Australia: Warning for foreign-based businesses: ignore Australias consumer laws at your peril

What you need to know

• The Federal Court of Australia recently ordered a US-based online game retailer to pay a penalty of $3 million for engaging in misleading or deceptive conduct and making false or misleading representations to Australian consumers, in breach of the Australian Consumer Law.
• The decision helpfully canvasses the types of factors that may be taken into account in determining whether a foreign-based business is engaging in conduct in Australia, such that it is caught by the provisions of the ACL.
• The orders imposed by the Federal Court in this case demonstrate that overseas online distributors that conduct business in Australia may face significant penalties if they do not understand and comply with their ACL obligations.

The Australian Competition and Consumer Commission (ACCC) has clearly demonstrated that it will not shy away from taking action against foreign-based businesses offering their goods to Australian consumers, if it considers they have contravened Australian laws. A recent decision of the Federal Court shows just how high a price can be paid when the provisions of the Australian Consumer Law (ACL) are ignored.

Background

In 2014 the ACCC commenced proceedings against US-based Valve Corporation (Valve) for making false or misleading representations to Australian consumers regarding consumer guarantees. The representations were made via Valve's online game distribution network, Steam, which operated out of Washington. Valve represented to consumers in the Steam Subscriber Agreement (displayed on the Steam website) and on the Steam delivery platform (an application that could be downloaded and installed on consumers' computers) that:

• it had no obligation to offer a refund for digitally downloaded video games they had purchased
• it had excluded statutory guarantees and/or warranties of acceptable quality
• it had restricted or modified statutory guarantees and/or warranties of acceptable quality.

Liability under Australian Consumer Law

In March 2016 the Federal Court found in favour of the ACCC¹ and determined that by making those representations, Valve had breached:

• section 18 of the ACL, which prohibits a person in trade or commerce from engaging in conduct that is misleading or deceptive, or is likely to mislead or deceive
• section 29 of the ACL, which prohibits a person in trade or commerce from making false or misleading representations about goods or services, including about the existence, exclusion or effect of any condition, warranty, guarantee, right or remedy.

The Court considered that Valve had breached these sections in circumstances where:

• sections 259(3) and 263(4) of the ACL entitle consumers to a refund, at the consumer's election, in the event of a major failure in complying with the consumer guarantee of acceptable quality
• section 64 of the ACL prohibits suppliers of goods from excluding, restricting or modifying consumer guarantees by contract.

Valve submitted that it did not engage in conduct in Australia for various reasons including the fact that it was a foreign corporation and had no staff, business premises or real estate in Australia. Both the trial judge and ultimately the Federal Court disagreed, finding that the following factors demonstrated that Valve operated within a significant Australian context and had a strong connection to Australia:

• Valve had personal property in Australia worth $1.2 million
• Valve had 2.2 million subscriber accounts in Australia
• Valve provided overseas support services to Australian subscriber accounts
• Steam content was deposited on three servers in Australia
• payments were made to an Australian bank account of an Australian company.

The Court was also satisfied that the games and software supplied by Valve fell within the ACL's extended definition of 'goods' which includes computer software.

Penalties under Australian Consumer Law

The ACL entitles the court to impose various monetary and other penalties for non-compliance with its provisions.

In December 2016 the Federal Court ordered Valve to:²

• pay the Commonwealth the sum of $3 million within 30 days
• be restrained for a period of three years from representing in communications to Australian consumers that:
• • it is under no obligation to offer refunds
  • it is not bound by the consumer guarantees of acceptable quality under the ACL
  • it is able, with respect to its dealings with Australian consumers, to exclude, restrict or modify the consumer guarantees of acceptable quality under the ACL
• for a period of 12 months after 20 February 2017, publish on the home page of the Steam Website, a link reading 'IMPORTANT NOTICE ABOUT CONSUMER RIGHTS IN AUSTRALIA' which directs consumers to a consumer rights notice
• within 90 days, establish and implement an Australian Consumer Law Compliance Program to be undertaken by each Valve employee or other person involved in Valve's business who deals or may deal with Australian consumers, and maintain and continue to implement this program for three years from the date of the order.

The Federal Court also ordered Valve to pay 75% of the ACCC's costs.³

Why was $3 million an appropriate penalty?

The main issue of contention between the parties was the monetary penalty.

Valve submitted that the appropriate amount should be $250,000 while the ACCC argued that Valve should pay $3 million. The Federal Court ultimately favoured the ACCC's amount with Justice Edelman making the point that Valve's amount was "next to nothing" for a corporation of its size and revenue. His Honour noted that the amount proposed by Valve was "not even a real cost of doing business" and "would barely be noticed" before embarking on a detailed discussion about the legal principles behind pecuniary penalties.⁴

Justice Edelman referred to section 224 of the ACL which provides that, in determining an appropriate penalty, the court must have regard to all relevant matters including:

• the nature and extent of the act or omission and of any loss or damage suffered as a result of the act or omissions
• the circumstances in which the act or omission took place
• whether the person has previously been found by a court to have engage in similar conduct.

In this case, Justice Edelman also looked to additional factors such as:

• the nature and extent of the contraventions and the period of contraventions
• the loss or damage suffered and the profits caused by contraventions
• Valve's culture of compliance
• the deliberateness of the contraventions and involvement of senior management
• Valve's size and market share
• Valve's cooperation with the ACCC, admission of culpability, compensation and contrition
• previous contraventions and conduct.

After addressing each of these factors in detail, Justice Edelman ultimately concluded that Valve's contravention was significant because it would have affected a significant number of consumers. While appreciating that the misrepresentations would not have been read by many of Valve's consumers, Justice Edelman was satisfied, in the context of the 2.2 million subscriber accounts, that even if a small portion of these consumers had read the misrepresentations then hundreds and possibly thousands of consumers could have been affected.

His Honour further commented that Valve had a "very poor" culture of compliance with little regard for Australian law and concluded that this permeated from the upper echelons of management.⁵ Justice Edelman specifically referred to evidence given by Valve's General Counsel that Valve did not obtain legal advice about its position in Australia, and even if it did receive advice that the ACL was applicable, it may not have acted differently.⁶

When it came to factors that might have warranted a discount on the penalty, such as cooperation and contrition, Justice Edelman noted that Valve "contested liability on almost every imaginable point, including jurisdictional issues" and that it was unclear from Valve's evidence at the remedies hearing whether it even accepted the decision of the court.⁷

Having regard to all of the above factors, the Federal Court concluded that a penalty of $3 million was appropriate in the circumstances.

Key takeaways

Two strong lessons emerge from this case involving Valve.

First, the matter has clarified the scope of the ACL when it comes to overseas-based online distributors to Australian consumers. A foreign company will not be exempt from the provisions of the ACL if it conducts business in Australia and supplies goods to Australian consumers. Businesses that predominantly operate overseas, but can demonstrate a significant connection to Australia (for example, personal property, consumer accounts or support services in Australia), should ensure they understand their obligations under the ACL.

Second, it is clear that if the ACCC considers a breach of the ACL has occurred, it is prepared to take action against businesses that, like Valve, are primarily based outside of Australia. With the potential for significant penalties to be imposed for breaches of Australia's consumer guarantee provisions, foreign businesses should take care to comply with the ACL or ignore it at their peril.

Footnotes

¹ ACCC v Valve Corporation (No 3) [2016] FCA 196.
² ACCC v Valve Corporation (No 7) [2016] FCA 1553.
³ ACCC v Valve Corporation (No 8) [2016] FCA 1584.
⁴ ACCC v Valve Corporation (No 7) [2016] FCA 1553 at [7].
⁵ ACCC v Valve Corporation (No 7) [2016] FCA 1553 at [38], [41] and [49].
⁶ ACCC v Valve Corporation (No 7) [2016] FCA 1553 at [40].
⁷ ACCC v Valve Corporation (No 7) [2016] FCA 1553 at [58] and [59].

This article is intended to provide commentary and general information. It 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 article. Authors listed may not be admitted in all states and territories