One enduring puzzle of interstate commerce is the fact that the common advertising phrase “Made in the USA” may mean different things under federal and state law. To the Federal Trade Commission (FTC), the claim means that “all or virtually all” of the product in question was assembled or manufactured in the United States, even if the product includes imported content such as raw materials and component parts. In California, by contrast, the claim means that not only the finished product, but also 90-95 percent of the product’s components, were “made in America.”
In May of this year, the Senate Committee on Commerce, Science, and Transportation favorably reported to the full Senate a draft bill from Senator Mike Lee [R-UT] that would resolve this conundrum by making the FTC solely responsible for regulating labeling claims regarding domestic origin, such as “Made in the USA,” “Made in America,” and equivalent claims (MUSA claims). If enacted, the Reinforcing American-Made Products Act of 2017 (S.118) would preempt conflicting state laws for products sold, advertised, or offered for sale in interstate or foreign commerce. By preventing states from enacting a conflicting “patchwork” of regulations that impose more stringent standards for MUSA claims that those required by the FTC, the proposed bill would simplify compliance for consumer-product companies that advertise and sell their goods across state lines. Nowhere is that compliance issue more challenging than in California, where the state’s uniquely restrictive MUSA statute, even after significant amendment in 2015, requires special attention from companies trying to do business in the nation’s largest consumer market.
The New Status Quo: How the FTC Regulates MUSA Claims Nationally
No federal statute imposes specific standards for making MUSA claims. Instead, under 15 U.S.C. § 45a (Labels on Products), the FTC regulates MUSA claims by applying its broad authority to prevent unfair or deceptive acts and practices under Section 5 of the FTC Act (15 U.S.C. § 45(a)(1)).1
The FTC identifies two broad categories of MUSA claims: unqualified claims and qualified claims. Unqualified claims do not acknowledge any non-U.S. processing or content: for example, labels that simply state “Made in the USA” or “Made in America.” Qualified claims, by contrast, disclose that only a portion of the production or manufacturing process occurred in the United States: for example, “Made in the USA with U.S. and foreign materials,” or “Assembled in the USA from foreign parts.”
Qualified claims are unlikely to be the target of FTC enforcement attention. The FTC permits all qualified MUSA claims, so long as the claim is accurate and does not express or imply more U.S. content than is actually present.2 FTC closing letters demonstrate that the agency is often lenient regarding the amount of foreign content, so long as the last “substantial transformation” of the product occurred in the States.3
Unqualified claims, by contrast, are subject to a higher degree of scrutiny. The FTC forbids unqualified MUSA claims unless “all or virtually all” of the product is made in the United States. There is no bright-line objective test for evaluating such claims, but per FTC guidance, (1) the foreign content must be de minimis or negligible; and (2) the final assembly or processing of the product must take place within the United States. Other factors may also be taken into account, including the portion of the product’s total manufacturing costs that are attributable to U.S. parts and processing.4
The FTC analysis becomes more complicated still if “all or virtually all” of the finished product is made in the United States, but some of the raw materials are imported. In that case, the FTC looks at both (1) the percentage of the finished product’s value attributable to the raw materials and (2) how far removed from the finished product the raw materials are. Under this standard, a gold ring “made” within the United States from foreign gold would likely fail the test for an unqualified MUSA claim, whereas a clock radio with a plastic case made from imported petroleum could very well pass.
When the FTC becomes aware of a potential violation, either on its own initiative or via a competitor or consumer watchdog report, FTC staff will typically contact the company via informal letter explaining the MUSA requirements, outlining the concern of potential violation, and asking for a response. The company must then provide substantiation of the MUSA claim to satisfy the FTC. If the company cannot substantiate its claim, but corrects its erroneous labels and institutes internal measures to ensure future compliance, the FTC will typically issue a closing letter with no further action. In the rare cases that proceed to litigation, defendants rarely fare well.
Changes Ahead: How California Regulates MUSA Claims
If passed, the proposed bill stands to have the most dramatic impact on companies currently marketing products in California—the only state with specific “Made in the USA” labeling laws. California MUSA regulations are currently not preempted by the FTC regulations because they do not prevent compliance with FTC standards, and do not impede the FTC’s regulatory objectives.6 That analysis would change immediately if the proposed bill becomes law, because the FTC standard would then become both the floor and the ceiling for MUSA claims.
Although California’s regulations were recently relaxed to better match the FTC regulations,7 its standards for MUSA claims are still significantly more restrictive than the FTC’s. Similar to the FTC regulations, California law does not subject qualified MUSA claims to the same stringent standards as unqualified claims. Though the language of the California statute is silent, courts have held that qualified MUSA claims such as “Made in the USA of globally sourced components” are permissible under section 17533.7 of California’s Business and Professions Code.8 Qualified claims must still comply, however, with California false advertising law, meaning that they must “accurately describe where a product and all its component parts are sourced and manufactured.”9
California currently limits unqualified MUSA claims to products in which at least 95 percent of the article, unit, or part was made, manufactured, and produced in the United States.10 This standard may be relaxed to 90 percent upon a showing that the article, unit, or part in question cannot be produced or obtained within the United States for reasons other than cost (if, for example, no domestic manufacturer makes the component, or the raw material is not native to the U.S.).11 Interestingly, California is less restrictive than the FTC with respect to foreign sourcing of raw materials. California permits products made from foreign-sourced raw materials to be labeled “MUSA,” so long as the actual making, manufacturing, or producing process that transforms the raw material into a product or product-component occurs within the U.S.12
What Lies Ahead
If enacted, Senator Lee’s bill would essentially eliminate the California standard, leaving the FTC standards as a nationally consistent set of MUSA regulations.
Companies marketing MUSA products should monitor the bill’s progress and take any necessary steps to ensure compliance with FTC standards. The FTC has been relatively vigorous in enforcing its MUSA labeling standard, issuing approximately 57 investigatory closing letters between 2014 and 2016, with 15 closing letters issued in 2017.
The proposed bill is consistent with the Trump administration’s stated commitment to working towards more domestic industry-friendly policies. The Trump administration has demonstrated its interest in highlighting “Made in USA” products, including by declaring the week of July 17, 2017 to be “Made in America Week” in recognition of “the incredible workers and companies who make ‘Made in America’ the world standard for quality and craftsmanship.”13
Similarly, President Trump signed the “Buy American and Hire American” executive order on April 18, 2017 to fully enforce federal guidelines prioritizing the use of American firms and goods in federal projects. These federal guidelines are enshrined in the Buy American Act, which directs the federal government to purchase only American-made goods when possible, but defines American-made goods to be any product assembled in the US with more than 50 percent American-made parts. Companies that sell products to the federal government under provisions of the Buy American Act should monitor the proposed bill to standardize MUSA claims to see if it has a ripple effect on the Buy American Act standards for American-made products.
The proposed MUSA bill, co-sponsored by Lee, Shelley Moore Capito (R-WV), Susan Collins (R-Maine), Deb Fischer (R-Neb), and Angus King (I-Maine), awaits action by the full Senate.