The FTC (the Commission) has given us plenty to write about these days, particularly as it looks for ways to beef up its ability to obtain monetary relief in light of the Supreme Court’s unanimous AMG decision. We have written a lot recently about the FTC’s Notice of Penalty letters, but we would be remiss if we did not take time to also comment more extensively on the FTC’s adoption of a new rule regarding misleading Made in USA claims on product labeling and in mail-order catalogs and mail-order promotional materials. The latter, by the way, includes electronic mail, and caused a bit of a partisan spat among the FTC commissioners as to whether Congress intended for the Commission’s Made in USA rulemaking authority to extend that far.
In any event, the Commission codified its long-standing guidance that for an unqualified Made in USA claim, “all or virtually all” ingredients or components of the product must be made and sourced in the USA. The problem is that the FTC’s Made in USA enforcement policy is rife with vague standards that are, in practice, often hard to apply with any degree of certainty. Vagueness and ambiguity are one thing when a company is weighing whether its actions might violate Section 5 and subject it to a cease-and-desist order, but it is quite another thing when they characterize a rule, the violation of which subjects companies to potentially substantial per-violation civil penalties. If the FTC is going to promulgate rules and expect companies to abide by them, compliance shouldn’t involve having to guess how the rules apply, which, unfortunately, happens all too often the case with Made in USA. In this blog and others that will follow over the coming weeks, we will highlight some of the uncertainties surrounding the FTC’s Made in USA rule.
All or Virtually All
As some of you know, we have long taken the position that the consumer survey the FTC touts to support its “all or virtually all” standard suffers from numerous flaws, including the fact that only 11 percent of those surveyed said that a Made in USA claim implies anything about how many of the parts that went into the product were manufactured in the U.S. Putting that disagreement aside, the Commission’s “all or virtually all” standard is far from clear. Indeed, the Commission itself has been a bit schizophrenic about it. On the one hand, the Commission’s long-standing enforcement policy statement indicates that the “all or virtually all” standard is based primarily on the portion of the product’s total manufacturing costs that are attributable to the U.S. but also suggests that all “significant” parts must be of U.S. origin. On the other hand, however, the Commission has indicated that so long as the manufacturing cost requirement is met, the potential for any deception is “likely to be very limited” and the “costs of bringing an enforcement action challenging such a claim are likely to substantially outweigh any benefit that might accrue to consumers and competition.”
Of course, that still leaves open the question of how high the percentage of U.S. costs has to be in order to satisfy a “virtually all” standard. While we don’t often have nice things to say about California’s approach to consumer protection law, we’ll say something nice now. California has put precise percentages around how much domestic content it expects to substantiate a Made in USA claim. So it should not be surprising that several commenters urged the FTC to adopt a specific percentage requirement as it moved from a Made in USA Enforcement Policy to a Made in USA rule. The FTC, however, declined that invitation, finding that its existing guidance is clear enough. But is it?
In declining to provide a specific percentage, the FTC noted that cost is not the only factor and that all “significant parts” must also be of domestic origin. As an initial matter, even if that were the case, the Commission could have still provided a specific percentage required to satisfy the cost factor. In other words, what percentage of cost must be of domestic origin when all significant parts are of domestic origin? More importantly, the Commission declined to provide more certainty because of a factor – significant parts – that it previously dismissed as not “likely” to lead to deception and that would not likely justify the cost of any enforcement action.
Providing a specific percentage would not only have created greater certainty, but also could have led to the alignment of the California and federal definitions of Made in USA, a significant win for both consumers and businesses. Instead, while California amended its Made in USA law several years ago to at least bring it closer to alignment with the FTC’s, true alignment remains elusive. And while we, as much as anyone, applaud the concept that the FTC, in interpreting Section 5, should not decide what it wants terms such as “Made in USA” to mean as opposed to discerning what consumers think it means, there is surely room here for the FTC to discard the requirement that “all significant” parts be of domestic origin and go to a definition based solely upon cost, given that, as noted above, 89 percent of consumers in the survey the agency is relying upon to define “Made in USA” said that the claim implies nothing about how many of the parts that went into the product were manufactured in the U.S.
As a result, under the current rule, at the risk of incurring significant civil penalties, a company first has to figure out what percentage constitutes “virtually all.” Is it 85 percent, 90 percent, 92 percent, 95 percent or something else? And how is a company that wants to be in compliance with the rule to figure that out? Then, as an additional matter, if a company is confident that it satisfies the “virtually all” standard, it must separately determine whether all “significant” parts are of domestic origin. What is a “significant” part? In its response to comments it received as part of the rulemaking process, the FTC noted that the mechanism of a watch is a “significant” part. In other Made in USA commentary, the FTC has noted that an imported base of a brass lamp is a significant part but that the knobs and tubing of a gas grill are not. What easily applied principle makes the base of a lamp significant but not the knobs and tubing of a gas grill? Beats us. All of them are essential for the product to function, so that can’t be the distinction. So what is it, and more importantly, how is a company supposed to figure out whether an imported part that makes up very little of the total cost of its otherwise Made in USA product is significant? Companies deserve better and shouldn’t have to guess at compliance, particularly when a rule and civil penalties are in the mix. Further, the lack of certainty may also threaten the ability of the Commission to actually seek civil penalties, given that under Section 45, the Commission must show that the advertiser had “actual knowledge or “knowledge fairly implied” that its conduct violated the rule. It seems to us that in certain circumstances, companies might have a nonfrivolous argument of a lack of knowledge, given the inherent ambiguity of the current rule.