On 24 March 2016, Justice Edelman of the Federal Court of Australia handed down a judgment against American company Valve Corporation (Valve) in the matter of ACCC v Valve Corporation (No 3)  FCA 106 for breaches of the Australian Consumer Law (the ACL).1 We have written previously about these proceedings in our Focus Paper ACCC Steamed Up over Refund Policies and Consumer Guarantees.
The Court found that Valve had made false or misleading representations in its subscriber agreement and refund policy to Australian consumers. Critically, this is the first time the Australian Competition and Consumer Commission (the ACCC) has brought proceedings, and the Court has enforced, the consumer statutory guarantee provisions of the ACL against a wholly overseas company with no physical presence in Australia.
This case is significant for overseas-based direct selling businesses which provide goods and services to customers located in Australia. The case confirms that these businesses must ensure that their terms and conditions, return policies, customer agreements and any other customer documents are compliant fully with Australian laws, in particular, the ACL. Failure to do so may place your business at risk of legal prosecution in Australia and significant penalties may be imposed.
Seattle-based company Valve owns and operates the online computer game distribution platform, ‘Steam’ which distributes digital computer games to 65 million users around the world, including to more than 2 million users in Australia. Valve has no physical presence in Australia. On 28 August 2014, the ACCC commenced proceedings against Valve for allegedly making false or misleading representations to Australia Steam subscribers.
In summary, the ACCC alleged that the Valve Subscriber Agreement and Refund Policy was misleading by indicating that Valve was under no obligation to repair, replace or provide a refund for a game and that the statutory consumer guarantees do not apply to games sold by Valve, in contravention of provisions of the ACL.2
The Federal Court Proceedings3
There were four main issues in this case:
- Do the provisions of the ACL apply if the contract between Valve and the Australian customers states expressly that the laws of Washington State apply?;
- Was Valve’s online distribution of games a “supply of goods” for the purposes of the ACL?;
- Was Valve’s conduct in Australia and/or did Valve “carry on business” in Australia?; and
- Did the representations made by Valve constitute misleading and deceptive conduct and/or false or misleading representations in breach of sections 18(1) and 29(1)(m) of the ACL?
First Issue: The Steam Subscriber Agreement
Sections 18 and 29 of the ACL “could only apply in this case if the s 54 guarantee of acceptable quality was capable of applying to a supply by Valve”4. Valve argued that section 67 restricted the application of certain sections of the ACL to circumstances where the “proper law” of the contract is Australian law.
In particular, Valve submitted that the statutory guarantee at section 54 of the ACL that goods supplied must be of acceptable quality did not apply in these circumstances on the basis that the Steam Subscriber Agreement (the SSA) entered into with consumers was not a contract to which the consumer guarantees in the ACL apply because the relevant laws which govern the SSA are the laws of Washington State.
While the Court accepted that the “proper law” of the contract was that of Washington State (on the basis of where the contract was formed and performed and the party's place of business among other factors), the Court held that section 67 operated to ensure that consumer guarantees apply to contracts regardless of the “proper law” of the contract, and that parties cannot purport to contract out of the provisions of the ACL. Accordingly, the Court held that the section 54 consumer statutory guarantee of acceptable quality was applicable.
Second Issue: Was the online distribution of games a “supply of a good”?
Valve submitted that it did not “supply goods” within the meaning of section 2(1) of the ACL but, rather, that a licence agreement for the use of a good is a service rather than a supply of goods.5 Valve submitted that there had been no supply of goods, as customers merely purchased a licence to use the digital games and that therefore, as there is no supply of goods, section 54 could not apply.
While the Court did not accept the ACCC’s primary submission that everything Valve supplied to its customers through the Steam platform was the “supply of goods”, the Court cited the High Court of Australia case of Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd6 as authority for the proposition that “services may accompany the supply of goods in such a way to constitute a single transaction properly described as a supply of goods.”7
Further, the Court considered the definition of “goods” under the ACL, which includes expressly, computer software. Ultimately, the Court held that “at the core of Steam’s supply to its subscribers was the provision of games. And at the heart of the provision of games was the supply of computer software”. In particular, the availability of games in “offline mode” was a substantial indicator in favour of classifying these games as goods “supplied”, as no further communication with Valve or its servers, and no account verification, were required in order to use the game (unlike the online versions). Accordingly, the Court rejected Valve’s submissions that there was no supply of goods.
Third Issue: Was Valve’s conduct in Australia and/or is Valve carrying on business in Australia?
Section 131(1) of the Competition and Consumer Act 2010 (Cth) (the Act) provides that consumer protections under the ACL apply to the conduct of corporations in Australia. Section 5 of the Act provides that the ACL applies to the conduct of a body corporate outside of Australia where that body corporate either is incorporated, or carries on business, in Australia.
Valve argued that its conduct did not occur in Australia and that it does not carry on business in Australia and, therefore, the ACL did not apply to it, on the basis that it is a foreign corporation with business premises and staff all located outside of Australia; it holds no real estate in Australia; its website is hosted outside of Australia; Valve support services are provided from outside of Australia; and the payments it receives for subscriptions are made in US dollars and the transactions occur in Washington.8
The "conduct" in question was the representations made by Valve to Australian consumers on its Steam website, in chat logs and through the Steam Client (the online game delivery platform operated by Valve). The Court concluded that the representations made by Valve amounted to conduct occurring in Australia on the basis that:
- the chat log representations were specifically made to individual Australian customers;
- the representations to Australian customers through the Steam Client were made specifically to Australian consumers who had downloaded the Steam Client in Australia;
- by accepting and agreeing to Steam (Valve)’s terms and conditions, a direct relationship between Valve and the Australian consumer was established;
- Valve has established game servers and content delivery networks in Australia; and
- Valve had approximately 2.2 million Australian subscribers.9
These factors indicated that Valve “intended to make representations to each Australian consumer who downloaded Steam Client”.10 Accordingly, the Court held that each of the classes of representations at issue in the matter involved conduct of Valve that occurred in Australia.11
Although the issue was not necessary to decide, the Court also considered the issue of, and ultimately concluded that, Valve “undoubtedly carried on business in Australia”12 on the basis that Valve has approximately 2.2. million customer user accounts in Australia which generates millions of dollars in revenue from Australia; the Steam content is “deposited” on three servers located in Australia, owned by Valve in addition to significant personal property owned by Valve; Valve pays significant monthly fees to Australian companies to run its business in Australia; and Valve has entered into contracts, and relies on relationships, with third party service providers and content delivery providers in Australia to provide its content to Australian users.
The Court therefore held that, even if Valve did not engage in conduct in Australia, the ACL would still apply because Valve was carrying on business in Australia. Fourth Issue: Did Valve contravene sections 18(1) and 29(1)(m) of the ACL?
Section 18(1) of the ACL prohibits misleading or deceptive conduct in trade and commerce. Section 29(1)(m) more specifically prohibits false or misleading representations “concerning the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy”.
The ACCC contended that there were nine alleged representations made which amounted to conduct in contravention of sections 18(1) and 29(1)(m) of the ACL. These representations allegedly were made in the SSA, the Steam Refund Policies displayed on the Steam website and during online “chats” between Steam Support staff and three Australian consumers.
In summary, the ACCC alleged that Valve made the following misleading representations:
- Customers would not be entitled to a refund for any games purchased from Valve via the Steam platform or website, in any circumstance (the No Entitlement Representations);
- Valve excludes, restricts or modifies the Australia statutory guarantees and/or warranties of acceptable quality (the Exclusion of Statutory Guarantees Representations).
- Valve was under no obligation to repair, replace or provide a refund for game purchases through the Steam website or platform, where the consumer had not attempted to resolve the problem directly with the game developer (the No Refund Representations).
- Customers had no entitlement to a refund or replacement for digital downloaded games they had purchased from Valve via the Steam website or the Steam platform, unless required by local law (the Local Law Representations).
The Court held that the No Entitlement and No Refund Representations were misleading, in breach of the ACL, due to the application of sections 259(3) and 263(4) of the ACL, which provides consumers with an entitlement to elect to have a refund in any event of (i) a failure by a company to comply with the consumer guarantee of acceptable quality that cannot be remedied or a major failure, and (ii) where the consumer has rejected the goods.13
Further, the Court held that the Exclusion of Statutory Guarantees Representations were misleading on the basis that, under section 64 of the ACL, none of the statutory consumer guarantees under the ACL may be excluded, modified or restricted. Valve’s argument that the inclusion of a disclaimer which stated that the exclusions only apply “to the maximum extent permitted by applicable law” was rejected by the Court on the basis that it was not clear to a reasonable consumer whether this meant Australian law applies to an Australian customer.14
In respect of the Local Laws Representations, the Court held that the words “unless required by local laws” would have been reasonably understood by Australian consumers to refer to Australian law. The Court therefore held that these representations were not false or misleading.15
The remaining four representations were made in online chats between three Australian consumers and Steam Customer Support representatives. The Court held that these representations were not false and misleading, as they were not representations made specifically in respect of Valve’s obligations and none of the three customers were misled, or likely to be misled, by any statement made by the Steam Support representatives.16
What does this mean for direct selling businesses?
This case is significant particularly for overseas-based direct selling businesses that provide goods or services to Australian consumers online as it confirms that online businesses selling into Australia, to Australian customers, will most likely be subject to obligations under the ACL, even if the overseas entity does not have a physical presence in Australia.
The case is also important in demonstrating the ACCC’s intention to stand by its strong message that any company who wishes to conduct business in Australia (even from offshore) must comply with the ACL and must be aware that the ACCC will be seeking to more strongly enforce the provisions of the ACL in respect of the conduct of overseas companies, provided that the company is carrying on business within Australia.17
The proceedings against Valve demonstrates the importance of considering Australian legal requirements in preparing consumer registration or subscription agreements, terms and conditions of sale and refund policies to ensure the accuracy and truth of any statement made in these consumer facing documents. The matter is listed for a hearing on remedies on 15 November 2016, so it will be of interest to see just what action is taken, or penalties imposed, against a company with no physical presence in Australia. We will keep you informed about the outcome of this hearing.