FTC issues Final Rule codifying policy on unqualified “Made in USA” claims and authorizing penalties

News

FTC issues Final Rule codifying policy on unqualified “Made in USA” claims and authorizing penalties

19 July 2021

The Federal Trade Commission (FTC) recently issued a Final Rule, which codifies the Commission’s longstanding “all or virtually all” policy on unqualified U.S.-origin claims, extends enforcement to online labeling, and enables the Commission to seek civil penalties of up to US$43,792 per violation of the Final Rule. The Final Rule is effective 13 August 2021.

Separately, but informed by FTC’s Final Rule, the United States Department of Agriculture (USDA) announced it will be initiating a top-to-bottom review of its own “Product of USA” label policy that permits meat product producers to use the claim voluntarily on certain qualifying products. USDA indicates it aims to use FTC rulemaking learnings to ensure the label reflects what a plain understanding of those terms means to U.S. consumers. These developments underscore the ongoing importance of the regulatory environment to companies that contemplate incorporating Made in USA themes into current or future marketing communications.

FTC “Made in USA” Policy

The Proposed Rule and Final Rule, described in more detail below, can be viewed in the Federal Register at 85 FR 43162¹ and 86 FR 37022².

Background

In 1997 the Commission released an Enforcement Policy Statement on U.S. Origin Claims, (Policy Statement)³ pursuant to Section 45 of the FTC Act, which does not authorize the use of monetary penalties for violations. Under a separate section of the FTC Act, Section 45a, the FTC was authorized to seek penalties and other relief for Made in USA fraud, but only after the Commission formally codified a rule.⁴ Until recently, there had been consistent bipartisan consensus among the Commissioners at the FTC that Made in USA fraud should not be penalized. Therefore, the Enforcement Policy remained an informal document enforced under Section 45, rather than a codified rule enforced under Section 45a.

The 1997 Policy Statement established the so-called “all or virtually all” standard for unqualified Made in USA claims. Specifically, the standard requires that for an unqualified Made in USA claim, the product should (1) undergo final assembly or processing in the United States and (2) the product's contents should be "all or virtually all" U.S. origin. Under this standard, only "negligible" or de minimus amounts of foreign content are permitted. If a product contains more than minimal foreign content, it may still be eligible for a qualified claim, such as "made in USA from U.S. and foreign ingredients."

Rule making process

In September 2019 the FTC held a stakeholder workshop on Made in USA claims. According to the FTC, participating stakeholders expressed nearly universal support for the Commission to exercise authority pursuant to 15 U.S.C. 45a to issue a rule addressing Made in USA claims, arguing that it could have a strong deterrent effect against unlawful Made in USA claims without imposing new burdens on law-abiding companies that were in adherence with the decades-old “all or virtually all” standard.

In July 2020 the Commission released a Notice of Proposed Rulemaking on Made in USA labeling.[5] The Proposed Rule proposed to codify the “all or virtually all” standard, to expand enforcement to online labeling, and to authorize penalties. The Proposed Rule received over 700 comments. According to the Commission, the majority of comments supported finalizing the rule as proposed.

Final Rule

The Final Rule covers labels on products that make unqualified Made in USA claims. It prohibits marketers from making 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. The rule also covers labels making unqualified Made in USA claims appearing in mail order catalogs or mail order (electronic) advertising.

All or virtually all standard. In codifying the longstanding “all or virtually all” standard, the Commission specifically declined to adopt or incorporate any of the different standards recommended by commenters. For example, the FTC considered but declined a percentage-based assessment, the flexibility to exclude foreign content unavailable in the United States, or incorporation of the Customs Border Patrol (CBP) “substantial transformation” standard. The FTC also declined to revise or further clarify any of the definitions or examples of “Made in USA” claims, noting that “the means of communicating U.S. origin are too numerous to list” and “the non-exhaustive list of examples given provide sufficient guidance on the scope of covered express and implied claims.”

Interplay between labeling and advertising. The FTC conducted this rulemaking under a special provision in Section 45a of the FTC Act, which authorizes the Commission to issue rules governing ‘‘Made in the U.S.A.” claims specifically on “labels.” This authority differs from FTC’s general authority under Sections 5 and 12 of the FTC Act to regulate advertising generally. The FTC concluded that Section 45a allowed it to regulate labels “appearing in all contexts, whether, for example they appear on product packaging or online.” However, the FTC clarified, “the final rule does not cover Made in USA claims in all advertising.”

Thus, the Final Rule applies to “Made in USA” claims appearing on product labels and in mail order catalogues or mail order promotional materials (which included electronic mail). Although the Final Rule focuses on labels only, the FTC also notes that its “general authority under Sections 5 and 12 of the FTC Act covers advertising, including advertising of qualified and unqualified MUSA claims.” Therefore, the FTC could continue to take action against advertising not involving “labels,” but in doing so the Commission would have to rely on its Sections 5 and 12 authorities, not the Final Rule issued under Section 45a.

Penalties. The FTC Act allows the Commission to seek civil penalties of up to US$43,792 per violation of the Final Rule.

Qualified claims. Section 45a is directed at labels on products declaring that a product is ‘‘in whole or substantial part of domestic origin,’’ and therefore the Final Rule is directed to unqualified claims, rather than more varied qualified claims. Accordingly, the FTC will continue to address deceptive qualified U.S.-origin claims under its general authority in Section 5 of the FTC Act and in keeping with the Policy Statement.

Petitions for exemption. A new Section, § 323.6, was added to address commenter concerns about the applicability of the ‘‘all or virtually all’’ standard across product categories. This provision allows marketers and other covered persons to seek full or partial exemptions if they can demonstrate application of the rule’s requirements to a particular product or class of product is not necessary to prevent the acts or practices to which the rule relates.

Effective date. The Final Rule is effective 13 August 2021. Because in the FTC’s view the Final Rule merely codifies these longstanding enforcement principles and imposes no new requirements on marketers, the Commission concluded a delayed effective date is unnecessary.

Commissioner comments. The Commission vote approving publication of the final Made in USA Labeling Rule in the Federal Register was 3-2. Several of the Commissioners have issued statements regarding the Final Rule, which can be viewed in the Federal Register publication, and on the FTC website, here.

USDA “Product of USA” labeling

The Final Rule is clear that it does not affect “the application of any other federal law or regulation relating to country-of-origin labeling requirements.” The USDA oversees two separate U.S.-origin labeling programs: mandatory country of origin labeling (COOL) at retail for certain agricultural products considered “Covered Commodities” under Agricultural Marketing Service (AMS) regulations implementing the Agricultural Marketing Act of 1946; and Food Safety and Inspection Service’s (FSIS’s) policy for voluntary “Made in USA” claims on labels for amenable meat and poultry products. In its discussion of the Final Rule, the FTC uses the example of mandatory seafood origin labeling under AMS COOL to reinforce that the FTC does not intend to supersede USDA origin-labeling programs.

The FTC received over 450 comments requesting clarification of the rule that applies to beef products, and dozens of comments related to shrimp products. Although the FTC indicates it defers to USDA’s origin-labeling programs, the FTC also notes in its explanation of the Final Rule that FSIS has expressed an intent to revisit its policy for voluntary “Made in USA” claims on meat and poultry product labels and that “the Commission remains committed to engaging with the USDA to ensure American consumers receive truthful and accurate information about the beef products they buy.” FSIS has not initiated rulemaking on this topic, although the White House Office of Management and Budget’s Unified Agenda indicates that FSIS is working on a proposed rule with a target date of November 2021.[6]

Next steps

Adoption of the FTC Final Rule marks a significant change in the regulatory environment in which companies operate even if the codified long-standing policy is unchanged. Similarly, companies marketing meat and poultry products under FSIS’s jurisdiction should remain attentive to FSIS’s planned rulemaking and the potential interplay between FTC and FSIS policies. Given the amount of formal and informal enforcement and attention on Made in USA Claims at the FTC and USDA, the formalizing of the FTC policy and apparent continued focus at FSIS suggests that companies should exercise great care in ensuring that sourcing, manufacturing and labeling practices are well-documented and fully support qualified and unqualified Made in USA related claims.