April 23, 2015

"Made in the USA" Update: California Law Upheld and FTC Closes Investigations

Seller Beware: Consumer Protection for Insights for Industry

A California federal court denied a motion to dismiss challenging California's strict law regulating the use of "Made in the USA" claims on preemption and constitutional grounds. As we have previously discussed, California's stringent standard prohibits describing merchandise as "Made in the USA" if "any article, unit or part" has been "entirely or substantially" made outside the US. This is stricter than the FTC's guidance under the Federal Trade Commission Act, which permits using "Made in the USA" if the product is "all or virtually all" of US origin. The defendants sought to dismiss the class action complaint alleging that jeans they sold violated the California law because they contained parts made outside the US, including "fabric, thread, buttons, subcomponents of the zipper assembly, and/or rivets.

Defendants Macy's, Amazon subsidiary BOP, and jeans company Citizens of Humanity argued that the California law is preempted by the FTC's regulation because the law poses an obstacle to accomplishing one of the FTC's objectives: encouraging domestic manufacturing by allowing businesses to use the "Made in the USA" label.

In rejecting the defendants' argument, the court found that complying with both standards is not impossible because the FTC's regulation permits, but does not require, calling clothing that is "all or virtually all" made in the US "Made in the USA". The court further found that "if" promoting domestic manufacturing is indeed an FTC objective, the California law does not pose an obstacle because it "surely . . . encourages some manufacturers to complete all of their manufacturing in the United States."; Finally, the court adopted the reasoning of a California federal court decision last year holding that the California law allows the use of qualified labels—such as "Made in the USA of imported fabric"—and is therefore not in conflict with the Federal Textile Fiber Products Identification Act (TFPIA), which requires garments "processed or manufactured" in the US to include a "Made in the USA" label.

The court also rejected the defendants' argument that the California law violates the dormant commerce clause. It explained that California has a legitimate interest in combating deceptive advertising, and its law does not unduly burden interstate commerce because manufacturers can use qualified labels on their products and need not create separate labels for products sold in California.

This decision is consistent with the general tendency of California courts to be hostile toward preemption arguments and strive to reconcile federal and state requirements. And although California's law effectively modifies the FTC's regulation—since it's generally not feasible for businesses to create separate labels for products sold in California—companies should not expect California courts to be sympathetic. Indeed, this court acknowledged that using separate labeling or adhering to the California standard nationwide "may be burdensome or frustrating for Defendants" but found no preemption because "it is not impossible." As an alternative, businesses may want to consider qualified labeling, which two California federal courts have now found would satisfy the California law.

In other "Made in the USA" news, the FTC closed two investigations based on the corrective action taken by the advertisers. In its investigation into Office Depot's "Made in USA" claims on certain private label desks, Office Depot explained that the mislabeling was inadvertent, and agreed to remove the claims from the affected products and increase legal review of the company's US-origin claims. The FTC also closed its investigation into certain Toagosei America adhesive products that were labeled "Made in USA" but contained raw materials substantially sourced abroad. Toagosei agreed to instead use the label "Made in USA with Foreign Materials" and to modify existing packaging so that unqualified claims are not visible. In both cases, the FTC reserved the right to take action in the future. So, while the FTC continues to investigate "Made in USA" claims, it appears that under the right circumstances, swift, comprehensive, and effective corrective measures my help avoid an enforcement action.

© Arnold & Porter Kaye Scholer LLP 2015 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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