Made in USA

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Most of our posts regarding “Made in USA” claims relate to FTC investigations and enforcement actions. Private plaintiffs, however, also closely watch those claims. For example, in 2018 plaintiffs filed a class action lawsuit against New Balance Athletics Inc. challenging qualified “Made in USA” claims. Although the plaintiffs acknowledged that New Balance qualified the claim in some places to indicate that the domestic value is at least 70%, they alleged that the general impression is that the products are American made. To resolve that litigation, a California federal judge recently granted preliminary approval to a proposed $750,000 settlement.

In Dashnaw v. New Balance Athletics, Inc., consumers alleged that New Balance mischaracterized its line of “Made in USA” sneakers because as little as 70% of the product was made with domestic components or labor. The claim appeared in advertising, on the shoes, and on the shoe boxes. The complaint acknowledged that New Balance disclosed in some places that its “Made in USA” sneakers contain a domestic value of 70% or greater, but alleged that an “Made in USA” claim appeared in places like the shoe and the shoe box. Because 30% of the value of those shoes could be attributed to a foreign country, plaintiffs alleged that the claims violated both California law, requiring that foreign materials must not exceed 5% of the final wholesale value, and FTC guidelines, stating that a product must be “all or virtually all” made in the United States.

The case was transferred from state court to the U.S. District Court for the Southern District of California, where the parties initiated settlement discussions. In April, the parties proposed a settlement of $750,000, with $215,000 going to settlement administration costs and compensation and $535,000 to consumers, with each consumer receiving up to $10. Judge Lorenz denied the settlement stating that the proposed amount was not enough for the estimated 1 million class action members. In response, the parties explained that a 5% participation rate among class members would result in full compensation and even with a 10-15% participation rate, each class member would receive 35-50% of the maximum damages the class could receive at trial, which they called a “reasonable settlement amount.” Judge Lorenz granted preliminary approval to the proposed settlement of $750,000 on January 25, 2019.

This case reminds advertisers that when using a disclosure to qualify a Made in USA claim or any other claim, the disclosure must appear consistently to maximize effectiveness. The FTC has also cautioned that even qualified claims may imply more domestic content than exists, so advertisers should avoid qualified claims unless the product has a significant amount of U.S. content or U.S. processing.

The FTC’s “Hey Nineteen” blog post caught our attention this past week, and not just for its witty title. One of those reasons is the reference to continued interest in “Made in USA” claims.  As we’ve written about here, “Made in America” has been a frequent enforcement target in recent years and 2018 generally continued this trend.  Here’s how it stacked up:

The FTC completed 25 investigations, settling four enforcement actions and issuing 21 closing letters.

Similarly, in 2017 the FTC settled two enforcement actions and issued 22 closing letters. All indications are that these trends will continue in 2019.

So what can companies do to avoid being the subject of an upcoming FTC Business Center blog post? Here are some tips:

Tip #1: Audit Inventory Management Systems and Processes

Mistakes can launch FTC investigations, as one company learned this past year.

In response to inquiries from the FTC, Prime-Line Products Company, a maker of corner shields, stated that after depleting its inventory of US-made corner shields, it substituted identical imported corner shields. Then, apparently inadvertently, the company continued to apply the “Made in USA” label.

Eventually, the FTC closed its investigation without bringing an enforcement action against the company. But the case serves as a reminder to companies employing the “Made in USA” label to closely manage inventory.  If only a percentage of supply is sourced to the US, companies should create internal processes to avoid mislabeling inventory.

Of course, inventory management can become challenging, especially when working with multiple dealers, distributors, or resellers that may not be familiar with inventory changes. Companies should proactively develop a compliance plan to ensure marketing remains accurate in all sales channels.

Tip #2: Train Employees

Employees, from marketing and sales to the warehouse floor, are the first line of defense against false “Made in USA” claims. Employees should be aware of when “Made in USA” claims may be made, and should be trained on processes for alerting management if they observe any inadvertent errors.

As detailed in multiple closing letters, companies targeted by FTC investigations told the FTC that they would retrain staff on proper, non-deceptive claims. This common-sense approach is advisable for all companies.  All training materials should conform to the standards laid out by the FTC in its Complying with the Made in USA Standard guidance, but should also be practical and easy-to-use.  Checklists, webinars, and workplace posters are good options for educating a company’s workforce.

Tip #3: Qualify Advertising Claims

Last year’s cases show that investigations skewed toward plain, unqualified “Made in USA” claims. Qualified claims, which provide more detail about a component made domestically or process that occurred domestically, may take up more space or obscure a company’s marketing message.  Nevertheless, when it comes to “Made in USA” labeling, accuracy counts.

In one example from the last year, The Gillette Company, LLC, was the target of an FTC inquiry due to its “Boston Made Since 1901” advertising. The FTC closed its investigation, but the example is instructive.  Gillette has deep roots in Boston and sought to use this information in an advertisement.  But without a qualification, the FTC viewed the advertisement as asserting that all of Gillette’s products are made in the US.  Gillette stated that it would re-focus its advertising campaign to highlight its Boston-based employees and manufacturing and the FTC closed the matter.

Tip #4: Size Doesn’t Matter

When it comes to enforcement of the “Made in USA” standards, there is no safe harbor for small businesses. Companies large and small were the target of investigations in 2018.

That included large companies, like Hallmark Cards, Incorporated, and IKEA Purchasing Services (US), Inc. The FTC closed investigations into each of these companies via a closing letter, without further action.

Meanwhile, the FTC’s major enforcement actions of the year were primarily against small or mid-size companies. Underground Sports Inc. d/b/a Patriot Puck imported just 400,000 hockey pucks since January 2016, but faced a significant enforcement action.  Notably, American-made claims featured prominently in these companies’ advertising.  Indeed, their conduct was so objectionable, that following announcement of these settlements, discussion has arisen regarding monetary penalties for false “Made in USA” claims.

Tip #5: Act Now!  Financial Penalties May Be Coming

FTC commissioners are very publicly debating the merits of imposing financial penalties for false “Made in USA” claims.

A leading advocate has been Commissioner Rohit Chopra, who argued in a dissent that settlements have been too lenient and are not deterring similar conduct.  But, as reported in December in this blog, Chairman Joseph Simons too is focused on the potential need to impose monetary relief.  At a hearing before the Senate Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security, Simons said, “Now we’re exploring whether we can find a good case that would be appropriate for monetary relief to serve as an additional deterrent.”

Given the political interest in increasing the penalties for false claims, companies may want to (make and actually stick to) a New Year’s resolution to make sure their “Made in USA” claims are substantiated. If you’re new to this area or need a refresher, check out our webinar and materials here.

On November 27, the FTC Commissioners testified on a range of issues before the Senate Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security. One excerpt that caught our attention was their comments on “Made in USA” advertising and the potential for increased scrutiny.

Here’s an excerpt of the Q&A between Sen. Shelly Moore Capito (R-WV) and the FTC Commissioners (emphasis added):

CAPITO: Okay, last question I have on fraudulent marketing would be the… fraudulent Made in America label. How prevalent is this? And what are some of the means you’re going to try to curb this practice?

SIMONS: This is fairly prevalent. We get hundreds of these, hundreds of complaints a year, that people are improperly using the Made in the USA label. We are committed to investigating those, and usually a lot of times what happens is the firm, the company doesn’t even realize that it’s a violation. So we explain to them it’s a violation and they stop it.

Sometimes companies do it intentionally, sometimes we tell them and they don’t stop and those people we sue. And one of the things that we’re exploring now, as a general rule, we have only gotten injunctive relief in cases like this previously. Now we’re exploring whether we can find a good case that would be appropriate for monetary relief to serve as an additional deterrent.

CHOPRA: I just want to add here that I think there are manufacturers out there who hire American workers and who purposely do that because they want to put the flag on their product. And for those who lie, this cheapens the Made in the USA label so it’s not just hurting American consumers, it’s hurting every American manufacturer who is trying to do right. So I want us to be much more aggressive with this, actually. And if you and Senator Cortez-Masto want to team up, finding civil penalties for some of these bad actors, we can make sure we increase compliance levels. And I got to tell you — right now there’s a country of origin labeling issues in agriculture, country of origin issues in product marketing. We have to do more to put a stop to this because this is extremely unfair to honest companies.

Continue Reading FTC Testimony Signals Possible Increase in “Made in USA” Advertising Scrutiny

Having now turned the page to the back half of 2018, we took a look at how the FTC’s “Made in USA” enforcement is stacking up to prior years. As we previously posted, the FTC made known its intent to prioritize “Made in USA” enforcement in remarks delivered at last fall’s NAD Conference.  Year to date, the FTC has settled two cases (Bollman Hat Company and Nectar Brand LLC) and has issued 15 closing letters regarding “Made in USA” claims.

By comparison, there were two settlements and 22 closing letters in 2017. If the current pace continues, the number of closing letters may exceed prior years.

What can we learn from these cases?

  • Qualified Claims Must Still Be Substantiated: Most closing letters involve unqualified “Made in USA” claims. However, qualified claims and those involving terms open to interpretation can still be the subject of scrutiny and must still be properly substantiated. Nectar Brands allegedly claimed in promotional materials that its mattresses were “Designed and Assembled in USA,” but the FTC’s complaint alleges that the mattresses were wholly imported from China, with no assembly taking place in the United States. “Crafted in America” was also among the claims that saw enforcement as was “Built in USA.”
  • Watch For Disclosure Issues: In addition to labeling wholly imported products as “Made in USA,” the FTC alleged that Bollman Hat Company and its subsidiary licensed the “American Made Matters” seal to any company that claimed it had a United States-based manufacturing factory or one product with a U.S.-origin label, and met several membership requirements, including self-certifying that at least 50% of the cost of at least one of their products was incurred in the United States, with final assembly or transformation in the U.S., and payment of an annual licensing fee of $99. The settlement requires the respondents to engage an independent auditor regarding use of the seal or to clearly and conspicuously disclose that products and services may display the seal based on self-certification.

Continue Reading Ever Wondered What Pillows, Electric Bikes, and Neon Signs Have in Common? FTC’s “Made in USA” Enforcement On Pace With 2017

In a keynote address at the National Advertising Division conference earlier this month, Mary Engle, Associate Director in the Advertising Practices Division of the FTC, included “Made in USA” as among the agency’s current enforcement priorities.   The FTC’s interest in U.S. origin claims is nothing new, but these claims have garnered considerable regulatory attention in recent years, as we have written about here.  With manufacturers and retailers increasingly eager to highlight their domestic operations, we took a look at how the FTC’s “Made in USA” enforcement this year stacks up to prior years.

For 2017 year to date, the FTC has issued 15 closing letters and has settled one case (Block Division).  By comparison, for calendar years 2014-2016, the FTC issued 56 closing letters and settled one case (Chemence, Inc.)  This suggests that “Made in USA” enforcement is roughly on pace with the prior three years.

Enforcement year to date also spans a considerable number of industries and products, involving advertising on household items like pillows, coffeemakers, and lawn mowers, to office and industrial equipment such as ice machines, standing desks, data security products, scales, cell phone signal boosters, air purifiers, and LED tubes.   Common remedial measures noted in closing letters include discontinuation of the claims at issue and replacement with qualified claims, packaging modifications, coordinating corrective measures with vendors, and monitoring and correcting third-party marketers.

Given that “Made in USA” claims will remain a priority from the foreseeable future, claim substantiation is a key consideration for advertisers.  If you are new to making country of origin claims or just need a refresher, check out our webinar, originally offered in May 2017, called “Buy American, Hire American: Is Your (Or Your Competitor’s) Product Really ‘Made in the USA’?,” for an overview on the substantiation requirements for advertising and the “Buy American” standard that applies to government procurement.

 

The U.S. Senate Committee on Commerce, Science, and Transportation has scheduled a reading this week of the proposed S. 118 Reinforcing American-Made Products Act of 2017.   The bill proposes to amend the Violent Crime Control and Law Enforcement Act of 1994 to require the Federal Trade Commission’s regulation of the labeling of products as “Made in the U.S.A.” or “Made in America” to supersede any state laws regarding the extent to which a product is introduced, delivered, sold, advertised, or offered for sale in interstate or foreign commerce with such a label in order to represent that the product was in whole or substantial part of domestic origin.  The bill’s sponsors include the following: Sens. Mike Lee (R-Utah), Shelley Moore Capito (R-W.V.), Susan Collins (R-Maine), Deb Fischer (R-Neb.), Angus King (I-Maine).

The FTC has been a consistent enforcer of its “Made in USA” advertising policies in recent years, having issued 57 investigation closing letters between 2014 and 2016 alone. In 2017, the agency has already released ten closing letters regarding “Made in USA” claims to companies selling everything from pillows to water filters to standing desks. As domestic manufacturing has received more attention from the Trump administration, many companies are wondering whether they can say their product is “Made in the USA” and, for some, whether they can sell that product to the government under the provisions of the Buy American Act.

We will tackle just these issues in our upcoming webinar “Buy American, Hire American: Is Your (Or Your Competitor’s) Product Really ‘Made in the USA’?” on Wednesday, May 17, at Noon-1:00 Eastern.  More information and registration details are here.

A recent decision the by the U.S. Court of International Trade (CIT) has important implications for importers, government contractors, and manufacturers that make “Assembled in America” and similar claims. In a ruling against Energizer Battery, Inc., the CIT determined that domestic assembly of foreign component parts does not fulfill the Buy America requirements found in government procurement law.

The case turned on the question of what constitutes “substantial transformation” of a product, a standard also used by the FTC in regulating “Made in the USA”-type marketing claims. Because FTC defers to Customs in determining whether an article has been “substantially transformed,” this ruling could impact the validity of current marketing claims.  Companies making these claims currently or who may be considering what kinds of “Made in USA”-type claims they can make going forward will want to understand how this decision impacts their products.  Read more about it here.

Earlier this week, the FTC announced settlement of one of the few “Made in USA” cases the agency has litigated in recent years.  Earlier this year, we sent an update regarding the FTC’s lawsuit against Chemence, Inc., in which the FTC alleged that Chemence was deceiving consumers by claiming that their glues were “Made in the USA.”   Regular readers of our blog may know that the standard for substantiating “Made in USA” claims is fairly high – all or virtually all of the inputs must originate in the U.S.

According to the FTC, approximately 55 percent of the costs of the chemical inputs to Chemence’s glues are attributable to imported chemicals that are essential to the glues’ function, thus falling short of the “all or virtually all” standard.  The complaint also alleged that Chemence assisted others in deceiving consumers by distributing its Made-in-USA marketing materials to private-label sellers and third-party websites and storefronts.

Chemence Product Packaging:

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The settlement terms prohibit the company from making unqualified “Made in USA” claims for any product unless it can show that the product’s final assembly or processing – and all significant processing – take place in the United States, and that all or virtually all ingredients or components of the product are made and sourced in the United States. The order permits Chemence to make qualified “Made in USA” claims as long as they include a clear and conspicuous disclosure about the extent to which the product contains foreign parts, ingredients, and/or processing. Chemence also is prohibited from providing others with the means to make deceptive Made-in-USA claims about its products.  In addition, Chemence must pay a $220,000 judgment.

It’s also worth noting that the settlement covers claims that are synonymous with “Made in the USA” even if they use slightly different language.  The definition of “Made in the United States” includes express or implied claims that a Product or Service (as defined), 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,” or “produced” in the United States, or any other U.S.-origin claim.  This case serves as a helpful reminder to companies marketing with “Made in USA” claims that proper substantiation for an unqualified “Made in USA” claim is a particularly high bar.

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Massachusetts-based New Balance has long made “Made in the USA” a cornerstone claim for their athletic wear.  The graphic below, from the company’s website, explains exactly what New Balance means by “Made in the USA” – but recently, the company has taken further steps to make clear the importance of this claim to their brand.

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As reported on NPR, New Balance has developed a shoe that is 100% made in the USA.  However, the company fears that the potential finalization of the Trans-Pacific Partnership (TPP), an international trade agreement that would reduce or eliminate tariffs for certain goods flowing to and from the U.S. and eleven other countries, including countries where many competitors make athletic shoes, could create new competitive pressures.  Because of the TPP, tariffs on shoes from countries such as Vietnam will eventually be eliminated, thereby making it cheaper to bring those products to the U.S.  Per New Balance’s argument, this would make it harder to compete with its U.S.-based factories – thus, the decision to oppose the deal.  Notably, TPP has yet to be finalized and there are hotly-contested views regarding trade on both sides of the political aisle.

This is just one example in which a trade deal can impact a company’s business decisions, including advertising claims.  If your company is interested in learning more about the potential impact of the TPP on your business,  please contact us to learn how Kelley Drye’s nationally-ranked International Trade Practice Group can help.