ezine

11 Apr 2011

With the recent disasters in Greymouth, Christchurch and Japan serving as sober reminders of the ability of catastrophic and unexpected events to interrupt business, our first article, Force Majeure - What Happens When Disaster Strikes?, discusses the obligations under, and the implications of, force majeure clauses.

Our second article, Will New Zealand get with the Times?, looks at recent changes to The New York Times' subscription system that makes the newspaper available over the Internet and via Smartphones. This system, although simple in a practical sense, may have a significant impact on existing and future intellectual property licensing agreements.

With more than 500 million individual users and a rapidly increasing number of active companies having pages on Facebook, this social network may be the next step for exploitation of Intellectual Property rights, marketing and customer relations. Initial weaknesses, such as misappropriation and misuse of third parties rights, have largely been resolved by putting into practice user-friendly and cost-effective mechanisms. But, what if you are the legitimate owner of a trade mark - and the victim of a spurious infringement claim by one of your competitors? Our third article, The increasing business use of Facebook and its potential misuse by competitors, answers this question.

On 14 March 2011, the Mobile Messaging Services Code (Code) came into effect. The Code, which replaces the Premium Messaging Services Code, sets out the rights and obligations of telecommunications service providers, and others involved in the advertisement, promotion and operation of chargeable and non-chargeable mobile messaging services in New Zealand. Our fourth article, Mobile Messaging Services Code, looks at the key elements of the Code.

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Force Majeure - What Happens When Disaster Strikes?

The recent disasters in Greymouth, Christchurch and Japan are sobering reminders of the ability of catastrophic and unexpected events to interrupt business. Often, events of such magnitude will allow parties to suspend or terminate their contractual obligations under "force majeure" clauses. 

Unfortunately, a force majeure clause is often added to a contract as a "boilerplate" clause without careful consideration of the clause's implications. This approach does not recognise the importance of a force majeure clause. A force majeure clause defines circumstances in which a party may suspend or cancel its contractual obligations without penalty. Parties should take care when drafting and negotiating force majeure clauses to ensure they are appropriate, particularly where the operation of critical infrastructure is at stake.

This article describes:

1. when a force majeure clause can be relied on;
2. what happens when a force majeure event occurs; and
3. the common issues with drafting and negotiating force majeure clauses.

When can a force majeure clause be relied on?

Force majeure clauses are drafted with varying degrees of sophistication. Ability to rely on a force majeure clause will be determined by the precise drafting, but there are some common themes running through the vast majority of force majeure clauses:

1. Force Majeure Event: A force majeure clause will typically be triggered if a "force majeure event" occurs. Modern practice is to define a "force majeure event" in the contract. Usually, a force majeure event will be defined as an event which is beyond the control (or reasonable control) of a party, including a prescribed list of events such as floods, earthquakes, cyclones, riots and confiscations or requisitions of facilities. Numerous other analogous events might also be specified.
2. Causal Connection: Usually, a force majeure clause may only be relied upon when the force majeure event has rendered a party unable to perform its contractual obligations, wholly or in part.
3. Contribution to the force majeure event: Usually, a party may only rely on a force majeure clause if that party did not cause, in whole or in part, the force majeure event. This is less relevant with natural disasters, but can be particularly relevant with strikes or industrial actions and confiscations and requisitions. If these events are included as force majeure events, a party may be able to rely on a force majeure it causes to relieve it of obligations unless appropriate drafting is used.
4. Notice: The party seeking to rely on the force majeure clause may need to give notice of the force majeure event in order to rely on the force majeure clause. The notice may be required to specify various details such as the nature of the event and the expected length of disruption to usual services.

What happens when a force majeure event occurs?

When a force majeure clause is triggered:

1. contractual obligations may be suspended;
2. a party may be given a longer period of time to fulfil its obligations; or
3. the contract may be cancellable either immediately or after the completion of a suspension period.

A party which is affected by a force majeure event may still be required to endeavour to perform the contract despite the force majeure event. Such an obligation may involve:

1. using the party's best endeavours to mitigate the effects of the force majeure event on the performance of its obligations; and
2. perform the party's obligations which are not affected by the force majeure event in accordance with the usual requirements of the agreement.

What are the common issues with drafting and negotiating force majeure clauses?

Force majeure clauses are essentially about the allocation of risk in unforeseen circumstances. Whatever approach is taken, parties should consider the risk being assumed and build it into their pricing models. Parties should also consider how the risk allocation under a force majeure clause relates to their insurance arrangements (particularly business interruption and professional indemnity cover). A purchaser should also consider the implications of a supplier invoking a force majeure clause - this may force the purchaser to rely on force majeure clauses in contracts with its customers.

A supplier will typically want to be able to defer, limit or postpone its obligations if its ability to perform is adversely affected by a force majeure event. Flexibility in dealing with force majeure events suits suppliers. Conversely, a purchaser of services will typically want to ensure continuity of supply, particularly where the supplier is providing critical infrastructure. The result is that:

1. suppliers typically want broadly defined force majeure clauses with minimal requirements to mitigate the effect of a force majeure; and
2. purchasers typically want narrowly defined force majeure clauses with mitigation requirements. In extreme cases, a purchaser might not want a force majeure clause at all.

The danger each party faces is that the force majeure clause is drafted too much in favour of the other party. For example, in most situations:

1. a purchaser should only allow the definition of "force majeure event" to include circumstances where it will not expect the supplier to continue to supply on an uninterrupted basis;
2. a purchaser should ensure a force majeure clause does not apply to events which are within the supplier's control;
3. a purchaser should consider requiring the supplier to use its best endeavours to continue to supply products and services (and continue to supply any unaffected services), instead of being able to terminate an agreement for force majeure;
4. a purchaser will want to ensure it can procure replacement services during any period in which the supplier's obligations are suspended and/or effect appropriate insurance and limit its liability through appropriate force majeure clauses in its contracts with customers;
5. a supplier should ensure that a force majeure clause covers all circumstances which will make it impossible for the supplier to continue to meet its contractual obligations; and
6. a supplier should consider the implications of an obligation to mitigate the effects of a force majeure carefully - performance of obligations during a force majeure event may require additional expenditure which cannot be recovered from the purchaser.

Key Contacts

Don Holborow
Mark Cunliffe

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Will New Zealand get with the Times?

From 28 March 2011, the New York Times (NYT), which attracts approximately 30 million monthly online readers, switched to a digital subscription service. Prior to this, all users could view an unlimited amount of content on the NYT site free of charge. The NYT is the first major news entity that has tried to address the issue of how to make online news reporting financially viable. The subscription service will allow users to view up to 20 articles per month for free. Once the users tries to select the 21st article, this will be unavailable and will prompt a request for a subscription. 

Although this seems like a reasonably simple practical change, it is significant in a legal sense. The NYT is making all content available to subscribers via the Internet and via Smartphones. This change may have required the review of many licensing contracts involving intellectual property because older licensing contracts would not have specified whether the material cou ld be made available on the Internet and via wireless phone networks.  

The question for New Zealand is, would a subscription model similar to the NYT system be viable, and if so, how would this system affect standard licensing agreements in New Zealand?

Could this system be implemented in New Zealand?

In New Zealand, the most visited news websites, such as The New Zealand Herald, Stuff, Scoop, and TVNZ are all available at no charge to the user. There is no limit to the amount of content that users can view.

One practical issue with implementing a subscription system similar to the NYT would be the size of New Zealand. The NYT has an average of 30 million readers per month, the New Zealand population is only 4.4 million. It is anticipated that only one out of four readers of the NYT will reach the limit at which a subscription is required. Based on current readership levels, this still works out to approximately $1.3 billion in revenue. This amount of revenue, despite the eventual loss of some readers, is sufficient to make the subscription system viable. New Zealand may not have the population to support such a system. 

Standard licensing agreements

The standard practice in licensing agreements, both internationally and in New Zealand, has been to license a work based on the type of media the work will be used within. For example, Entity A will have a licence agreement with the copyright owner that is restricted to using the work on paper, Entity B will have a licence agreement that covers internet use, while Entity C has a licence agreement relating to use on wireless telephone networks. 

However the subscription service offered by the NYT makes the newspaper available via both Internet and wireless media. To modern users, who generally alternate between their computers and phones for information, this seems logical. However, given that some of the content may be subject to licences negotiated well before transmission of news via phone (possibly even before the internet) the move is a significant one. For example, a publisher may have rights in the internet work, but not in a wireless medium. This means that for many archived items, further rights may need to be purchased for the content to be legally made available via applications on Smartphones as well as the Internet.

This point has recently been emphasised by the discussions surrounding the acts of American cable networks such as Time Warner Cable and Cablevision. The two cable providers have recently created an iPad application that allows customers to watch the television on their iPad within their own homes. However many television networks are disputing the fact that the licence agreement allows this to occur. These developments involving iPad applications are a reminder for businesses to seek legal advice before expanding their business into different avenues. If it is found that cable networks did not have the authority from the television networks to distribute the material via iPad applications, it will be costly for the cable companies to purchase these rights and will require them to negotiate new agreements from an inferior negotiating position.

The developments of the NYT re-emphasise the importance of drafting licence agreements in such a way that the interested party gets the broadest rights possible. Twenty years ago, the importance of the overlap between the Internet and wireless phone networks would not have been contemplated. Today, those licence agreements that had been drafted the most broadly, as to include Internet, wireless and Smartphones, will be significantly more valuable.  

Future developments

The subscription system implemented by the NYT shows the importance of drafting licensing contracts as clearly as possible and demonstrates how licensing agreements should be considered before releasing content from new and innovative technologies. As technology and use of the internet continues to evolve, and online sites play a more prominent role in society, so to will our laws need to evolve to keep pace.   

Key Contacts

Richard Watts
Rachel O'Brien

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The increasing business use of Facebook and its potential misuse by competitors

With more than 500 million individual users and a rapidly increasing number of active companies having pages on Facebook, this social network may be the next step for exploitation of Intellectual Property rights, marketing and customer relations. Initial weaknesses, such as misappropriation and misuse of third parties rights, have largely been resolved by putting into practice user-friendly and cost-effective mechanisms. But, what if you are the legitimate owner of a trade mark - and the victim of a spurious infringement claim by one of your competitors?

Facebook has become an attractive platform for business visibility and intellectual property rights exploitation. Its cost-effectiveness and virtually unlimited possibilities mean that increasing number of companies are seeing it as a viable marketing platform.

There are numerous ways for companies to gain visibility on Facebook. One way is through the creation of so-called Facebook Pages - "official" pages containing information about their businesses, such as trade marks, products, etc. They are visible to everyone on the Internet and rate highly with search engines. Users can become fans of these pages, receive updates and actively participate by leaving comments. "Groups" are another way of sharing information, but they are generally created and controlled by users. Facebook Community Pages are automatically generated using information provided by users in their personal profiles, individual employment details and personal interests. 

While companies can create and moderate their official pages, they do not have control on groups and community pages, and it will be up to the brand owners to regularly monitor the network in order detect and stop infringing behaviours. 

Mechanisms of protection against infringement on Facebook

In order to deal with conflicts arising within the network, Facebook has implemented a system for reporting intellectual property infringement by filing a report online - available on Facebook's website. It is simple to use, as it only requires right holders to provide basic information including personal information, owner information and details about the right. No proof of the rights alleged to be infringed is required. These complaints are normally dealt with in a very short period of time, commonly resulting in the removal of infringing content, closure of the pages where the reported infringing conduct was identified and, in the most extreme cases, termination of the responsible user's account.

When use could turn into misuse and protection could go wrong

Because it is not necessary to submit any proof of the legitimate right in order to file a Notice of Intellectual Property Infringement with Facebook, legitimate trade mark owners could potentially have their pages closed down under unfounded claims of intellectual property infringement. And, unsurprisingly, this has already happened. 

When Facebook receives a claim of intellectual property infringement, it promptly removes or disables access to the allegedly infringing content - unless it has a reason to believe the claim has been made under false grounds and legal advice is sought. The main advantage of this costless and efficient mechanism is therefore its greatest downside.

The 2006 case of Quads4kids v. Campbell in England dealt with a similar conduct - although in a different platform, that was considered to amount to unjustified threats. Mr Campbell alleged that dirt bikes sold by its competitor, Quads 4 Kids, infringed his designs rights and he took advantage of eBay’s Verified Rights Owner (VeRO) system to prevent his competitor from selling them. This involved merely completing an online form recording the registration number of the designs. Pumfrey J held that the complaint made to eBay by Mr Campbell constituted an actionable threat of design infringement proceedings. As it was unclear whether Campbell would be able to pay the damages caused, an interim injunction was granted to prevent Campbell's interference with Quads 4 Kids sales through eBay. 

The global character of Facebook could make the enforcement of holder's rights difficult and costly where their competitors are overseas. However, if right holder and competitor are in the same country, obtaining relief becomes significantly easier. In New Zealand, an unlawful Notice of Intellectual Property Infringement filed with Facebook may, if based on a registered design or patent, amount to groundless threats of infringement proceedings. For trade marks and copyright, New Zealand's "threats" regime is limited to unjustified proceedings rather than threats. This means that aggrieved brand owners may need to take action under the Fair Trading Act to prevent misuse of Notices of Intellectual Property Infringements.

Looking into the future

Social media has opened up new opportunities for companies to explore different ways to trade. It also allows new ways for competitors to - lawfully or unlawfully - try to position themselves in the race for success. 

The Facebook take-down system is a sensible response to a difficult problem. However, like all take-down mechanisms, it needs to be quick and efficient - otherwise, it would be useless. And in return for speed, some degree of certainty must be sacrificed. Facebook cannot be responsible for detailed policing of the actions of those filing Notices of Intellectual Property Infringement. Therefore, self-help is still essential for brand owners, and brand owners need to have a strategy for dealing with third party abuse. Not surprisingly, modern watching services are no longer focused on trade mark registers and supermarkets - now the brand war is being fought in the fast paced arena of social media.

Meanwhile, brand owners are not the only ones viewing social media as a back-drop for brand wars. Some courts around the world have already adapted their judgments to the new media they apply to. In particular, the Commercial Court of Vienna ordered the publication of a judgment on YouTube and on the infringer's Facebook profile. Such measures are extremely useful in order to reach the same target group that was confronted with the actual infringement.

Key Contacts

Richard Watts
Sonia Felipe

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Mobile Messaging Services Code

In December 2010, the Telecommunications Carriers' Forum (TCF) endorsed the Mobile Messaging Services Code (Code). The Code sets out the rights and obligations of telecommunications service providers and others in relation to the advertisement, promotion and operation of both chargeable and non-chargeable mobile messaging services in New Zealand. 

The Code 

The Code came into effect on 14 March 2011 and replaces the Premium Messaging Services Code, which has been in place since February 2008. The key change from the Premium Messaging Services Code is that the Code applies to non-premium messaging services (ie where a customer is not charged for messaging services provided via a mobile handset) in addition to premium messaging services (ie where a customer is charged for the messaging services). 

The TCF adopted the new code as a result of the growing development of non-chargeable mobile services in New Zealand (nowadays, it is not unusual for customers to receive numerous text messages from their service providers, promoting their products and services). TCF members considered that customers, and the industry, would benefit from a self-regulated industry code of conduct that would provide stronger and clearer guidelines on the running of these services. 

The Code is a voluntary code. There are currently 22 signatories to the Code, including 2degrees, Telecom and Vodafone. The Code applies not only to its signatories, but also to "aggregators" and "content providers" who enter into agreements for the provision of messaging services with telecommunications service providers which have signed up to the Code. 

An "aggregator" is someone who has a contractual relationship with a telecommunications service provider to deliver messaging services or mobile messages. A "content provider" is someone who has a contractual relationship with an aggregator or a telecommunications service provider to provide mobile content or mobile messages.

Key Aspects of the Code

The Code provides guidelines and standards for the best practice management of mobile messaging services in New Zealand. 

In particular, the Code contains or outlines requirements for the following:

• Advertising and promoting all mobile messaging services, including that: 
  • messaging services must comply with all New Zealand legislation, advertising standards and industry guidelines;
  • all information relating to price and other material terms must be displayed clearly and accurately;
  • where a message service is referred to as being "free" (or uses an equivalent term such as "no cost") it must not then be subject to any charge, fee or cost; and
  • advertisements must not be confusing, misleading or deceptive in any way, and must not contain outdated material.
• Advertising and promoting chargeable messaging and subscription services via television, video, radio, print, WAP or web based advertising (for which additional requirements apply). 
• Obtaining customer consents to receiving messaging services, including the process for obtaining consent and whether the consent needs to be express or can be inferred.
• Termination of subscription services, including the requirement for a "STOP" request being able to be sent via a mobile handset and for an "unsubscribed confirmation message" to be sent (at no charge to the customer) to confirm the termination of the subscription service. There must also be no minimum subscription period and, if a service is a chargeable subscription service, a 30-day subscription service reminder message must be sent.
• The operation of all chargeable messaging services, including that:
  • every message must include the service name (ie a description of the service), where this is not implicit;
  • content providers must inform customers about fees or charges (including data charges) that may apply before the customer first uses the messaging service, or at the time the customer accesses the messaging service but before any fees or charges are incurred by the customer; and
  • a customer is notified once he/she reaches or exceeds a $30 spend for that messaging service (in a particular calendar month for a subscription service, or in total for a non-subscription service), unless the customer has elected to "opt out" of this requirement.
• The provision of customer support services and the complaints handling process for mobile messaging services.

Non-chargeable messaging services 

The requirements in the Code applying to non-chargeable messaging services are considerably less extensive than those applying to chargeable messaging services. However, non-chargeable messaging services must nevertheless comply with a number of requirements under the Code, including in respect of:

• The general advertising and promoting of mobile messaging services.
• The relevant processes and customer consents required to send non-chargeable messaging services. For non-chargeable services (whether subscription or non-subscription), inferred customer consent is generally sufficient, whereas for any chargeable services (both subscription and non-subscription), express customer consent is required.

The requirements described above for subscription services will generally also apply to non-chargeable subscription services. 

Compliance with the Code

The Code sets out a number of other general requirements to which parties bound by the Code must comply. These include requirements:

• To comply with all applicable laws and regulations (including other applicable industry standards or codes such as the TCF Mobile Content Code).
• To be compliant at all times with the latest version of the Code (which the TCF proposes to review each year).
• To carry out any obligations under the Code promptly and effectively, with all reasonable steps taken to ensure the informed and safe use of the messaging services.
• For aggregators to ensure that the content of all the messaging services (whether produced by themselves or others) comply with the Code (while these obligations may be allocated to content providers, aggregators will remain responsible for fulfilling these obligations).

If an aggregator fails to comply with its obligations under the Code, the relevant telecommunications service provider may take certain actions, including issuing a warning to the aggregator requiring the problem to be remedied within 10 working days and, in certain circumstances, suspending or terminating the offending messaging service. The relevant aggregator can take broadly similar actions against a content provider if the content provider fails to comply with its obligations under the Code.

While the Code does not provide for any financial sanction for non-compliance, the suspension or termination of the relevant messaging service (and any associated adverse publicity) should not be under-estimated by any person that is bound by the Code, given the possible damage to reputation caused by such a failure.

Key Contacts

Karen Ngan
David Alizade

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