The State of California bestowed a belated holiday gift on U.S. manufacturers, importers, retailers and distributors effective as of January 1, 2016. Under SB 633, which amends Section 17533.7 of the California Business and Professions Code, goods sold in California may now be labeled "Made in the USA" if: (1) the finished product is manufactured in the United States; and, (2) any foreign materials or parts contained in the finished product do not exceed 5% of the final wholesale value of the merchandise. If the manufacturer can show that it cannot obtain the materials or parts in the United States from domestic suppliers, then the total foreign content cannot exceed 10% of the final wholesale value of the item. SB 633 effectively replaces the previous, more restrictive requirements of Section 17533.7 that put California law squarely at odds with the Federal Trade Commission's "Made in the USA" rules. Without intending to rain on anyone's parade, though, it should be noted that the FTC and California rules are still not identical. It is likely that some products bearing "Made in the USA" labels may pass the FTC test while failing the California standard. Therefore, companies are urged to exercise caution and reflect carefully before proceeding with unqualified "Made in the USA" claims for products sold in the state of California.
By way of background, the Federal Trade Commission ("FTC"), which exercises jurisdiction at the federal level over all products that are advertised or sold in the United States, permits a good to be labeled "Made in the USA" if it is all or virtually all made in the United States. The phrase "all or virtually all" means that the significant parts of the product and its processing must be of U.S. origin and that the end item should contain either zero amounts or merely negligible amounts of foreign content.
In contrast, Section 17533.7 of the California Business and Professions Code imposed the following restriction on companies selling merchandise in the state of California:
It is unlawful for any person, firm, corporation or association to sell or offer for sale in this State any merchandise on which merchandise or on its container there appears the words "Made in U.S.A." "Made in America," "U.S.A.," or similar words when the merchandise or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.
This rule was far more stringent than the FTC standard and meant that even the smallest foreign part or component contained in a product that was manufactured in the US, and marketed and sold in California, could disqualify the finished good from being marked "Made in the USA." Thus, goods that fully satisfied the FTC's "Made in the USA" requirements failed the California standard, resulting in great frustration and agitation on the part of companies that marketed their products nationwide. Section 17533.7 also ushered in a flood of class action lawsuits against companies that had made "Made in USA" claims resulting in costly settlements. For example:
- In Paz v. AG Adriano Goldschmieid, Inc. et al, Nordstrom and AG Adriano Goldschmied were alleged to have violated California law by placing "Made in the USA" labels on denim jeans that contained imported fabrics, components and trim items. The garments were manufactured in the United States and fully complied with the FTC's "Made in the USA" rules. A similar class action was also filed against jeans retailer Citizens of Humanity and several California jeans companies also received notices of pending litigation threatening to bring additional class action lawsuits.
- In Colgan v. Leatherman, certain tools were alleged to have been illegally labeled "Made in the USA" because some of the processing operations (i.e., grinding and polishing of the parts and components) were performed outside the United States. Even though the design work, testing, assembly and other manufacturing processes were performed in the United States, the court still held that the foreign processing was "substantial" and therefore the "Made in the USA" label violated California's Section 17533.7.
- In Benson v. Kwikset, certain deadbolt and locksets were alleged to have violated the California "Made in the USA" rules because they contained screws and other parts that were manufactured in Taiwan and some of the sub-assembly operations were performed in Mexico. Even though the labor and parts used in the locksets were US-origin, the court still concluded that the labeling violated Section 17533.7 because the locksets contained parts that were substantially made outside the United States.
The changes made by SB 633 were, of course, warmly received by companies tasked with finding ways to comply with both the FTC and California "Made in the USA" rules. However, both rules are still not mirror images of one another. For example, the California rule contains specific de minimis percentages for foreign origin inputs, while the FTC rule provides a more subjective all or virtually all standard for unqualified claims. In addition, the SB 633 fails to define the term "wholesale value" and does not provide any guidance as to how the de minimis thresholds should be calculated. Thus, differing outcomes as to whether a product complies with both rules are still possible.
So, even though companies doing business in the state of California rang in the New Year with favorable news on the "Made in USA" front, they should still consider carefully whether it is wise to proceed with an unqualified "Made in the USA" claim or alternatively use a safer, more conservative qualified claim, such as "Made in the USA of U.S. and imported parts."
Melissa Proctor is a Shareholder with Polsinelli, P.C. With significant experience in the customs laws and regulations, export controls, economic sanctions, and international trade, Melissa is committed to understanding companies' operations and providing assistance geared toward helping them reach their specific business and operational goals. She may be reached at (602) 650-2002 or via e-mail at email@example.com.