With topics relating to the trade war hitting major headlines, businesses have been adjusting their strategies to face this political and economic turmoil. The uncertainties of the U.S. – China relationship have forced companies to reevaluate their supply chain in China. Evidence shows that many companies have moved their supply chain out of China. However, the U.S. administration’s goal is not just to move business from China to other countries such as Vietnam or the Philippines. Instead, the United States is aiming to move manufacturing business back to the U.S.
Under these circumstances, there is a surge among U.S. companies, especially manufacturing businesses, in utilizing the “Made in USA” designation as a patriotic marketing tool for the purpose of driving sales. However, in today’s highly interdependent global economy, companies should understand laws regulating U.S. origin claims before waving the American flag.
The Federal Trade Commission (FTC) regulates product representations that may be deceptive or unfair to U.S. consumers, including using U.S. origin claims. Claims that a product is “Made in USA” (an “unqualified claim”) or “Partially Made in USA” (a “qualified claim”) are subject to the Federal Trade Commission Act (15 U.S.C. §45) and various state consumer protection laws.
Unqualified “Made in USA” Claim
An unqualified “Made in USA” claim can be either express or implied. Examples of express claims include “Made in the USA” or “Our products are American-made.” In identifying the implied claims, the FTC focuses on the overall impression of the advertising, label, and promotional materials. For example, U.S. symbols or geographic references, such as U.S. flags and outlines of U.S. maps, may convey a claim of U.S. origin.
To make an unqualified “Made in USA” claim, the product must be “all or virtually all” made in the U.S., and the marketer shall have “competent and reliable evidence” to substantiate such claim.
“All or Virtually All” Standard
“All or virtually all” means that all significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no – or negligible – foreign content. The FTC has articulated its “all or virtually all” standard that “a product can be labeled as Made in the USA if it contains only de minimis, or a negligible amount of foreign content.” However, this standard is unclear and ambiguous. As the FTC stated, there is no bright line to establish when a product is “all or virtually all” made in the U.S.. Because of the complex nature of factual scenarios in this area of law, issues will be resolved on a case-by-case basis. However, there are certain factors the FTC will look to in making its determination.
The first factor is that the product’s final significant manufacturing or processing must be done in the U.S. This requirement means that the product must be substantially transformed in the U.S. A substantial transformation is a manufacturing or other process that results in a new and different article of commerce, having a new name, character, and use that is different from that which existed before the processing. Even though a product is last substantially transformed in the U.S., if the product is thereafter assembled or processed (beyond de minimis finishing process) outside the U.S., the “all or virtually all” standard is not met. For example, if a product is manufactured primarily in the U.S. but then sent to Canada or Mexico for final assembly, then any U.S. origin claim should be qualified to disclose the assembly that took place outside the U.S.
After the FTC is satisfied with the first factor, it will then examine the portion of the total manufacturing costs of the product that is attributable to U.S. parts and processing. To calculate the total manufacturing cost, the marketer should use the cost of goods sold or inventory costs of finished goods in its analysis. Such costs are generally limited to the total cost of all manufacturing materials, direct manufacturing labor, and manufacturing overhead. The FTC states that there is no fixed point at which a product is considered to be “all or substantially all” made in the U.S. Rather, the FTC will conduct case-by-case analysis by balancing the proportion of the U.S. manufacturing costs along with other factors and taking into account the nature of the product and the consumer’s expectation. But, for example, the FTC has held that a product with foreign parts that made up 15% of the total manufacturing cost could not be labeled “Made in USA.” In addition to federal law, some States have enacted laws restricting Made in USA claims. For example, Section 17533.7 of California Business and Professions Code prohibits any person or entity from making an unqualified “Made in USA” claim unless the foreign parts of a finished product constitute no more than 5% of the total manufacturing cost (or if foreign parts cannot be manufactured in the U.S., then they may constitute no more than 10%).
Lastly, to satisfy the “all or virtually all” standard, the importance of foreign content or processing should be far removed from the finished product. In other words, the product must not have foreign components that consumers would reasonably view as significant to the final product. In some instances, only a small portion of the total manufacturing costs are attributable to foreign processing, but that processing represents a significant amount of the product’s overall processing. In these cases, the foreign content is more than negligible, so unqualified claims are inappropriate. For example, a table lamp is assembled in the U.S. from American-made brass and lampshade and an imported base. Even though the base accounts for a small percent of the total cost of making the lamp, an unqualified “Made in USA” claim is deceptive for two reasons: the base is not far enough removed in the manufacturing process from the lamp to be of little consequence, and the base is a significant part of the lamp.
Competent and Reliable Evidence
A claim is considered deceptive unless, at the time the claim is made, the marketer possesses and relies upon a reasonable basis substantiating the claim. This means that the marketer needs competent and reliable evidence to back up the claim that its product is “all or virtually all” made in the U.S. To satisfy the “competent and reliable evidence” requirement, the marketer can rely on, if given in good faith, information provided by suppliers about the domestic content in the parts or components such suppliers produce, including raw materials. Therefore, when a marketer purchases a component from a U.S. supplier, the marketer may not assume that the component is 100% U.S. made. Rather, the marketer has an affirmative duty to conduct reasonable due diligence investigation so that the marketer will have “competent and reliable evidence” to make an unqualified “Made in USA” claim. The marketer shall maintain accurate documentation substantiating its country of origin claim.
The marketer and/or its suppliers should look back far enough in the manufacturing process to be reasonably sure that any significant foreign content has been included in their assessment of foreign costs. Foreign content incorporated early in the manufacturing process will be less significant than content that is a direct part of the finished product or components produced by the immediate supplier. As the FTC noted, “even where a raw material is nonindigenous to the United States, if that imported material constitutes the whole or essence of the finished products, it would likely mislead consumers to label the final product as an unqualified Made in USA claim.”
Qualified “Made in USA” Claim
If one of the marketer’s products does not meet the “all or virtually all” standard but the product contains a significant U.S. content or U.S. processing, the marketer can make a qualified claim to highlight the Made in USA advantage without deceiving consumers. For example, the marketer may make claims like “80% U.S. content” or “Made in USA of U.S. and imported parts.”
“Assembled in USA” Claim
If a product contains a large portion of foreign components, then it is not eligible to make either the unqualified or qualified “Made in USA” claim. But the marketer may make an “Assembled in USA” claim if the product’s principal assembly takes place in the U.S. A product that includes foreign components may be called “Assembled in USA” without qualification when its principal assembly takes place in the U.S., and the assembly is substantial. For the assembly claim to be valid, the product’s last substantial transformation should have occurred in the U.S.
Conclusion
Failure to comply with laws regulating country of origin claim may result in fines, regulation and litigation costs and, damage of company’s good will, etc. With product contents and components costs constantly changing, companies should regularly review their product information to make sure the products are really “Made in USA.”