Businesses beware – are you caught by the ACL? Implications of the ACCC v Valve decision - Consumer Trading & Unfair Trading

The Australian Consumer Law, including the consumer guarantees can apply to the supply of goods by an overseas online platform even if the contract is governed by foreign law. Online and international businesses should consider whether they are subject to the ACL and amend their customer agreements to ensure compliance.

INTRODUCTION AND BACKGROUND

The respondent, Valve Corporation (Valve), is a company based in Washington in the USA. Valve operates an online game distribution network known as Steam. Steam contains approximately 4,000 video games and has approximately 2.2 million Australian subscriber accounts.

On 24 March 2016, Justice Edelman of the Federal Court held that Valve engaged in deceptive and misleading conduct by representing to Australian consumers that they were not entitled to a refund in whole or part for defective video games.¹ This decision resolves uncertainty as to whether the consumer guarantees under the Australian Consumer Law (ACL) apply to the supply of software by an overseas online platform. The Federal Court has confirmed the ACCC's broad view on the application of the ACL.

IMPLICATIONS

Specifically, this decision confirms that:

the ACL applies to transactions involving sales to Australian consumers by an online overseas provider regardless of the proper law of the contract;
a foreign company operating outside of Australia will be regarded as carrying on business in Australia if the company makes repeated sales, generates revenue and has business relationships in Australia; and
the supply of computer software will be considered the supply of goods for the purposes of the ACL. This is the case even when the software is provided on a licensed basis.

We address each of these issues in more detail below.

The Federal Court's decision reinforces that foreign based businesses selling goods and/or services to Australian consumers can be subject to ACL obligations, including the consumer guarantees. In response to this decision, businesses (especially online and international businesses) should consider whether they are carrying on business in Australia and subject to the ACL. If so, businesses should amend their customer agreements accordingly to ensure compliance with the ACL.

WHAT ABOUT THE PROPER LAW OF THE CONTRACT?

Valve submitted that the Steam Subscriber Agreement (SSA) is not a contract to which the consumer guarantees in the ACL applied because the proper law is the law of Washington State in the USA, not Australia.

Section 67 of the ACL provides:

If:

the proper law of a contract for the supply of goods or services to a consumer would be the law of any part of Australia but for a term of the contract that provides otherwise; or
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 following provisions for all or any of the provisions of this Division:
1. the provisions of the law of a country other than Australia;
2. the provisions of the law of a State or a Territory;
the provisions of this Division apply in relation to the supply under the contract despite that term.

Valve submitted that, by implication and not by express words, section 67 of the ACL excludes the consumer guarantees where the proper law of the contract is not the law of an Australian jurisdiction.

While the Court accepted that the proper law of the contract is Washington State, it rejected Valve's construction of section 67 of the ACL. The Court focussed on subsection 67(b) to find that the ACL was extended to a consumer contract, regardless of the proper law of the contract. Further, the Court held that Valve's position was contrary to the context, history and purpose of the section.

DID VALVE'S CONDUCT OCCUR IN AUSTRALIA OR IS VALVE CARRYING ON BUSINESS IN AUSTRALIA?

The ACL applies to companies or persons carrying on business in Australia or engaging in conduct in Australia. Valve:

was not incorporated in Australia;
had no Australian based staff;
had no real estate in Australia; and
hosts its website outside of Australia.

Despite these circumstances, the Federal Court found that Valve's conduct did occur in Australia and consequently, the ACL applied. At the core of the Court's reasoning was that Valve:

had more than 2 million user accounts in Australia;
generated potentially millions of dollars in revenue from Australian consumers;
owned, and used, content servers in Australia, with an original retail value of US$1.2million. The ACCC compared these content servers to 'digital warehouses';
had contractual relationships with businesses based in Australia, including providers of content servers; and
paid tens of thousands of dollars monthly to Australian companies in expenses for running its business in Australia.

Although the issue of whether Valve was carrying on business in Australia would only arise if the Court concluded that Valve's conduct was not in Australia, the Court considered this issue as the parties dealt with it in comprehensive detail.

Valve had argued that merely receiving orders and providing goods to Australian consumers was not sufficient to be considered to be carrying on business in Australia. Rather, the act of carrying on a business must involve some element of commercial enterprise to make a profit. The ACCC argued that carrying on business merely amounted to selling to Australian consumers.

The Federal Court endorsed a broad test of "carrying on business", specifically whether an entity had engaged in a series or repetition of acts commonly involved in activities undertaken for the purpose of profit.² Accordingly, although in obiter, the Court found that Valve was carrying on business in Australia, for similar reasons to those listed above.

WAS THERE A SUPPLY OF GOODS BY VALVE?

The Federal Court rejected Valve's argument that its conduct did not amount to a supply of 'goods' within the meaning of section 2(1) of the ACL. Importantly, this is the first case to consider the extended definition of 'goods' in the context of 'computer software' for the purposes of the ACL. Although 'computer software' is included in the definition of 'goods' in the ACL, 'computer software' is not defined.

Valve submitted that it provided a 'service' and not a 'good'. The 'service' being in the form of a licence agreement to play the games and use other functions on the Steam platform. Valve contended that whilst the download of digital bits was part of the transaction, it was not the essential element being contracted for. Rather, by subscribing to the Steam service, or in purchasing a game, the consumer was entering into a contract for a licence to play the game on the Steam platform and other services related to the game. Valve emphasised that Steam games require that the user play the game through the Steam platform and be verified each time that they play the game. However, the Court held that this submission omits the fact that a consumer can play games in 'offline mode' without a connection to the internet and without verification of their account.

Ultimately, the Court held that computer software is the coded instructions or programs that make hardware work. The Court rejected Valve's argument for the following reasons:

the definition of 'goods' in the ACL includes 'computer software';
given that the games could be played offline and without verification by the Valve servers, the core element of the supply was the computer software;
the term 'supply' is defined to include a hire or an agreement to hire and the licensing arrangement was essentially that of a hire without a bailment; and
the ACL expressly provided that a reference to a supply of goods included goods supplied with services.

The Court held that the core element of the supply was computer software, being the games themselves.

NEXT STEPS

In the ACCC media release, Rod Sims, the ACCC Chairman noted 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".

Please contact us if you would like to discuss whether your business is subject to the ACL and whether your business needs to amend its customer agreements to ensure compliance with the ACL.

Footnotes

¹ ACCC v Valve Corporation (No 3) [2016] FCA 196 (Valve Case).

² Valve Case at [197].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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