Category Archives: E-commerce

The problem with “mixed” digital contracts

One of the biggest challenges for regulation is to keep up with the complexities of the digital ecosystem. A good example of this is dealing with a “mixed” digital contract under the Consumer Rights Directive.

Consumer Rights Directive

A key aspect of the Directive is the distinction between (a) contracts for the supply of goods (“sales contracts”), (b) contracts for the supply of services (“service contracts”) and (c) contracts for the supply of online digital content (“digital content contracts”).

The distinction is important because, under the Directive, different rules apply regarding consumers’ withdrawal rights when they enter into any of these contracts “at a distance” (e.g. buying something online or via an app etc). Broadly speaking, for sales contracts, consumers have 14 days from receipt of the goods, to change their mind and withdraw and can receive a refund for the goods. For service contracts, consumers can withdraw within 14 days from conclusion of the contract, but the trader is now entitled to pro-rate the consumer’s refund to take account of any services performed during the 14 day withdrawal period. For digital content contracts, the trader is able to exclude the consumer’s cancellation right completely from the point when supply (e.g. download or streaming) of the digital content starts (provided certain information requirements and formalities are met).

The question therefore arises as to what happens if the contract involves the provision of a combination of goods, services and/or digital content?

In the case of goods and services, this situation is legislated for expressly. Article 2(5) of the Directive states that where a contract has as its object both goods and services, the contract should be considered a “sales contract” (i.e. a sale of goods contract) – this means that for the purpose of calculating when the 14 day withdrawal period starts running, you use the “goods” procedure (and not the “service” procedure) so that it starts running from when the goods are received (and not from when the contract is concluded as is the case with services). However, in addition to this, Recital 50 of the Directive states the following:

“for contracts having as their object both goods and services, the rules provided for in this Directive on the return of goods should apply to the goods aspects and the compensation regime for services should apply to the services aspects.”

The example given by the European Commission in its guidance on the Directive is the situation where a distance contract involves the delivery and installation of a household appliance. If the appliance was delivered and also installed when delivered, the consumer will have the right to cancel within 14 days from receipt of the appliance and receive a refund for it, but the trader will be entitled to retain the installation service fee.

However, the situation for mixed contracts involving digital content is less clear. The problem is that, as mentioned above, a “mixed purpose contract” as described in the Directive and the Commission’s guidance, together with the limited European case law cited by the Commission in its guidance (e.g. case C-20/03 Marcel Burmanjer), is described only as including a mixture of goods and services. It doesn’t involve the new statutory concept of “digital content”. In particular, Recital 19 of the Directive expressly states that digital content contracts “should be classified, for the purpose of this Directive, neither as sales contracts nor as service contracts.” So it appears to be the case that digital content contracts are envisaged to be a mutually exclusive class of distance contract.

It’s therefore very unclear how the withdrawal rights should operate in a contract which involves the provision of digital content together with either goods and/or services. Imagine for example a subscription involving periodic delivery of a hard copy comic (goods) together with access to exclusive streamed video clips (digital content). In particular when does the 14 day period start running and can the withdrawal right be excluded in relation to the digital content?

The most obvious conclusion would be to assume that the same principle under Article 2(5) and Recital 50 of the Directive applies by analogy and the contract would be classed as a “sales contract” but the trader would still be able to exclude the withdrawal right in respect of the digital content element. However, this is very much an assumption and the outcome would still not be very clear regarding how this would work in practice – i.e. if the trader can exclude the cancellation/refund rights for the digital content – what would then be refunded to the consumer if he/she cancelled pursuant to the goods rules?

In contrast to the Directive, the new UK Consumer Rights Act 2015 (the CRA) which will come into force in October this year and which, broadly speaking, relates to defective or substandard goods, services and digital content, deals with mixed digital contracts in a more granular way.

Consumer Rights Act

Sections 1(4)-(6) of the CRA set out the position regarding mixed contracts including any combination of goods, services and/or digital content. Under the CRA, the service element expressly attracts specific service rights and remedies, the goods element attracts the specific goods rights and remedies and the digital content element attracts the specific digital content rights and remedies. The CRA also addresses how termination in whole or part might work for mixed contracts and in particular whether such a contract is “severable” (sections 20(20)-(21)).

However, the lack of clarity in the Consumer Rights Directive on this point seems to defeat one of the key purposes of the Directive which was intended to bring simplicity and clarity to the regulation of distance contracts. As stated in Recital 2, the new regime was introduced “with a view to simplifying and updating the applicable rules, removing inconsistencies and closing unwanted gaps in the rules.”

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The curious case of the newspaper exception in the Consumer Rights Directive

Any lawyer who works in the e-commerce space will no doubt have been busy over the past few weeks advising businesses on the new rules under the Consumer Rights Directive which applies, amongst other things, to all B2C contracts made at a “distance” (e.g. online or over the phone etc).

The new rules, amongst other things, amend consumers’ cancellation rights for distance contracts. In particular, provided certain conditions are satisfied, consumers will now have a 14 day period (it was previously 7 days), in order to change their mind, return the goods, and receive a refund.

Under Article 6(3) of the old Distance Selling Directive which the Consumer Rights Directive replaced (Reg 13(1)(e) of the old Distance Selling Regs in the UK), there was an exception from the consumer’s right to cancel “for the supply of newspaper, periodicals, or magazines”. This exception made obvious sense given that the value of these types of publications is limited in time (in the case of a newspaper – generally only one day). Therefore, it would be unreasonable for a consumer to be able to cancel and return such goods after a few days and get a refund etc.

However, under Article 16(j) of the Consumer Rights Directive (Reg 28(1)(f) of the Consumer Contracts Regs in the UK), the exception now applies to “the supply of a newspaper, periodical, or magazine with the exception of subscription contracts for the supply of such publications”.

A plain reading of the above seems to imply that (a) the cancellation/refund rights do not apply to the supply of a newspaper, periodical, or magazine, but (b) the cancellation rights do apply to the supply of a newspaper, periodical, or magazine if such supply is made pursuant to a subscription contract.

If the above is correct – this seems totally crazy to me because it means that a consumer who purchases a print newspaper as part of a subscription taken out online (or over the phone etc), can now cancel within the 14 day period, return potentially up to two weeks worth of old newspapers and receive a refund for them! What is the publisher supposed to do with two weeks worth of out of date newspapers?!

There is nothing on this point in the UK BIS Guidance, nor is there anything on this in the (very long) Commission Guidance.

I contacted someone at Trading Standards about this and here’s an extract of what I got back:

…my reading of the legislation is that a consumer has the right to cancel a distance or off-premises contract which is a subscription to a newspaper by virtue of Reg 29(b). The consumer may cancel the contract at any time within the cancellation period without incurring any liability except where the value of goods is diminished by consumer handling beyond what is necessary to establish the nature, characteristics and functioning of the goods [Regs 29(c) and 34(9)]. The meaning of this is elaborated in Reg 34(12) where it indicates that this would be equivalent to “beyond the sort of handling that may reasonably be allowed in a shop”. I take this to mean that in the event that the newspaper(s) received before cancellation are returned in pristine condition he could expect a refund but if he has read them through and done the Su Doku probably not…

Not much help from Trading Standards, so I decided to go to BIS. Here’s an extract from what I got back from someone at BIS:

…the regulations (which copy out the Consumer Rights Directive) do not specifically state that, in the case of cancellation of a subscription, a newspaper already delivered must be returned or that it cannot be returned. Although the regulations seek to ensure that where cancellation rights apply, the consumer’s liability is limited, and goods should be able to be returned with minimum penalty, at the same time, as you point out, one-off supply of publications are not subject to cancellation (because presumably the buyer can read and send back)… You will want to take your own view on what the courts might say in the light of the wording of the regulations but if you did settle on [the interpretation that the newspapers can be returned] then the rules around return of goods are likely to apply which means that the consumer (provided they have been told about the costs) would have to pay for the return of the publication and, if it looked used, there could be a deduction  for diminished value from any refund.

Not much help from BIS either. I tried to see if there was any discussion of this during the legislative process. There doesn’t seem to be much / anything of use (unless there’s something buried amongst the debates which I haven’t been able to find).

There’s a brief reference to the exception in a 2009 Committee of the Regions report, but nothing of any substance.

The exception was also briefly referred to in the list of proposed amendments published by the Committee on the Internal Market and Consumer Protection in October 2010. Buried deep in this 224 page document is one reference on page 158 to the exception being justified because:

Consumer [sic] should have a possibility to withdraw from the subscription contract. Full harmonization.

No other explanation was included. In particular there was no consideration of the bizarre practical implication of the reworded exception meaning that a consumer could in theory return almost 2 weeks of newspapers back to a publisher and receive a refund.

In its 2011 opinion on the proposed Directive, the Committee on Legal Affairs briefly justified the amended exception as follows:

One of the objectives of the revision of the Consumer Acquis under civil law within the EU, the development and strengthening of consumer protection, also requires the critical analysis and reduction of the myriad of exceptions from the right of withdrawal… these exceptions are always cited in practice as an argument against a right of withdrawal of the consumer and are therefore to their disadvantage.

It’s true that the exceptions disadvantage consumers in as much as they are exceptions to the right of withdrawal. However, the whole point of having the exceptions is that, quoting directly from Recital 49 of the Consumer Rights Directive: “…a right of withdrawal could be inappropriate for example given the nature of particular goods or services“.

In addition to the above, there are of course pages and pages of European Parliamentary debates on the Directive. However, as far as I can see, whilst there are plenty of statements around the importance of maximising consumer protection, there are no considerations around the practical implications of narrowing the well established newspaper exception.

My view is that the amendment to the exception is probably a failure by the legislature (whilst attempting legitimately to increase consumer protection) to fully appreciate the actual practical implications that the addition of a few words to a statutory exception can have.

Some thoughts on the legal structure for online business models

In an audit it conducted at the end of last year, the Irish Data Protection Commissioner said of a certain online service:

“…we examined [its] practices and policies related to the extent to which [it] uses personal data of users to target advertising to them. [It] provides a service that is free to the user. Its business model is based on charging advertisers to deliver advertisements which are targeted on the specific interests disclosed by users. This basic “deal” is acknowledged by the user when s/he signs up…”.

The service referred to is Facebook. As part of the “deal”, the user doesn’t pay “money” to use Facebook, instead the user “pays” by providing Facebook with his/her personal data. The user’s personal data has a “value” because Facebook can monetise it by charging advertisers to target ads based on that personal data.

The first thing to note is that, broadly speaking, for the purposes of European data protection law, there’s nothing unlawful, in principle, about a model based on this kind of “deal”. Likewise, the Irish Commissioner concluded it was legitimate to target ads based on interests disclosed by users in their “profile” information or inferred from users’ activity on the service (e.g. by “liking” things). This is assuming, according to the Irish Commissioner, that users are “made fully aware, through transparent notices, that their personal data would be used in this manner to target advertisements to them.

The second thing to note is that this kind of deal is, of course, not just operated by Facebook. The web is swamped with online services based on this business model. Any consumer who has used the web will have entered into this kind of deal with an online service provider many times.

From a legal perspective, this kind of “deal” is regulated by, amongst other things, a combination of data protection laws such as the UK Data Protection Act 1998 (DPA) (because it involves the processing of personal data) and contract law (because the user signs up to online terms and conditions). However, it seems that, increasingly, these types of “deals” draw parallels with transactions involving the licensing of intellectual property regulated by statutes such as the UK Copyright Designs and Patents Act 1988 (CDPA).

Take copyright as an example. It’s a very basic principle that copyright works “belong” to their owners. It’s specifically contemplated by the CDPA that a copyright work is a monetisable asset. The CDPA explicitly states that a “licence” is needed from the copyright owner in order to do certain “restricted” acts. The logic for this seems clear: Money can be made from doing the restricted acts, so it would be unfair if the restricted acts could be done without the owner’s permission. There are, of course, various exceptions in the CDPA where a licence isn’t required (e.g. research and private study, or incidental inclusion etc). However, broadly speaking, these exceptions all cover circumstances where the intellectual property isn’t being monetised.

Data protection law, however, isn’t conceptualised on the basis that data subjects “own” their personal data (i.e. that personal data is “property”). Likewise, unlike for intellectual property, the rights we have in relation to our personal data aren’t constructed on the basis that we have the exclusive right to make money out of data which relate to us. The point of data protection law is that we have the right for our privacy not to be abused through the use of our personal data. That’s why it’s called data “protection” and not data “property”.

Nevertheless, it’s interesting that, whilst the “deal” falls under the remit of the DPA as opposed to the CDPA, in practice, we come out with a similar net effect: I “licence” you my personal data so that you can monetise it. Under this parallel, the personal data is like the copyright work, the data subject (i.e. the user) is like the owner/licensor, the data controller (i.e. the online service) is like the licensee, and the targeting of ads is like the permitted use under an IP licence.

The above parallel assumes that consent (i.e. a “licence”) is required to process personal data. This is where the parallel breaks down a bit because consent is only one of several possible conditions which can legitimise the processing of personal data under the DPA. For example, under Schedule 2 to the DPA, subject to various other conditions, processing can be done without consent if there’s a “legitimate interest” in processing or if the processing is necessary for the purposes of performing a contract.

There’s also the issue of damages. Copyright owners can claim damages or an account of profits where their copyright has been infringed. Under the DPA, individuals are entitled to compensation, however, there are generally very few claims by individuals and they tend to be limited to situations where the individual suffers distress as a result of the breach.

The idea behind the award of an “account of profits” under an IP infringement claim is so that a party infringing another party’s IP, won’t be unjustly enriched by doing so. The concept of an account of profits doesn’t exist under UK data protection law. However it’s interesting to note that this is something which has been considered in the context of privacy cases involving the misuse of private information (such as Douglas v Hello). Given the increasing monetisation of personal data and the proliferation of online services which use the “deal” as their model, I wonder whether we’ll ever see data protection law evolve so that business models such as the “deal” and the potential for monetisation of, and making a profit from, personal data are brought more clearly within its scope. How much are our names worth anyway?