By T. Daniel Logan, Cynthia L. Meyer, and Jacqueline J. Chan
On July 1, 2021, the Federal Trade Commission (“FTC” or “the Commission”) announced that it was finalizing the Made in USA Labeling Rule (hereinafter “Final Rule”) regarding the use of unqualified “Made in USA” or similar US-origin claims.[1] As we detailed in our previous post, the final rule, which will be effective on August 13, 2021, will prohibit entities from labeling products with unqualified “Made in USA” claims unless all of the following apply:
(1) the 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.
The rule, which serves to codify the FTC’s longstanding Enforcement Policy Statement on U.S. Origin Claims, applies broadly to all products and services except where another federal statute or regulation prescribes country-of-origin labeling requirements.[2] Notably, the Final Rule does not apply to qualified claims (such as “Made in USA of U.S. and global ingredients,” “60% U.S. Content,” “Made in USA from imported metal,” or “Made in USA from French components”). Further, state law is only preempted to the extent inconsistent; state laws that provide greater protections are expressly left in place.[3] Failure to comply with the requirements of the rule could subject violators to enforcement action. Moreover, because the requirements applicable to unqualified “Made in USA” claims are now set forth in a regulation, FTC may now commence an action in federal court seeking civil penalties from anyone who violates the rule “with actual knowledge or knowledge fairly implied on the basis of objective circumstances that the act is unfair or deceptive and is prohibited by such rule.”[4] Such penalties may be assessed for each violation; as of 2021, the maximum penalty per violation is $43,792.[5]
Having received over 700 comments largely supporting the proposed rule, the FTC finalized the proposed rule as written, with one modification. Specifically, the Final Rule incorporates a new section, codified at 16 C.F.R. § 323.6, which permits entities to petition the Commission for a partial or full exemption from the requirements of the rule.[6] Further, under the new provision, the FTC may issue partial or full exemptions from the rule requirements if “not necessary to prevent the acts or practices to which the Rule relates,” and may “condition such exemptions on compliance with alternate standards or requirements to be prescribed by the [FTC].”[7] The provision further specifies that the FTC must resolve petitions under the procedures provided in 16 C.F.R. § 1.25, which govern the issuance of rules or regulations; accordingly, the FTC would likely be required to undertake the fairly burdensome notice-and-comment rulemaking process in order to grant a request to exempt a product or class of products from the requirements of the Final Rule.
The remainder of the proposed rule is unchanged. Commenters focused on several key areas.
First, several commenters addressed concerns regarding the FTC’s authority to regulate “Made in USA” claims made on materials other than product labels, with the majority asserting the proposed rule was within the scope of the FTC’s statutory authority.[8] In the preamble to the Final Rule, the FTC concluded that the Final Rule falls within the scope of its authority, clarifying that “[t]he [F]inal [R]ule does not cover [Made in USA] claims in all advertising. Instead…the [R]ule covers labels appearing in all contexts,” whether appearing on packaging or online.[9]
Second, many commenters disagreed with the Rule’s “all or virtually all” standard, arguing for alternative standards (1) based on percentage-of-costs; (2) allowing for imported parts or materials not available in the United States; (3) aligned with the U.S. Customs and Border Protection substantial transformation standard; or (4) providing a safe harbor for good faith efforts to comply.[10] The FTC rejected each of these in turn, concluding that the “all or virtually all” standard represents current consumer perceptions. Notably, the Commission explained that if future consumer research establishes that another standard is applicable to a specific class of products, entities could petition for an exemption under 16 C.F.R. § 323.6. Moreover, with regard to the safe harbor proposals, the Final Rule states that the FTC “will continue to (1) advise marketers that, if provided in good faith, marketers can rely on information from suppliers about the domestic content in the parts, components, and other elements they produce; (2) generally conserve enforcement resources for intentional, repeated, or egregious offenders; and (3) provide informal staff counseling where appropriate.”[11]
Third, other commenters requested additional definitions, such as a definition for “all or virtually all.” The FTC declined to supplement the rule with additional definitions, stating that it has provided ample guidance about the meaning of the term, such as in its policy statement.[12] It further explained that for a product to be considered “all or virtually all” made in the United States, “the final assembly or processing of the product must take place in the United States” as an initial threshold, beyond which the FTC will consider other factors, including: “the portion of the product’s total manufacturing costs attributable to U.S. parts and processing; how far removed from the finished product any foreign content is; and the importance of the foreign content to the form or function of the product.”[13]
Finally, in response to comments from ranchers and shrimpers, the FTC noted that the Final Rule does not supersede food labeling requirements set forth by the United States Department of Agriculture (“USDA”) and U.S. Food and Drug Administration (“FDA”), the former of which has separate standards for “Product of USA” claims.[14] In response to the Final Rule, USDA has announced that it will initiate its own rulemaking to “alleviate potential confusion in the marketplace.”[15]
Given that the rule largely codifies the longstanding policy of the FTC, it is unlikely that sudden large-scale changes will be seen in the marketplace as a result of the rule’s finalization. As the FTC explained, the Commission intended to codify existing guidance and thus sought to “impose no new obligations on market participants.”[16] However, with the formalization of this policy, there may be an uptick in enforcement and putative class action lawsuits premised upon an alleged violation of the new regulation. Companies making such claims should continually reassess the claims, particularly with any changes to suppliers, materials, or manufacturing processes, and confirm that the claims continue to be substantiated.
[1] 86 Fed. Reg. 37,022 (July 14, 2021)(codified at 16 C.F.R. Part 323). The Commission voted 3-2 to approve the Final Rule, with one member issuing a public dissent. See FTC.gov, Dissenting Statement of Commissioner Christine S. Wilson (July 1, 2021).
[2] 86 Fed. Reg. at 37,022.
[3] 86 Fed. Reg. at 37,030.
[4] 15 U.S.C. § 45(m)(1)(A). See also FTC.gov, A Brief Overview of the Federal Trade Commission’s Investigative, Law Enforcement, and Rulemaking Authority (May 2021).
[5] Adjustments to Civil Penalty Amounts, 86 Fed. Reg. 2539, 2541 (Jan. 13, 2021).
[6] 86 Fed. Reg. at 37,031.
[7] Id.
[8] As noted in our previous post, two FTC Commissioners – Commissioners Christine S. Wilson and Noah Joshua Phillips – issued dissents when the proposed rule was announced, contending that the proposed rule overstepped the FTC’s statutory authority under Section 5a of the FTC Act to regulate “Made in USA” claims made on “labels” by broadly prohibiting “Made in USA” claims in “mail order catalog[s]” and “mail order promotional materials,” which, as defined, could include websites and other materials outside of the product’s label. Both Commissioners also voted against the approval of the Final Rule, and Commissioner Wilson issued a written dissenting statement reiterating her concerns. In her dissent, she noted that, in contrast to the text of Section 5a of the FTC Act, 15 U.S.C. § 45a, that repeatedly refers to “labels,” Congress recently passed the Country of Origin Labeling Online Act (COOL Act) which specifically prohibits deceptive country-of-origin representations in “labeling, advertising, or other promotional materials, or any other form of marketing, including marketing through digital or electronic means in the United States.” She concludes that because the COOL Act explicitly applies to labeling and advertising, Congress views these terms as distinct and could not have intended for Section 5a of the FTC Act to apply to claims on advertising and other promotional materials. Dissenting Statement of Commissioner Christine S. Wilson at 2.
[9] 86 Fed. Reg. at 37,024. Indeed, later in the preamble, the FTC declined to extend the coverage of the rule to restaurant menus. 86 Fed. Reg. at 37,028.
[10] 86 Fed. Reg. at 37,025.
[11] 86 Fed. Reg. at 37,027.
[12] FTC.gov, Enforcement Policy Statement on U.S. Origin Claims (Dec. 1, 1997).
[13] 86 Fed. Reg. at 37,028.
[14] 86 Fed. Reg. at 37,029.
[15] Id.
[16] 86 Fed. Reg. at 37,023.