Avoid Sticky "Made in U.S.A" Situations
The latest in a line of Federal Trade Commission (FTC) enforcement actions challenging "Made in USA" claims by manufacturers was recently resolved with a stipulated order in the FTC's lawsuit against the glue manufacturer Chemence, Inc. The FTC's lawsuit alleged that Chemence engaged in misleading practices by labeling and marketing its glue products Kwik Frame, Kwik Fix, and Krylex as "Proudly Made in the USA" or "Made in the USA." (See our previous post on the FTC's complaint against Chemence).
In addition to a monetary judgment of $220,000 against the glue manufacturer, the stipulated order prohibits Chemence from making unqualified "Made in USA" claims for any product unless it can show that the product's final assembly or processing – and all significant processing – take place in the United States, and that all or virtually all ingredients or components of the product are made and sourced in the United States.
As we discussed in other posts, in order for a product to be labeled or advertised as "Made in the USA," the FTC requires that "all or virtually all" of the production and content of the product be of U.S. origin. According to the FTC’s Enforcement Policy Statement on US Origin Claims, "all or virtually all" made in the United States means that all significant parts and processing that go into the product are of U.S. origin. Therefore, the product should contain only "a de minimis, or negligible, amount of foreign content." Among other factors, the FTC assesses the portion of the product's total manufacturing costs that are attributable to U.S. parts and processing, and how far removed from the finished product any foreign content is. California, on the other hand, has a bright-line rule that allows a product to be labeled as "Made in USA" as long as foreign parts compromise no more than 5% of the product, or 10% if the manufacturer can establish that the part is not domestically made (See our post discussing the California law that went into effect earlier this year).
According to the FTC's complaint, Chemence failed to meet the "all or virtually all" standard because its glue products are made with a significant amount of imported chemicals. Specifically, the FTC alleged that approximately 55% of the costs of the chemical inputs to the glues are attributable to imported chemicals that are essential to the glues' function.
The Chemence case is part of the FTC's effort to closely scrutinize glue manufacturers' "Made in USA" claims. In the past, however, the FTC had only issued closing letters to glue manufacturers making "Made in USA" claims. In those instances, the FTC decided that no further enforcement action was necessary because the companies were taking corrective actions to remove or modify their "Made in USA" claims on labeling, advertising, and websites. (See closing letters in April, June, and September 2015).
These glue cases are a reminder that businesses making unqualified "Made in USA" claims need to evaluate carefully whether foreign-sourced ingredients and other inputs are "significant" to the final product in terms of cost, function, or role. Even if an unqualified claim is not appropriate, a qualified claim—such as "Made in USA of Domestic and Imported Materials" —may be. The Chemence case in particular also illustrates that prompt and comprehensive corrective actions may help companies avoid a costly and burdensome FTC order. Businesses should also check their "Made in USA" claims against California's statute. It is at least conceivable that products that meet the FTC standard may not automatically meet the California standard, and vice versa.
© Arnold & Porter Kaye Scholer LLP 2016 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.