On Aug. 9, 2022, the Federal Trade Commission (FTC) announced that it had referred a complaint to the U.S. Department of Justice alleging that Axis LED Group LLC, ALG-Health LLC and the individual who controls the companies violated the Made in USA Labeling Rule and FTC Act by claiming their products were Made in USA when they contained significant imported materials. Because the alleged fraudulent conduct involved personal protective equipment, such as masks, the alleged violations implicated the COVID-19 Act as well.
Accompanying the complaint was a proposed settlement ordering the defendants to pay $157,683.37 in civil penalties. An additional judgment of $2.8 million was suspended due to an inability to pay, but the FTC maintained the ability to lift the suspension if the financial information the defendants provided to the FTC was discovered to be inaccurate or incomplete.
In its press release, the FTC reiterated that protecting consumers and honest businesses from deceptive Made in USA claims is a “key priority” for the FTC, potentially signaling a trend upward in enforcement. Exactly one year since the Made in USA Labeling Rule took effect, this is the fourth enforcement action the FTC has brought for violations of the rule. The three other actions and resulting settlements were against Resident Home LLC, Lithionics Battery LLC and Lions Not Sheep Products LLC.
Notably, each of the four enforcement actions were filed with proposed settlements. Three of the four involved civil penalties of $100,000 to $215,000 — the fourth included a settlement of $753,000, but the commissioners voting in favor of the penalty noted that the defendant was a “repeat offender.” (See the joint statement of Chair Lina M. Khan, Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya, In the Matter of Resident Home LLC Commission File No. 2023179, June 22, 2022.)
Making Made in USA Claims Under the Labeling Rule
The Made in USA Labeling Rule prohibits claims on labels that a product was made in the United States unless:
- 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.
Further, the rule allows the FTC to obtain civil penalties immediately, rather than first issuing a cease-and-desist order to the violating entity. The financial penalties can be severe — up to $46,517 per violation, even for first-time violators. In each of the four enforcement actions, the companies at issue made “unqualified” Made in USA claims, marketing their product as Made in USA. Companies making an unqualified Made in USA claim for a product must ensure that “all or virtually all” ingredients or components of the product were made or sourced from the United States.
Notably, there is no bright-line rule for what constitutes “all or virtually all” and there is no specific percentage of foreign inputs that exceeds “virtually all.” The FTC’s guidance says only that all significant parts and processing that go into the product must be of U.S. origin and the product should contain no — or “negligible” — foreign content. The FTC also may look at (1) how much of the product’s total manufacturing costs can be assigned to U.S. parts and processing, and (2) how far removed any foreign content is from the finished product. Finally, there is no exception for components that cannot be found in the United States, when assessing whether a product meets the “all or virtually all” standard.
Companies whose products do not meet the “all or virtually all” standard may choose to make a “qualified” Made in USA claim for their products. Qualified Made in USA claims must describe the extent, amount or type of a product’s domestic content or processing. The FTC has provided examples of qualified Made in USA claims, including: “60% U.S. content,” “Made in USA of U.S. and imported parts” and “Couch assembled in USA from Italian Leather and Mexican Frame.” While qualified claims can protect against an enforcement action for a violation of the Made in USA rule, such claims also must be accurate to avoid running afoul of the FTC’s prohibition on false or misleading advertisements.
Lessons From One Year Under the Rule
Based on one year of enforcement under the new rule, companies wishing to make Made in USA claims should keep in mind the following:
- The FTC interprets the “all or virtually all” standard strictly. The FTC may view a relatively small amount of foreign material incorporated into a product as in violation of the rule.
- Companies may have to make tough choices on imported material. Where preferred material is only available abroad or is significantly more expensive if sourced from the United States, companies may have to choose between including such material in their products and making unqualified Made in USA claims.
- When in doubt, companies should qualify their Made in USA claims. Companies can avoid having to comply with the “all or virtually all” standard if their labels specifically describe the amount of foreign versus domestic material and/or processing in each product.
- Companies must consider Made in USA claims in all forms of marketing. While the rule applies specifically to Made in USA claims on labels, the FTC also has enforced improper Made in USA claims made on company websites, social media and other areas as violations Section 5 of the FTC Act (15 U.S.C. § 45), which prohibits unfair or deceptive acts or practices in or affecting commerce.
- Enforcement actions remain a threat. While the FTC has brought only four enforcement actions in a year under the new rule and has settled all of them, each has involved a six-figure fine. Expect the number of enforcement actions to increase in coming years as the FTC adjusts to the new rule and pursues this “key priority” for the agency.
Companies with questions about the implications of the FTC’s Made in USA rule on their labeling/advertising, or those facing a potential enforcement action, are encouraged to reach out to the McGuireWoods authors, who have extensive experience with these and other FTC matters.
McGuireWoods has published additional thought leadership analyzing how companies across industries can address crucial business and legal issues related to COVID-19.