Australian Competition and Consumer Commission v Lovelock Luke Pty Ltd

[1997] FCA 1100

FEDERAL COURT OF AUSTRALIA

TRADE PRACTICES - misleading and deceptive conduct - goods described as being “Made in Australia” - goods containing an important component manufactured overseas - whether false or misleading representation concerning the place of origin of goods - whether misleading or deceptive conduct

Trade Practices Act 1974 (Cth): ss 52(1), 53(eb)

Federal Commissioner of Taxation v Jack Zinader Pty Limited (1949) 78 CLR 336 - applied
Korczynski v Wes Lofts (Aust) Pty Limited (1985) 10 FCR 348 - cited
Netcomm (Australia) Pty Limited v Dataplex Pty Limited (1988) 81 ALR 101 - applied
Thorp v C A Imports Pty Limited (1990) ATPR 40-996 - considered
Siddons Pty Limited v The Stanley Works Pty Limited (1991) 29 FCR 14 - cited
Just Juice Corporation Pty Limited (Receiver and Manager Appointed) v Hook (1992) 27 NSWLR 123 - cited
Trade Practices Commission v QDSV Holdings Pty Limited t/as Bush Friends Australia (1994) 128 ALR 551 - cited
QDSV Holdings Pty Limited v Trade Practices Commission (1995) 59 FCR 301- applied

AUSTRALIAN COMPETITION & CONSUMER COMMISSION v LOVELOCK LUKE PTY LTD

NG 679 of 1996

LOCKHART J
24 OCTOBER 1997
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 679  of   1996

BETWEEN:	AUSTRALIAN COMPETITION & CONSUMER COMMISSION APPLICANT
AND:	LOVELOCK LUKE PTY LTD RESPONDENT
JUDGE:		LOCKHART J
DATE OF ORDER:		24 OCTOBER 1997
WHERE MADE:		SYDNEY

THE COURT ORDERS THAT:

1. The application is dismissed;

2. The applicant pay the respondent’s costs of the proceeding.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 679 of 1996

BETWEEN:	AUSTRALIAN COMPETITION & CONSUMER COMMISSION APPLICANT
AND:	LOVELOCK LUKE PTY LTD RESPONDENT

JUDGE:	LOCKHART J
DATE:	24 OCTOBER 1997
PLACE:	SYDNEY

REASONS FOR JUDGMENT

The question in this case is whether Lovelock Luke Pty Ltd (“Lovelock Luke”) has contravened s 52(1) or s 53(eb) of the Trade Practices Act 1974 (Cth) (“the Trade Practices Act”) by representing for the purposes of sale that various kinds of air conditions are made in Australia given that the compressors, being important parts of the air conditioners, are imported.

The respondent, Lovelock Luke, is a wholly owned subsidiary of Email Limited (“Email”), previously the first respondent; but the applicant, Australian Competition & Consumer Commission (“the Commission”) by leave discontinued the proceeding against Email.

Lovelock Luke manufactures and distributes air conditioners to resellers in Australia.

The packaging of the relevant air conditioners contains the words “Australian made” and the logo “Australian made” (“the logo”).  The bodies of the air conditioners also contain the logo.  The logo consists of a green triangle on which appears a drawing of a hopping kangaroo.

Lovelock Luke also causes brochures to be published with respect to its air conditioners which contained various combinations of words including “Made in Australia”, “All are Australian made”, “All Australian”,“All of these room air conditioners are Australian made”, “Australian air conditioners for Australian conditions”, “Australian air conditioning”, “The majority of our air conditioning units are still made in Australia” and the logo “Australian made”.

Lovelock Luke also caused advertisements to be published in various Yellow Pages relating to air conditioners containing the words “Australian made” or “Australian air conditioning for Australian conditions” or the logo together with certain other words which I need not recite for present purposes.

The air conditioners of Lovelock Luke are of various kinds including what are known as “split systems” air conditioners.  

Whilst initially the case included Lovelock Luke’s use of the words “Australian made” and the logo “Australian made” as they applied to the “split systems” air conditioners, that issue has disappeared.

I note that, pursuant to s 87B(1) of the Trade Practices Act, Lovelock Luke gave to the Commission, by way of letter dated 11 September 1996, undertakings that it would cause the immediate removal from all points of marketing, distribution and sale, the brochures entitled “Australian Air Conditioning for Australian Conditions” and “Split Systems” in the form attached to that letter and it undertook to take immediate steps to ensure that all future advertising of Emailair Air Conditioners in the Yellow Pages (Australia wide) do not contain the words “Australian Made”, the logo “Australian Made” or the words “Australian Air Conditioning for Australian Conditions”.  The undertaking also extended to Lovelock Luke agreeing that it would not cause to be published certain advertisements which appeared in Australian Home Beautiful, January 1996 and Australian House and Garden, February 1996 in the form attached to the letter previously mentioned.  The case now concerns other air conditioners produced by Lovelock Luke.

I shall refer hereafter only to the expression “Made in Australia”; but there is no relevant difference between it and the other expressions on the facts of this case.

Components and Operation of Air Conditioners
Air conditioning systems consist of the working fluid (the refrigerant) and four basic components:

• the indoor heat exchanger (in cooling mode this is the evaporator)

• the outdoor heat exchanger (in cooling mode this is the condenser)

• the compressor

• a throttling device, normally consisting of either a TX valve or a capillary tube.  This is a device which induces a high pressure drop.

All air conditioners have at least two heat exchangers, one for the indoor and one for the outdoor.  When the air conditioner is in cooling mode the indoor heat exchanger absorbs heat from the air to be cooled, since the heat exchanger is at a lower temperature than the air to be cooled and heat always flows from a higher temperature to a lower temperature.  The heat absorbed by the heat exchanger evaporates the working fluid (ie. the refrigerant) that is flowing inside.  This heat exchanger in cooling mode in referred to as the evaporator.

Similarly, the outdoor heat exchanger rejects heat.  By reason of the principle of conservation of energy, this is equal to the heat which has been absorbed in the evaporator plus the work input to the compressor.  The heat is rejected from the outdoor heat exchanger because it is at a higher temperature than the outdoor air.  As a result of the heat rejected, the refrigerant passing through the heat exchanger is condensed.  Hence, this heat exchanger is known as the condenser.

These roles are reversed if the air conditioner is run in reverse cycle mode (ie. heating).  In these circumstances, the indoor heat exchanger is the condenser and the outdoor heat exchanger is the evaporator.

An air conditioner functions as follows:

• Warm room air is drawn (via a fan) over the outside of the evaporator tubes where it is cooled before being blown back into the room.  Heat that is removed from this air boils the refrigerant which is inside the tubes.  This refrigerant is supplied to the tubes at low pressure as a liquid via the throttling device and is removed as a gas via the compressor.

• The compressor then increases the pressure of this refrigerant gas to the condenser pressure.  In doing so, the compressor acts as a means of circulating the refrigerant from the evaporator to the condenser.

• In the condenser the high pressure gas is then condensed (at high temperature) to a liquid.  The refrigerant is now a high pressure liquid at high temperature (typically 45-55°C).  The refrigerant which at the outlet of the condenser is at a high pressure and high temperature, is allowed to suddenly drop in pressure using a throttling device.  As a result of the much lower pressure some of the liquid oils off or, as it is sometimes termed, some of the liquid “flashes as gas”.  From the application of the law of conservation of energy, in such a process the enthalpy (which is a measure of the “energy” of the refrigerant) must remain the same.  Since the overall “energy” or enthalpy must remain the same during the throttling process, but there is now some gas which has “flashed off” and it has a much higher enthalpy or “energy level”, then the “energy” or enthalpy of the liquid must drop by the same amount as that of the vapour increase.  This drop for the liquid is represented by a fall in temperature.

• This now completes the cycle.  This low pressure, low temperature liquid enters the evaporator where it absorbs heat from the warm room air drawn over the outside of the tubes.

Therefore, the function of the compressor is to pump the refrigerant vapour “boiled off” in the cooling coil to a condensing pressure commensurate with the cooling medium which will cool the vapour to a liquid.  In a residential air conditioning unit ambient air is normally the cooling medium used for cooling the hot gases when they discharge from the compressor exit into the condensing coil.

There are some essential features that a compressor must possess, namely, it must be capable of pumping a continuous flow of refrigerant gas through a range of pressures which are generated by the evaporating temperature and the condensing temperature, and the refrigerant load conditions; materials within the compressor must be compatible with the type of refrigerant being pumped by the compressor; in residential units the compressor should have a low noise level, it should be gas leak proof and be explosion proof.

The compressor is a vital part of an air conditioning system.  Its performance characteristics are matched via a particular refrigeration fluid to the cooling load and the evaporating and condensing conditions.  If a compressor fails to operate, then since no fluid can be circulated there can be no heat absorption or heat rejection effects and hence no air cooling effect.

For the proper functioning of an air conditioning unit all components must function effectively and the malfunction of a component in the cycle will obviously be reflected in the effectiveness of the unit as an air conditioner.  The compressor is an important and complex component of the vapour compression cycle.

Similarly, the functioning of the evaporator and condenser are fundamental to the performance capabilities of an air conditioner. 

The compressor comprises about 20-30% of the total cost of each of the relevant air conditioners.

There is some conflict between the experts on each side as to whether the compressor is the most important component in the air conditioning process or simply an important component. In my opinion the compressor is a vital component of an air conditioning system.  It does not seem to me to matter whether it is the most important or one of the most important.

There is no practical source within Australia for the supply of compressors for the air conditioners made by Lovelock Luke.  James N Kirby Pty Limited manufactures compressors, but these are only suitable for the replacement or repairs market.  Also they are not of sufficient standard or capacity to be incorporated into the air conditioners that are produced by Lovelock Luke at its factory in Mt Waverley, Victoria.

The production process
The production process by which Lovelock Luke’s air conditioning units are produced should be stated briefly.  Galvanized sheet steel is used for both internal structure and external panels of the air conditioners, the panels once cut to size are then formed or folded into their required shape.  The sheet metal panels are used for the chassis, frames and casings of the air conditioning units.

All panels are painted by a powder coating process.  The panels may be painted in one of a variety of colours, dependent upon the unit.  Any panels which will be in contact with cold air need to be insulated.  This is done by affixing fibreglass or foam insulation to the panel with adhesive.

Copper tubing is used for a variety of purposes in the air conditioner.  Electrical cables are also used.

There is a control box made of sheet metal which has various components fixed to it.  These include a contactor, overload and timer.

The preparation of sheet metal and frames, preparation of the copper tubing and preparation of the electricals are all carried out in parallel for each model.  These processes are then brought together at the stage of final assembly.

At this stage the compressor is bolted to its mounting plate on the base panel and the motor is laid onto the base panel.  The condenser and/or evaporator coils are then mounted into the unit followed by certain copper tubing sub-assemblies.  These copper tubing sub-assemblies join the compressor and coils to create the refrigeration system.

The refrigeration system is then pressure tested to confirm that there are no leaks in it.  It is then evacuated of all air and contaminants for a period of several hours.  While the unit is undergoing the evacuation process the electrical control box is installed into the unit.  Then power wiring from the control box to the compressors and motors is installed.  Following the charging of the unit, the evaporator or blower is installed inside the unit and the motor and the belt drive are mounted onto it.  The evaporator motor is then wired and electrically tied into the unit. 

Finally the condenser fan and its motor are assembled into the unit and the external guard is screwed above the fan.  The side panels are also affixed at this stage.

By this point the unit is essentially complete and ready for a test run which takes place at the assembly run.  A test run is performed on every unit to ensure proper and safe operation.  During this run safety controls are set and readings are taken of pressure, temperature and current and recorded on a test sheet which is completed for each unit.  After the test run is completed final side panelling is affixed, with test panels being removed, and labels are attached to the unit.  The unit is then ready to go to the warehouse for dispatch.

Submissions
Section 52(1) is too well known to need restatement. Section 53(eb) provides that a corporation shall not in trade or commerce, in connexion with the supply or possible supply of goods or services or in connexion with the promotion by any means of the supply or use of goods or services, make a false or misleading representation concerning the place of origin of goods.

It was argued by the Commission that a representation without qualification that goods are “Made in Australia” would ordinarily have the meaning that the goods are made wholly in Australia or, in other words, they are not made wholly or partly overseas.

It was submitted that a representation without qualification that complex manufactured goods such as air conditioning units involving a number of sophisticated components are “Made in Australia” would ordinarily have the meaning that:-

(a)       all the important steps in the manufacturing process have occurred in Australia; and

(b)       all the important components have originated in Australia.

It was argued that, because the compressors are critical to the efficient operation and marketing of the air conditioners produced by Lovelock Luke, and because the compressors represent a significant part of the overall cost of the air conditioners produced by Lovelock Luke, their importance is such that to represent that the air conditioning units are made in Australia when the compressors are not made in Australia, contravenes the two statutory provisions in question.

Counsel for the Commission submitted that the expressions used by the respondent could have been qualified so as to render them accurate.  One suggestion was a representation that the air conditioners are “Built in Australia” and another suggestion was that the air conditioners are “Made in Australia from Australian and Imported Components”.  This submission is not relevant to the issue of whether the representations before the Court are misleading.  However, I accept that the suggested expressions would probably leave the consumer better informed.

Lovelock Luke’s case is that an article of trade is “Made in Australia” where it:

(a)       is wholly designed in Australia;

(b)has no components save the compressor, which is alleged to have been made outside Australia; and

(c)is wholly manufactured in Australia in the sense that all its components are put together so as to constitute something different from those out of which it is made.

Conclusion

In a related field of discourse, in Federal Commissioner of Taxation v Jack Zinader Pty Limited (1949) 78 CLR 336, Dixon J at 343 dealt with the question whether fur coats, stoles, capes and collars formed by remodelling fur garments are for the purposes of the Sales Tax Assessment Act (No 1) 1930-1942, goods manufactured and sold. His Honour cited from the judgment of Darling J in McNicol v Pinch [1906] 2 KB 352 at 361:

“The essence of making or of manufacturing is that what is made shall be a different thing from that out of which it is made.”

Dixon J posed the decisive question as being whether the garments which result from the process of remodelling are different things, that is are different “goods”, from the garments that the customer hands over.  He said it was perhaps rather a question of fact than of law. 

Williams J said words much to the same effect (at 350).  Once the work done to various goods causes the goods to lose their original character they become goods within the meaning of the sales tax legislation.

The question in this case is whether Lovelock Luke has contravened s 52(1) or s 53(eb) of the Trade Practices Act by representing for the purposes of sale that its air conditioners are “Made in Australia” when the compressor, being an important part of an air conditioner, is imported.  The relevant principles have been discussed in a number of cases: Korczynski v Wes Lofts (Aust) Pty Limited (1985) 10 FCR 348; Netcomm (Australia) Pty Limited v Dataplex Pty Limited (1988) 81 ALR 101; Thorp v C A Imports Pty Limited (1990) ATPR 40-996; Siddons Pty Limited v The Stanley Works Pty Limited (1991) 29 FCR 14; Just Juice Corporation Pty Limited (Receiver and Manager Appointed) v Hook (1992) 27 NSWLR 123; Trade Practices Commission v QDSV Holdings Pty Limited t/as Bush Friends Australia (1994) 128 ALR 551 (per Davies J); QDSV Holdings Pty Limited v Trade Practices Commission (1995) 59 FCR 301 (on appeal).

The question of origin labelling was addressed in the Trade Practices Amendment (Origin Labelling) Bill 1994 which has lapsed.  In general terms, that Bill provided that the description “Made in Australia” could not be used unless the goods acquired their essential character or quality in Australia.

In this area of the discourse it is desirable that rigid rules are not set down; the words of the statute speak clearly enough. Whether an article of commerce is “Made in Australia” must be determined by reference to the circumstances of each case.  Some articles may consist of parts manufactured either wholly abroad or partly abroad yet fully assembled here.  It may be apposite in some cases to refer to such articles as being Australian made because the purchasers or potential purchasers know that the parts are manufactured either wholly or partly abroad.  In the case of some goods the meaning conveyed by the expression “Australian Made” may be that all the components are manufactured in Australia and assembled here.  In some cases where the goods are designed may be irrelevant; this was the view adopted by Sheppard J in Thorp.  In the case of other articles the fact that they are designed in Australia may be important in considering the question whether they are “Made in Australia”.  I cannot emphasize enough the need to look at each particular set of facts to determine the answer to this question.

In examining the facts in this case I acknowledge the importance of having regard to the nature of the product itself and the expectations and likely understanding of purchasers: Sackville J in QDSV Holdings at 309.

With respect to the nature of the air conditioners the remarks of Gummow J in Netcomm, at 106-7, are apposite:

“With minerals or crops, it may be quite easy to state what is their place of origin and so to characterise representations concerning that place of origin as being or not being false or 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 is then more likely to be a complex of integers constituting the origin of those articles.”

This case is concerned with air conditioners which have many component parts.  In the 1990s markets and manufacturing processes are becoming increasingly global and in the case of some manufactured goods there is an growing tendency for them to be made in a number of countries. Purchasers expect that in such an environment it is unlikely that a sophisticated good consisting of many components would be wholly manufactured in Australia. In these circumstances it is unlikely that purchasers would understand the expression “Made in Australia” to mean that the air conditioners are wholly made within Australia.

In my opinion, the best means in this case of determining whether the place of origin of the air conditioners is Australia is to ask the question: have the air conditioners been substantially manufactured in Australia? See QDSV per Sackville J at 310-313, Thorp per Sheppard J at 50,966-50,967.

The starting point in this exercise is that the air conditioners are wholly designed in Australia. The design is, in my opinion, relevant and important to the question in issue, although I accept that in some cases it may not be so.

The air conditioners are also wholly assembled in Australia. This is another important factor to consider.

The next question is where the components of the air conditioners are made. The parties agreed that all of the essential components are made in Australia except for the compressor. As I discussed earlier, the compressor, condenser and evaporator are all vital components of the air conditioners.

Taking the above factors into account, on balance I find that the air conditioners have been substantially manufactured in Australia and that the use by Lovelock Luke of the words “Made in Australia”, together with the logo, is not misleading or deceptive conduct within the meaning of s 52(1) and not a false or misleading representation concerning the place of origin of the air conditioners within s 53(eb).

The application is dismissed with costs.

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Lockhart

Associate:

Dated:            24 October 1997

Counsel for the Applicant:	Mr B W Walker SC Mr S Gageler
Solicitor for the Applicant:	Australian Government Solicitor
Counsel for the Respondent:	Mr T E F Hughes QC Mr A S Martin
Solicitor for the Respondent:	Clayton Utz
Date of Hearing:	1 September 1997
Date of Judgment:	24 October 1997