The Federal Trade Commission is empowered to initiate law enforcement actions against false or misleading claims that a product is of U.S. origin. Standards apply to U.S. origin claims that appear on products and labeling, advertising, and other promotional materials, including marketing through digital or electronic mechanisms.
In order to expressly or impliedly refer to a product as Made in USA or to be of domestic origin without qualification, the product must be “all or virtually all” made in the United States. In other words, all significant parts and processing that go into the product must be of U.S. origin. According to the FTC guidance, the product should contain no—or negligible—foreign content and final assembly or processing must take place in the United States.
A product that includes foreign components may be called “Assembled in USA” without qualification when its principal assembly takes place in the United States and the assembly is substantial. For the “assembly” claim to be valid, the product’s last “substantial transformation” should have occurred in the United States.
Unqualified U.S. origin claims must be supported by competent and reliable evidence possessed by the marketer at the time the representation is made. While there is no bright line to establish when a product is or is not all or virtually all made in the United States, there are a number of factors that the FTC considers.
First, the final assembly or processing of the product must take place in the United States. According to the Commission, the country in which a product is put together or completed is highly significant to consumers in evaluating where the product is “made.” Thus, regardless of the extent of a product’s other U.S. parts or processing, in order to be considered all or virtually all made in the United States, the product must have been last “substantially transformed” in the United States.
Even where a product is last substantially transformed in the United States, if the product is sent outside of the United States for more than de minims final assembly or processing, the FTC is unlikely to consider an unqualified Made in the USA claim to be truthful.
After that, the Federal Trade Commission considers the proportion of the product’s total manufacturing costs that are attributable to U.S. parts and processing (i.e., U.S. parts and processing vs. foreign costs). Where the percentage of foreign content is very low, it is more likely that the FTC will consider the product all or virtually all made in the United States. The FTC considers when products become all or virtually all made in the United States on a case-by-case basis by balancing the proportion of U.S. manufacturing costs, the nature of the product and consumer expectations.
The FTC will then consider how far removed any foreign content is from the finished product. FTC guidance states that manufacturers and marketers should use the cost of goods sold or inventory costs of finished goods in their analysis. Such costs generally are limited to the total cost of all manufacturing materials, direct manufacturing labor and manufacturing overhead. As a general rule, in determining the percentage of U.S. content in its product, a marketer should look far enough back in the manufacturing process that a reasonable marketer would expect that it had accounted for any significant foreign content. In other words, a manufacturer who buys a component from a U.S. supplier, which component is in turn made up of other parts or materials, may not simply assume that the component is 100 percent U.S. made, but should inquire of the supplier as to the percentage of U.S. content in the component. Foreign content that is incorporated further back in the manufacturing process, however, will often be less significant to consumers than that which constitutes a direct input into the finished product.
Raw materials are neither automatically included nor automatically excluded in the evaluation of whether a product is all or virtually all made in the United States. Instead, whether a product whose other parts and processing are of U.S. origin would not be considered all or virtually all made in the United States because the product incorporated imported raw materials depends on what percentage of the cost of the product the raw materials constitute and how far removed from the finished product the raw materials are.
Typically, if the FTC initiates an investigation, it will require the implementation of qualified Made in USA claims that describe the extent, amount or type of a product’s domestic content or processing. Qualified Made in USA claims are appropriate for products that include U.S. content or processing but do not meet the criteria for making an unqualified Made in USA claim. Qualified claims for products that do not contain a significant amount of U.S. content or U.S. processing should be avoided.
Claims that a particular manufacturing or other process was performed in the United States or that a particular part was manufactured in the United States must be truthful, substantiated, and clearly refer to the specific process or part, not to the general manufacture of the product, to avoid implying more U.S. content than exists.
Companies are often provided with an opportunity to implement a remedial action plan by qualifying its representations. Remedial action plans typically include phasing-in accurate qualified claims on packaging and the products, masking unsubstantiated claims on packaging and that are visible to consumers at the point of sale, masking unsubstantiated claims on digital photographic images, updating websites and promotional materials, contacting distributors with instructions to properly mask unsubstantiated claims, updating advertising materials distributed to third-party distributors, and designing legal policies and procedures.
The agency has noticeably increased the number of “Made in the USA” investigations and enforcement actions this year. Most recently, the FTC announced two proposed settlements and final order arising from allegedly deceptive claims by a New York hockey puck seller, a California-based backpack business and an online mattress company.
A number of senators subsequently urged the Federal Trade Commission to adopt tougher-enforcement measures. Sens. Sherrod Brown, Tammy Baldwin and Christopher Murphy wrote to FTC Chairman Joseph Simons encouraging the FTC to use its “full statutory authority” in similar cases going forward.
“We do not believe ‘no-fault, no-money’ settlements adequately penalize companies that have taken advantage of American consumers, nor do they adequately deter other companies from committing future violations,” the senators wrote. “If the consequences of misusing the ‘Made in the USA’ label do not include paying fines or admitting wrongdoing, it is unlikely that bad actors will be deterred from using the same deceptive tactics to sell their products in the future.
Takeaway: As a result of the FTC’s recent focus on U.S. origin claims, manufacturers of products labeled or advertised with U.S. origin claims should familiarize themselves with recent investigation and enforcement actions.
Richard B. Newman is an Internet marketing compliance and regulatory defense attorney at Hinch Newman, focusing on advertising and digital media matters