Australians enter online transactions daily – but how far does the law go to protect Australian consumers dealing with international online companies?
In a significant win, the ACCC has successfully prosecuted US-based online gaming giant Valve Corporation for breaching the Australian Consumer Law (ACL). On 24 March 2016, the Federal Court of Australia found that foreign corporations can be subject to the ACL, including the consumer guarantees, even if the company in question is based outside Australia.
The case has clarified some important questions about the application and reach of the ACL in regards to the supply of goods by an overseas online platform where the contract is governed by foreign law. It is also notably the first time a court has used the extended definition of ‘goods’ to include ‘computer software’.
Justice Edelman’s decision serves as a timely warning to online and international businesses to reconsider their potential ACL liability, and review their customer agreements to ensure compliance.
Valve Corporation (Valve) is a software company based in Washington State, United States of America, which owns and operates an online game distribution network known as Steam. With in excess of 100 million subscribers worldwide (2.2 million being Australian), and about 4,000 games available for download, Steam is the largest digital gaming distribution platform in the world.
In August 2014, the ACCC commenced proceedings against Valve alleging that Valve had contravened a number of provisions in the ACL, including that it had engaged in misleading and deceptive conduct, and made false or misleading representations regarding the consumer guarantees in its Steam Subscriber Agreement (SSA), Refund Policy and in chat logs with Australian consumers. Specifically, the ACCC alleged that Valve had made misrepresentations in relation to the ‘acceptable quality’ guarantee contained in the ACL, in particular that consumers were not entitled to a refund under any circumstances.
Valve argued in response that:
- The Consumer Guarantees in the ACL did not apply to the SSA entered into with consumers, because the law which has the “closest and most real connection” is the law of Washington State;
- The ACL did not apply as Valve’s conduct did not occur in Australia, and it does not carry on business in Australia; and
- Valve does not supply goods within the definition of the ACL, despite the definition of ‘goods’ expressly including ‘computer software’. Rather, Valve submitted that it provided a service (by a Licence Agreement) to consumers, and any supply of ‘computer software’ was part of this service.
Conflict of law
Justice Edelman rejected Valve’s submission that the ACL would only apply where the law with the ‘closest and most real connection’ to the contract is Australia, and as the proper law of the contract was the law of Washington State, it did not apply in this case. This was on the basis of section 67(b) of the ACL, which provides that if a contract for the supply of goods or services to a consumer contains a term that purports to substitute, or has the effect of substituting, the provisions of the law of a country other than Australia, then the consumer guarantee provisions will apply to that contract regardless.
Whilst it was found that the proper law of the contract for the supply of goods and/or services by Valve was the law of Washington State, Justice Edelman rejected Valve’s submission that the ACL would only apply where the law with the ‘closest and most real connection’ to the contract was Australia. His Honour stated that contrary to Valve’s interpretation, s 67(b) prevents Valve from substituting Washington State law (which lacks the necessary consumer protection provisions) for Australian law, and makes the various subscriber agreements subject to the Consumer Guarantee regime.
Engaging in conduct in Australia
The ACL states that consumer protections only apply to the conduct of corporations in Australia. Valve submitted that it did not engage in conduct in Australia because it is a wholly foreign corporation with its registered office, business premises, staff, website and support services all based outside of Australia. Further, it holds no real estate in Australia, no content was ‘pre-loaded or stored’ on servers in Australia, and all subscription payments were made in US dollars and processed in Washington.
Justice Edelman accepted these points and acknowledged that Valve’s connections with the US were legitimate, but noted that the submissions ignored Valve’s extensive connections to Australia which provided the contextual background to the conduct. His Honour ultimately held that all conduct in question did occur in Australia, and was therefore subject to the provisions of the ACL, on the basis that:
- The background to the conduct involved a ‘significant Australian context’;
- The representations made in the chat logs were specifically made to individual Australian consumers in regards to the supply of goods in Australia; and
- When a consumer subscribed to Steam, they were required to stipulate Australia as their place of residence, therefore making Valve aware it was dealing with, and making representations to, Australian consumers.
Conducting business in Australia
Although the Court was not required to consider whether Valve was carrying on business in Australia, as it had concluded the conduct occurred in Australia, His Honour also considered this in the alternative, as ‘the parties dealt with this issue in comprehensive detail’.
There is no definition of ‘carrying on business’, and little authority distilling the meaning. Justice Edelman considered the ordinary meaning of the words and endorsed a broad test of ‘carrying on a business’; specifically whether an entity engaged in a series or repetition of acts commonly undertaken as part of commercial enterprise and for the purpose of profit. The Court concluded that even if the conduct did not take place in Australia, Valve ‘undoubtedly carried on business in Australia’ on the basis that:
- There were a significant number of Australian customers, with approximately 2.2 million Australian Steam subscribers;
- Valve earned a substantial, and ongoing, amount of revenue from Australian customers;
- Although Steam content is not ‘pre-loaded or stored’ on Valve’s three servers in Australia, content is deposited on these servers when requested by a subscriber;
- Although Valve holds no real estate in Australia, it has significant personal property located in Australia, namely servers at a value of $1.2 million, configured by employees who travelled to Australia;
- Valve incurs tens of thousands of dollars of expenses per month in Australia, paid to an Australian bank account of an Australian company; and
- Valve has numerous relationships with third parties in Australia for the purposes of content delivery.
Supply of goods
Importantly, this is the first case to consider the extended definition of ‘goods’ in the ACL, in the context of ‘computer software’ (which is not defined in the ACL). Valve submitted that it provided a ‘service’, not a ‘good’, as consumers were provided with a license to access and use the video games, and were required to verify their accounts before using a game. Valve also submitted that the provision of a licence for use of computer software did not equate to a provision of computer software.
The Court disagreed, and placed emphasis on the fact that games downloaded from Steam could also be played ‘offline’, without connecting to the internet or verification of the account; a fact omitted by Valve’s submissions. As such, Justice Edelman found that there had been a supply of goods, as the software could be used without any further communication with Valve’s servers. Additionally, it was acknowledged that not everything supplied by Valve via Steam could be classified as a good; however the key point was that the core of Steam’s supply was the provision of games to subscribers, and at the ‘heart of the provision of games was the supply of computer software’.
Although the Court ultimately found that Valve had made misleading or deceptive representations to Australian consumers, the importance of this case rests with the finding that Valve came within the ambit of the consumer protection provisions in the ACL, despite being a foreign corporation.
Justice Edelman’s decision has significant implications for businesses supplying goods to Australian consumers, namely that:
- The ACL will apply to transactions between Australian consumers and an online company based overseas, regardless of if the proper law of contract is a country other than Australia;
- A foreign company with no physical presence in Australia may be regarded as carrying on business if it has significant customer numbers, personal property, expenses, revenue or business relationships in Australia; and
- A supply of computer software will be considered a supply of goods, even when provided on a licensed basis, potentially capturing Software as a Service, and other similar providers.
The case confirms that overseas-based businesses which provide goods and services to Australian consumers must ensure that their terms and conditions, customer agreements, refund policies and other relevant documents are fully compliant with Australian law, particularly the ACL. With ACCC Chairman Rod Sims noting that ‘consumer issues in the online marketplace are a priority for the ACCC and we will continue to take appropriate enforcement action to hold businesses accountable for breaches of the ACL’, a failure to review any relevant agreements may place a business at risk of legal action.
The matter is listed for a hearing on remedies on 15 November 2016.
This article was written by Luke Dale and Mary Szumylo.