FTC: Some "Made in USA" Claims Don't Stick to the Facts
As we discussed recently (here), the FTC's Enforcement Policy Statement on US Origin Claims (the Policy Statement) explains that companies should not make an unqualified "Made in USA" claim for a product unless "all or virtually all" of the product is made in the United States. To satisfy this standard, the final "substantial transformation" of the product (i.e., the last major step in processing or assembly) must take place in the United States. In addition, the product must contain no more than a "de minimis, or negligible" amount of foreign raw material or parts.
Over the past year, the FTC has applied the "all or virtually all" standard to several glue products that were made in part from foreign raw materials. Most recently, the FTC filed a complaint in federal district court against Chemence, Inc., which manufactures glue products that are sold under Chemence's own name and by private-label sellers. Chemence makes "Made in USA" claims on packaging and promotional materials for its own products and it also distributes these materials for use by sellers of private-label products. According to the FTC, the products fall short of the "all or virtually all" standard because "a significant proportion (approximately 55%)" of the cost of the raw materials is attributable to imported chemicals, which are essential to the function of the products. Thus, the FTC alleges that Chemence deceives consumers by making "Made in USA" claims for its own products and provides the "means and instrumentalities" to deceive consumers by distributing materials containing "Made in USA" claims to private-label sellers. (The FTC’s suit is against Chemence only, not any private-label sellers.)
Prior to filing the action against Chemence, the FTC issued closing letters in April, June, September 2015 addressing "Made in USA" claims by other glue manufacturers. The closing letters describe the FTC's objections to the claims and explain how the manufacturers resolved the matters by voluntarily changing their labeling. In each letter, the FTC acknowledged that the "substantial transformation" of raw material into glue had occurred in the United States. But the FTC deemed the "Made in USA" claim deceptive because the finished products were made from foreign raw materials that were "significant" to the final products. To determine the significance of the foreign raw materials, the FTC applied factors outlined in its Enforcement Policy Statement—(1) the percentage of manufacturing costs attributable to foreign raw materials, (2) the significance of the foreign raw materials to the final product, and (3) how far removed from the finished product the foreign materials are. In each case, the manufacturer agreed to change its claims to say “Made in USA, with Foreign Materials" (or similar wording).
The FTC's recent scrutiny of glue manufacturers provides lessons for other businesses. When considering whether to make a "Made in USA" claim for a product containing foreign materials, sellers must evaluate carefully whether the foreign materials are "significant" in terms of cost, function, or role in the manufacturing process. Sellers must also consider state laws that diverge from the FTC's Policy Statement, such as California's law, which was recently amended to permit "Made in USA" claims if foreign parts constitute no more than five percent of the wholesale value of the product (or ten percent if the parts cannot be obtained domestically). A seller that affixes a "Made in USA" claim to a product without adhering to the Policy Statement and relevant state law could find itself in a sticky situation with the FTC and state enforcers, not to mention plaintiff's lawyers who base consumer class actions on such claims.
© 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.