Key Points:

Overseas online sellers now have some clarity about their obligations to comply with the Australian Consumer Law.

The Federal Court has clarified some important questions about the reach of the Australian Consumer Law (ACL) and its application to online distribution to Australian consumers where the provider is based outside Australia (Australian Competition and Consumer Commission v Valve Corporation (No 3) [2016] FCA 196).

The Australian Competition and Consumer Commission took action against Valve Corporation alleging Valve had made misleading representations about consumer guarantees. Valve operates an online game distribution network known as Steam out of Washington State in the United States.

The case answered the following questions:

  • Does the ACL apply to transactions involving sales to Australian consumers from a foreign corporation of computer software?
  • Can a foreign company operating mainly outside Australia be engaging in conduct in Australia or carrying on business in Australia?
  • Does the online distribution of games involve the supply of a good?

Steam Subscription Agreements and the ACL contraventions

The Federal Court found that Valve had misled consumers about their ACL consumer guarantee rights by the terms and conditions of its Steam Subscription Agreements (SSAs) and by statements in two of its refund policies. The misleading representations were said to have been made in (i) the SSAs, (ii) the Steam Refund Policies displayed on the Steam website from 1 January 2011, and (iii) during online “chats” between three Australian consumers and Steam Support staff.

Those representations found to be misleading were:

  • that consumers had no entitlement to a refund from Valve for digitally downloaded video games they had purchased from Valve via the Steam website or Steam in any circumstances;
  • that Valve had excluded, restricted or modified statutory guarantees and/or warranties of acceptable quality; and
  • that, from about 1 January 2011, a consumer had no entitlement to a refund for digitally downloaded video games purchased from Valve via the Steam website or through the Steam Client (the online video game delivery platform).

Valve's conduct contravened sections 18(1) and 29(1)(m) of the ACL by the terms and conditions in its SSAs and also by the statements in two of its refund policies which broadly concerned availability of refunds. However, the conduct of Valve's Stream Support representatives in online chats did not contravene the ACL (though this applied only to the particular three Australian consumers in the litigation).

Did Valve's conduct amount to a "supply of goods"?

Valve's argument that there was no supply of goods to any consumer was rejected by the Court.

When the ACL was enacted at the start of 2011, the definition of "goods" was extended to include "computer software" (although "computer software" itself is not defined in the ACL). The Court found that computer software comprises instructions or programs that make hardware work. The evidence was that that non-executable data was not computer software, but that computer software made non-executable data work (ie. one of the most fundamental things that Valve provided to its customers contained an essential component of "computer software").

The judge placed significance on the fact that games were able to be played "offline". A contractual licence to use goods is, essentiality, a hire without a bailment. Further to this, it was held that the verification requirement that Valve imposes upon consumers who wish to play Steam game when they connect to the internetdoes not prevent the computer software from being "supplied". As such, the Federal Court found that there was a "supply of goods".

Although not everythingValve supplied was a good, the important point is that at the core of Stream's supply to its subscribers was the provision of games. At the heart of the provision of games was the supply of computer software. The Federal Court found it noteworthy that the three consumers who gave evidence for the ACCC all said that they considered that the basic thing that they were purchasing was computer software.

Was Valve's conduct in Australia? Was Valve carrying on business in Australia?

Section 131(1) of the Competition and Consumer Act (CCA) applies the ACL as a law of the Commonwealth to the conduct of corporations and in relation to contraventions of Chapters 2, 3 and 4 of the ACL by corporations. Section 4 of the CCA defines a corporation to include a foreign corporation, and section 5 of the CCA extends the application of the ACL to the engaging in conduct outside Australia by bodies corporate incorporated or carrying on business within Australia. One of the key issues for the trial judge to decide upon was whether Valve's conduct was "in Australia".

Valve submitted that it did not engage in conduct in Australia because it:

  • was a foreign corporation;
  • had business premises and staff located outside Australia;
  • had no real estate in Australia;
  • hosts the website outside Australia;
  • provides support services outside Australia;
  • did not have Steam content "preloaded or stored" on Valve's servers in Australia; and
  • received payment for subscriptions is made in US dollars and proceeds in Washington State.

However, the trial judge found that Valve engaged in conduct in Australia because the following factors involved a significant Australian context and displayed a strong connection to Australia, including:

  • significant personal property, namely servers, in Australia worth $1.2 million;
  • 2.2 million subscriber accounts in Australia;
  • support services outside Australia provided to the 2.2 million accounts in Australia;
  • Stream content is deposited on Valve's three servers in Australia; and
  • made payments to the Australian bank account of an Australian company (Equinix).

Having found that the Valve engaged in conduct in Australia, the Court found that the ACL applied to that conduct. It was therefore not necessary for the court to answer the question whether Valve carried on a business in Australia because this issue would only have arisen had the trial judge concluded that Valve's conduct was not in Australia. However, as both parties dealt with the issue in detail, the trial judge provided views on whether Valve carried on a business in Australia.

The Federal Court noted that in the ordinary sense of carrying on a business, Valve undoubtedly carried on a business in Australia. These reasons were similar to the strong connection stated above and also included the fact that Valve entered into contracts with third party services providers. Ultimately, the Federal Court held that even if Valve did not engage in conduct in Australia, the ACL was engaged because it was an incorporated body which was carrying on a business in Australia.

Key lessons from the Valve decision for foreign companies selling online

The case answered the following questions:

  • Does the ACL apply to transactions involving sales to Australian consumers from a foreign corporation of computer software? Yes. The ACL can reach both foreign companies and sellers of computer software.
  • Can a foreign company operating mainly outside Australia be engaging in conduct in Australia or carrying on business in Australia? Yes. By making representations to Australian consumers, a foreign company can be said to be engaged in conduct in Australia. A company is also likely to carry on a business in Australia when it has millions of Australian subscriber accounts (in Valve's case, 2.2 million), generates large Australian revenues, has valuable personal property in Australia, has business relationships in Australia, and incurs tens of thousands of dollars of monthly expenses in Australia.
  • Does the online distribution of games involve the supply of a good? Yes. Games supplied by Steam required computer software to make them work and consist of computer software and other assets, for example, music, images and the content of Steam's content servers is the software for the game. A contractual licence falls within the meaning of "supply". Computer software is a good within the meaning of the ACL, and Valve supplied goods to Australian consumers, together with other matters such as non-executable data and services.

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Disclaimer
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.