Game Over

On 24 March 2016, Justice Edelman of the Federal Court handed down his judgment in Australian Competition and Consumer Commission v Valve Corporation (No. 3) [2016] FCA 196. As we blogged about here in 2014 when the ACCC commenced the proceedings, the case concerned allegations that Valve, an e-commerce business based in the USA, engaged in misleading and deceptive conduct by effectively representing to Australian consumers that statutory consumer guarantees in the Australian Consumer Law (ACL) did not apply to its software.

Valve, through its platform Steam, offers subscription services to over 4,000 computer games hosted on its servers, which consumers install and play either online or offline.

The judgment deals with three key issues:

• the application of the ACL where, in Valve’s submission, the law which has the closest and most real connection to the contract is the law of Washington State;
• whether Valve, a foreign corporation, engaged in conduct or carried on business in Australia; and
• the supply of games and software by licence.

Proper Law – so what?

The Court’s finding on the complex issue of jurisdiction has implications for all overseas-based suppliers and particularly those engaged in e-commerce.

Valve’s contract contained a clear choice of law clause, which provided that the consumer agrees that “this Agreement shall be deemed to have been made and executed in the State of Washington” and that “any dispute arising hereunder shall be resolved in accordance with the law of Washington“.

The Court did agree with Valve that the law of Washington State, not Australia, was the proper law (or the law with the “closest and most real connection”) of the contract. However, this did not result in a finding that the ACL consumer guarantees did not apply to Valve.

Section 67(b) of the ACL provides that if a contract for the supply of goods to a consumer contains a term that purports to, or has the effect of, substituting the provisions of the law of a foreign country for the ACL consumer guarantees, those provisions apply despite that term. Valve submitted that section 67(b) was only concerned with circumstances where the proper law of the contract was a law of Australia. In Valve’s submission, because the proper law of the contract was Washington State, the ACL consumer guarantees would not apply to Valve.

Through an analysis of the text, context, history, purpose and policy of section 67, Edelman J found that section 67 does not limit the ACL consumer guarantees by confining their operation only to cases where the closest and most real connection to the contract is the law of Australia. Valve’s choice of law clause was found to be, in the words of s 67(b), “a term that purports to substitute, or has the effect of substituting” the ACL consumer guarantees, and as such, the consumer guarantees continued to apply as a matter of statute.

The force of Edelman J’s decision in this respect is that s 67(b) includes not just a discrete substitute of Australian law provisions for discrete provisions of a foreign law, but where the entire applicable law purported to cover the contract was the law of a foreign country. The takeaway for foreign suppliers is that a contract’s specific choice of law clause – and even the Court’s own finding that the proper law of the contract as a whole is a foreign law – is not enough to exclude the application of the ACL consumer guarantees.

Conduct in or carrying on business in Australia

This is not to say, of course, that any foreign contract is captured by section 67(b) by virtue of it purporting to be subject to a law other than the ACL. The Court also had to consider whether Valve’s conduct was in Australia or whether it carried on business in Australia for it to fall within the jurisdiction of the ACL.

In holding that Valve’s representations involved conduct in Australia and that Valve carried on business in Australia, Edelman J undertook to a factual inquiry, finding that:

• Valve has servers in Australia with a retail value of $1.2 million
• Valve has was approx. 2.2 million subscriber accounts in Australia
• Valve’s servers were initially configured by an employee who travelled to Australia
• Although Valve’s support services are provided outside Australia those support services provide support for subscribers including the 2.2 million accounts in Australia
• Although the content is not preloaded or stored on Valve’s servers in Australia, it is deposited on Valve’s three servers in Australia when requested by the subscriber
• Although payment for subscriptions was made 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.

Licence to play games: supplying of goods?

As well as its jurisdictional objections, Valve argued that its transactions with Australian consumers were really for the supply of services, not for goods and as such not caught by the relevant provisions of the ACL. Given the 2011 extension of the ACL’s definition of “goods” to include computer software, it was relatively straightforward to establish that the software was a good.

The more complex issue was whether the software could be said to have been “supplied” to Australian consumers, or whether there was no supply of goods because consumers acquired a non-assignable licence to access and use the video games. Valve’s argument was that a mere licence could not be a supply of goods. Part of its argument was that the software downloaded by consumers required the consumer to log on to Steam, Valve’s platform, and verify their account and subscription to the game, which pointed to the game not being a good supplied to and in the possession of the consumer, but remaining with Valve and only access to it being provided to the consumer.

Not only did Edelman J find that this characterisation was not supported by established principles on the term ‘supply’, but the games themselves could be played offline, albeit with some reduction in functionality, which showed that the consumer had been provided – or supplied – with the software.

The Court did note that not every part of the Valve product downloaded and installed by consumers was a good: to be computer software, the digital code had to be executable by the consumer; in other words, it had to provide instructions for the computer hardware to perform a function. As such, the non-executable data that accompanied and was incidental to the games, such as music and images, were not goods.

The contraventions: misleading exclusion of refunds and warranty of acceptable quality

The complex issues of this case were establishing jurisdiction, and to a lesser extent, the existence of a supply of goods. Once these were established, the actual finding of contravention was relatively straightforward and does not offer much in the way of untested law. However, Edelman J did neatly set out seven fundamental principles on the operation of the ACL misleading and deceptive conduct provision:

1. The conduct should be viewed as a whole, and whether it is misleading is an objective question. This means that it is unnecessary to establish whether any actual or potential consumer has been misled or deceived.
2. The conduct needs to be examined in its relevant context, including the type of market and the habits and characteristics of reasonable purchasers in such a market.
3. There is no requirement of intention, knowledge, or a lack of good faith for liability to arise.
4. Where there is an express representation which is demonstrably false, there is usually no need to go beyond that finding to establish a contravention. This includes statements which are literally true but contain or convey a meaning which is false.
5. The conduct should be considered by testing it against a reasonable representative member of the class of customers likely to be affected by the conduct.
6. An incorrect statement of law can constitute misleading and deceptive conduct.
7. It is possible for conduct to be likely to mislead even if it is directed towards a single person who is not misled.

The pertinent implication of this decision is not its findings on contravention, but on its assessment of the reach of the ACL consumer guarantees provisions. Foreign suppliers selling – or providing a licence – to Australian consumers will (if they are considered to have engaged in conduct in Australia or to carry on a business in Australia) not be able to use choice of law clauses, or arguments of proper law, to excuse their consumer contracts from the consumer guarantees provisions of the ACL.

Photo credit: Flickr/Keith Williamson – remixed to black and white and resized