2 February 2018

Online distributors selling into Australia can be caught by the Australian Consumer Law, Court confirms

The Australian Consumer Law (ACL) applies to overseas-based online operators that sell products into Australia.
Australia Consumer Protection
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A foreign company operating mainly outside Australia can be engaging in conduct in Australia or carrying on business in Australia, and the Australian Consumer Law can apply to its activities with Australian consumers.

Many international businesses might be based in one jurisdiction, but sell all over the world. At what point do they become liable to comply with overseas consumer law? In Australia, at any rate, the position is clear, with the Full Federal Court clarifying the overseas reach of the Australian Consumer Law (ACL), which applies to overseas-based online operators that sell product into Australia (Valve Corporation v Australian Competition and Consumer Commission [2017] FCAFC 224)

The earlier proceedings

Valve Corporation operates an online game distribution network, Steam, out of Washington State in the United States. The Australian Competition and Consumer Commission (ACCC) took action against it in the Federal Court, alleging that Valve had made misleading representations to consumers about their ACL consumer guarantee rights in the terms and conditions of its Steam Subscriber Agreement (SSA) and in two of its refund policies.

The ACCC needed to prove that:

  • Valve's conduct occurred in Australia; or
  • if not, that the carrying on business provisions of the Competition and Consumer Act (CCA) applied to extend the operation of the ACL to conduct outside Australia.

Valve contended that it did not engage in conduct in Australia because its business is conducted from the US, its business involves making products available for download from a website that is hosted in the US, and the website is accessible by the world at large.

Where is an online representation made?

The Full Court clarified the test for determining the place where a representation on the internet is made:

"If the respondent is based overseas and has a relationship with customers in Australia, it is likely that representations addressed to those customers will be taken to have been made in Australia, being the place where the customer accesses and reads the representations on his or her computer. This is likely to be the case even if the representations are available to be accessed by consumers in other countries around the world... for the purposes of determining the place where the representations were made, it is not necessary to determine whether any loss or damage was suffered and, if so, the place of that loss or damage."

Applying this test, the Full Court held that Valve engaged in conduct in Australia, because of the relationship between Valve and its customers in Australia, and that customers needed to agree to the SSA before they could open an account and purchase a game (at which time the customer provided their location as Australia). Even if Valve had not engaged in such conduct, the ACL applied because Valve was an incorporated body that was carrying on business in Australia.

Carrying on business in Australia

While the Full Court was not strictly required to determine the carrying on business issue because of its finding that the representations were made in Australia, it nevertheless specifically addressed the issue in its reasons.

"Carrying on business" in the context of the CCA usually involves a series or repetition of acts undertaken for the purpose of profit on a continuous and repetitive basis. Valve pointed out:

  • it is a US corporation based in Washington State;
  • it operates a website that is hosted and fully supported by servers outside Australia;
  • it operates a subscription service that is worldwide;
  • it receives payment for subscriptions in US dollars in the US;
  • it is not registered in Australia as a foreign corporation; and
  • it has no registered office, subsidiaries or employees in Australia.

The Full Court rejected Valve's arguments, finding that it did carry on business in Australia because Valve:

  • had 2.2 million customers in Australia;
  • earned significant revenue from those customers on an ongoing basis;
  • stored content on three Australian servers when a customer requested it do so;
  • had significant personal property, namely servers worth $1.2 million, located in Australia;
  • paid invoices to an Australian company into its Australian bank account for equipment involving its servers;
  • incurred expenses in Australia for rack space and power for its servers;
  • relied on relationships with third party members of content delivery providers in Australia; and
  • had contracts with third party service providers who provide worldwide services, including in Australia.

The Full Court also rejected Valve's submission that merely engaging in conduct outside Australia in relation to the supply of goods or services in Australia will not suffice to establish the "carrying on" of "business within Australia".

Foreign companies and compliance with the Australian Consumer Law

The key lessons for foreign companies are:

  • the ACL applies to transactions involving sales to Australian consumers from a foreign corporation of computer software;
  • a foreign company operating mainly outside Australia can be engaging in conduct in Australia or carrying on business in Australia. This can be as a result of making representations to Australian consumers, having millions of Australian subscriber accounts, generating large Australian revenues, having valuable personal property in Australia, having business relationships in Australia, and incurring tens of thousands of dollars of monthly expenses in Australia; and
  • in particular, the online distribution of games involves the supply of 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.

The Full Court's decision will not change the $3 million penalty already imposed on Valve by the earlier proceedings. Nonetheless, it is worthwhile noting that the ACCC has for some time campaigned for significantly higher penalties to be imposed in ACL cases. The highest ACL penalty for false, misleading and deceptive conduct to date is the $6m penalty imposed on Reckitt Benckiser (Australia) Pty Ltd in ACCC v Reckitt Benckiser (Australia) Pty Ltd [2016] FCAFC 181 in December 2016.

More recently, Commonwealth, State, Territory and New Zealand Ministers for fair trading and consumer protection met on 31 August 2017 and agreed that the ACL should be amended to increase the maximum penalty for contraventions to the greater of $10 million or three times the benefit arising from the contravention or, if the benefit cannot be determined, 10% of the annual turnover of the company in the 12 months preceding the contravention.

These increased penalties only increase the risk for foreign companies in Valve's position. As a first step, we'd encourage you to look at the representations made to Australian consumers or users of your goods and services - including the representations about consumer rights which tripped Valve up:

  • they excluded, restricted or modified the statutory consumer guarantees owed to consumers under the ACL; and
  • they represented that customers had no entitlement to a refund under the ACL.

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.

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