Thinking | 7 October 2021

Lift Your Game: a quick guide for the Australian gaming industry

By Ben Hamilton and Monique Sterrenberg

The spotlight is on the games industry in Australia. For those who are either in, or looking to break into, this industry, we set out some key legal considerations, including the Digital Games Tax Offset, how the Australian Consumer Law is likely to apply to subscription agreements and what the ACCC has been saying with respect to competition in mobile app markets.

30% Digital Games Tax Offset

The Federal Government will be investing $18.8 million over four years for a 30% Digital Games Tax Offset commencing from 1 July 2022 for eligible businesses on qualifying Australian games expenditure.

A key driver for this initiative is for the Australian industry to increase its stake in the estimated US$90 billion global industry.

What is a tax offset? Eligible expenditure of a business can become non-deductible, allowing it to be converted into a tax offset. If a company has a tax liability, it can use this offset to reduce that liability. If the company has no tax liability, the offset is then refunded back to the company.

An ‘eligible business’ must be:

  • an Australian resident company; or
  • a foreign resident company with a permanent establishment in Australia.

To access the 30% tax offset, eligible businesses will need to spend a minimum of AU$500,000 on qualifying Australian games expenditure (ongoing from 1 July 2022), becoming available in the year when the qualifying Australian games expenditure ceases.

The government will engage with industry to determine the criteria and definition of ‘qualifying Australian games expenditure’. While there haven’t yet been any specifics as to the definition of ‘qualifying Australian games expenditure’, games which contain gambling elements or are unable to obtain a classification rating will not be eligible.

Australian Consumer Law

The Australian Consumer Law (ACL) is uniform consumer protection legislation and is incorporated into the law of each Australian state and territory. It applies to the provision of both goods and services (including digital ‘goods’). Typically, these provisions cannot be contracted out of. Key provisions include prohibitions on misleading or deceptive conduct, unfair contract terms and consumer guarantees.

It is important for the gaming industry to be aware of how the ACL applies to their contracts and dealings with their player base (their ‘consumers’). Businesses that fail to do so run the risk of incurring significant liability.

In particular, risks can arise if end user licence agreement (EULA) terms are adopted from terms that were prepared for overseas markets. It is therefore prudent for multinational businesses operating in Australia to have their agreements reviewed from the perspective of ACL compliance.

The Australian Competition and Consumer Commission (ACCC) is the regulator tasked with ensuring compliance with the ACL.

Some significant cases concerning the gaming sector include:

  • Sony was ordered to pay $3.5 million for making false and misleading representations on its website and in dealings with Australian consumers about their rights under the ACL (Australian Competition and Consumer Commission v Sony Interactive Entertainment Network Europe Limited [2020] FCA 787).
  • Valve Corporation has also fallen foul of the ACL with the Federal Court of Australia finding even foreign corporations may engage in conduct in Australia (or carry on business) even if they do not have a physical presence in Australia. Where a business is supplying goods online to Australian consumers (including computer software) the statutory protections under the ACL will apply (Australian Competition and Consumer Commission v Valve Corporation (No 3) [2016] FCA 196).
  • The ACCC accepted a court-enforceable undertaking from Zenimax Media Inc, Zenimax Europe Limited, and Zenimax Australia Pty Ltd after it was ‘acknowledged they were likely to have misled consumers about their statutory consumer guarantee rights in relation to the game Fallout 76’.
  • EB Games also provided a court-enforceable undertaking to the ACCC following complaints from consumers that EB Games representatives had advised them they were not entitled to a refund after experiencing a range of faults with the game Fallout 76.
  • The ACCC accepted a court-enforceable undertaking from Electronic Arts Inc, EA Swiss Earl, and Electronic Arts Proprietary Limited after they acknowledged potential misrepresentations made to consumers regarding refunds relating to digital goods purchased through Origin.

Unfair contract terms

The ACL also contains provisions that prevent suppliers of goods or services from entering into contracts with consumers which contain unfair contract terms. Any contract a gaming business offers will be subject to this law if it fits the following specifications:

  • a standard form contract, one that is not intended to be negotiated between the parties but either accepted or rejected (this would typically include End User Licence Agreements (EULAs) which accompany downloaded software);
  • for the supply of goods or services; and
  • is either with:
    • an individual for whom the good or services is for personal, domestic or household use (eg someone directly purchasing a game or subscription); or
    • a ‘small business’ with fewer than 20 employees and the ‘up front’ value of the contract does not exceed $300,000 or $1,000,000 for a term-contract of 12 months or more.

The legislative definition of a ‘small business’ is set to be changed to a business that employs fewer than 1,000 employees or has an annual turnover of less than $10 million. Changes to unfair contract term provisions will also remove the requirement for the upfront price. These proposed definitional changes will greatly increase the number of business-to-business interactions which will be covered by the unfair contract terms provisions. It is also looking like courts will have the power impose financial penalties where unfair contract terms are used. It is important for gaming businesses to consider these provisions and to bring their standard form contracts into compliance.

Understanding these changes will also assist studios that may meet the ‘small business’ definition to understand what redress they may have in contracts they enter and which may contain unfair terms.

A term may be unfair if it:

  • would cause a significant imbalance in the parties’ rights and obligations arising under the contract;
  • is not reasonably necessary in order to protect the legitimate interests of the party who would be advantaged by the term; and
  • would cause detriment (whether financial or otherwise) to a party if it were to be applied or relied on.

Examples of terms that could be in breach of the provisions include terms that:

  • force automatic renewal on the other party with no ability to opt-out (of a subscription or EULA, for example),
  • permit only the supplier to vary the contract or terminate it for breach; or
  • impose excessive early termination fees.

Consumer guarantees

There have been recent changes in the ACL where businesses providing goods or services valued up to $100,000 are subject to the consumer guarantees contained within the ACL. This $100,000 limit is calculated on a per transaction or contract basis. The guarantees can apply to small transactions with individual customers (such as purchasers of a game or subscription) as well as to larger contracts with business consumers.

These protections are for the actual ‘end’ consumer of a product or service, and not for those who resell the product or service. For example, a distributor of physical copy games will not be entitled to the consumer guarantee protections for its purchase of goods if it was purchasing them to resell to consumers.

The consumer guarantees entitle consumers to expect relevant goods and services to be of a certain quality. The specific guarantees given to consumers regarding goods include (but are not limited to) that the goods:

  • are of ‘acceptable quality – meaning they are fit for the purpose they are commonly used for and free from defects;
  • meet the description given to the purchaser; and
  • match descriptions made by the salesperson, on packaging and labels, and in promotions or advertising.

Consumer guarantees regarding services include (but are not limited to) that the services are:

  • provided with acceptable care and skill or technical knowledge and taking all necessary steps to avoid loss and damage; and
  • fit for the purpose or give the results you and the consumer had agreed to.

The ACL prevents businesses from inserting terms into their contract (this includes EULAs) which attempt to exclude, restrict or modify a consumer’s rights under the guarantees. However, such provisions are not void if they simply limit a business’ liability for failing to comply with a guarantee to:

  • the replacement of the good;
  • the cost of the replacement of the good;
  • supplying the services again; or
  • the cost of having the services supplied again.

Gaming businesses should be aware their contracts should not attempt to override the application of any applicable consumer guarantee (such as by including blanket statements such as ‘no refunds’ or seeking to exclude all liability). If they do so, then this can constitute misleading or deceptive conduct, and expose the business to financial penalties.

App marketplaces: the emergence of mobile gaming

The state of play in the app space has not materially changed since its inception. Mobile apps have become an integral part of daily life and have facilitated the emergence of the mobile gaming platform. In 2020 it was estimated that Apple made US$47.6 billion from mobile gaming revenue, while Google made US$31.9 billion.

In April 2021, the ACCC released its second interim report on its Digital Platform Services Inquiry. The Report highlighted the impact of the bisected market on app developers and flagged several instances of conduct that raised competition law red flags, including:

  • Apple preventing app-developers from informing customers about alternatives to the App Store where they can purchase the same apps and services cheaper;
  • developers having no choice but to use Apple and Google’s own payment systems (and concede accompanying commission charges) for any in-app purchases;
  • Google dictating to phone producers the bundling of Google Search on Android phones;
  • self-preferencing’ whereby Apple and Google prioritise the visibility of their own apps within the respective marketplaces; and
  • moving the goal posts for their competitors to enter the market – the absence of fair, reasonable, timely and transparent mechanisms for app developers to challenge the app review and approval process.

The ACCC has taken a cordial approach at this stage and proposed six potential measures for Apple and Google to implement to address areas of concern. The ACCC has indicated that if Apple and Google don’t take action, regulation may be introduced.

If your studio develops apps, you may benefit from the ACCC’s initiatives and any potential resulting regulatory changes. Improved app store processes may enable more effective action against malicious apps or apps which impersonate you or your business. In addition, changes to the complaints handling processes available to app developers and consumers would better facilitate the resolution of disputes with Google, Apple and third parties.

Hall & Wilcox is experienced in assisting clients (Australian and internationally based) with navigating their business needs in the Technology and Digital Economy sector. For more information, please contact our Technology & Digital Economy team.

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