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INTANGIBLES AS PROPERTY AND GOODS
Ken Moon, A J Park Law
Published in New Zealand Law Journal, July 2009
Personal property law, especially as it relates to intangibles, is not in good logical shape.
The property rights conferred on personal property have always been less than those
conferred on land. For example, the right to exclude (or the “trespassory” right), is not
usually available to personal property. The usual remedy is damages because at common
law protection for personalty is provided by the law of torts: Bridge, Personal Property Law
(OUP Clarendon, 3rd ed, 2002) 47. Intangibles are not given the same property status as
tangibles. The property protection tort of conversion has recently been held not available
for choses in action: OBG v Allan [2007] UKHL 21. Some intangible assets, such as
computer programs and electricity, for no good reason, are not accorded property rights at
all.
The unsatisfactory nature of this field of law was noted by Lindley LJ as long ago as 1885:
“We all know that our law has not been put into a very scientific shape, and there is often
considerable difficulty in determining in what sense a particular expression, such as a chose
in action is used.” Colonial Bank v Whinney (1885) 30 Ch D 261 at 283. But intangibles are
not just legal rights such as choses in action, whether or not the latter term includes
intellectual property as well as debts and shares. Electricity, confidential information and
computer programs are intangible assets and the nature of property in the first and last
have been little discussed, despite their fundamental importance to modern society.
Just as property law struggles to accommodate intangible assets so too does sale of goods
law. In most jurisdictions and international forums, the question of whether computer
programs are goods admits no unequivocal answer. The problem arises because of the
straight jacket legal tradition imposes by categorising things transacted in a constrained
binary manner - either goods (tangible) or services. New Zealand is the exception.
Computer software was declared to be “goods” by a 2003 amendment to the Sale of Goods
Act.
It is not just the common law that is illogical. Recent New Zealand legislation, perhaps with
the intention bringing laws relating to property and goods into the 21st century, has in
general either added illogicality or failed to take the incremental step needed for effective
rationalisation. For example, the Crimes Amendment Act 2003, contrary to the common
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law definition, by s 4(3) amended the definition of “property” to include “electricity”
although the Crimes Act already made electricity “a thing capable of being stolen” - without
being property. Unfortunately the definition of “property” was not amended to include
“computer programs” and thus the misappropriation of computer programs still does not
constitute theft - an issue long ago raised by Dunning: “Some Aspects of Theft of Computer
Software” (1980) 4 Auckland UL Rev 273. Stealing a disk which stores a copy of a program
is theft from the owner (user) of the disk, but the real concern is the taking of program
source code from its creator by, say, accessing the creator’s computer and making a copy,
whether or not the original program is left untouched or deleted. The raft of anti-hacking
crimes established by s 15 of the same amending Act still miss this point. “Criminalising
mere unauthorised access …is to punish activities which are themselves not the conduct that
is considered to be morally reprehensible”: Couser “Software Piracy and the Doris Day
Syndrome”, 7 International Journal of Law and Information Technology 1.
Reference to the Crimes Act is a good reminder that property law, particularly in common
law jurisdictions, is not a discrete section of law and cannot be found in one place as it was
in Roman law. From a functional viewpoint property law must include torts such as
conversion and trespass to goods, crimes against property, the law of seizure, insolvency
law and succession law along with sale of goods law and contract law. All these should be
considered when analysing the state of personal property law.
The significance of personal property as an institution is belied by its relatively modest
treatment in law despite property being called “the guardian of every other right”: Ely, The
Guardian of Every Other Right: A Constitutional History of Property Rights (OUP 2nd ed,
1997). There is every reason to require personal property law to reflect contemporary
commercial practice and be logically consistent. The value of personal property traded –
including as it does not just goods, but shares and financial instruments long ago exceeded
the value of real property transacted.
The noted Peruvian economist Hernando de Soto emphasizes the importance of the
institution of property (and property law) in determining the economic well-being of
countries. In The Mystery of Capital: Why Capitalism Triumphs in the West and Fails
Everywhere Else (Bantam Press, 2000) he pointed out that while the west, at least
nowadays, takes property for granted, the majority of assets in developing countries have
no legal owner. It is his thesis that developing countries have not been able to achieve the
benefits of capitalism because what property law there is, is not embraced by the majority
of citizens (for good reason) and they are forced to rely on non-uniform extra-legal
customary rules with no record system and no recognition at law. Without property,
ownership and legal titles these assets cannot be converted into capital to generate wealth.
For example, assets cannot be used as collateral to raise credit and land cannot be
aggregated nor sub-divided.
Intangibles as Property
What constitutes personal property at common law? The classical definition, repeated in
Garrow and Fenton Law of Personal Property in New Zealand (Butterworths 6th ed, 1998)
18, was that given by Fry LJ in Colonial Bank: “All personal things are either in possession
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or in action , the law knows no tertium quid between the two.” But is this 1885 view
(seemingly approved on appeal by the House of Lords) correct today? If true it means that
intangible assets which are not legal rights and which therefore do not fall within the rubric,
choses in action, cannot be personal property. Doubt was expressed even before the end of
the 19th century. A learned debate began as to whether patents and copyright were choses
in possession or choses in action - their founding statutes having declared them to be
personal property. Elphinstone in “What is a Chose in Action?” (Oct. 1893) LQR 311
espoused the view that they were neither, “They are, in fact, personal property of an
incorporeal nature”. Nevertheless this logic was lost with the argument of T Cyprian
Williams in “Property, Things in Action and Copyright”, (1895) 11 LQR 223 holding sway –
accepting Fry’s binary definition of personal property, patents and copyright were more akin
to a chose in action than a chose in possession.
This view was reflected in the UK Patents Act 1949 (ss 38(5), 54(5)) and in the NZ Patents
Act 1953 (s 63(5)), but in a radical step forward was finally rejected by the UK legislature in
the UK Patents Act 1977. Section 30(1) of that Act declares patents to be “personal
property (without being a thing in action)…”. Unfortunately New Zealand’s Patents Bill
2007, intended to replace the long outdated Patents Act 1953, does not adopt the property
reform of the UK Act and in clause 16(2) reiterates the old orthodoxy: “the rules of law that
apply to the ownership and devolution of personal property generally apply to patents as
they apply in relation to other choses in action”.
On the other hand the New Zealand courts have in the 20th century criticized Fry’s definition
of personal property as “too all-embracing” (re Marshall (Deceased) , Commissioner of
Inland Revenue v Public Trustee [1965] NZLR 851 at 861 per McCarthy J ). In New Era
Printers and Publishers v Commissioner of Stamp Duties [1927] NZLR 438 at 445, a case
turning on whether confidential information could be property, Stringer J said, “ … and if
there is no place for a secret process in existing definitions the result is not that the secret
process is not property, but that the definitions are defective.”
Under Fry’s definition, computer programs cannot be personal property. They cannot be
choses in possession because they are intangible and they cannot be choses in action
because a chose in action is defined as a thing which you cannot take, but must go to law to
secure. This leaves copyright, and occasionally patents, as the only property in programs.
This hardly seems adequate given the commercial value of computer programs globally was
estimated in 2005 at $320 billion: www.siia.net/estore/globecon-08.pdf.
And what of the property clauses drafted in most program licences which are directed to the
program per se as well as the copyright therein? For example, “The [Licensed Programs]
and the copyright … in the Licensed Programs … are and shall remain the property of the
Licensor …”.
It is suggested that Fry’s definition is well out of date, even if it was ever correct bearing in
mind the difficulties in accommodating patents and copyright, and that the best view should
be one derived from that quoted by Elphinstone above, namely that personal property
comprises choses in possession (tangible property) and intangible property (“incorporeal
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property”), with choses in action being but one sub-category of the latter. Such a
formulation redefines one of the two elements rather than introducing a tertium quid.
Computer programs could then be property, as they are incorporeal while not being legal
rights. Unfortunately their status as property is only potential as it still remains for a court
to declare them to be property.
At common law there is no property in electricity, because it was not tangible and obviously
could not be a chose in action. This statement of law was affirmed as “recently” as 1975 in
Low v Blease [1975] Crim LR 513. For the purposes of the Crimes Act it is now property in
New Zealand, but what of other purposes?
What are the consequences of the property status of computer programs and electricity
being indeterminate? An absence of property in a thing means that at law it can have no
owner. If a thing has no legal owner there is no one who can legally sell it. It is no solution
to focus instead on who has the best possessory interest in the thing because electricity
cannot be possessed. A thing of such status cannot legally be pledged or otherwise used
as security. It cannot be licensed. Trespassers cannot be legally restrained. The only
traditionally recognized exception to the owner-as-vendor relationship is in the provision of
services, which are obviously priced and sold without being “owned” by the provider. The
US courts have held the only situation where programs might be services is where they are
one-off custom written to order. See for example, Wharton Management Group v Sigma
Consultants, Inc 1990 WL 18360, 1990 Del. Super. Lexis 54. Electricity is not a service:
Electricity Supply Association of New Zealand Inc v Commerce Commission (1998) 6 NZBLC
102,555. Nevertheless programs and electricity are traded every day, the transactions
presumably having validity under a modern day law merchant (as well as under copyright
so far as programs are concerned). This is hardly satisfactory in the 21st century.
Confidential Information
Despite the dicta of Stringer J in 1927, it seems clear that confidential information does not
constitute property. This notion was rejected by the UK Law Commission in their report,
Breach of Confidence (Report No. 110, Cmnd 8388, 1981). Hammond sets out eight
arguments justifying why confidential information should not or cannot be made property in
“Quantum Physics, Econometric Models and Property Rights to Information” (1981) 27
McGill LJ 47, 54. However, the law offers alternative protection by according non-property
rights to confidential information – providing a remedy for the mis-use of confidential
information, deriving from equity. In addition, New Zealand (alone in the Commonwealth)
offers more than just this civil remedy and has made the theft of trade secrets a crime,
notwithstanding the absence of property: Crimes Act, s 230. This provision, which requires
the trade secret to be in documentary form, was added without fanfare along with the
previously mentioned misuse of computer crimes by the Crimes Amendment Act 2003.
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Computer Programs
A computer program is a set of instructions to be acted upon by a computer. The program
instructions may be written in binary code form which when rendered machine-readable
may be directly executed by a computer. Or they may (more usually) be written in a higher
level code or language (“source code”) from which a corresponding binary code and
machine executable program (“object code”) is machine-derived by a computer executing a
“compiler” program.
Thus a program is both logical code (either source or object) as written or as memorised by
the writer and a machine readable version of that code. The machine readable code may be
stored in a variety of electronic, magnetic or optical storage media for use by a computer or
for delivery to a computer. Or it may modulate a signal so as to be transferred between
computers by wired or wireless networks.
Instructions are information and as such are intangible. Instructions for humans are often
written and thus “stored” on paper for subsequent reading by the human eye. Instructions
for computers, programs, may be stored on suitable physical media such as CDs and
memory sticks in a machine-readable form. The instructions are the message and the
media must not be confused for the message.
Intangibles as Goods
Deciding whether subject matter is tangible or intangible has traditionally been a necessary
(but not sufficient) step in deciding whether it is goods. Under the Sale of Goods Act 1979
(UK) s 61(1), “goods” includes ‘all personal chattels other than things in action and money
…”. For Scotland the definition in this Act is “all corporeal moveables except money”.
Goods seem to be restricted to tangible objects at common law. See for example, Bridge at
14. In St Albans City and District Council v International Computers Ltd [1997] FSR 251 at
265 Sir Iain Glidewell seemed to think so, “Clearly a disc is within this definition. Equally
clearly, a program, of itself, is not”.
The common dictionary definition of “tangible” is simply “perceptible by the touch”.
Similarly “intangible” means “unable to be touched”. Can one “touch” a computer program?
Even ignoring the impossibility of touching programs in transmission via a
telecommunications network, touching a disk or chip containing a program is doing no more
than touching the storage medium. This is made obvious in the situation where the disk or
chip contains many different programs. The answer seems to be that programs per se
cannot be touched and therefore must be intangible.
As to case law, the New Zealand authority is Erris Promotions Limited and Others v
Commissioner of Inland Revenue [2004] 1 NZLR 811, a tax case where the tangibility of
program source code was the ultimate issue. Ronald Young J, using some of the above
logic, held that source code was intangible. An earlier decision of the Taxation Review
Authority had come to the same conclusion: Case T28 (TRA No. 95/37) reported (1997) 18
NZ TC 8, 197. The one English case touching on the tangibility of programs was St Albans
where at 265 Sir Iain Glidewell, in deciding whether programs were goods, referred to the
program as “the intangible instructions or commands”.
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Dealing first with the situation where the program is delivered stored on a tangible item
such as a disk. Is it the delivery of the disk or the program itself that characterises the
transaction? The common law has long been familiar with the analogous situation where
what is delivered is partly goods and partly services, as in Lee v Griffin (1861) 1 B & S 272,
where it was held that the supply of dentures by a dentist was a supply of goods because
although skilled services were employed the substance of the contract was the production of
goods. The questions are whether the deliverable is more readily characterised as goods
rather than services and which is ancillary or incidental to the predominant other. The
supply of software with a complete computer system was analysed in these terms in Toby
Construction Ltd v Computer Bar (Sales) Pty Ltd (1983) 2 NSWLR 48; 1 IPR 334. Rogers J
held that what was contracted for was computer hardware, a financial software package and
a word processing package. The sale of the whole computer system, because it included a
substantial hardware component, was therefore a sale of “goods”. This has also been the
universal approach of the US courts, starting with Sperry Rand Co v Industrial Supply Corp,
337 F.2d 363 (5th Cir. 1964), decided at a time when programs were sold as a package
(“bundled”) with the hardware.
One interpretation of the common law test is whether the intangible services have been
sufficiently mixed with goods when delivery is taken by the purchaser. There is an analogy
with legal doctrines under which intangibles are made tangible and therefore susceptible to
a remedy (and no doubt conceptually easier to deal with). Documentary intangibles are a
prime example, where paper is deemed to have the value of the right which it represents.
This fiction also permits the application of the tort of conversion to apply to debts when the
paper evidencing them is converted: Morrison v London County and Westminster bank Ltd
[1914] 3 KB 356. In the United States this “merging” of intangible property with something
which is tangible, namely a document, to allow tangible property remedies to apply is
reflected in the Restatement (Second) of Torts, §242.
But what of the now increasingly common situation where programs are acquired online as
part of an e-commerce transaction and downloaded over the internet from the vendor site.
In that transfer mode the programs are neither supplied with a disk and nor is a disk even
temporarily used to transport them. They are not merged with any “thing” which can be
termed goods. Programs so delivered cannot be characterised as “goods” under the
principles derived from the goods versus services cases or the US merger doctrine.
The supply of programs online therefore cannot be a supply of goods. But the supply of the
same programs on a disk or other physical storage medium to which the purchaser takes
title is a supply of goods. This apparently contradictory conclusion seems bizarre, but must
be accepted as the current law in most common law jurisdictions. But since the Sale of
Goods Amendment Act 2003 New Zealand is not such a jurisdiction. The anomaly has been
resolved by statutory fiction – by simply amending the definition of “goods” in the Sale of
Goods Act 1908 to include “computer software”. This means that programs purchased
online and downloaded over the internet will be “goods”, even when in transit.
A similar amendment was also made to the Consumer Guarantees Act, the Fair Trading Act
and the Commerce Act. The exact addition to the definition of “goods” (so far as “computer
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software” is concerned) in each Act is “to avoid doubt, … computer software. It was surely
reckless, at the least, to use the words “to avoid doubt”, when the amendment essentially
overturned Case T28 (TRA No. 95/37), the only New Zealand case on the point and where
St Albans, the only English case, had decided likewise.
As noted by Cox, “”Goods” and “services” in consumer protection acts”, [2003] NZLJ 281,
the driver for legislation which incidentally made software “goods” was really to make
electricity “goods” in the Consumer Guarantees Act, to overturn the High Court decision in
Electricity Supply Association v Commerce Commission. In that case Neazor J had decided
electricity was neither goods nor services. The explanatory notes to the Consumer
Protection (Definitions of Goods and Services) Bill 2001, which introduced the reform and
the speech of the Acting Minister of Consumer Affairs, Mr Jim Anderton, make it clear a
prime purpose for the legislation was political - fixing alleged consumer difficulties arising
from the previous National government’s deregulation of the electricity industry.
Unlike the Consumer Guarantees Act and the Sale of Goods Act, the Fair trading Act was
even more radically amended. “Goods” in that Act is now defined as “personal property of
any kind (whether tangible or intangible)”. This has made traditional intangibles, namely
choses in action, goods. Cox asks what the consequences of making shares (being choses
in action) “goods” will be. But the same issue applies to patents and copyright. What is the
point of making intellectual property “goods” for the purposes of the Fair Trading Act? As
Cox states, it would have been preferable to achieve claimed social goals without so
distorting the meaning of “goods”.
In summary, computer programs are goods for the purposes of these statutes, but not at
common law and likewise electricity, except that electricity, unlike programs, has not been
made “goods” in the Sale of Goods Act. The problem in jurisdictions not prepared to distort
the meaning of goods, and in international law, remains – what to classify programs
delivered online? To escape it Microsoft (www.microsoft.com/issues/essays/1999/1115wto-b.mspx) has proposed to break away from the traditional binary goods/services
paradigm and establish a third category, namely “virtual goods”, into which computer
programs and digital content should be placed. This is because programs exported on a
physical medium are currently considered goods and covered by GATT rules while programs
delivered electronically are considered services and covered by the weaker GATS rules, a
situation which the US government has campaigned against since the WTO Seattle round
and through the current Doha round. As explained by Sacha Wunsch-Vincent, The WTO,
The Internet and Trade in Digital Products: EC-US Perspectives, (Hart Publishing, 2006)
neither the concept of virtual goods or any alternative proposal has been accepted by the
WTO.
Conclusions
The courts need to recognise that legal rights are not the only intangible things that can be
property. At common law personal property, unlike real property, is capable of expansion.
The House of Lords in National Westminster Bank v Ainsworth [1965] AC 1175, visited this
issue, with Lord Wilberforce setting out some requirements: “before a right or interest can
be admitted into the category of property … it must be definable, identifiable by third
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parties, capable in its assumption by third parties and have some degree of permanence or
stability.” Computer programs meet these requirements.
The courts also should apply to such intangible property all the usual proprietary remedies
to protect it. The reactionary decision by the House of Lords in OBG, refusing to allow the
tort of conversion to apply to choses in action, let alone other to other intangibles, should
not be followed in New Zealand. As Baroness Hale stated in her minority speech in that
case, “In a logical world, there would be such a proprietary remedy for the usurpation of all
forms of property.” Developments such as that by New York State’s highest court, the
Court of Appeals in Thyroff v Nationwide Mutual Insurance Co 8 NY 3d 283 (2007), where
electronic data was held to be capable of conversion, should be followed.
The Crimes Act should be amended by including “computer programs” in the definition of
“property” so that their misappropriation by copying constitutes theft. The Patents Bill
should be amended to recite patents as personal property without being things in action. It
would also be timely to remedy the absence of property rights for electricity in the
Electricity Act 1992 and associated law governing electricity trading.
If it was thought desirable to make software subject to sale of goods remedies, the contrary
holding of St Albans (that is, that software was not goods) and the difference between
tangibles and intangibles and the way they are transacted should have been recognised.
The 2003 amendment to the Sale of Goods Act failed to do this. It seems to have been
totally overlooked that programs are not sold – they are licensed. Declaring one intangible
to be goods is a momentous change to the law. It can now be argued other intangibles, so
long as they are not choses in action, are goods. The definition in the Act is inclusive and
not exclusive.
That law developed for sales of tangible things made a poor fit with information products
such as programs was recognised in the United States and special rules were proposed to
be added to the Uniform Commercial Code (UCC) Article 2 (sale of goods) in the 1980s. In
the end these were promulgated as the Uniform Computer Transactions Act (UCITA) in 1999
which among other things was structured around a licence transaction rather than a sale.
Further recognition of the special category of programs has come more recently in a
proposed amendment to Article 2, Part 1, s 102(4) of the UCC: “A transaction in a product
consisting of computer information and goods that are solely the medium containing the
computer information is not a transaction in goods …”. Thus UCC Article 2 will not be
available to computer programs even when delivery is on tangible media.
The 2003 amendment to the Sale of Goods Act 1908 needs to be revisited and
comprehensive reform undertaken if software is to remain within the ambit of that statute.
In addition, if electricity can be “goods” under the Fair Trading, Consumer Guarantees and
Commerce Acts, then it ought to be “goods” under the Sale of Goods Act to reflect the
commercial reality of its distribution in New Zealand’s deregulated electricity industry.