In December 2017, the Full Federal Court dismissed an appeal by Valve Corporation against a ruling that it engaged in misleading or deceptive conduct and made false or misleading representations about consumer guarantees. This case is particularly instructive for foreign businesses operating in Australia and businesses providing digital content to consumers online.

What do you need to know?

  • Foreign corporations that supply goods or services to Australian consumers have strict obligations under Australia’s consumer protection legislation, even where the “proper law” of a supplier’s contract is a foreign law. Contractual terms that limit a company’s liability in contradiction to the remedies available to Australian consumers under the Australian Consumer Law (ACL) risk breaching the law.
  • The supply of digital content is likely to be found to take place in Australia if it is downloaded and accessed in Australia, even if the supplier has a role in the process from an international location.
  • Representations made on a website to Australian consumers can amount to ‘conduct in Australia’, even where a company is foreign-based and manages its website from overseas.
  • Businesses, particularly online service providers, should carefully consider whether they are providing goods, services or both – what might seem to be a service, could also be a good. The distinction is critical given the supply of ‘goods’ attracts different and additional consumer guarantees.

Background

Valve Corporation (Valve) is a video game developer and global digital distribution company based in the United States. As part of its worldwide business operations, Valve operates Steam, a digital gaming subscription service. In Australia alone, Steam has over 2 million subscribers.

Subscribers obtain access to the video games on Steam after entering into a “Steam Subscriber Agreement” and “Licence Agreement” (collectively, the Agreements) which, in part, made the following representations:

  • consumers were not entitled to refunds;
  • statutory guarantees and/or warranties of acceptable quality were restricted or modified; and
  • statutory guarantees and/or warranties that goods would be of acceptable quality had been excluded.

From about January 2011, a number of Valve’s Australian customers complained to Valve that they were unable to fully utilise their subscription as the games they had purchased failed to operate correctly. Valve refused to give any refunds, directing the complainants to the terms of the Agreements.

In 2014, the ACCC took up the subscribers’ case and commenced proceedings against Valve. The ACCC alleged Valve had breached the ACL by engaging in misleading or deceptive conduct and making false or misleading representations about consumer guarantees.1

At trial, Justice Edelman, who has since been appointed to the High Court, found that Valve had engaged in the alleged conduct and ordered a pecuniary penalty of $3 million. Valve subsequently appealed to the Full Federal Court. In December 2017, the Full Federal Court upheld Justice Edelman’s decision and affirmed the penalty ordered.

Foreign law is no barrier

At first instance and on appeal Valve contended that it was headquartered in the United States and subscribers had agreed that the ‘proper law’ of the Agreements was that of the State of Washington in the United States. As a result, it was not subject to the ACL because s 67, headed “Conflict of law”, provided that where the objective proper law of a contract is not Australian law, the consumer guarantees regime does not apply.

While acknowledging the proper law of (or the law with the “closest and most real connection” to) the Agreements was Washington State, Justice Edelman and the Full Federal Court nonetheless rejected Valve’s arguments. Rather than limiting the scope of the consumer guarantee regime, s 67 was found to be a provision designed to prevent parties from trying to “contract out” of those guarantees.

Did Valve engage in conduct or “carry on business” in Australia?

Valve also argued that, assuming the erroneous representations were made, the relevant conduct did not occur in Australia. Alternatively, it argued that Valve did not “carry on business” in Australia. Both arguments were unsuccessful, with the Full Court concluding:

  • Valve supplied goods in Australia – the supply of the computer games took place in Australia as the games were downloaded and accessed in Australia, even though an internationally domiciled supplier had a role in the process;
  • Valve’s conduct occurred in Australia – representations made on its website to Australian consumers amounted to ‘conduct in Australia’, even if those representations are also available to be accessed by consumers across the world; and
  • Valve carried on business in Australia – Valve had a business presence in Australia by engaging in transactions with a large number of Australian consumers. In addition, Valve owned servers in Australia upon which Steam content was “deposited” when requested by Australian consumers. The Court considered there to be a series or repetition of acts in Australia that formed part of the conduct of Valve’s business.

And finally – is digital content a “supply of goods”?

While not contested on appeal, it remains relevant that at first instance Valve also argued it was substantially supplying a ‘service’ to consumers rather than ‘goods’. This distinction was potentially critical given the supply of ‘goods’ attracts certain different and additional consumer guarantees under the ACL – such as guarantees that goods are of an acceptable quality and/or fit for purpose.

The argument was rejected by Justice Edelman.

Under the ACL ‘goods’ are defined to include ‘computer software’ (although ‘computer software’ itself is not defined). The Court held that computer software contains a set of instructions or programs that facilitate the operation of hardware. In this case, Steam supplied games to its subscribers and at the heart of the provision of games was the supply of computer software or ‘goods’. In reaching this conclusion, the Court noted the following:

  • the three consumers who gave evidence for the ACCC all said that they considered that the basic thing they were purchasing was computer software;
  • the games were able to be played “offline”, which showed that the consumer had been provided with software that could be used without further interaction with Valve – the verification obligation imposed on consumers who wished to play games on the Steam platform while connected to the internet was simply a condition of that “supply”; and
  • not everything Valve supplied was a good – for example, non-executable data, such as music and html images, that accompanied the computer software was not a good.

This analysis highlights the complexity surrounding digital content and consumer rights, a complexity that produced UK consumer law amendments in 2015 to introduce clear legal rights for consumers of digital content such as online films and games, music downloads and e-books.2 The application of consumer guarantees to digital content was also identified as an area for future examination in the ACL review completed by Consumer Affairs Australia and New Zealand in March 2017.3

What should you do now?

This case is particularly instructive for foreign businesses operating in Australia and businesses providing digital content to consumers online.

  1. You should check whether you are supplying goods or services to Australian consumers given Australian consumer guarantees can apply, even if an agreement states that the supply is governed by the law of another country.
  2. If you are supplying goods or services to Australian consumers, you should review your current terms and conditions for compliance under the ACL especially in relation to any limitation of rights and remedies of consumers. Remember, representations made on a website to Australian consumers can amount to ‘conduct in Australia’, even where a company is foreign-based and manages its website from overseas.
  3. You should assess whether you are providing goods or services and understand the guarantees that apply. Businesses, particularly online service providers, should carefully consider whether they are providing goods, services or both – what might seem to be a service, could also be a good.

Valve not out of steam just yet

On 19 January 2018, Valve filed its application seeking special leave to appeal against the Full Court’s decision in the High Court.