Manufacturers and retailers face a serious and growing risk of California class-action lawsuits when labeling their products as “Made in USA” following a recent court ruling. A California federal judge in Paz v. AG Adriano Goldschmied, Inc. et al. denied Nordstrom’s motion to dismiss a putative class action based on California state labeling laws, finding that the Federal Trade Commission Act (FTCA) and the Textile Fiber Products Identification Act (TFPIA) do not preempt California labeling laws governing use of the “Made in USA” label.

Manufacturers and retailers are being subjected to increasingly high-profile class-action lawsuits based on California state law on country of origin labeling, which is more strict than national rules promulgated by the Federal Trade Commission (FTC). The class actions, including recent cases against retailers Nordstrom and Macy’s, allege that the companies deceived consumers by labeling their products as “Made in USA” when certain components (even relatively minor or insignificant ones) were of foreign origin.

California state law prohibits labeling a product as “Made in USA” if the item or “any article, unit or part thereof” is of non-U.S. origin. By contrast, U.S. FTC rules are less strict, allowing “Made in USA” labeling if “all or virtually all” parts and processing are from the U.S., permitting “Made in USA” claims even if the items contain certain negligible foreign content.

California is the only state in the country to separately regulate this labeling area. Although California’s stringent law has been in place for several decades, class-action lawsuits have only been brought in the last several years, following the California Supreme Court’s 2011 ruling in Kwikset Corp. v. Superior Court, which made it easier for plaintiffs to pursue claims under the state’s unfair businesses statute. 
 
The Paz court analyzed the defendants’ arguments under both “impossibility” and “obstacle” conflict preemption principles, as well as field preemption principles. Although the judge in Paz found, in relevant part, that federal law did not preempt state law under conflict preemption principles because companies could comply with both rules by using separate labels for items in California, that option may not be practical and could be extremely burdensome for companies. Instead, companies may decide to make qualified U.S. origin claims on their labels in order to not run afoul of California’s rules, indicating that the products are assembled or processed in the United States but that the products contain foreign-origin materials.
 
Finally, in addition to California and FTC rules, as is true for all companies importing products with labels containing statements on U.S. origin, a determination must first be made under U.S. Customs rules that the product is properly of U.S. origin pursuant to Customs’ “substantial transformation” principles or other relevant free trade agreement labeling requirements.
 
Because of the complexity of this area and the increased risk of legal liability, we recommend that companies labeling their products “Made in USA,” or using similar language, review the origin and sourcing of every component in their finished products to determine whether their labels may violate California and/or federal law and subject the companies to risk of legal action.