This summer, the Federal Trade Commission (FTC) published final rules codifying its long-running standard for “Made in USA” product labels.[i] The Commission also announced its 2022 timeline for rolling out a new version of the Green Guides that focus on environmental claims.[ii] But for legal advisors to advertisers, understanding how to stay out of hot water with the FTC and avoid the litigation bullseye of competitors is more fraught than merely following the latest FTC guidance.
Behind the backdrop and out of the spotlight of federal court, the BBB National Program’s National Advertising Division (NAD) and its National Advertising Review Board (NARB) wrestle with the FTC’s guidance through arguments that test the outer limits of advertising claim standards. Recent challenges between competitors through this self-regulation dispute resolution mechanism reveal that these latest rules from the FTC leave a great deal of gray area still to cover.
Made in USA: ‘All or virtually all’
The test for an unqualified claim of US origin is—and has historically been—whether “all or virtually all” of the product comes from the United States.[iii]
This long-running standard emerged from FTC case law developed in the 1940s.[iv] In 1997 and 1998, the Commission issued guidance elaborating on what it means to be “all or virtually all” domestically made.[v] Through this guidance, the FTC insisted that no “bright line” rule existed to determine whether a product satisfied the standard. Instead, three factors should be considered to determine the validity of a claim: (1) whether the final assembly or processing of the product took place in the United States; (2) the portion of the total manufacturing cost of the product that is attributable to US parts and processing; and (3) how far removed any foreign content is from the finished product.[vi]
Though it might read like a straightforward, factor-balancing test, the first and third factors have more specific requirements. For final assembly, the 1997 guidance explained, “[A] product promoted as ‘Made in USA’ must have undergone its final assembly or processing in the United States. In particular, the product must at minimum, have been last substantially transformed in the United States.”[vii] Foreign content also has a pre-defined limit: a US-made product “should contain only a de minimis, or negligible, amount of foreign content.”[viii]
One complication is that these factors and requirements are conjunctive, not disjunctive. As one recent federal court had to explain to a litigant, simply having final assembly be in the United States is “a necessary but not sufficient condition to satisfy the ‘all or virtually all’ standard.”[ix]
As part of its program to prevent deceptive “Made in USA” claims, the FTC finalized a new rule that went into effect on Aug. 13.[x] Part of the goal of these new measures is to add a civil penalty to deter the “rampant Made in USA fraud” and protect “small businesses that rely on the Made in USA label, but lack the resources to defend themselves from imitators.”[xi]
The other goal is to officially codify the “Made in USA” standard into a final rule.[xii] A product will officially not meet the “all or virtually all” standard unless: “(1) Final assembly or processing of the product occurs in the United States, (2) all significant processing that goes into the product occurs in the United States, and (3) all or virtually all ingredients or components of the product are made and sourced in the United States.”[xiii] Though there remains some flexibility in defining “final assembly” or “significant processing,” the three factors now function as required checkboxes that need to be crossed off before applying a “Made in USA” label.
Though these new—but also old—standards may bring some clarity for advertisers, review of recent NAD/NARB cases wrestling with the “Made in USA” standard reveals that disputes around the truthfulness of domestic-origin claims stray far from the three factors or requirements into broader questions that are left largely unanswered by the new regulations. For example, depictions of American flags on a website for Chinese-made mop pads suggested a “Made in USA” claim might be made to consumers implicitly, whether the advertiser intends the claim or not.[xiv] The J-B Weld saga, discussed below, tackled a threshold question and considered where a US-made product ends and its foreign packaging begins.[xv]
Product or Packaging?
J-B Weld makes glue products and touts the fact that its products are “Made in USA” and “have always been made in the USA.”[xvi] A competitor challenged the validity of these claims, and the NAD recommended that J-B Weld discontinue using them. The NAD reasoned that, although the glue might be made domestically, the tube, cap, and applicator are all manufactured elsewhere. Because these elements contain the glue and allow it to be used by consumers, they constitute part of the “product” that must be “all or virtually all” manufactured domestically.[xvii]
On appeal to the NARB, J-B Weld argued that the glue within the tube is the product and what consumers really care about.[xviii] The NARB poetically translated in its own words: “[L]ong after the caps, applicators, and tubes have been discarded… the consumer is concerned with the ongoing performance of the substance found within the tube.”[xix] J-B Weld offered the analogy to toothpaste: “[T]he tube and cap are ‘necessary’ for use, and are not discarded until the paste is used up, but … their place of origin is not a material consideration for the consumer.”[xx]
On the front of the packaging of the product, J-B Weld touted its “re-sealable/no waste cap,” which the panel felt demonstrated “the importance of the cap to the consumer.” This persuaded the NARB to determine that the applicator caps, tubes, and syringes should be considered part of the “product” in an “all or virtually all” analysis. “[A] sufficient number of reasonable consumers would consider the caps, tubes, syringes, and/or applicators to be part of the ‘product’ covered by the advertiser’s domestic-origin claims.”[xxi]
As previously discussed, one factor in the FTC’s “Made in USA” framework is the percentage of the total manufacturing cost that is done abroad.[xxii] J-B Weld did not feel comfortable revealing that cost data as it considered its production prices as highly confidential, trade secret information.[xxiii] Thus, even if the tube, cap, and applicator were small fractions of the overall cost of the product, it could not turn that factor in its favor. After rejecting the NARB’s recommendation, J-B Weld was referred to the FTC.[xxiv]
In March 2020, an FTC staff attorney issued a public letter advising that it would not pursue any further investigation or action regarding J-B Weld’s claims.[xxv] This was in part due to J-B Weld’s own remedial measures in updating its packaging and changing the domestic-origin claims on its company’s general literature.[xxvi] However, the FTC also declined a further investigation because the FTC disagreed with the NARB and its interpretation of the tube, cap, and applicators as being part of the product. “FTC staff finds it is unlikely that reasonable consumers interpreted the unqualified U.S. origin claims on these adhesive products as covering the incidental, discarded packaging.”[xxvii]
The Commission noted its lack of policy guidance specifically on this topic, but confirmed that it has not previously required manufacturers to account for the origin of packaging and cited a 1968 opinion deciding that “a manufacturer of domestically-made vinegar need not disclose the origin of imported plastic containers in the absence of an affirmative representation that the bottles were made in the United States.”[xxviii] The FTC letter referred to the caps, tube, and applicator as “incidental” packaging that “had no independent value to consumers and was typically discarded upon depletion.”[xxix]
Though the FTC staff’s opinion on glue tubes is now clear, it remains challenging to evaluate what to take away from the decision, especially given its departure from the NARB decision. The FTC letter did not address one of the NARB’s primary findings; namely, J-B Weld’s claims about the cap meant it had value to the consumer as part of the product. Accordingly, it is hard to predict whether future claims about packaging features—“easy open” or “spill free”—will then require such foreign-made packaging to meet the “all or virtually all” standard. When determining what elements of a product count as the “product,” advertisers may need to evaluate what is typically discarded upon depletion versus what has independent value to consumers.[xxx]
For now, comparing the new FTC rules to the J-B Weld dispute suggests a disconnect between the rules promulgated and their interpretation and application by the NAD and NARB. For open questions that remain in other advertising areas like the Green Guides, advertisers will have to simply wait until 2022 to determine if the FTC clears up the NAD/NARB edge cases.