Court orders American online video game distributor to pay $3 million for breach of the Australian Consumer Law

31 January 2017
Antoine Pace, Partner, Melbourne

The Federal Court decision in Australian Competition and Consumer Commission v Valve Corp (No 3) [2016] FCA 196 puts foreign corporations on notice that when selling goods to Australian consumers, you may be required to comply with the consumer guarantees set out in the Australian Consumer Law (ACL).

Valve Corporation (Valve) operates an online distribution network known as Steam, which contains approximately 4,000 video games which are available for download.

The ACCC claimed that Valve had contravened ss 18(1) and 29(1)(m) of the ACL by making nine representations which were misleading or deceptive or likely to mislead or deceive.  At the heart of the allegations made by the ACCC were statements by Valve in its terms and conditions (including in the Steam Subscriber Agreement (SSA)) that, “ALL STEAM FEES ARE PAYABLE IN ADVANCE AND ARE NOT REFUNDABLE IN WHOLE OR IN PART” (No Refund Representation).1

Valve defended the proceedings on the basis that:

  • the SSA was not a contract to which s 67 of the ACL (being a conflict of laws provision) applied because the law which had the closest and most real connection to the SSA is the law of Washington State;
  • Valve did not “supply goods” within the meaning of “goods” in s 2(1) of the ACL;
  • Valve’s conduct did not occur in Australia and it does not carry on business in Australia; and
  • Valve did not contravene the ACL because the ACCC did not prove that the representations as pleaded were made, and even if they were made they were not false, misleading or deceptive or likely to mislead or deceive.

In March 2016, the Court found that the No Refund Representation was misleading and accordingly, that Valve had breached the ACL.  On 23 December 2016, the Court handed down a pecuniary penalty of $3 million amongst other orders.2

Does the ACL apply to the SSA?

The SSA contained jurisdiction and choice of law clauses which provide the jurisdiction and proper law as Washington State.3   Edelman J concluded that Washington State is the place where the contract was formed and that the contract was governed by the laws of that State, however, this was found to have little weight.4  The effect of s 67(b) of the ACL is that the provisions in the ACL containing the consumer guarantees apply in relation to the supply under a contract despite the contract containing a choice of law clause which stipulates a foreign law.5

The fact that the proper law of the contract is the law of a foreign country does not prevent the conduct of one party to the contract from falling within the purview of the ACL, if it would otherwise do so.6

Meaning of “goods”

The definition of “goods” was extended when the ACL was enacted on 1 January 2011 to include “computer software”.  Prior to this extension, cases had recognised that computer software that was supplied on a physical medium such as a CD-Rom was a good but digitally downloaded computer software was not.7

The Court found that at the core of Valve’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.8

Was Valve carrying on business in Australia?

The question is not whether “conduct” occurred in Australia, but whether Valve carried on business in Australia.9

The Court found that Valve had the following connections to Australia:

  • Although it has no real property in Australia, it has significant personal property, namely servers in Australia which, at the time of acquisition, had a retail value of $1.2 million.
  • Although it has no staff in Australia, it had approximately 2.2 million subscriber accounts in Australia.  Its Australian servers were initially configured by an employee who travelled to Australia.
  • Although its support services are provided outside Australia, those support services provide support for subscribers including the 2.2 million accounts in Australia.
  • Although the Steam content is not ‘pre-loaded or stored’ on Valve’s servers in Australia, it is ‘deposited’ on Valve’s three servers in Australia when requested by a subscriber and will stay on the server if it is requested again in a particular period of time.
  • Although payment for subscriptions is in US dollars and processed in Washington State, the payments include those made by Australian consumers to Valve and, against that revenue are expenses including payments of tens of thousands of dollars per month by Valve to the Australian bank account of an Australian company.10
  • Valve relies on relationships with third party members of content delivery providers in Australia who provide proxy caching for Valve in Australia.  Valve has entered into contracts with third party service providers, including companies such as Highwinds, who provide content around the world, including in Australia, Valve is aware that Highwinds has servers in Australia and that it is sometimes more efficient for customers in Australia to be provided content from servers in Australia.11

The ordinary meaning of ‘carrying on business in Australia’ usually involves a series or repetition of acts.  Those acts will commonly involve ‘activities undertaken as a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous basis.’12

Edelman J stated that given this ordinary meaning of carrying on a business, Valve undoubtedly carried on business in Australia.13

Misleading or deceptive conduct

The Australian consumers who were likely to be misled by representations in the SSAs could only be those few consumers who conscientiously read the terms and conditions of the SSAs, including the consumers who did so because they wished to know whether they could obtain a refund for a game that they considered to be defective.14

The No Refund Representation was misleading because, pursuant to the ACL, consumers are entitled to elect to have a refund in the event of (i) failure to comply with the consumer guarantee of acceptable quality that cannot be remedied or a major failure and (ii) where the consumer had rejected the goods.15

The Court ordered Valve:

  • to pay to the Commonwealth the sum of $3 million by way of pecuniary penalty;
  • be restrained for a period of 3 years from representing to Australian consumers that Valve is under no obligation to offer refunds to Australian consumers for video game subscriptions;
  • for a period of 12 months, for the benefit of Australian consumers logging onto the Steam website, to publish on the home page a link which reads “IMPORTANT NOTICE ABOUT CONSUMER RIGHTS IN AUSTRALIA”, which directs Australian consumers to a notice about consumer rights; and
  • to establish and implement an ACL compliance program.16 

This case demonstrates that a choice of law clause will not necessarily shield foreign entities from the ACL.  The Courts will carefully scrutinise and seize upon facts and circumstances that support a conclusion that a business is being conducted here in Australia, such that the provisions of the ACL will apply.

1 Australian Competition and Consumer Commission v Valve Corp (No 3) (2016) 337 ALR 647 at p. 650.
2 Australian Competition and Consumer Commission v Valve Corporation (No 7) [2016] FCA 1553.
3 Australian Competition and Consumer Commission v Valve Corp (No 3) (2016) 337 ALR 647 at p. 663
4 Ibid, p. 664.
5 Ibid, p. 666.
6 Ibid, p.668 citing Francis Travel Marketing Pty Ltd v Virgin Atlantic Airways Ltd (1996) 39 NSWLR 160 at 164.
7 Ibid, p. 676.
8 Ibid, p. 680.
9 Ibid, p. 651.
10 Ibid, p. 681.
11 Ibid, p. 688.
12 Ibid, P. 687.
13 Ibid, p. 687.
14 Ibid, p. 694.
15 Ibid, p. 696.
16 Australian Competition and Consumer Commission v Valve Corporation (No 7) [2016] FCA 1553

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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