Thorpe v CA Imports Pty Limited

Federal Court of Australia|1994-12-16|Before: Davies J

In this application, the Trade Practice Commission ("the Commission") seeks orders under s 80 of the Trade Practices Act 1974 (Cth) ("the Act") seeking to restrain labelling which is alleged to be misleading or deceptive or likely to mislead or deceive in breach of s 52 of the Act and which 1s alleged to make a false or misleading

Tepresentation concerning the place of origin of goods in breach of s 53(eb) of the Act.

-2- The respondent, ODSV Holdings Pty Limited, which trades under the name "Bush

Fnends Australia", is a wholesaler of soft animal toys. In early 1994, QDSV commenced to supply a range of toy animals, in respect of which it used what is alleged to be an unregistered mark, "Aussie Born". One of these toys is a koala, which is sold in several sizes. Exhibit A, a koala some 17 cm high, is made of soft synthetic plush fabric which is grey in colour, but the belly and the front parts of two fluffy ears are white. Its claws are of black felt, 1t has black and brown eyes on a white felt background and a large black nose. The koala is in a sitting position, its hmbs outstretched and its head turned

When the koalas were first marketed, a cardboard label was stapled to the left ear. On the outward side of the tag was a picture of a koala on a green background and

im large letters the words "AUSSIE BORN". On the other side, this description

The AUSSIE BORN range is made in The Hunter Valley, Australia by BUSH FRIENDS AUSTRALIA (a wholly owned Austrahan Company) and meets all international child safety standards. The mayor component of the manufacturing process uses Australian labour and materials. In order to maintain the highest quality and value, some elements (including the casings) have been purchased abroad.

BUSH FRIENDS AUSTRALIA - WORLD WIDE GUARANTEE If you are not entirely satisfied with your purchase, you may return it for refund or exchange to BUSH FRIENDS AUSTRALIA,

96 Gloucester Street, Sydney NSW 2000. Phone: (02) 240 6150

The parties are in agreement that this label was misleading. In September 1994, QDSV advised the Commussion that it would no longer use that label. Accordingly, in relation to that label, it 1s sufficient that there be a declaration of breach. No further use

The second label has on one side a depiction of a koala on a yellow background

and the words in large letters "AUSSIE BORN". Against those letters in small print are the letters "TM". Evidence has been given, which I accept, that the use of those letters

1s an indication to the public that the term "AUSSIE BORN" 1s used as a trademark.

On the other side of the label is this description:-

The AUSSIE BORN range from the Hunter Valley, Australia is a product of BUSH FRIENDS AUSTRALIA (a wholly owned Australian Company) The major component of the manufacturing cost 1s in Australian Jabour and matemals. In order to maintain the highest quality and value, some elements have been purchased abroad. Gentle Machine Wash

refund or exchange to BUSH FRIENDS AUSTRALIA. Level 5, 62 Pitt Street, Sydney NSW 2000. Phone: (02) 241 4888

-4- The koala was designed by QDSV. The fur fabric is produced in China. It was

selected by Mr Bruce Arrata, a director of QDSV, who went to China for that task. The fur fabric is purchased by another firm in China which produces a wide range of soft toys

for QDSV. Many of these toys are fully manufactured by the firm in China.

However, in the case of the "Aussie Born" koalas, the Chinese firm cuts the fur fabric into shape and forms holes therein so as to enable the eyes and the nose to be inserted later. The firm then sews the pieces together, leaving the head and torso separate. The head is comprised of six pieces, there being a grey and a white piece for each of the ears, a piece for the back of the head and a piece for the front of the head. The torso is made of two pieces for the back and a piece for the front, an additional piece for each of the bottom legs and two pieces for each of the upper legs, a total of 9 pieces. Into the upper and lower legs are sewn fabric claws. There is also a piece of velcro attached to the upper limbs so that they can be joined together and there is sewn into the koala a tag which, on one side, shows "Bush Friends Australia" and, on the other, "All new materials, Gentle Machine Wash Reg Design Applied". The reference to the

design application 1s false but we are not concerned with that.

When the process of sewing has been completed, the head and torso parts are

inside out and it is in that form that they are sent to QDSV in Australia.

The eyes and nose of the koala are produced m Hong Kong or Taiwan. The appropiate number of noses and eyes are usually sent by the Chinese firm to QDSV in

Australia together with the head and torso; but QDSV also keeps a stock of eye and

nose parts. The eyes, the nose and the fittings for them are invoiced separately from the

The koalas are completed at a factory at Dungog, New South Wales, which QDSV has established. The casings are turned the correct way and the noses and eyes fitted and clipped into position at the factory itself. The heads and torsos are then given out to piece workers who, at their own homes, insert the filling and sew the heads and torsos together and make any stitching repairs as may be required. The piece workers also brush each toy. Each koala is given a final inspection in the factory and the labels are

The parties have agreed on the following description of the manufacturing

"a) The torso casing 1s turned from inside out to right side out and shaken and brushed 10 remove excess fluff.

b) The arms and legs of the casing are pushed out and extended. c) All seams are checked for sewing faults and necessary repairs made by hand.

d) The head casing 1s turned from mside out to night side out and the ears are extended. The seams are checked and repaired if necessary.

e) A check is made to sec that the eye holes and nose aperture are in the correct positions which involves checking the holes and apertures against a chart for correct sizing.

f) The correct nose and eye size 1s selected from the Respondent's size chart The eyes are then affixed to the desired position mn the eye apertures by a manually operated machine after a piece of white material has been correctly placed at the back of each eyeball.

g) The nosepiece 1s then affixed to the nose aperture by a similar process.

h) The pressure for the eyes 1s different to the pressure for the nose and the pressure must be set at a level that does not break the eye or nose but 1s hard enough to push the locking washer over the locking ridge on the back of the eye and nose. In this manner

the locking washers are utilised in the process for affixing the eyes and noses to the face

of the toy. It 1s necessary to check the pneumatic pressure on the locking machine which affixes the eyes and nose to prevent damage to them

Thereafter the filling of the casings 1s commenced, starting at the extremities, that 1s the hands and feet. The filling process is carried out by hand

The filling continucs with the stuffing of the head and the nose area to achieve the correct shaping of the face. A little 1s added at a tume and 1s pushed into place with a wooden rod.

The filling used 1s a 70-30% blend of silicone coated synthetic material which 1s purchased by the Respondent in Austraha.

After filling 1s completed the head 1s sewn on to the torso of the casing The head must be positioned so that 1t fits in proper alignment with the torso. The position of the head varies according to the particular design and look desired for the toy In some imstances the head 1s sewn at a 45° angle while in other instances it 1s sewn at a 90° angle. The sewers are familiar with variations of designs and fit the head in the appropriate position to accord with the design bnef. The first stitch 1s positioned at the back of the head and 1s double knotted to anchor the head in the correct position. The stitchmg then continues around the neck region mm a blanket stitch pattern and the tension is pulled tightly on every third or fourth stitch. It 1s necessary to place some extra fill into the

back section of the neck to properly support the head and the final stitching 1s then completed with a double knot to avoid any unravelling of the stitching.

The inner ears are then hand stitched to the side of the head so that the ears sit forward and give a proper 'koala' appearance.

It 1s not easy to create an authentic koala look. In some instances 2 stitch 1s made from under the chin area of the toy to the bottom of the left eye and then returned to under the chin area and up to the right eye and again returned to under the chin area.

Thereafter the toy 1s hand brushed all over using a claw tooth steel brush A steel spike 1s Often used On the seams to pull out small pieces of fabric which have been caught in the scams and which give an untidy appearance

The toy 1s then the subject of a final inspection process dunng which the production manager examines each toy, checking the general appearance, the consistency of the filling and the contours of the toy follow the design and pattern It 1s checked to ensure that the stitching 1s neat and well concealed and tied off ughtly.

The label 1s then affixed by a plastic staple to the left ear im a way which ensures that the plastic earplug goes completely through the ear and the tag does not cover the face of the toy. The labels are triangular in shape so as to not conceal the appearance of the koala's

facial features. The labels are affixed so that the 'Aussie Born' side of the label faces outwards.

The toys are then hand packed into cartons to comply wit [sic] particular customer orders."

As can be seen, all the materials, except the filling, are overseas materials. The fur, the eyes, the nose, the claws, the velcro and the "Bush Friends" tag are overseas

The Managing Director of QDSV, Mr G.B. Hodge, gave evidence that the

average cost of production of the koalas was $10.19 per toy and that:-

@) $1.28 in respect of money expended in Australia other than on labour or overhead

(iii) $ 7.26 in respect of wages directly applicable to the toy and a

proportionate share of overheads allocated to the toy

Of the average production cost of $10.19, 17% 1s the amount paid for the imported material and 83% 1s the average local content component."

It is, I think, unfortunate that an independent accountant was not called to investigate the books of QDSV and to give a breakup of costs. In respect of items (ii) and (iii), Mr Hodge included such matters as the cost of the label, which is irrelevant as the description in the label does not refer to the label itself. Moreover, all overheads were included, including the cost of effecting sales. Also included in the Australian costs were the costs of the employee who travels to and from China constantly to supervise the production being undertaken by the Chinese firm. Included also were the costs of any

I think that I need not attempt to work out a precise figure for myself. It may be noted that, in the Trade Regulation Reporter, 7775 at 11,442, there is a note of

advisory opinions in the United States in which it was thought that, if 23% of the cost of

a computer was accounted for by foreign parts, it would be improper to designate the computer as "Made m USA" and, if 20% of the component parts were imported, it would be improper to label a product as manufactured by a particular American company. I do not rely upon these mdications as authorities, but simply as indications that the relative costs incurred in relation to what was done in China and what was done in Australia in the present case are in the range where, if the case is such as to make the

finding appropriate, it could be held that the words "Made in Australia" were misleading.

Of course, a difficulty in using a comparison of this type is that the wages in China are so much lower than those in Austraha. Accordingly, a mere comparison of cost does not accurately indicate the extent of the work done in one country as against that carried

In Thorpe v CA Imports Pty Limited (1990) ATPR 940-996, Sheppard J held that the labelling of a toy koala as "Made mm Australia" was misleading. At 50,966-7, Sheppard

"It seems to me that there were three essential steps in the process of manufacture that 1s Nn question In saying this, I agree with submissions made by counsel for the prosecutor that it 1s not appropriate to include the designing of the koala bears as a step in their manufacture Many articles are designed m one country, but made in another. The first essential step was the cutting and sewing of the material to form the casing, the second, the filling of the casing, and the third, the further sewing and checking procedures, It 1s true that, of these, only the first was carried out in Korea, but in my opinion that was the step which transformed the material which was used into the essential shape and appearance of a koala bear. It 1s equally truc that each of the three steps was an essential element in the production process. Without any one of them, no koala bear would have been produced. So it might be just as wrong to say that the bears were made in Korea Only a statement such as I have formulated above correctly describes the position As Jenkinson J. poimted out in the Wes Lofts case [Korozynsia v Wes Lofts (Aust) Pty Ltd (1986) 10 FCR 348], a statement such as 'Made in Australia' 1s an historical statement. The expression suggests at least substantial manufacture in Australia. In my opinion the fact that the casings were cut and sewn 1n Korea prevents

the statement from being one which can be correctly applied to the articles in question here"

It should be noted, however, that in that case, the work done in Korea completed the koalas to a much greater extent than occurs in the present. The facial features were completed, and the ears, the legs and the body were all sewn together in Korea. When, the casings, which were inside out when imported, were turned in Australia, there was

in appearance a bear, though a bear which lacked filling.

In the present case, the imported components were too separate and mcomplete

In Netcomm (Australia) Pty Limited v Dataplex Pty Limited (1988) 81 ALR 101,

Gummow J discussed the words "Made 1n Australia" in this way, at 106-7:-

"What then 1s meant by a false or misleading representation concerning the place of origin of goods? 'Origin' directs attention, consistently with the Oxford English Dictionary meaning, to the beginnings of existence of the goods with reference to a source or cause of that existence, the concept is that of beginning regarded in connection with its cause. In s 4(1) of the TP Act, 'goods' 1s defined as including such sophisticated items as ships and aircraft as well as primary produce such as mmerals and crops. With munerals or crops, 1t may be quite easy to state what 1s their place of origin and so to characterise represcntations concerning that place of origin as being or not being false ot misleading The concept of 'place of origin' will present difficulties where sophisticated articles derive their value and character as articles of commerce by various circumstances involving design and manufacture. There 1s then more likely to be a complex of integers constituting the origin of those articles. The present 1s such a case.

To say of goods that they were made m Australia plainly is to make a statement concerning their place of origin The making of goods involves the steps and procedures which preceded and resulted m the formation or composition of the goods: cf Korczynska v Wes Lofts (Aust) Pty Lid (1986) ATPR 47-206 at 47,212 When used im relation to equipment, such as the DPX-224 modem, and without a qualifying context to limit it, the expression 'Made 1n Australia' suggests that the steps in the composition or construction of the item, mcluding the design work which makes it the technically proficient equipment it 1s promoted to be, were taken in Australia The expression will, depending on the context, amount to a representation, and depending on the facts the representation may be false or misleading,"

In the view of Gummow J, the words "Made in Australa" make a representation as to the place of origin and a statement which concerns the steps and procedures which preceded and resulted in the formation or composition of the goods. His Honour distinguished such a statement from "built in Australia" which his Honour, at 107, considered not to relate to the origin in the sense of design and manufacture but rather

Gummow J's exposition was not followed by the draftsman of the Trade Practices Amendment (Origin Labelling) Bill 1994. The Bill provides that the description "Made im Australia" may not be used unless "the goods acquired their essential character or qualities im Australia", of which circumstance the following examples are given in the

"(1) The goods were given their essential function, shape or appearance in Australia. (2) | The mayor processes which transformed the goods from their component parts into the finished goods happened in Australia.

(3) If the goods are promoted as having certain characteristics or functions, the goods were given the characteristics or functions i Australia"

The approach taken in the Bill is similar to that which has been adopted in relation to drawback and preferential tariff provisions of customs legislation. In

Anheuser-Busch Brewing Association v The United States, 207 US 556 (1908) Mr Justice

McKenna, delivering the opinion of the Court, said at 562:-

"Manufacture implies a change, but every change 1s not manufacture, and yet every change 1n an article 1s the result of treatment, labour and manipulation But something more 1s necessary, as set forth and illustrated in Hartranft v Wiegmann, 121 U.S. 609. There must

be a transformation; a new and different article must emerge, 'having a distinctive name, character or use."

The substantial transformation test has had wide application m the United States notwithstanding that, as Joseph A. LaNasa III has observed in 34 Harvard International

*The substantial transformation standard gives customs officials the freedom to apply the standard on a highly subjective, case-by-case basis that often results in seemingly arbitrary decisions. In reviewing these origin determinations, courts have had a great deal of trouble discerning the point at which a processing Operation causes a product to be substantially transformed, and as a result, they have developed a variety of inconsistently apphed criteria. Not only have the courts failed to develop a umform set of criteria for substantial transformation, but they have also apphed the test

inconsistently in similar situations depending upon the purpose of the determination "

The International Convention on the Simplification and Harmonization of Customs Procedures 1973 (the Kyoto Convention) adopted the concept of substantial transformation, though it modified it by the principle of change of tariff heading, as did the US Canada Free Trade Agreement 1988. See G N Horlick & M A Meyer mn Rules

of Origin in International Trade, Vermulst, Waer and Bourgeois eds, 1994, at 404.

I mention these matters so as to emphasise that the substantial transformation test has particular relevance for customs purposes when it is necessary to decide whether a particular manufacturer or importer should obtain the benefit of a drawback or a tariff

preference in the circumstance that parts of the manufacturing process have occurred in

In Australia, as is pointed out by K Steele & D Moulis in Rules of Origin in International Trade at 200, Australian rules of origin did not originate from a need to define the countries from which all goods originated, but rather as specifications of the

conditions under which tariff preference would be accorded to particular goods. The

-12- current provisions, ss 153A-153T of the Customs Act 1901 (Cth), certamly cannot be

Even in the United States, where the substantial transformation test 15 firmly established, matters arising in the context of trade regulation may be considered under somewhat different tests. Thus, the Trade Regulations Reporter, when dealing with the

subject of misrepresentation, states at 17775, p 11,422, inter alia:-

"Cases regarding misrepresentation of origin of products are legion. Issues range from calling domestic products imports and vice versa to use of names of places where products were not made in the product name. Symbols representing origin and language have been attacked. Affirmative disclosure might permit use of some of the challenged appellations

Special care must be taken with respect to products of varied origin, such as perfumes compounded in the United States contaiming oils imported from France, or products 'made in the U.S.A.' containing foreign parts For example, although more than 50% of the parts of a product are of domestic origin, or more than 50% of total cost 1s the result

of domestic labor, it may nevertheless not be unqualifiedly represented as 'Made in U.S.A"

I have already mentioned two of the examples which the paragraph gives.

I therefore approach the current issue by giving to the words used on the label their meaning in ordinary parlance, not the meaning which would be given by the application of the substantial transformation test, or 1ts equivalent, the essential character test which appears in the Trade Practices Amendment (Origin Labelling) Bill. In my opinion, the ordinary meaning of the words "Made in Australia" is that enunciated by

I should say, however, that if the substantial transformation or essential character

test were applied in the present case, I would hold that the component parts were

transformed into a toy koala in Austraha and that, prior to their transformation m Australia, they were merely component parts. In my opmion, the goods obtained their essential character as a toy koala in Australia. The skill exercised m Australia in filling the head and the torso, and in sewing the two parts together at the correct angle, was

Notwithstanding the wide application received by the concept of substantial transformation for the purposes of customs law, this is not the context in which the issue arises in the present case. The present issue is whether consumers in Australia would be misled or deceived or would be likely to be misled or deceived by the respondent's labelling and whether there has been a misleading representation in Australia as to the

In my opmion, the subject toy koalas were manufactured partly in Chima and partly in Australia. This 1s not a case where certain parts which were produced for general sale in another country were purchased and imported into Australia and incorporated into a new product in Australia. The koalas were designed in Australia but were partly manufactured in China by a firm which was producing goods for QDSV and

the production of which was supervised by an employee of QDSV.

In the course of the hearing, evidence was given that, if ingenuity were applied, the torso and/or the head could be converted to uses other than that of making a koala.

That may be so, but the fabric was cut in China for the specific purpose of being made

into koalas and it was there sewn together for that purpose. I did not find the evidence

It is clear that a significant part of the manufacturing process occurred in China. There is also the point that the components, in the sense of all the parts and materials save the fillmg, were produced overseas, in China or principally in China. But it is not necessary, or J think useful, n the present case to attempt to put a precise percentage

upon the extent of the part played by China in the manufacture.

It is in this light that I turn to the second label. It may be noted that, on the reverse side of the label, the words "Made in Australia" are twice as large as any other

words on that side of the label and very much larger than most of the words.

Size is important. The larger the print, the more it catches the eye. Even without his glasses, the trial Judge can read the words "Made in Australia" on that side of the label and also the words "Aussie Born" on the other side of the label; though he cannot

As a matter of strict theory, if words such as "Made in Australia" are misleading and deceptive, qualifying words which are added to render the message accurate should be in the same sized print, for the qualification is just as important as the description

I consider that the words "Made in Australia", in the print size in which they appear, are misleading and deceptive. Only some of the manufacturing process, in the sense explained by Gummow J mn Netcomm, occurred in Australia. A significant part of the manufacturmg process occurred m China and most of the components were

The next matter is the qualification contained m the words "with some imported components". The word "component" 1s ordinarily understood to be "a constituent part". See the Macquarie Dictionary, meaning 2. A consumer would take the term as referring to the materials making up the koala, such as the fur, the nose and the eyes. A

consumer would be misled. Most, not some, of the components are imported.

A statement which appears after "Bush Friends Australia (a wholly owned Australian company)" 1s "The major component of the manufacturing cost is in Australian labour and materials." In the present case, the major component of cost in relation to materials is the cost of the mmported materials. Moreover, the reference to Australian labour fails to direct attention away from the fact that there was substantial Chinese labour involved in the manufacture of the koalas and that labour in China 1s paid at a fraction of the rate of Australan labour. Again, the statement appears to me to be

The next statement is "In order to maintain the highest quality and value, some elements have been purchased abroad." That 1s misleading in several ways because the

word "element" in association with the word "purchased" would be taken to refer to parts

and materials. Most, not some, of these were purchased abroad. Moreover, the reference to "some elements have been purchased abroad" misleads the consumer, for the fact is that the arrangements between QDSV and the Chinese firm mvolve the use of Chinese labour to undertake a part of the manufacturimg process, a process which is supervised by an employee of QDSV. Persons reading the label would not understand that Chinese labour is used in the manufacture of the toy koalas and that this is done,

The use of the trademark "Aussie Born" on the front side of the label enhances the umpression given by the label that, apart from some mmported components, the koala is an Australian product. Thus, the trademark adds to the misleading and deceptive nature of the label. J have not attempted to form a view as to whether the words "Aussie Born" would be misleading and deceptive absent the words "Made in Australia" on the reverse side of the label. The mmputation arismg from the mark could alter depending

upon what was said on the reverse side of the label.

I am of the view that the second label misrepresented the origin of the goods. They were not made m Australia. They were made partly in China and partly in

Australia. Accordingly there has been a breach of s 53(eb) of the Act.

Two other points were raised. It was said on behalf of QDSV that, if an injunction were to issue, the respondent would have to close its factory at Dungog and that the many persons which it employs there on a full or a part-time basis would lose

employment. I understand the argument; but if the label 1s misleading, it should not be

permitted. It would be unfair to the retailers of the koalas, to consumers and to other

manufacturers and importers of competing toys that the respondent should be allowed

Secondly, it was put on behalf of QDSV that the Australia Council had certified the use of the words "Made in Australia" for many products which were manufactured in a manner similar to that of the respondent's koalas. However, such evidence as there is before the Court shows that the material given to the Australia Council, when application was made for certification, did not disclose that there was to be an overseas manufacturing process equivalent to that which the respondent's product undergoes in China. Accordingly, I consider that this part of the evidence was not helpful. Nor did I gain assistance from the examples m evidence of names and packaging of the goods which suggest a connection with Australia. It 1s impossible to deduce from this evidence either that the advertising of other competitors 1s misleading and deceptive or that the

For these reasons, I am of the view that the Commission should succeed in its

I shall make declarations that both labels were in breach of ss 52 & 53(eb) of the Act. There will be an injunction restraming QDSV from sellmg or distributing the toy koalas to which the infringing labels are attached. I shall reserve leave to the Commussion to apply should the Commission seek any further order that QDSV recall

such of the toy koalas with either of the labels attached as yet remain unsold to an

ultimate consumer. The application should be supported by maternal providmg evidence as to the feasibility of a recall, as to the number of toy koalas likely to be involved and as to the likely cost of the recall. Should the Commussion seek a correctional

advertisement, details of the advertisement, of its benefits and costs should similarly be

I certify that this and the 17 preceding pages are a true copy of the reasons for judgment herein of the Honourable Mr Justice Davies.

Solicitors for the applicant: Australian Government Solicitor Counsel for the respondent: P W Neil

Solicitors for the respondent: Chrysiliou Moore Chrysiliou Date of hearing: 9, 10 November 1994

Trade Practices Act 1974(Cth)

At a glance

Court

Decision date

Before

Source

Judgment (137 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (2)

Cited By (1)