By: Cynthia L. Meyer, Jacqueline J. Chan, and T. Daniel Logan
(An edited version of this article was published in Law360 on July 20, 2020)
On July 16, 2020, the Federal Trade Commission (“FTC”) published a Notice of Proposed Rulemaking (“NPRM”) in the Federal Register for its proposed Made in USA Labeling Rule that seeks to codify at 16 C.F.R. § 323 et seq. its longstanding enforcement policy for the use of unqualified “Made in USA” or similar US-origin claims on products.[1] Specifically, the proposed rule prohibits entities from labeling products with such claims unless:
(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.
In line with the FTC’s longstanding position, the proposed rule’s reach is broad, applying to “any unqualified representation, express or implied, that a product or service, or a specified component thereof, is of U.S. origin, including, but not limited to, a representation that such product or service is ‘made,’ ‘manufactured,’ ‘built,’ ‘produced,’ ‘created,’ or ‘crafted’ in the United States or in America, or any other unqualified U.S.-origin claim.” In addition to codifying the FTC’s existing standards, the rule would also significantly enhance the FTC’s ability to seek civil penalties for unfair or deceptive “Made in USA” claims. The proposed rule also expressly states it will not supersede, alter, or affect any country-of-origin labeling requirements under (1) any federal statute or regulation; or (2) any state statute, regulation, order, or interpretation that is not inconsistent with the proposed rule, including those that provide more protection to consumers than the proposed rule.
Interestingly, the proposed rule’s prohibitions explicitly extend to “mail order catalog[s]” and “mail order promotional material[s],” which are defined as “any materials, used in the direct sale or direct offering for sale of any product or service, that are disseminated in print or by electronic means, and that solicit the purchase of such product or service by mail, telephone, electronic mail, or some other method without examining the actual product purchased.” Thus, the FTC could construe such definition broadly to include websites and other electronic marketing materials.
It is this broad application to materials other than labels that is causing some controversy, with two FTC Commissioners noting in dissenting opinions that this application exceeds the FTC’s authority under Section 5a of the FTC Act[2] to issue a rule regulating “Made in USA” claims on product “labels.”
Stakeholders can submit comments through Regulations.gov for the FTC’s consideration until September 14, 2020.
Historical Background
Although the FTC has pursued enforcement actions to prevent unfair and deceptive “Made in USA” claims for 80 years, it has done so under its general authority to prohibit unfair or deceptive acts or practices in or affecting commerce per Section 5 of the FTC Act.[3] It had not promulgated specific rules regulating such claims, and instead provided guidance to industry through its 1997 Enforcement Policy Statement on U.S. Origin Claims (“FTC Enforcement Policy”).
Still in effect today, the FTC Enforcement Policy provides that marketers should make unqualified US-origin claims only when they have a reasonable basis for asserting that “all or virtually all” of the product is made in the United States. Recognizing that there is no “bright line rule” for the “all or virtually all” standard, the FTC explained that it evaluates several factors, including the proportion of the product’s total manufacturing costs attributable to US parts and processing, how far removed any foreign content is from the finished product, and the importance of the foreign content or processing to the overall function of the product.
The FTC has issued over 150 closing letters regarding potentially misleading “Made in USA” claims, and since 1997, it has issued 24 administrative Decisions and Orders and entered into four federal court settlements enforcing this “all or virtually all” standard.[4] However, recent so-called “no money, no fault”[5] settlements for deceptive and arguably egregious “Made in USA” claims pressed FTC Commissioners, Congressional leaders, and stakeholders to question whether the FTC needed to take a stronger enforcement stance.
In 2019, the FTC held a public workshop to seek input on its Enforcement Policy and enforcement approach for “Made in USA” claims. As reflected in the recently issued FTC Staff Report of the workshop, the FTC determined no evidence existed to support changing its longstanding “all or virtually all” guidance in its Enforcement Policy. The FTC further found that stakeholders expressed nearly universal support for the FTC to exercise its authority pursuant to Section 5a of the FTC Act to issue a rule addressing “Made in USA” claims, arguing such a rule could have a strong deterrent effect against unlawful “Made in USA” claims without imposing new burdens on law-abiding companies.[6]
Policy Versus a Rule – What Difference Does it Make?
Given the seemingly minor differences between the already-existing FTC Enforcement Policy and the proposed rule, some might question what difference finalizing the proposed rule would make. The answer is likely twofold: deterrence and enforcement efficiency.
Generally, under Section 5 of the FTC Act, the FTC may seek cease and desist orders but cannot obtain monetary relief or civil monetary penalties except through a consent order or if a marketer violates an existing order. And while the FTC can pursue enforcement under Section 13(b) of the FTC Act to obtain monetary equitable relief for deceptive “Made in USA” claims, this presents challenges given the difficulty of determining appropriate monetary damages based on such claims, which do not affect the performance or efficacy of the advertised product.
However, once a rule regarding unfair or deceptive practices has been finalized, the burden for imposing a civil penalty is lessened. Any individual or corporation that violates such rule with either actual knowledge or knowledge fairly implied on the basis of the objective circumstances may be subject to civil penalties for each violation.[7] With a final rule in place, it would be much easier for the FTC to impose civil penalties, allowing it to more effectively dissuade potential violators and even punish first-time (egregious) offenders.
Is the FTC Overstepping Its Statutory Authority?
Intriguingly, there appear to be differing opinions within the FTC itself regarding whether the proposed rule oversteps the FTC’s statutory authority. Section 5a of the FTC Act is entitled “Labels on products” and refers repeatedly to product “labels.” For instance, it states, in part:
To the extent any person introduces, delivers for introduction, sells, advertises, or offers for sale in commerce a product with a “Made in the U.S.A.” or “Made in America” label, or the equivalent thereof, in order to represent that such product was in whole or substantial part of domestic origin, such label shall be consistent with decisions and orders of the Federal Trade Commission issued pursuant to section 45 of this title. This section only applies to such labels. Nothing in this section shall preclude the application of other provisions of law relating to labeling.[8]
Commissioners Noah Phillips and Christine Wilson point to the plain language of the statute as evidence of Congressional intent to give the FTC authority over only certain “Made in USA” claims made on a product’s label. In contrast, they note the broad applicability of the proposed rule to unqualified “Made in USA” claims in “mail order catalog[s]” and “mail order promotional materials,” which, as defined, could include websites, electronic promotional materials, and other materials outside of the product’s label. In their view, such application goes beyond the FTC’s authority under Section 5a of the FTC Act.[9]
On the other hand, Commissioner Rohit Chopra contends that the proposed rule’s targeting of “Made in USA” labeling both online and offline is consistent with the FTC’s statutory authority. Commissioner Chopra explains Section 5a of the FTC Act “does not define the term ‘label,’ nor does the text limit the Commission’s authority to physical labels stitched to a product through a sewing or manufacturing process.” He further notes that the FTC has developed considerable expertise on statutes and policies related to communications made outside of traditional advertising and relies on this expertise to define what constitutes a label.[10]
Practical Impact
- The proposed rule does not impose any new substantive requirements for unqualified Made in USA claims. The application of the FTC Enforcement Policy – and, if finalized, this new rule – continues to be fact-driven. For qualified Made in USA claims, marketers should continue to use the FTC Enforcement Policy and prior FTC Decisions and Orders as guides. Even for unqualified claims made after publication of a final rule, these past actions will continue to be useful guideposts for assessing the likelihood of FTC action.
- When finalized, the proposed rule will allow the FTC to impose a civil penalty of up to $43,280 per violation. While this amount represents a maximum that is unlikely to be requested by the FTC in every case, it is reasonable that the FTC might seek the maximum in particularly egregious instances. However, the civil penalties imposed by the proposed rule appear to be part of the FTC’s growing shift to steeper monetary relief sought against “Made in USA” violators.[11] Thus, marketers should be increasingly vigilant when considering making unqualified “Made in USA” claims.
- If the proposed rule is finalized, more marketers seeking to promote the US origin of its products may seek to avoid the rule’s applicability by only making qualified “Made in USA” claims. Because the rule expressly applies only to unqualified “Made in USA” claims, marketers may seek instead to make only qualified “Made in USA” claims, which may require more nuanced evaluation and thus be comparatively more difficult for the FTC to assess and enforce against.
- As currently written, the proposed rule, if finalized, could permit the FTC to impose civil penalties for claims that are found on advertising materials (e.g., websites, social media posts and hashtags) in addition to claims on product labels. However, such enforcement could be vulnerable to challenge based on the argument that the FTC is acting beyond its statutory ambit.
[1] In contrast, the proposed rule does not apply to qualified US-origin claims (e.g., “Assembled in USA from imported and domestic parts”) that describe the extent, amount, or type of a product’s US content or processing, clearly indicating a product is not entirely of US origin.
[2] 15 U.S.C. § 45a.
[3] 15 U.S.C. § 45.
[4] See Made in the USA – An FTC Workshop: Staff Report of the Bureau of Consumer Protection (June 19, 2020) (“FTC Staff Report”) at 3; NPRM at 3-4.
[5] Consistent with past practices, the FTC agreed to enter administrative consent orders that prohibited the offending companies from making deceptive “Made in USA” claims for twenty years, but did not require admissions of liability or exact a financial cost. See In the Matter of Sandpiper of California, Inc. et al. (Apr. 17, 2019); In the Matter of Underground Sports Inc., doing business as Patriot Puck et al. (Apr. 17, 2019); see also FTC Staff Report at 4.
[6] FTC Staff Report at 9, 17.
[7] 15 U.S.C. § 45(m)(1)(A).
[8] 15 U.S.C. § 45a.
[9] Statement of Commissioner Christine S. Wilson Concurring in Part and Dissenting in Part (June 22, 2020); Dissenting Statement of Commissioner Noah Joshua Phillips (June 22, 2020).
[10] Concurring Statement by Commissioner Rohit Chopra (June 22, 2020) at 1.
[11] See, e.g., In the Matter of Williams-Sonoma, Inc., Agreement Containing Consent Order (March 2020) (settlement included $1 million payment).