In 1997, following consumer research and public comments, the FTC published an Enforcement Policy Statement on U.S. Origin Claims to guide marketers and manufacturers that want to make an unqualified Made in USA claim under the “all or virtually all” standard and those who want to make a qualified Made in USA claim.
In August 2021, the FTC finalized the Made in USA Labeling Rule, (the Labeling Rule). The Labeling Rule codified the “all or virtually all” standard for labels on products. Marketers are now subject to civil penalties if they use an unqualified Made in USA label on a product that is not “all or virtually all” made in the U.S., including in catalogs or online.
How to comply with the “all or virtually all” standard was previously covered by FTC Made in USA lawyer, including, but not limited to, what kinds of claims the Made in USA Policy Statement applies to, what kinds of claims the FTC Made in USA Labeling Rules applies to, consideration regarding entire product lines, and the standards for unqualified and qualified Made in USA claims.
The focus of this article is the factors that the FTC considers when determining whether a product is “all or virtually all” made in the U.S.
By way of summary, with regard to the standard for unqualified Made in USA claims, for a product to be called Made in USA or claimed to be of domestic origin without qualifications or limits on the claim, the product must be “all or virtually all” made in the U.S.
“All or virtually all” means that the final assembly or processing of the product occurs in the United States, all significant processing that goes into the product occurs in the United States, and all or virtually all ingredients or components of the product are made and sourced in the United States. In other words, the product should contain no - or negligible (do not materially affect how a product looks or works) - foreign content.
Marketers and manufacturers must possess a “reasonable basis” to support their express and implied claims, including competent and reliable evidence to back up a claim that a product is “all or virtually all” made in the U.S.
Whether a product is “all or virtually all” made in the U.S. is based upon the analysis of numerous factors by the FTC.
First, the product’s final assembly or processing must take place in the U.S. Only, then will the FTC consider other factors, including how much of the product’s total manufacturing costs can be assigned to U.S. parts and processing, how far removed any foreign content is from the finished product, and the importance of the foreign content to the product’s form or function.
Marketers and manufacturers often make the mistake of presuming that costs tell the entire story. They do not. For example, sometimes, only a small portion of the total manufacturing costs are attributable to foreign processing, but that processing represents a significant amount of the product’s overall processing.
The same could be true for some foreign components. Here, the foreign content (processing or parts) is more than negligible, and, as a result, unqualified claims are inappropriate.
Example No. 1: A company produces watches at a plant in New York using mostly U.S. parts and labor. All watches include movements, which are the parts that allow the watch to keep time. The company uses inexpensive Swiss movements in its watches. Movements account for a small proportion of the costs to make the company’s watches. However, without the movements the watches cannot tell time. Because movements are considered essential to the watches’ function, an unqualified Made in USA claim may likely be considered deceptive by the FTC.
Example No. 2: A table lamp is assembled in the U.S. from American-made brass, an American-made Tiffany-style lampshade, and an imported base. The base accounts for a small percentage of the total cost of making the lamp. An unqualified Made in USA claim may be considered deceptive for two reasons: The base may not be considered far enough removed in the manufacturing process from the finished product to be of little consequence and it may be considered a significant part of the final product.
Note, FTC guidance suggests that marketers and manufacturers should use the cost of goods sold or inventory costs of finished goods in their analysis. Those costs generally are limited to the total cost of all manufacturing materials, direct manufacturing labor and manufacturing overhead.
An area that marketers and manufacturers often overlook is that information from American suppliers about the amount of domestic content in the components and other elements that are purchased and used in final products should not be relied upon unless certain conditions are met. In other words, do not just assume that the input is 100% U.S.-made. For example, if given in good faith, marketers and manufacturers may be able to rely upon information from suppliers about the percentage of domestic content in the components and other elements.
An experienced FTC Made in USA attorney can assist with drafting of an acceptable verification, the implementation of compliance protocols designed to meeting corporate marketing objectives while at the same time minimize liability exposure, and defending your company against a private or regulatory inquiry relating to marking, advertising, marketing and/or labeling activities relating to the use of domestic origin claims.
Example: A company manufactures food processors in its U.S. plant, making most of the parts, including the housing and blade, from U.S. materials. The motor, that constitutes 50% of the food processor’s total manufacturing costs, is purchased from a U.S. supplier. The food processor manufacturer knows the motor is assembled in a U.S. factory. Even though most of the parts of the food processor are of U.S. origin, the final assembly is in the U.S., and the motor is assembled in the U.S., the FTC would not consider the food processor “all or virtually all” American-made if the motor itself is made of imported parts that constitute a significant percentage of the appliance’s total manufacturing cost. Prior to claiming the product is Made in USA, the manufacturer should look to its motor supplier for more specific information about the origin of the motor.
Marketers and manufacturers often ask how far back in the manufacturing process must it look. According to the FTC, in order to determine the percentage of U.S. content, one must look back far enough in the manufacturing process to be reasonably certain that any significant foreign content has been included in the assessment of foreign costs.
Foreign content incorporated early in the manufacturing process often may 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.
Example: Silicon used in a microchip within a computer is an early input into a computer’s manufacture and is likely to constitute a very small portion of the final product’s total cost. Conversely, wood in a less complex product like a wooden table is a direct and significant input. Whether the wood in a table is imported is considered by the FTC to be a significant factor in evaluating whether the finished product is “all or virtually all” made in the U.S.
What about raw materials?
Whether raw materials are included in the evaluation of whether a product is “all or virtually all” made in the U.S. may depend upon how much of the product’s cost the raw materials make up and how far removed from the finished product they are.
Example: If the gold in a gold ring is imported, an unqualified Made in USA claim for the ring is considered deceptive by the FTC. According to the agency, that is because of the significant value the gold is likely to represent relative to the finished product, and because the gold is an integral component and only one step back from the finished products. By contrast, according to the FTC, consider the plastic in the plastic case of a clock radio otherwise made in the U.S. of U.S.-made components. If the plastic case was made from imported petroleum, a Made in USA claim may potentially be considered appropriate by the FTC because the petroleum is far enough removed from the finished product and is an insignificant part of it as well.
Marketers and manufacturers should avoid expressly or implied making unqualified Made in USA claims in marketing, labeling and packaging unless all or virtually all” of the product in question is made in the U.S. If the final assembly or processing does not take place in the U.S. that is the end of the analysis. However, in the event of a “substantial transformation” in the U.S., all significant processing that goes into the product must take place in the U.S., and all or virtually all ingredients or components must be made and sourced in the U.S. Whether a product contains only negligible foreign content is an issue of fact and should be assessed by qualified advertising compliance counsel, alone with the proportion of total manufacturing costs attributable to U.S. parts and processing, how far removed any foreign content is from the finished product, and the importance of foreign content to the product’s form or function.
