For products imported into or offered for sale in the United States, there are a couple of federal agencies' rules that have a say in how you mark your goods; some are a "may" and some are a "must." Do you understand the differences? This will help guide your analysis as you consider the impact on your goods.
The "May" of FTC Made in USA Marking
There is no requirement that a company label its products as "Made in USA"; rather, it is a privilege to make such a claim, provided the facts support the standard that has been issued by the U.S. Federal Trade Commission (FTC or Commission). That standard has recently come under review as many more companies are interested in promoting the "American-ness" of their products consistent with the administration's recent executive orders. See, e.g., E.O. 13881 on Maximizing the Use of American-Made Goods, Products and Materials, 84 Fed. Reg. 34257 (July 15, 2019).
On July 16, 2020, the U.S. Federal Trade Commission (FTC) published a Notice of Proposed Rulemaking (NPRM) regarding unqualified U.S.-origin claims under its Made in USA Labeling Rule. The Rule, published at 85 Fed. Reg. 43162 (July 16, 2020), accessible here, is an update to the broad Enforcement Policy Standard that was released by the Commission in 1997. In response to a public workshop held last fall in which a variety of issues were addressed, including consumer perception of such claims, enforcement, and whether changes were needed, the FTC collected public comments with a particular point of focus on the enforcement authority granted to the FTC to pursue and prevent unfair and deceptive "Made in USA" (MUSA) claims. There was widespread support for the agency to invoke its unused authority under 15 U.S.C. 45a to issue a rule addressing MUSA claims that would have a "strong deterrent effect" against unlawful claims "without imposing new burdens on law-abiding companies," citing the Transcript of Made in USA: An FTC Workshop (Sept. 26, 2019) at 63-72. The statute had previously granted the authority to the Commission to issue rules to prevent unfair or deceptive acts or practices relating to MUSA labeling and, more importantly, to seek civil penalties for violations of such rules. The NPRM would bring this authority to life by codifying what the Commission sees as existing standards. The goals of the NPRM are (1) to strengthen the enforcement of the program, and (2) to make it easier for companies to understand and comply with the requirements.
Key factors for consideration. It continues to be a "prohibited act" as an unfair or deceptive act or practice to label any product as 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 U.S., and all or virtually all of the ingredients or components of the product are made and sourced in the United States. These rules apply to all goods or services promoted or offered for sale in the U.S. and to both explicit claims (e.g., "Made in USA"; "American-Made") and implied claims that arise from descriptive statements (e.g., "True American Quality") or images (e.g., Americana imagery, such as American flags).
As now proposed, these rules would also now extend to any mail order catalog or promotional material that includes a seal, mark, tag, or stamp labeling the product "Made in the United States." Violations would be subject to civil penalties consistent with 15 U.S.C. § 57a, which are currently set at $42,530 per violation. The NPRM also acknowledges that the Rule shall not be construed as superseding, altering, or affecting any other federal statute or regulation relating to country of origin labeling requirements, such as those enforced by the U.S. Customs and Border Protection (CBP) as discussed below, or any other state law.
During the workshop, there was discussion regarding the Commission's current enforcement priorities and the impact on job creation or innovation, and on the chilling effect of legitimate claims. More than one commenter noted that in certain instances the enforcement discretion to enforce the "all or virtually all" standard against companies that use U.S. labor in parts to the extent possible may chill such claims because of the fear of getting it wrong. Instead they "play it safe" instead by not making such claims. The Commission is also aware of the difficulty in addressing MUSA fraud by overseas actors selling directly to U.S. consumers. Given these complicated issues, the Commission is seeking comment on the proposed updated rules, with a deadline to submit within 60 days of publication, namely, on or by September 14, 2020.
The "Must" of CBP Country of Origin Marking
In contrast to the privilege of using an MUSA marking, there is a requirement that any non-U.S. origin product that is imported into the United States be marked with its country of origin. 19 U.S.C. § 1304. There are very strict marking regulations that are imposed on imported goods to inform customers as to the origin of the goods, as provided for in 19 C.F.R. Part 134. Not only do the regulations require the legible notice of "Made in" or "Product of" the country of origin; the rules also dictate placement, font size, and other particulars as to how the marking must be made.
Another important distinction is the test that applies to determining the origin of a product under the Customs marking rules. While the FTC imposes an "all or virtually all" standard, the Customs regulations apply a different test. For products that may be imported from a country with which the U.S. has a free trade agreement, like Canada or Mexico under the U.S.-Mexico-Canada Free Trade Agreement (USMCA), which replaced the North American Free Trade Agreement, there are certain marking rules based upon a "tariff shift" and/or regional value content that must be followed. For other countries where no trade agreement applies, a "substantial transformation" test will dictate the product's origin. As you might imagine, the patchwork of rules can be complex and may result in a product being considered to be of U.S. origin under the Customs rules, but as not meeting the "all or virtually all" standard imposed by the FTC. Therefore, it is important to understand how the origin of your products has been determined to ensure compliance with whichever set of requirements applies.
While penalties are just now being contemplated by violations of the MUSA provisions, CBP has had the authority to enforce compliance through a de facto monetary penalty for many years. Specifically, the Customs regulations provide that the agency assess a 10% marking duty on any imported product that is found to be marked in violation of the requirements, unless corrected or exported under Customs supervision. In considering its new potential authority, the FTC could take a page from the CBP rulebook, as Customs regularly uses its enforcement authority to ensure compliance with the rules. Moreover, because the 10% is assessed on the domestic value of the imported goods and treated as a "duty" and is technically not a penalty per se, Customs officers are not permitted to mitigate the amount applied, as they would if it were charged as a penalty, under 19 U.S.C. § 1618. As such, the amount owing to CBP for mismarked imported items, in addition to normal Customs duties, can quickly add up.
Understanding These Rules and How They May Impact Your Business
For any company offering products to U.S. customers, it is critical to understand these marking rules and how they might apply to your goods, as getting it wrong can be costly. Moreover, there is an increased impetus to source U.S.-origin goods, whether to meet consumer preference or obtain a benefit for government contracting, such as under the Buy American Act of 1933, as amended. Once the origin is determined, understanding when and how the product must be marked is the next important step for bringing your product to market, and the enforcement for non-compliance is becoming ever more critical.
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If you are interested in submitting comments in response to the NPRM or gaining a better understanding as to how these rules apply to your products, please reach out to us. We can gladly assist in guiding you through these analyses and provide you with options to best meet your business needs.