Business, Innovation and SkillsWritten evidence submitted by Federation Against Software Theft (FAST)

The Federation Against Software Theft (FAST) is a not-for-profit organisation established in 1984 which represents software publishers in protecting their intellectual property rights. Its web site with further information may be found at http://www.fastiis.org/

In general FAST welcomes the provisions of the Consumer Rights Bill and in particular the clarification of the law which will result from the introduction of a new concept of “digital content”.

However, we are concerned about some elements of Chapter 3 of Part I (“Digital Content”) and one element of the new enforcement regime in Schedule 5.

A. Digital Content

1. Proposed new implied terms

Our first area of concern relates to the implied terms as to “satisfactory quality” in proposed section 36, fitness for purpose in proposed section 37 and correspondence to description in proposed section 38. Plainly breach of any of these requirements gives rise to a right to repair or replacement, the right to a price reduction and a potential right to the full panoply of measures referred to in proposed section 44(5). In addition, and very significantly, the effect of section 49 is that liability under these provisions cannot be excluded or restricted (this is dealt with further below).

As the Impact Assessment makes clear, software is special: “Bugs are considered standard in digital content on issue.”1 As Prof Bradgate said in his report for BIS: “Even with extensive testing, it is quite common, and an experienced computer user will be aware of the fact, that the complexity of modern programs is such that bugs in the program are likely to manifest themselves throughout the program’s lifetime. Modern complex programs therefore need regular updating and patching to correct bugs and/or other potential weaknesses in the program as they arise.”2

Prof Bradgate also states: “the courts have shown themselves aware of the fact that new software cannot be guaranteed free from ‘bugs’ and the presence of bugs, especially in new software, does not necessarily make it unsatisfactory because bugs are considered standard in digital content on issue.”3

It follows that in general the presence of bugs in software is not in itself regarded as a breach of contract. We understand from the Impact Assessment that it is not the Government’s intention to change the law in this regard.4 The difficulty with the new implied terms as drafted is that they do not appear to cater explicitly for the presence of bugs. There is a real danger that an ordinary reader of these provisions (and it is evident from the user-friendly form of the drafting that the Act is in part at least directed at the ordinary reader) may well be led to conclude that digital content containing bugs is not of satisfactory quality, is not fit for purpose and is not as described.

This is apparent from the following:

Proposed section 36 (satisfactory quality). One of the indicia of satisfactory quality is freedom from minor defects. The test is what a “reasonable person” would consider satisfactory and all relevant circumstances are to be considered. However, there is no evidence that a “reasonable person” would be aware that bugs are normal or consider this a relevant circumstance. The position would be clearer if the fact that the presence of bugs is normal was expressly mentioned as a relevant circumstance in subsection (5), but unfortunately it is not. We recognise that some forms of digital content (music and ebooks being perhaps the classic examples) are not expected to contain bugs. This could be catered for by specific reference to those forms of content.

Proposed section 37 (fitness for purpose). This provision is qualified by a requirement of reasonableness. However, in this instance the position is even less clear than in proposed section 36. There is no reference to a “reasonable person” test but simply to “reasonableness”. Again there is no mention of the fact that bugs are normal.

Proposed section 38 (correspondence to description). Here the position is even worse because this requirement does not seem to be qualified by reasonableness at all, still less is there reference to bugs.

This problem is to a certain extent recognised in the Impact Assessment:5 “Bugs are considered standard in digital content on issue and as such it is proposed that a reasonable person would expect a certain amount of bugs when purchasing digital content. Therefore the existence of bugs will not necessarily amount to a breach of the guarantee as to quality and fitness. However as some forms of digital content, such as music, or e-books, can be expected to be of a very high quality, we will retain the ‘freedom from minor defects’ aspect of quality for digital content and clarify in guidance that bugs may be acceptable in some forms of content.”

While we welcome the fact that the problem has been recognised we do not consider that the proposal for clarification in guidance represents a satisfactory solution. First, such guidance would not have the authority of the statute and could therefore be ignored by a Court. Second, the provision of guidance involves another level of complexity for the consumer. Third, there is no evidence that a consumer would read any guidance. Finally and in any event, we are not aware that any draft guidance has been published.

It seems to us that if these provisions are implemented in this form this will result in precisely the unsatisfactory results referred to in the Response to Consultations6 at page 28: “some consumers may think that they are entitled to a remedy which the business [and, we would add, the Government and the Court] does not think it is obliged to provide under the current law. In such situations there is a risk that both the business and the consumer will spend time and money on an unnecessary dispute. There is also a reputational risk to business if it declines to provide the remedy the consumer wants. In addition, when consumers do experience problems and are unable to claim the remedy they expect, consumer confidence is undermined. This could disadvantage new entrants to the market in particular as consumers are driven towards established brands.”

2. Proposed section 48

This proposed section provides for a consumer to be entitled to the cost of replacing hardware or other digital content if it has been damaged and that damage has been caused by digital content supplied under a contract. While we note that there is a “reasonable care and skill” defence, we also note that there is no requirement that the damage should have been reasonably foreseeable by the supplier nor is there a requirement that the consumer should have been using the digital content appropriately (eg on suitable hardware or with compatible software). The result is that a supplier may be liable under this provision for damage caused in a wholly unforeseeable manner perhaps by the way in which a consumer has configured his or her computer. We consider that this places an unfair burden on the supplier.

In addition, it seems to us that many claims under this section will be difficult and expensive for suppliers to investigate. In those circumstances we consider that there is a real risk that this section will be misused by unscrupulous consumers who attempt to use it in order to obtain a new computer or software program at the expense of an innocent supplier.

3. Proposed section 49

This section introduces a complete prohibition on excluding or restricting liability for breach of the various implied terms referred to above and under proposed section 48. It seems that the prohibition extends to all liabilities, not merely those specified in proposed sections 45 and 46. This will leave the software provider exposed to unlimited liability for damages for breach of contract (subject to the usual rules of causation and remoteness). Since such liabilities have generally been excluded or restricted in the past that involves a very substantial change in the legal landscape for software providers and suppliers.

Some of the liabilities (or at least claims) to which some or all software providers or suppliers may now be exposed for the first time are as follows:

Costs and expenses caused by loss or damage to data. Clearly such liabilities could be multifarious and in some cases extremely extensive. In this context we note that a consumer is defined as someone who is acting wholly or mainly outside his or her trade or profession. Thus someone who uses the software in part for business purposes may be able to mount a claim for business losses. The same would apply to someone who was using the software for creative purposes in the hope of making money from the sale of a film script or an artwork and who might seek to mount a massive claim for lost profits.

Costs of replacing hardware irrespective of its suitability for the software in question.

We believe that this change will potentially have a chilling effect on risk-taking and innovation.

While we would not suggest that there should be no liability in these circumstances we would propose that a more equitable approach would be to permit the exclusion or restriction of liability to the extent that it is reasonable to do so taking into account factors analogous to those under the Unfair Terms in Consumer Contracts Regulations (SI 1999/2083). That would enable the Courts to develop a fair and equitable system on a case by case basis.

If software publishers and others supplying digital content are required to abandon standard and commercially-accepted limitations on liability then this could inevitably result in an increase in prices. Software publishers may price their products against their standard terms and in the expectation and understanding that, if there is a claim, this will be limited—generally to the value of the product or, in case of subscription models, to the value of one year’s fees. Insurance is not readily (or cheaply) available for breaches particularly in the areas of intellectual property, confidentiality or loss of data meaning that publishers may have to self-insure and set aside substantial funds against possible claims—funds which will need to be obtained by a marked increase in prices to their customers.

B. Schedule 5 para. 20(4)

We welcome the general principle of consolidating the various enforcement powers contained in a vast range of statutes. We also recognise that a balance needs to be struck between the effectiveness and efficiency of enforcement on the one hand and the reduction of the regulatory burden on businesses, the reduction of state intrusion and the protection of civil liberties on the other. We recognise that the Government is obliged to consider whether advance notice before visits is appropriate under Protection of Freedoms Act 2012.

The effect of proposed Schedule 5 para. 20(4) is to introduce a requirement that advance notice be given by enforcers before entering premises for the purposes of ascertaining whether an offence has been committed (“the notice requirement”) subject to certain exceptions.

FAST is reliant on Trading Standards Officers using their powers under the Trade Marks Act 1994 and the Copyright, Designs and Patents Act 1988 to enforce the criminal provisions of those Acts in relation to counterfeit and pirated software.

Our members have mixed views on the change to incorporate a notice requirement.

An example of the current without notice inspection power has resulted in illicit copies of software being removed from being purchased by unsuspecting consumers. In this instance, the Trading Standards Officer asked to see any software for sale under the counter in a shop selling computers and related services. McAfee software discs were produced. There was a concern that these did not appear to be genuine and this was confirmed. As a result, 400 discs which were not genuine were identified and removed from sale and the supplier.

Digital evidence can be destroyed easily. If a trader is committing an offence with tangible items, it is more difficult to destroy evidence. This is because something physical has to be got rid of. In comparison, digital copies or content may be very easily destroyed without leaving a trace if advance notice is given.

Whilst we accept the general principle of consolidating the various enforcement powers contained in a vast range of statutes, we consider that Government should be cognisant that the change may deter Trading Standards from carrying out checks. The figures in the Impact Assessment7 show local authorities are cutting back on their budgets so that the absolute number of inspections is going to fall in any event (Impact Assessment para. 47).

In this instance we submit that this proposal could mean that certain illicit activity may slip through the net unnoticed and Trading Standards may be put off from checks under a notice requirement regime.

Lawyers who are members of the FAST Legal Advisory Group were provided with access to a draft of this paper for consideration. The following have given their consent to be referenced:

Andew Moir
Partner
Herbert Smith Freehills

Dawn Osborne
Partner
Palmer Biggs Legal

Jonathan Cornthwaite
Partner
Wedlake Bell

27 August 2013