In Turnaround, California Abandons Restrictive "Made in USA" Standard

California Governor Jerry Brown (D) signed into law an amendment to the state's strictest-in-the-nation "Made in USA" law earlier this month.  Previously, incorporation of any element that was foreign sourced -- even a single screw on a treadmill -- made an unqualified U.S.-origin claim illegal under state law.  Now, the new law permits such a claim to be made despite incorporation of some foreign content, under certain conditions.  The changes provide real, albeit limited, relief for companies making products that previously complied with federal requirements but not those in California (see some of our previous items on the California law here and here). 

Starting January 1, 2016, marketers will be able to stamp "Made in USA" on their products and packages that contain some foreign-sourced elements if:

• All of the articles, units, or parts of the merchandise obtained from outside the United States constitute up to, but no more than, 5% of the final wholesale value of the manufactured product; or

• All of the articles, units, or parts of the merchandise obtained from outside the United States cannot be produced or obtained in the U.S., and all such articles, units, or parts constitute up to, but no more than, 10% of the final wholesale value of the manufactured product. (Cost is not a permitted basis for determining that an item used in a product could not have been made or obtained in the U.S.)¹

The labeling standard does not apply to goods intended for resale outside of California.  Items offered for sale outside of the state will not be deemed mislabeled so long as they comply with the laws where they are offered for sale.

The amendment, although helpful, still varies in important respects from the more-familiar guidance from the Federal Trade Commission (FTC) about the use of "Made in USA" (MIU) claims, as well as "country of origin" standards under laws administered by U.S. Customs and Border Protection (CPB).  The FTC, in its Enforcement Policy Statement on U.S. Origin Claims (Dec. 1997), requires that "all or virtually all" of a product must be of U.S. origin for the whole product to bear a non-misleading U.S.-origin claim.  The FTC does not incorporate any strict value-based requirements for determining when products qualify for U.S.-origin claims, instead assessing origin claims based on a variety of factors, including value, the remoteness of foreign content, the proportion of U.S. manufacturing costs, the site of assembly or final processing, and potentially other aspects that would affect consumer understanding of what a U.S.-origin claim means on a particular product.

CBP's country-of-origin requirements differ from the FTC's.  Under the Tariff Act of 1930 (commonly known as the Smoot-Hawley Tariff Act), which CBP enforces, goods produced in foreign countries must be marked with the name of the foreign country of origin.  For goods with origins in multiple countries, CBP uses the "substantial transformation" test.  This test identifies the country of origin as the last country in which a substantial transformation of the product took place.   The FTC does not consider CBP's country-of-origin requirements as decisive for its own analysis under the FTC Act.  Indeed, the FTC has recently been investigating claims of U.S.-origin in industries where substantial transformation served as all or some of the basis for U.S.-origin claims.  And yet other MIU/country-of-origin schemes apply in other domains governed by federal laws.

Thus, the variation in the California and federal standards will still require companies to carefully assess U.S.-origin claims.  The size of the California market means that meeting the federal claim will often not be enough in the national market.  For companies that cannot meet the California standard, our prior guidance still applies:

• Modify (so that the claim addresses foreign-sourced elements, such as "Made in USA of U.S. and Imported Materials");

• Quantify (say how much of what comes from the U.S. and how much comes from elsewhere, as in "Made in USA of 90% domestic and 10% Imported Materials by Weight"); or

• Clarify (specify which parts of the item come from where, as in "Doll Body Made in USA, Embroidery from China Applied in U.S.").

Companies that find a benefit in U.S.-origin claims can breathe a little easier today if they met the federal requirements but not the old California requirements.  Of course, you should always substantiate your claims before you make them.  While California has loosened its laws, the FTC has been taking a close look at MIU claims.  In this hot area, it pays to be doubly careful.

¹See Cal. Bus. & Profs. Code § 17533.7(b) & (c) (as amended by S.B. 633 (signed Sep. 1, 2015)).