On July 16, 2020, the FTC published a Notice of Proposed Rulemaking seeking comments on the Rule. In response, the FTC received hundreds of comments. The Commission majority voting to approve the final rule believes that the Rule represents a proper exercise of the FTC’s rulemaking authority under 15 U.S.C. section 45 (a), and it provides clarity, deters bad actors, and confirms and codifies the “all or virtually all” standard.
In reaffirming the “all or virtually all” standard for domestic sourcing of content when making an unqualified “Made in USA” claim, the FTC rejected several proposed alternatives: (1) a percentage-of-costs standard; (2) a standard that makes allowances for imported parts or materials not available in the United States; (3) a Customs and Border Protection’s “substantial transformation” test standard; and (4) a standard that implements a safe harbor for “good faith” efforts to comply. Instead, the Rule codifies the Commission’s prior policy statement, decisions, and orders and prohibits unqualified “Made in USA” claims on labels unless (1) 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.
FTC Commissioner Christine Wilson issued a dissenting statement regarding the Rule. Although Commissioner Wilson supports the FTC’s prosecution of “Made in USA” fraud, she believes that the Rule exceeds the authority of the FTC. According to Commissioner Wilson, the Rule is not supported by the plain language of 15 U.S.C. section 45(a), which Congress intended to extend to the rulemaking authority of “Made in USA” claims found on labels, not to claims made in advertising or marketing. The debate around the concept of labeling and of the Rule’s application may become an area of significance once the Rule becomes effective on August 13, 2021.
The Rule’s operative prohibition talks about “labeling” – not “advertising.” See 16 C.F.R. section 323.2. Then why is there a debate about whether the Rule is applied beyond labels? The Commission broadens application of the Rule by making it applicable to “any mail order catalog or mail order promotional material,” which includes a “seal, mark, tag, or stamp labeling a product Made in the United States.” 16 C.F.R. section 323.3. The Rule defines “mail order catalog and mail order promotional materials” 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.” 16 C.F.R. section 323.1(b). This definition would appear to place television and YouTube videos outside of the scope of the Rule, even if they would still be subject to an action under section 5 of the FTC Act for deceptive acts and practices. It may be that advertisements in social media are also outside the scope of the Rule. But clearly, the Rule applies beyond simply physical labels.
As articulated by FTC Chair Lina Khan in her Statement appended to the Final Rule, and joined by Commissioners Rohit Chopra and Rebecca Slaughter, “the definition of label does extend beyond labels physically affixed to a product. As described in the rule, other depictions of labels are also covered; in some circumstances, labels appearing online may also be subject to the rule. The Commission declines to cover advertising more broadly, as this is inconsistent with the authority granted by Congress.” 86 Fed. Reg. at 37033. Thus, although there is some ambiguity that will need to be clarified through experience, it seems that a website for a product that depicts a product label bearing an unqualified “Made in USA” claim would be subject to the Rule, but a website for the same product that describes the product’s qualities, including that it is made in the United States, would not be subject to the Rule, even if such descriptions might still be subject to liability if they did not meet the consumer deception standards pursuant to section 5 of the FTC Act.
Substantively, the determination as to whether an advertiser can substantiate an unqualified “Made in USA” claim appears to be based on many of the same principles that have governed the FTC staff’s approach to this area for almost 25 years. The Rule recognizes that an unqualified U.S. origin claim represents to consumers that no more than a de minimis amount of the product is of foreign origin. Marketers making unqualified “Made in USA” claims on labels must be able to prove that their products are “all or virtually all” made in the United States. The Commission expressly points marketers to the FTC policy statement, its decisions and orders, and other Commission guidance such as the FTC’s Made In the USA Compliance Guide. 86 Fed. Reg. at 37028. Thus, there is not much difference in terms of the way one substantiates a “Made in USA” claim under the Rule and under the section 5 deception principles.
However, whether or not a claim falls within the Rule’s scope carries a very different level of risk from an enforcement perspective. The Rule includes the threat of civil penalties as well as other injunctive and monetary remedies. Thus, a first-time violation of the Rule can expose the marketer to civil penalties of up to $43,280 per violation. Further, the Rule does not supersede or alter any other federal labeling law or regulation. The Rule also explicitly provides that it does not affect the Buy American Act. Marketers must also be aware of the Country of Origin Labeling Online Act, which prohibits deceptive country of origin representations.
One additional provision that is unusual in a rule such as this is the express reference to exemptions offered pursuant to the Commission’s standard procedures. See 16 C.F.R. section 323.6. Although a party has always been permitted to seek an exemption from a Commission rule under the procedure set forth at 16 C.F.R. section 1.25, the Rule seems to invite marketers to seek full or partial exemptions from the Rule “if they can demonstrate application of the rules’ requirements to a particular product or class of product is not necessary to prevent the acts or practice to which the rules relates.” See 86 Fed. Reg. at 37031. There is virtually no context or rationale provided in the statement accompanying the Rule as to why the FTC decided to include express reference to this petition procedure. During the Workshop on Made in the USA claims held by FTC staff on September 26, 2019, the staff sought insight into whether in a particular industry there might be a reason to permit an unqualified Made in the USA claim for certain products due to variations in consumer perception. For example, the FTC staff asked whether consumer perception of an unqualified Made in the USA claim might be different for a product in a particular market segment where there may be widespread understanding of the traditional method of manufacture for that product. Perhaps the FTC added section 323.6 to the Rule to reflect the staff’s receptiveness to empirical evidence that something lower than the “all or virtually all” standard in a specific segment of the economy may not be likely to deceive consumers.
The Rule becomes effective on August 13, 2021. The FTC now has additional tools to target marketers that make false, unqualified claims that their products are “Made in USA.” The objection raised in the dissenting comment suggests that there could be a judicial challenge to determine whether the FTC has properly exercised its authority in promulgating this Rule. The dissent also suggests that enforcement is likely to be focused at least initially on situations where the Made in the USA claim is on a label or visible in a depiction of a product’s label. There are other ambiguities and tensions that will undoubtedly arise as marketers reassess the risk of making an unqualified “Made in USA” claim in connection with their products.
Client Alert 2021-204
