11 September, 2016
What you need to know
This edition covers some key developments in consumer law in the last quarter:
- We provide a snapshot of recent key matters, including in relation to penalty proceedings, unfair terms in small business contracts, law reform, and the ACCC's market study into new vehicle retailing.
- We consider in detail the recent decision in ACCC v Valve, concerning the consumer guarantees regime under the Australian Consumer Law (ACL) – the Court's conclusion that the ACL applied to online representations by a USA-based company may be unsurprising, but its conclusion that certain contract terms contained false or misleading representations warrants close attention.
- We finish by looking at a recent Federal Court decision regarding the unsolicited consumer agreements regime under the ACL, which provides important guidance on when that regime will, and will not, apply.
The Quarter at a Glance
Medibank: the ACCC has commenced proceedings against Medibank Private Limited, alleging that it engaged in misleading and unconscionable conduct, and made false or misleading representations, in connection with its communications regarding a decision to limit benefits for certain pathology and radiology services (in particular, the fact that it did not give existing members advance notice of that decision). The ACCC alleges that several of the surrounding circumstances render the conduct unconscionable, including that (the ACCC alleges) Medibank calculated that publicity about this decision could have negatively affected Medibank's planned listing on the ASX.
Ongoing focus on the word "Free": the Federal Court recently imposed a $2.75 million penalty on Bet365 for falsely representing that new customers would receive "$200 free bets", when in fact those bets were not, in substance, provided for free, including because customers had to deposit and gamble $200 of their own money before they received the "free" bet. Use of the word "free" attracts ongoing regulatory scrutiny, and this decision illustrates that substantial penalties be imposed when "free" is used in a misleading way.
ACCC appeals Reckitt Benckiser penalty: The ACCC has appealed from the recent Federal Court decision ordering Reckitt Benckiser (Australia) Pty Ltd to pay $1.7 million in penalties for making misleading representations that identical Nurofen products were specifically formulated to treat different types of pain. The appeal has been set down for hearing in November 2016. (While Reckitt Benckiser admitted liability, it did not agree on a proposed penalty; the ACCC sought at least $6 million, Reckitt Benckiser proposed $1.1 million.) Interestingly, the Court noted that the relevant Nurofen products had been criticised in mainstream print and television media on bases similar to those later challenged by the ACCC, but Reckitt Benckiser claimed not to have been aware of these early alarm bells.
Unfair terms: small business contracts are receiving increased regulatory attention ahead of the extension of the unfair terms regime to those contracts from November 2016. We are seeing activity in and beyond the key focus areas of independent contracting, franchising, retail leasing, telecommunications and advertising.
Another market study: the new car retailing industry is the focus of the ACCC's latest market study, which will examine issues such as compliance with consumer guarantees, misleading practices (including in relation to performance, emissions, and fuel efficiency and consumption) and access to data; an issues paper will be released later this year, with a draft report to follow in the first quarter of 2017.
Review of the Australian Consumer Law: Submissions on the issues paper released by Consumer Affairs Australia and New Zealand (CAANZ) were due at the end of May, but are not publicly available. CAANZ's interim report will be released by the end of the year, and there will be a further call for submissions (an important opportunity to comment on the feasibility and practicality of any reform proposals), before CAANZ's final report in March 2017.
The Decision in ACCC v Valve: When does the ACL apply to overseas businesses and when might bare contractual terms contravene the prohibition on false or misleading representations?
- In ACCC v Valve Corporation (No 3)1, the Federal Court rejected an argument by Valve, a software business predominantly located outside Australia, that the ACL did not apply to Valve's conduct regarding online software sales to consumers in Australia. The decision sheds light on how the ACL applies to businesses which do not have a storefront presence in Australia, and confirms that businesses cannot avoid the application of the ACL by nominating a governing law or jurisdiction outside Australia, or by arguing that the proper law of the contract is the law of another country.
- The decision is particularly striking for its conclusion that a number of Valve's contractual terms contravened the ACL prohibition on false or misleading representations, because they appeared to exclude rights that were available to the consumer under the ACL. This conclusion was drawn despite Valve's use of phrases such as "to the maximum extent permitted by applicable law" in some of the relevant terms. This decision also highlights the risks with using consumer-facing materials (eg global terms and conditions) which are not tailored for Australia.
- The decision also confirms that, for the purpose of the ACL, the supply of a licence to use software constitutes supply of a "good" rather than a "service". In this case, this meant that the statutory guarantee that goods will be of "acceptable quality" applied to software supplied by way of licence.
Key points
Background facts
- Valve is a USA-based company which sells software to customers in Australia and elsewhere using the "Steam" website and online game distribution network, an online video game delivery platform called "Steam Client" and an online support service called "Steam Support".
- Valve made various statements that it would not refund fees paid for its software. These statements were made in Subscriber Agreements, a Refund Policy and online chats with Steam Support representatives.
- The ACCC alleged that a number of statements were misleading or deceptive (in contravention of ACL s 18) and contained false or misleading representations (in contravention of ACL s 29(1)(m)), because they wrongly represented that consumers in Australia could not obtain a refund from Valve, when in fact consumers had a right to a refund for software that did not comply with the statutory guarantee of "acceptable quality" under the ACL.
The jurisdictional issues – did the ACL apply to Valve?
Was Valve engaged in conduct, or carrying on business, in Australia?
Valve argued that the ACL did not apply to it, because its business did not trigger either of two important jurisdictional thresholds under the ACL: it said it was not engaged in "conduct", and was not "carrying on business", in Australia.
In making these arguments, Valve pointed to the fact that it is a foreign corporation; its business premises and staff
are located outside Australia; it holds no real estate in Australia; its website is hosted outside Australia; and payment for subscriptions to Valve's products are made in US dollars and processed in Washington State.
However, Justice Edelman observed that Valve nevertheless had several significant connections with Australia,
including its ownership of servers in Australia. It also had over 2.2 million Subscriber accounts in Australia (from which it generated significant revenue), and it incurred expenses payable to service providers in Australia.
1 ACCC v Valve Corporation (No 3) [2016] FCA 196 (Edelman J).
Justice Edelman found that the making of statements on Valve's website (including in its Refund Policy), in Subscriber Agreements and in online conversations through "Steam Support" was conduct in Australia, on the following bases:
- Statements in the Subscriber Agreements were made to consumers in Australia who had downloaded Steam Client (the delivery platform), and in doing so had accepted the terms of a Licence Agreement and the Subscriber Agreement. This established a direct relationship between Valve and each consumer. In circumstances where the relevant consumers were in Australia, and Valve had servers and content delivery networks in Australia, this meant that the statements involved conduct in Australia. (Justice Edelman also noted that consumers would have identified that they were from Australia during the purchasing process, but this was not critical to this conclusion).
- Statements on Valve's website, relevantly in its Refund Policy, were made in Australia, even though the website was hosted outside of Australia. Justice Edelman noted that Valve had a relationship with the relevant consumer by the time they had made a purchase or downloaded a product from Valve, and that this meant that Valve's statements to these clients involved conduct in Australia. Justice Edelman also noted that customers had to select a box in order to indicate their agreement to the Subscriber Agreement, and identify their location as Australia, and that Valve priced some games differently in Australia, and sometimes communicated specific information to customers in Australia (eg that a particular item was unavailable in their region). However, the decision does not specifically identify whether the bare publication of information accessed in Australia would, without these additional factors, constitute conduct in Australia.
- The statements made through Valve's online chat log were specifically made to individual consumers in Australia (even though they were made online, by a person not physically present in Australia), and so involved conduct in Australia.
In relation to Valve's submission that it was not "carrying on business" in Australia, Justice Edelman rejected the argument that the mere supply of goods or services to persons in Australia does not of itself constitute "carrying on business" in Australia. Justice Edelman concluded that Valve's significant connections with Australia (eg its subscriber accounts, assets and expenses in Australia, as outlined above) meant that it "undoubtedly" carried on a business in Australia.
Did the "proper law" of Valve's contracts, or the choice of law clauses in those contracts, affect the application of the ACL?
Valve argued that the law of Washington State was the proper law of its Subscriber Agreements, and therefore that the ACL did not apply to supply under those agreements. This argument was based on section 67 of the ACL, which relevantly provides that the ACL statutory guarantees regime will apply to a supply made under a contract for the supply of goods to a consumer:
- if the proper law of the contract would be the law of Australia (or part of Australia), but for a term of the contract that provides otherwise (eg that nominates the law of another jurisdiction); or
- if the contract contains a term that purports to substitute or has the effect of substituting the law of another country, or of an Australian State or Territory, for the provisions of the ACL statutory guarantees regime (ie the statutory guarantees will apply, despite that term).
Justice Edelman applied established principles to determine that, as argued by Valve, the proper law of the Subscriber Agreements was the law of Washington State (even when disregarding the choice of law and jurisdiction clauses which nominated the law of Washington State, as required by the first limb of section 67).
However, Justice Edelman accepted the ACCC's argument that the choice of law and jurisdiction clauses had purported to substitute, or had the effect of substituting, the law of Washington State for the provisions of the ACL statutory guarantees regime, within the meaning of the second limb of section 67. This involved rejecting Valve's argument that the second limb only applied where the proper law of the contract is the law of Australia (or part of it) but the contract nominates an alternative law in order to exclude the statutory guarantees regime. Justice Edelman rejected this argument as a matter of statutory construction, and in doing so had regard to the ACL's policy intention that the consumer guarantees regime not be able to be excluded by contract. As a result, Justice Edelman concluded that the ACL statutory guarantees regime would apply to supply under the Subscriber Agreements.
Is supply of a licence to use a good the supply of a "good", or a "service" under the ACL?
Valve argued that even if the ACL applied to it, statements by Valve that it would not provide refunds to consumers who purchased its software were not misleading. Valve reasoned as follows:
- A statement that Valve would not provide refunds could only be misleading if consumers did in fact have a right to obtain a refund from Valve (because in that situation, Valve would be representing that consumers could not obtain a refund from it, when in fact they could, if they exercised that right).
- A consumer would have a right to a refund from Valve if the software Valve supplied to the consumer did not comply with the ACL statutory guarantee that "goods" supplied to a consumer would be of "acceptable quality" (Consumer's ACL Rights).
- The Consumer's ACL Rights did not apply here, because Valve was not supplying "goods". Although software is specifically included in the ACL definition of "good", Valve argued that a licence to use its software involved the supply of a "service" (the right to use software), and not a "good" (the software itself).
- Since Valve was not supplying "goods", the guarantee of "acceptable quality" (and associated refund rights) did not apply.
- Accordingly, Valve could not have misled consumers: consumers did not have the refund rights that the ACCC claimed they had, so it was not misleading for Valve to make statements that it would not provide refunds.
Justice Edelman rejected Valve's argument. Importantly, he found that Valve's submission was inconsistent with the definition of "supply" in the ACL, since that definition non-exhaustively includes "supply by way of sale, exchange, lease, hire or hire-purchase", and Valve's contractual licences effectively involved a form of hire without bailment, such as to fall within this definition. Justice Edelman also considered that Valve's submission would give rise to undesirable inconsistencies in the application of the ACL, since it would mean that hired goods, but not licensed goods, would need to comply with the statutory guarantee of acceptable quality.
The alleged false or misleading representations
Having satisfied the Court that the ACL applied to Valve, the ACCC alleged that a number of statements by Valve, including statements in the terms of its Subscriber Agreements, were or contained false or misleading representations.
In each case, the ACCC alleged that the relevant representation was false or misleading because it represented that the consumer had no entitlement to obtain a refund from Valve, or appeared to exclude or limit a consumer's right to obtain a refund from Valve under the Consumer's ACL Rights.
Justice Edelman found that some, but not all, of the alleged contraventions were made out, as described here.
For further information, please contact:
Bill Reid, Partner, Ashurst
bill.reid@ashurst.com
