Australian made, foreign ingredients and "the ever-present threat of burp-back"

What you need to know

• The Federal Court of Australia has rejected an application by Nature's Care Manufacture Pty Ltd to label its fish oil product "Australian made".
• In doing so, the Court has provided useful guidance on interpreting the country of origin labelling provisions of the Australian Consumer Law.
• The ACCC has reinforced that it will continue to take action to maintain consumer confidence in country of origin claims.

What you need to do

• Ensure your country of origin labelling practices are robust and that your regulatory team or advisors are aware of this new guidance.

"Made in Australia"

In a recent decision of the Federal Court of Australia, Justice Perram addressed the question of "when is it permissible to claim that goods manufactured in Australia from ingredients sourced from overseas are 'Made in Australia'?" In doing so, his Honour has provided useful guidance for manufacturers of products in Australia using imported ingredients.

Cosmopolitan capsules

Nature's Care Manufacture Pty Ltd (Nature's Care) markets a range of "Fish Oil + Vitamin D" capsules. These capsules are made from three ingredients:

• fish oil from Chile;
• vitamin D from China; and
• gelatine sheets, made from glycerol from Indonesia as well as water and gelatine from Australia.

The ingredients are imported in raw form, and then made into gel capsules in Australia in a sophisticated process.

Nature's Care had used the well-known "Australian made and owned" kangaroo (Logo) on its packaging as part of its licensing arrangements with Australian Made Campaign Limited (AMC).

AMC owns the Logo as a certification trade mark, and licenses its use. While AMC decides whether or not to grant licences, it largely adopts the positions of the Australian Competition and Consumer Commission (ACCC).

In March 2018, the ACCC publicly indicated that it does not accept that the encapsulation of imported substances should qualify for "Australian made" claims. Consistently with this view, AMC advised Nature's Care that it would no longer license the "Australian made" Logo from December 2018.
Nature's Care applied to the Federal Court of Australia for a declaration that the capsules could be described as "Australian made" under section 255 of the Australian Consumer Law (ACL), being Schedule 2 to the Competition and Consumer Act 2010 (Cth). Readers may be aware that the key significance of section 255 is that it operates as a protection or "safe harbour" from the ACL prohibitions against misleading and deceptive conduct.

As AMC's position was derivative to the ACCC's, the ACCC intervened and made substantive submissions in the case.

The legal issues

Section 255(1) provides that a "made in …" claim requires that the goods "were last substantially transformed" in the relevant country. Sub-section (2) further explains that a substantial transformation will have occurred where:

Justice Perram considered this test and held that "identity", "nature" and "character" are separate questions, and there need only be a "fundamental difference" in any one. Justice Perram summarised the test as requiring "a fundamental change in the essential characteristics of the imported ingredients collectively".

Are the capsules "made in Australia"

His Honour concluded that the capsules were not substantially transformed in Australia. Key to this finding was the fact that the fish oil and vitamin D in the capsules was identical to the imported ingredients, and the mixing together had not resulted in any chemical change.

This was despite Justice Perram accepting the following differences, which were not sufficient for the "substantially transformed" test:

• The capsules provide a convenient way to deliver the miniscule dose of vitamin D (which a consumer could not ordinarily measure out from the raw ingredient).
• The capsules increase the shelf life of the fish oil.
• The capsules generally conceal the bad flavour of the fish oil, although not entirely (his Honour noted the "ever-present threat of burp-back" where the capsule dissolves in the stomach "releasing its noxious payload" that may rise to the mouth and present "itself as a salutary warning against the perils of belching").

It did not assist Nature's Care that the imported ingredients were fish oil and vitamin D, and the products were marketed as "Fish Oil + Vitamin D".

Lessons for manufacturers

Nature's Care engaged in a sophisticated manufacturing process in Australia. However, this decision makes clear that the test for an "Australian made" claim is not how much work was done, but rather how much the product differs from its raw ingredients.

This is a difficult and technical exercise. Justice Perram himself noted that to some extent it is impossible to compare the essential characteristics of a good with its constituent elements, in the same way that it makes no sense "to ask whether a car is a tyre".

This case demonstrates that factors which may indicate a "substantial transformation" are:

• Chemical change in ingredients, rather than mere mixing together.
• A complete change in a characteristic (eg concealing odour was not sufficient, removing an odour may be).
• Change in form or appearance, where the form or appearance goes to the heart of the nature of the goods (eg blank canvasses being painted).

The ACCC welcomed the decision and clarification on the complex test. The ACCC also indicated that it would continue to take action to preserve consumer confidence in country of origin labels.

Authors:  Joanna Lawrence, Counsel; and Tim Rankin, Lawyer.