why he acquired the computer. The legal test is whether the misrepresentation was material i.e. capable of influencing a reasonable person to decide whether to make the contract. Section 2( 1 ) of the Misrepresen- tation Act 1967 provides that a person making a misrepresentation will be liable in damages if he would have been liable had the misrepresentation been f raudulent - unless he proves that he reasonably believed the truth of what he said up to the time that the contract was made. If the representation is false in a material respect, regardless of whether or not made fraudulently, the person influenced can normally bring the contract to an end. As the Mackenz ie Patten case shows, a representation can become a term of the contract. The customer's right to end the contract because of misrepresentation is not, however, lost just~because the misrepresentation has become a term.

Liability for negligence The customer may also have a claim against the computer company in respect of the tort (i.e. legal wrong) of negligence. The House of Lords made it clear in Hedley Byrne El" Co. Ltd. v. Heller Et Partners Ltd. (1964) AC465 that there may be a claim if information or advice is given carelessly by a person who knows that he is being trusted to take care in giving that infor- mation or advice. A computer user may be able to sue on the basis of a negligent misstatement made by a salesman during the course of negotiations, even where he did not eventually acquire the computer direct from the salesman's company.

Damages The main difference between a claim,in negligence and a claim for breach of contract lies in the method of calculating damages. Broadly speaking, in tort law, one sues for loss actually suffered. On the other hand, damages for breach of contract are intended to put the plaintiff in the same position as if the contract had not been broken. This will sometimes be an important distinction, e.g. when obtaining a comparable working system elsewhere costs more than the price of the defective system. It is likely to be easier to recover the additional sum by claiming breach of contract than under tort law.

Mackenzie Patten ~ Company were prepared to claim against Olivetti pursuant to the Misrepresentation Act

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and the Hadley Byrne principle if the action for breach of contract failed. Future computer users who propose to sue their suppliers - no doubt as a last resort after more conciliatory courses have been explored to no avail - need to consider all the available legal avenues. The best results are likely to be achieved by computer users who take self-help measures e.g. keeping a

record of discussions with the suppliers' staff and compiling a 'computer break-down diary" and seeking professional advice promptly if problems persist, Consumer law may not provide a satisfactory solution to every problem, but it is far more flexible than many businessmen realise.

Mart in Edwards, Solicitor, Mace Et Jones E~ Co., Liverpool. Author of 'Understanding Computer Contracts'

PRODUCT LIABILITY- THE E.E.C. DIRECTIVE

For the software industry, plagued in recent times by unchecked counterfeiting, a more litigous market and falling margins, the new EEC Directive on Product Liability may be about to bring more headaches. And an industry which in many ways seeks to draw a distinction between itself and other goods based industries, is becoming concerned about the possible implications.

THE DIRECTIVE

The Directive (85/374/EEC) was eventually adopted in July of last year after more than nine years of discussions. Its objective is to give similar protection to consumers of defective goods throughout the Community by harmonising those laws of Member States which are concerned with product liability. The U K must adapt its laws to give effect to the Directive by July 1988. As the law stands at present in this country, the purchaser of defective goods has a contractual remedy against the person who supplied him with those goods. However, if that purchaser wishes to take action against the original manufacturer, he has to prove negligence, and the onus of proof rests with the purchaser. But ever since the Pearson Commission report of 1978, there has been growing pressure for the imposition of strict (no fault) liability for personal injury resulting from defective products. The Directive places strict liability on producers of defective products that cause damage. Damage is defined as death, personal injury or damage to goods for private use. No proof of negligence is required.

SOFTWARE

So, is it likely that software could fall within this definition ? It is becoming increasingly common these days for producers of packaged software to describe it as 'products'. But see Report on RRX Industries v Lab. Con Inc 9th Court US Court of Appeals on page21 of this isue). Even the legislation of recent years has failed to categorise software. It is not 'goods' under the Sale of Goods Act 1979, and packaged software is not likely to constitute 'services' under the Supply of Goods and es Act 1982. Even the freshly enacted Copyright (Computer Software) Amendment Act 1985 dodged the issue somewhat by equating software with other "literary works'. It therefore seems possible that many of the liabilities for defective software are regulated by common law principles. One then has to consider what is the nature of damage or injury contemplated by the Directive. In particular, does it extend to commercial damage ? At present, product liability insurance provides cover only for

damage caused by tangible objects. Moreover, in most cases involving software, the risk is more one of economic loss than of damage to the person or property. In the field of negligence, there again seems to be a trend towards an extension of liability to cover precisely this area of risk. The Directive, however, does not extend protection to economic loss. Each jurisdiction must determine its own position on this. In the United States the growing relevance of this area of law to the software industry is clear.

THE MOLINA BILL

This Bill, introduced in California last year, gave protection to purchasers of software when the software proved defective or failed to meet advertised capabilities and specifications. The purchaser was given the right to return the software within six months if these warranties were breached. In any ensuing legal action, triple damages could be claimed. The progress of the Bill has been delayed due to opposition from the U.S. Software industry who have pointed out the impossibil i ty of producing error free software. Nevertheless, the Bill is likely to be re-introduced this year.

THE U.K.

In this country, the common law is probably more effective in setting expected standards and in providing remedies when those standards are not met. Whilst many contracts contain an 'entire agreement' clause, seeking to disclaim responsibility for claims made in promotional literature or by eager salespeople, it seems probable that warranties of merchantability and fitness for purpose wil l be implied into contracts relating to the sale, lease or licence of software, and these will be enforceable.

THE RESPONSE

Legislation along the lines of the Molina Bill cannot be ruled out however, and this would be bound to impose severe restraints on the industry. It would seem sensible therefore to pre-empt such government measures by adopting standards or codes of conduct within the industry. Trade associations in the U.S, are already advocating this form of response, and the Computing Services Association could perform a similar role in this country. It is not unreasonable to offer a warranty that for a Limited period, software will perform to a published description or specification. The outcome should force suppliers to pay more attention to the accuracy of their advertising. This warranty should be qualified bytwo further provisions. Firstly, if