Prior to the new year, we blogged about how the Federal Trade Commission’s (Commission) decision to codify its Made in USA (MUSA) guidance into a rule – and the accompanying threat of civil penalties – makes it all the more important to clarify ambiguities and uncertainties with respect to MUSA. As we noted then, we believe that most companies want to comply with the law and the Commission’s rules, but if those rules are not well defined, compliance becomes a matter of guesswork. Further, out of an abundance of caution, companies may choose not to make certain claims that might otherwise be lawful and nondeceptive, which harms rather than benefits consumers.

Our first blog addressed the biggest ambiguity – how much domestic content there has to be to make an unqualified MUSA claim. Today we take on a smaller, yet still important, question: In calculating domestic cost and looking at components that went into manufacturing product, how far back in the manufacturing process does a company have to go?

What does the Commission’s guidance say on this question? The Commission states that “manufacturers and marketers should look back far enough in the manufacturing process to be reasonably sure that any significant foreign content has been included in their assessment of foreign costs. Foreign content incorporated early in the manufacturing process often will be less significant to consumers than content that is a direct part of the finished product or the parts or components produced by the immediate supplier.” Phrased as it is, this guidance suggests that the test is less about how much of the overall cost the foreign content may make up than it is about how meaningful the content is to consumers. But how does one measure that, and do consumers really parse a MUSA claim this way? We don’t. And the reality, as evidenced by the examples provided, is that cost still does factor into the equation.

As usual, the Commission provides some examples. Based on the discussion in our prior blog about calculating domestic costs, one might assume that at a minimum a manufacturer has to know whether the components it purchases were manufactured in the United States or outside the United States. But perhaps not. The Commission notes that a steel wrench manufacturer needs to ask whether the steel it used was domestic or imported. One might have assumed this was a given, since the steel is presumably at or near 100 percent of the material that goes into the wrench. The guidance notes that in the example, the steel is likely a significant part of the overall cost. But then why not just do the cost calculation, and if the cost of steel in some other product is inconsequential, determine that the result will justify a MUSA claim? Does the Commission’s guidance suggest that in some instances you can leave steel you purchase to manufacture a product out of the cost calculation altogether? And if that is the case, how is a company supposed to know how inconsequential the purchased component has to be?

Further, unlike in the above steel example, even if a company knows that all the components it purchases are manufactured in the United States, does it ever need to worry about whether the inputs for those purchased components also came from the United States? Not surprisingly, the answer from the FTC is, “it depends.” The Commission’s guidance states that one need not consider the origin of the oil used to manufacture the plastic used in a clock radio case or of the steel in a computer floppy disk drive (yes, the Commission’s guidance is dated (1998)), but that a food processor company does need to consider where the materials came from to manufacture a domestically produced motor purchased for use in its products. What accounts for the difference? The oil in the plastic and the steel in the floppy disk drive, the guidance explains, are far removed and are insignificant, while the motor accounts for 50 percent of the food processor’s overall cost. Once again, the following question needs to be asked: Where between these two fairly extreme examples does one draw the line? Suppose the plastic used for the food processor bowl and lid and other components accounts for 30 percent of the total product cost. These plastic parts are fairly significant in terms of the operation of the processor and are 30 percent of the total cost, close enough to 50 percent that they impose an obligation to probe further into the components used to manufacture the plastic. Shouldn’t an advertiser considering labeling its product “Made in USA” be able to answer that question with something more than a guess? Yet, how is the advertiser to do so given the Commission’s current guidance?

The good news, we suppose, is that we’re not aware of any MUSA enforcement matters that have turned on how one answers these questions. Rather, enforcement has involved far more straightforward and obvious violations of the Commission’s MUSA guidance. But if the Commission doesn’t intend to bring cases based on these more subtle distinctions, then why even have them in its guidance?

Coming up next: How to handle raw materials that are not available in the U.S.