Brodies Blog » Technology

TechBlogger article on SAS v WPL software copyright case

Martin Sloan — Wed, 15 May 2013 13:55:18 +0000

Brodies’ IP litigation partner, and TechBlogger, Gill Grassie has an article in the latest edition of the CIPA journal on the High Court’s recent decision in the SAS v WPL copyright case.

The case is important because it confirms that there is no copyright in the functional aspect of computer programs.

SAS had argued that WPL had infringed SAS’s copyright by developing a rival software application that allowed licensees of SAS’s software to run applications originally created by those licensees using SAS’s software. WPL’s application did this by imitating the functionality of SAS’s software, meaning that SAS’s customers were no longer tied in to using SAS’s applications.

The case went all the way to the European Court of Justice for clarification.

Here is the introduction to the article:

Some would say that this High Court Decision of handed down on 25 January 2013 amounted to nothing more than recognition of what had been decided in previous UK cases, in merely reinforcing the principle that there is no copyright in the functional aspects of computer programs.

Whilst this is correct, the sting in the tail is that there remains uncertainty as to the application of the principle and the precise line in practice between what is functional and what is not and is protectable.

On the whole, the decision gives a new level of clarity and certainty on the principle, a positive one from which the software industry overall should benefit. Competition should be encouraged overall, which in turn should be beneficial for the end consumer of these products.

Had the decision gone the other way, it might well have had an adverse effect on innovation in the software and computer games industries.

If you are not a member of CIPA then you can read the article by downloading this PDF.

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New consumer protection rules for mobile apps and digital content purchases

Martin Sloan — Tue, 14 May 2013 08:39:52 +0000

Good news for purchasers of apps and other digital content, such as films, music and games.

Hidden in amongst the detail of last week’s Queen’s Speech, the Government announced plans to introduce new laws to protect consumers that purchase mobile apps and digital content such as films, music and games.

At present, consumer protection laws are spread across a number of different acts and regulations, with different laws giving consumers different remedies. Rights in relation to digital content are particularly confusing because they do not easily slot into existing definitions of goods and services.

The current consumer protection regime has been criticised in academic and Law Commission reports.

New rights for consumers

According to press reports, the new law will consolidate these rules and provide clear rights for “faulty” digital purchases.

This includes the right to a refund if an online game freezes, or if a streamed film is unwatchable. Note that this is a refund – not just a right to a replacement download/or credit to watch another film/listen to another song. Arguably, that goes beyond the rights available to consumers for purchases of physical media.

How will the rules apply to app purchases?

The Government does not appear to be proposing an extension of distance selling rules (whereby consumers can cancel an order within a defined cooling off period).

We will need to wait until the draft legislation is published to see how the new rules will work. In particular, app developers and providers of digital content will be keen to understand what a consumer will need to do to prove that an app constantly froze, or a downloaded film was unplayable.

In particular, the following questions spring to mind:

Software is never error free. No matter how much testing is done, bugs and problems arise. Indeed, licences frequently state that software will not be error free. However, the ability for app stores to push out regular (free) updates with bug fixes is arguably a step forward for users, making it easier to distribute a patched version of the application. What will constitute a bug entitling consumers to a refund? It’s not clear.
Where will the burden of proof lie? On the consumer, the content provider or the app/content store?
What happens if the problem wasn’t an issue with the downloaded content, but actually the user’s device/operating system? How do you establish where the problem actually arose?
Who will be responsible for dealing with claims? Most app stores act as an agent (or commissionaire) of the content provider. The licence is between the content provider and the consumer, with the app store handling payment and sales admin on behalf of the content provider.
If it is the app stores, how will app stores deal with complaints? Will they simply issue a refund, knowing that they can charge the refund back to the content provider? That might not go down well with content providers. Here’s a summary of how Apple deals with copyright infringement claims.
Who will ensure that the content provider’s EULA complies with the new laws? Many app developers simply rely upon the app store’s proforma EULA, rather than uploading their own. Will we see EULAs containing separate sections for consumers and non-consumers?

The end of the EULA as we know it?

However, lots of 99p refunds can quickly add up. Whether this has an impact on pricing remains to be seen.

In the meantime, the days may be numbered for lengthy EULAs that include wide-ranging exclusions and limitations of liability and warranties, and limited remedies for consumers.

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Nestec fails to extend Nespresso patent protection to coffee capsules

John McGonagle — Fri, 10 May 2013 13:24:10 +0000

Who hasn’t enjoyed the experience of their heart thudding irregularly like a broken clock after too many coffees?

I have a Nespresso coffee machine which accepts Nespresso capsules. You buy a set of capsules which are different colours and you get a chart telling you what those colours mean (a bit like the chocolates list contained in a chocolate box). Some capsules are “intense” and others are “mild”, etc. The problem is that the colours used are quite hard to tell apart.

I am totally serious about this – take a look at this chart. Would you always be confident that you were picking a Volluto instead of a Finezzo Lungo? What if you used a Finezzo Lungo a few weeks ago but had forgotten? You could well look at the remaining capsules and pick up the Volluto thinking it’s Finezza Lungo. The decaffeinated capsules are all shades of red and virtually impossible to tell apart under bright lights. And so on.

I could rant about this all day but let’s discuss new law in this area. The capsules are a hi-tech business (you can read more about The Secrets of the Capsule here) owned by Nestec and very much part of Nestec’s Nespresso “system”.

The problem for Nespresso was that Dualit started manufacturing “NX Capsules” compatible with the Nespresso machines. Nestec claimed that this infringed its European Patent (UK) No 2 103 236 (the “Patent”), and the parties ended up in court, as reported in the case of Nestec v Dualit Limited [2013] EWHC 923.

As usual, if you wish to read and enjoy all the relevant arguments then fully reading the case is essential. However I will relate selected highlights.

Highlights

Claim 1 of the Patent begins:

Extraction system comprising a device for the extraction of a capsule and a capsule that can be extracted in the device.

Under Section 60(1) of the Patents Act 1977, a person infringes a patent for an invention if, without the consent of the proprietor of the patent, they make, disposes of, offer to dispose of, use or import the product.

Justice Arnold concluded that the purchase of NX capsules by owners of Nespresso machines did not “make” the claimed system. He considered the capsule to be an entirely subsidiary part of the system, pointing towards facts such as:

the Nespresso machines sell for hundreds of pounds, whereas the capsules sell for 20-30p each;
the machines are intended to last for many years, and make thousands of cups of coffee, whereas the capsule is intended to be used once and then discarded;
the capsules contain ground coffee which is perishable (Nespresso capsules have a “best before date” of 12 months from the date of manufacture, which is likely to equate to about eight months from the date of purchase);
the functioning of the machine is not altered by the presence or absence of the capsule – the machine is as capable of performing the necessary movements to cause a flanged capsule to be moved through its various positions within the machine whether or not the machine’s owner actually has a capsule in his or her possession; and
the presence or absence of a capsule does not affect the economic value of the machine, although the machine would be useless without a supply of capsules.

Quoting from Paragraph 203 of the judgement:

The capsule does not embody the inventive concept of the Patent…the invention is all about the way in which the machine operates. The fact the claims require the presence of a capsule is an artefact of clever claim drafting. In my view, it may be inferred that the reason why the granted claims require the presence of the capsule (whereas the claims in the Priority Document did not) is precisely in order to enable Nestec to argue that the mere supply of capsules constitutes an infringement and thus to enable Nestec to continue to control the market in capsules.

This seems to me like a sensible decision and will be of interest not just to manufacturers of compatible coffee capsules and pods, but also those manufacturing compatible “consumables” in other industries.

Making patents more straightforward

A related interesting development was that Justice Arnold criticised the length of Dualit’s submissions (which ran to 382 paragraphs and a separate 11 page schedule), stating at paragraph 4:

This case is a paradigm example of the regrettable tendency of current patent litigation in this country towards proliferation of issues rather than concentration upon the essentials. The result is unnecessary expenditure of both costs and the court’s time.

This is relevant because the Intellectual Property Office’s is proposing to accelerate patent processing with a “superfast” 90-day service, and the move towards a unitary European patent is finally gathering pace (highlighted by the recent intergovernment agreement on a Unified Patent Court).

Obtaining a patent is likely to become easier, meaning that and it’s likely that litigants are going to expect the resolution of disputes to become more straightforward too.

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Latest Meltwater copyright decision gives comfort to internet users

Martin Sloan — Thu, 09 May 2013 09:47:39 +0000

Last month, the Supreme Court handed down its latest judgement in the long-running Meltwater case.

This latest appeal considered whether merely viewing content on the internet could infringe copyright.

Whilst the Supreme Court has referred the matter to the European Court of Justics for clarification, the Supreme Court’s judgment will provide some welcome comfort for users of news aggregation services such as Meltwater, following less favourable judgments from the High Court and Court of Appeal.

Background to the Meltwater litigation

Meltwater operates an automated software programme which monitors news coverage for customers. Meltwater’s customers supply the search terms, and Meltwater produces a monitoring report with links to news stories which may be of interest to the customer. The Newspaper Licensing Agency (NLA) represents a number of key publications in the UK and has historically collectively licensed reproduction and sharing of newspaper articles. The report can be accessed by email or through Meltwater’s website.

A series of court cases have taken place on various issues relating to the extent to which licences are required from the NLA to provide and use news aggregation cases. Last year, the courts held that companies providing news aggregation services required a licence from the NLA to incorporate content from the NLA’s members.

The issue

The crux of this appeal is whether Meltwater’s customers need a licence to receive this service if the report was only made available on Meltwater’s website.

When an end user views a web-page on his computer, without downloading the content, the technical processes involved requires temporary copies to be made on screen and in the internet “cache” on the device. The end-user views the material online and permanent copies are not made unless downloads or prints of the image are made.

However copies are temporarily retained on the screen or in the cache of the computer – an incidental technical consequence of using a computer to view the online material. Those cached copies may subsist for minutes or months, depending on the size of the cache and the user’s browser settings.

The law

Section 28A of the Copyright, Designs and Patents Act 1988 deals with temporary copies of copyright material on a computer. This section gives effect to Directive 2001/29/EC on the harmonisation of certain aspects of copyright and related rights in the information society.

Article 5.1 of the Directive states that copying is restricted to “temporary acts of reproduction” which are “transient or incidental [and] an integral and essential part of a technological process and whose sole purpose is to enable – a transmission in a network between third parties by an intermediary, or a lawful use. ”

Both the High Court and the Court of Appeal interpreted Section 28A very narrowly, and held that Meltwater’s customers would require a licence to view this information.

The court’s decision

Lord Sumption held that when a person viewed an online webpage, the temporary copies made in the cache of the computer did not amount to copyright infringement.

Lord Sumption referred to recitals in the Directive, which state that the exception should apply to “acts to enable browsing”. Lord Sumption also considered recent cases from the ECJ relevant to the issue, including the ECJ’s decision in relation to the use of foreign satellite TV decoder cards by pub landlords.

In that case, brought by the FA Premier League, it was held that simply watching live TV broadcasts would not infringe copyright. That being the case, there could be no rational distinction between the law applying to viewing content on a television and viewing content on a computer. Interestingly, the consequence of this is that even the act of viewing illegally uploaded content would be within the scope of the exemption in Article 5.

Referral to the ECJ

However, Lord Sumption acknowledged that “the issue has a transnational dimension. The application of copyright law to internet use has important implications for many millions of people across the EU making use of what has become a basic technical facility” and for that reason the Supreme Court has referred the question to the Court of Justice of the European Union.

Previous decisions of the ECJ suggest that the ECJ will agree with Lord Sumption’s view. Internet users across the EU will await that judgment with interest.

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Court holds that failure to comply with data protection laws can be a material breach of contract

Martin Sloan — Thu, 02 May 2013 17:17:55 +0000

A recent case before the Court of Session has held that a company was in material breach of contract as a result of a failure to comply with data protection laws. The case also provided further guidance on when the courts will consider a aspirational pre-contractual sales statement to be a misrepresentation.

The case involved a company called Soccer Savings (Scotland) Ltd (SSSL). In 2010, SSSL entered into a contract with the Scottish Building Society (SBS) to run an affinity savings scheme targeted at football fans. Basically it allowed fans to get a savings account branded with their football club’s brand.

The scheme wasn’t very successful and SBS terminated the contract in June 2011. SSSL challenged the grounds of termination but accepted the termination as a repudiation of contract and sued for damages. The case came to proof before Lord Hodge.

The defence

When SBS terminated the agreement it relied on pre-contractual mis-representation and material breach of contract. At proof before Lord Hodge, SBS departed from some of the allegations on record and restricted their defence to mis-representation and three separate contractual breaches.

Mis-representation

Lord Hodge found that statements of aspiration or optimism about what was achievable did not amount to an undertaking or warranty. SBS had the clear impression that the proposed venture was likely to succeed but:

It is clear that the venture failed very badly. But that does not make the statements of aspiration by the promoters of SSSL into misrepresentations of fact. Other things may have been said that strengthened [SBS' Chief Executive] Mr Kay’s conviction that he had been given representations on which he had relied to recommend the deal to his board, but absent evidence of specific statements of fact, I am satisfied that the defence of misrepresentation fails.

So SBS were left with the three breaches of contract to justify their termination of the contract.

Breach of contract

The first breach relied upon was SSL’s failure to get a signed written agreement with a football club by the stipulated contractual deadline of 1st July 2010 thus delaying promotion of the venture.

In an earlier decision Lord Hodge had already held that this was a breach of contract but he now held that although it was a breach it was not a material breach. It did not go “to the heart of the contract” and did not contribute to the eventual failure of the scheme. Accordingly it could not be used to justify termination.

SBS argued that SSSL had breached regulations 3 and 5 of the Consumer protection from Unfair Trading Regulations 2008 by issuing letters on football club notepaper. Lord Hodge disagreed. The clubs had agreed to the issuing of the letters and had signed them. There was no breach.

Breach of data protection laws

And so to the final alleged breach – a failure to comply with data protection rules.

The data protection clause obliged SSSL to use reasonable endeavours to to comply with the statutory rules and to take appropriate measures against unauthorised or unlawful processing of personal data.

SSSL had used the database of a related company (Soccer Savings Ltd or SSL) to send out letters in its own name and in the name of two clubs to account holders in a similar scheme which another building society, the Dunfermline Building Society (DBS), already ran with the SSL. The deal with the SBS came about after the value of deposits under the SSL/DBS scheme fell significantly after DBS encountered difficulties and was put into special administration in 2009. The DBS was subsequently taken over by the Nationwide Building Society (NBS).

Lord Hodge found that SSSL was a data controller under the Data Protection Act, but was not registered as a data controller with the Information Commissioner when it processed data. It had committed an offence. In addition it did not have the necessary consent from the account holders to use their data to promote the new scheme:

While a failure to register may not of itself have been a material breach of contract, I am satisfied that SSSL’s use of the data obtained by SSL under the soccer saver scheme was. SSL did not have the consent of the data subjects (i) to make their data available to the football clubs with which it contracted or (ii) to use their data to promote SBS. Yet SSL had contracted with the football clubs to give them access to the names and addresses of account holders. And SSSL’s directors procured SSL to use the data for the latter purpose. It used the football clubs’ unauthorised possession of the soccer saver data in an attempt to circumvent the restrictions on SSL’s activities in its contract with DBS.

What takes the breaches to the heart of the contract is that SSSL was offering SBS a business proposal, a major component of which involved achieving the transfer of account holders from DBS to SBS. SSSL proposed to use SSL’s data to market SBS’s products and to obtain the transfer of accounts from DBS by targeted marketing. That is what it sought to do in SSL’s letter to the Rangers account holders [one of the clubs involved]. But that provoked NBS correctly to assert both a breach of contract by SSL and also breach of the data protection legislation. NBS carried out the threat in its letter of 10 November 2010 and complained to the Data Commissioner.

I conclude that an important component of SSSL’s performance of its obligations under the contract involved it in the breach of the statutory data protection rules and that that illegality materially impaired that performance. That amounted to a material breach of contract.

The result was that SSSL had indeed been in material breach of contract and so SBS had been entitled to terminate the contract –even if, perhaps, their reasons for doing so were originally quite different.

Ownership of customers

More importantly, however, the case emphasises the importance of ensuring that ownership of customers under affinity arrangements is clearly defined, and the importance of thinking up front about the privacy consents that may be required from customers.

Had the original privacy notices issued to customers clearly stated that SSL and its related companies could use customer details for marketing purposes, then many of these issues could have been avoided. However, I suspect that the course of events that subsequently unfolded were not in anyone’s contemplation when the original deal was conceived.

With assistance from Douglas MacGregor, PSL in Brodies’ Dispute Resolution and Litigation department

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Survey higlights key issues for senior IT professionals in IT outsourcing contracts

Martin Sloan — Fri, 26 Apr 2013 12:51:55 +0000

Supply Management, the official journal of the Chartered Institute of Purchasing and Supply, yesterday published details of a report by outsourcing consultancy Alsbridge into customer satisfaction with IT outsourcing arrangements.

According to the report, just over a quarter of the 250 senior IT professionals canvassed were unhappy with at least one of their IT outsourcing contracts, with 76% considering renegotiating or retendering two or more of their IT outsourcing contracts before the end of the term.

The reasons for this are telling, if unsurprising.

Too much left to be agreed post signature

40% of respondents said that they had left too many important details in the contract to be confirmed at the point at which the deal was signed.

There is often a push to sign a contract by a certain date, come what may.

However, that can be dangerous. Once a contract has been signed, the balance of power shifts hugely in favour of the supplier, meaning that the customer will usually be in a very weak position when it comes to reaching agreement on the outstanding issues.

If things are left to be agreed, it is therefore essential that the contract sets out a clear process for agreeing those outstanding points (with appropriate remedies if agreement can’t be reached) and that key commercial issues are resolved prior to signature.

Changing requirements

54% of respondents said that their IT outsourcing contracts failed to keep up to date with changing technology needs, with 46% saying that the contract also failed to keep up with changing business needs.

These are classic problems, particularly in long term outsourcing contracts. IT quickly dates, and the requirements of the customer’s business are always changing. It’s therefore essential that the contract includes a process for ensuring continuous improvement obligations. This might include IT refresh obligations, obligations to keep up to date with industry best practice or to adopt industry standards, and an obligation to regularly propose ways in which the services can be improved or delivered at better value.

Combined with this, it’s also important to ensure that the contract contains a robust governance and change control procedure, which allows the customer to ensure that issues are managed and to introduce changes to reflect the changing needs of its business. This might also include clear processes for ramping up or ramping down service provision or the scope of the services in the event of changing business requirements.

Value for money

Another theme coming out of the survey was value for money. 49% of respondents cited diminishing returns on their IT outsourcing investments, whilst 36% highlighted problems with complacent suppliers. A further 46% of respondents said that they were under pressure to cut costs.

Benchmarking provisions can help a customer to keep tracks on whether its outsourcing contracts are delivery value for money. However, a bechmarking regime is only effective if it encourages the supplier to keep its service provision competitive. Key to that is ensuring that the customer has adequate remedies in the event that the benchmarking findings show that the supplier is out of step with the market. This might include mandatory price reductions or ensuring that the customer can break the contract and move to another supplier (albeit the latter is not without cost, given the expense involved in carrying out a new procurement exercise and transition to another vendor).

Long term, not short term

If these issues are properly addressed in the contract then the outsourcing arrangement is likely to be more productive and rewarding for both the customer and the supplier.

Whilst there is always a pressure to sign deals as soon as possible (particularly against articial deadlines such as the end of a calendar year or the supplier’s quarter), this survey just goes to show that spending more time on the contract (and involving legal input at an early stage in the procurement process) can lead to a more satisfactory outsourcing relationship in the long term.

Which, ultimately, is what outsourcing is all about.

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European guidance on mobile apps and privacy

Martin Sloan — Thu, 18 Apr 2013 16:55:28 +0000

The Article 29 Working Party (the “A29WP”), a grouping of representatives from the various European data protection and privacy regulators, recently issued an opinion on apps on smart devices.

There are two constants with the A29WP’s opinions:

Firstly, although often presented as such, they are not an authorative statement of the law. They simply set out the collective (sometimes aspirational) interpretation of the European data protection directive.
Secondly, the opinions set out a far stricter interpretation of the directive than that usually taken by the UK’s Information Commissioner’s Office (ICO). This reflects the fact that the ICO usually takes a more business friendly/pragmatic approach to interpreting the law than some of its European counterparts.

That said, the latest opinion provides some useful guidance for app developers, and builds on previous guidance from California’s attorney general and the GSMA, which I summarised in this blog post last year.

The guidance also follows on from the so-called Cookie Law, which (contrary to popular opinion) also applies to mobile apps.

Why do mobile apps raise privacy concerns?

As I noted in that blogpost, there are a number of reasons for the current privacy deficiencies with mobile apps:

The market is immature, with many apps developed by individuals or small companies not familiar with privacy laws, but whose products have become hugely popular.
The distribution model is fragmented and apps frequently incorporate third party services (for example, mapping providers) into their functionality. SDKs and OS developer rules impose strict controls on developers, yet they don’t provide the necessary tools to ensure that developers adopt privacy by design.
The mobile app market has developed at the same time as a vast expansion in the data created by devices, such as geolocation data.
Many app developers are located outside the EU and are therefore unfamiliar with European privacy rules, despite the fact that they are selling their apps to users in the EU.

A29WP’s recommendations

The opinion imposes a number of requirements on app developers. These include:

App developers must understand their obligations as data controllers when they process data from and about users.
Freely given, specific and informed consent must be sought before an app is stalled.
Granular consent must be obtained for each specific category of data that the app will access.
The user must be provided with well-defined details of the purposes for which data will be processed before the app is installed. General purposes such as “product innovation” or “market research” are, in the A29WP’s opinion, not sufficient.
The purposes for which data is processed must not be changed without obtaining new consent from the user.
Users must be provided with a readable, understandable and easily accessibile privacy policy, which includes
Allow users to revoke their consent and uninstall the app and delte data where appropriate.
Incorporate data minimisation and privacy by design/default.

Part of the problem with these requirements is that some of them are impossible to achieve in practice as they are dependant upon the design of the app store and OS ecosystem. For example, the way in which most smart device operating systems install apps means that there is no opportunity in the app purchase system to notify users about data use and obtain consent. This could be set out in the app licence terms of use, but given the low profile given to such licence terms in the app store purchase process, this wouldn’t meet the A29WP’s own recommmendations on obtaining consent.

This is presumably why the opinion also sets out a number of requirements on app stores and OS and device manufacturers, even though there appears to be little base in law for such requirements (the neither party is a data controller in relation to data primarily processed by the app/the app developer).

These requirements, for example, oblige app stores to check that app developers have incorporated appropriate consent mechanisms, and obligations on OS manufacturers to build additional controls into their OS APIs to facilitate consent to access data on the device.

The practical approach

In my view, given these technical limitations, it is more pragmatic to recommend that app developers design apps so that the privacy policy is displayed, and consent obtained, when the app is first opened, and that no data is captured until this takes place. This way, app developers can be sure that they do not inadvertently collect data without consent.

The opinion also skims over one of the other big issues with mobile apps – the use of third party services. In many cases, I suspect that app developers simply aren’t aware of which party is responsible for data protection compliance. Where third party services are utilised (for example, mapping or geolocation), there will often be multiple data controllers. However, the app developer is the party that controls the primary interface with those third parties and therefore needs to flag the terms on which such third parties will use the data collected.

Given the opacity of the policies provided by many third party service providers (and the lack of clear guidance from regulators when the revised cookie law came into force), working this out is often difficult.

You can read the A29WP’s opinion in full by following this link (PDF). If you are an app developer and would like to discuss how your app collects data, and what you can do to ensure that it complies with EU data protection law, please get in touch.

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Court of Appeal overturns previous decision on obligations of good faith

Martin Sloan — Wed, 03 Apr 2013 17:47:09 +0000

Last year, the English courts ruled that an obligation could be implied into a contract that the parties would not exercise a discretion under that contract in a manner that was arbitary, capricious or irrational.

The case related to an outsourcing contract between an NHS Trust and catering company Compass, trading as Medirest. The contract contained a service level regime, but unusually the “Service Failure Points” (SFPs) awarded for a breach of the service levels, which in turn could lead to a right to terminate, appeared to be determined at the discretion of the NHS Trust (the customer).

As the relationship broke down, the NHS Trust allocated apparently disportionately high SFPs for individual breaches. Amongst the examples quoted by the judge was the award of over 30,000 SPFs and a deduction of £46,000 from the charges for an out of date box of tomato ketchup sachets found in a store room. By way of comparison, the fees were around £180,000 a month, and only 1,400 SPFs were required in a six month period to trigger a right to terminate.

The court held that the Trust had a discretion under the contract and therefore, in accordance with previous case law, a term should be implied not to act in a manner that is arbitary, capricious or irrational. The court in turn held that the Trust was in breach of that obligation and that Medirest was intitled to terminate for breach.

You can read a full summary of the original judgment in this previous blogpost.

The Court of Appeal’s decision
The Trust appealed on a number of grounds. On appeal, the Court of Appeal overturned the lower court’s decision, holding amongst other things that there was no need for the implied term.

Whilst the SFPs and deductions made were clearly absurd, the Court of Appeal took the view that the Trust had misinterpreted and misapplied the SPF and deduction procedure, but that it had not acted dishonestly.

If the Trust awarded itself execessive SFPs or deductions then that would be a breach of clause 5.8 (which dealt with the application of SFPs and deductions) – no further implied term was required to make that work. Indeed, clause 5.8 stated that SFPs and deductions that were not justified were deemed to have been cancelled.

As the SFPs had expired and the Trust had refunded the excessive deductions, the breach had been cured. Medirest was not, therefore entitled to terminate the contract for material breach.

Comment
The Court of Appeal’s judgment clarifies a number of points:

An implied term not to act arbitarily, capriciously or irrationally will only be applied where the part in question has genuine discretion about how to exercise a right under a contract, and where there is a range of options. In this case, the Court of Appeal held that the discretation was simply whether or not to exercise a contractual right.
Jackson LJ’s view was that any attempt to exclude such an implied term where it might otherwise apply would have to be explicitly stated and agreed by the parties (it could not be excluded by a general exclusion of implied terms).

The case serves also as a general reminder to organisations to ensure that their contractual arrangements are clear and unambiguous. In this case, the contract comprised a standard NHS contract and a procedure from a PFI contract for service failures and deductions. The two did not sit well together. Had the contract been properly drafted, then it is possible that the Trust may not have acted in the way it did, and that the relationship between the parties may not have broken down quite so irrepairably.

The case should also act as a warning to parties to think before terminating for material breach. In this case, it appears that Medirest was already in breach of contract, and that the Trust had also served notice to terminate. However, wrongfully claiming repudiatory breach and ceasing to perform your obligations is likely to lead to a substantial damages claim from the other party. This is particularly so where the terminating party is the supplier under an outsourcing arrangement, where the sudden cessation of the services could cause substantial damage.

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Dismissal and Dante’s Inferno – another Facebook case

Martin Sloan — Fri, 29 Mar 2013 16:43:23 +0000

Our Employment Law colleagues blog on another Employment Tribunal case related to an employee’s use of social media. In this case, the employer’s social media policy was relevant to the Tribunal’s dismissal of the employee’s claim.

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New rules on payment surcharges in consumer contracts

Martin Sloan — Thu, 28 Mar 2013 14:26:19 +0000

At the end of last year, the Government implemented Article 19 of the Consumer Rights Directive through the new Consumer Rights (Payment Surcharges) Regulations 2012. These regulations aim to address ‘above-cost’ payment surcharges made by traders.

Payment surcharges (where a trader imposes a fee on customers depending on the type of payment method they choose to use) have become a popular way for traders to reduce the headline cost of goods or services when trading in a competitive market. Payment surcharges are particularly notorious in the budget airline industry (where substantial charges are often imposed for using a credit card), but in recent years have become increasingly common in both on and offline consumer contracts.

The new laws are aimed at ensuring that any surcharges are note used by traders as a mechanism for generating additional revenue for the trader.

So what do these regulations actually change?
The new regulations prohibit traders from imposing payment surcharges on customers where the charge exceeds the cost to the trader of using the payment method – in other words, ‘above cost payments’. They are payment method agnostic – that means they apply not just to surcharges imposed when using a credit or debit card, but also other methods such as cheques, cash and direct debits.

In addition to payment charges, the regulations are also applicable to discounts offered for paying using particular methods (for example, direct debit).

The regulations apply to all consumer contracts (both on and offline) in sales or services, digital content and most utilities, and also extend to package holidays, which is beyond the scope of the Directive. The rationale for including package holidays is that a failure to extend the prohibition would produce inconsistencies between packages holidays and individual, separately purchased, components of a holiday (for example air travel).

The regulations detail some excluded contracts including certain financial service and social services contracts.

Charges that do not vary depending on the payment method (and therefore apply to all payment methods) are not affected by the regulations.

How do you calculate what charges are reasonable?
Neither the regulations nor the Directive define what the “cost to the trader” is for the purposes of determining what charge is appropriate. In its guidance (see link below) the Department for Business Innovation and Skills states that only direct costs are relevant, but that these will vary depending on the size of the trader.

In relation to card payments, the guidance lists the following types of costs as being relevant:

The Merchant Service Charge, which traders pay to their acquiring bank
IT and equipment costs used for particular means of payment such as card terminals, for example point of sale devices
Risk management – active fraud detection and prevention measures which vary depending on their business and whether transactions take place face to face or remotely
Processing fees such as charges for reversing or refunding a payment
Any operational costs that can be separately identified as internal administrative costs arising from activities dedicated exclusively to card payments. For example, where traders opt to buy in services from intermediaries who provide equipment, fraud detection and processing services (especially online payments) for card payments, they should be able to recover the costs they incur through a payment surcharge.

When does this change come into effect?
The regulations come into force on 6 April 2013 and apply to all contracts entered into on or after this date, although new businesses (which begin trading between 6 April 2013 and 12 June 2014) and micro-businesses (less than 10 employees) are given until 12 June 2014 before the regulations apply.

Do the regulations have any other powers?
In the event of non-compliance trading standards are provided with powers to investigate.

Trading standards can also seek undertakings from traders or apply for injunctions in the event of non-compliance. The regulations can also be enforced under the Enterprise Act 2002 (Part 8 Domestic Infringements) Order 2013. Specified enforcers can apply to the courts for enforcement orders if they become aware that a trader has or is likely to engage in conduct which constitutes an infringement.

What do traders need to do now?
Any trader that currently imposes payment surcharges should review their charges to ensure that they are compliant with the new regulations.

Further information…
The Department for Business, Innovation and Skills has published helpful guidance including Q&A’s on the new Regulations whith can be accessed on the BIS website (PDF).

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