November 2012

The Federal Trade Commission (“FTC”) is responsible for preventing deception and unfairness in the marketplace.  The Federal Trade Commission Act grants the FTC the ability to bring enforcement actions against false or misleading claims that a product is of US origin.[1] Additionally, the FTC interprets the Buy American Act, which requires that a product manufactured in the United States for more than fifty percent of its parts be considered “Made in USA” for government procurement purposes. [2] The FTC also interprets the American Recovery and Reinvestment Act of 2009.[3] Its law enforcement efforts pursue fraudulent marketers who wrongfully capitalized on the Act.

1. Although the “All or Virtually All” Standard Has No Bright Line, the Commission Will Consider Several Factors

The FTC formally announced in 1997 that it would require that a product advertised in an unqualified “Made in USA” claim must be “all or virtually all” made in the United States.[4] When a manufacturer claims that a product is “Made in USA,” it should possess and rely on a “reasonable basis” that the product is in fact all or virtually all made in the United States at the time the representation is made. This means a manufacturer needs to be able to substantiate its claims through competent and reliable evidence.[5]

A product that is all or virtually all made in the United States will ordinarily be one in which all significant parts[6] and processing that go into the product are of US origin. In other words, where a product is labeled or otherwise advertised with an unqualified “Made in USA” claim, it should only contain negligible amounts of foreign content.[7] The FTC has said that although there is no “bright line” to establish when a product is or is not “all or virtually all” made in the United States, it will consider a number of factors in making this determination.

A. To Make an Unqualified “Made in USA” Claim, The First Factor Requires That The United States Be the Site of Final Assembly or Processing

The first factor that the FTC takes into account is a prerequisite requirement. For a product to be considered “all or virtually all” made in the United States, the final assembly or processing of the product must take place in the United States. Because consumer perception evidence has indicated that the country in which a product is put together or completed is highly significant to consumers in evaluating where the product is made, the FTC has made this a minimal threshold requirement that must be fulfilled before it considers any other factors.

Regardless of the extent to which a product has other parts or processing in the United States, to meet the “all or virtually all” made in the United States standard, the product must be “substantially changed” in the United States. For example, even if a product imported into the United States has a very high proportion of US manufacturing costs, the US Customs Service will not consider it to have been last substantially transformed in the United States. In these cases, the product would be required to be marked with a foreign country of origin and an unqualified US origin claim could not be appropriately be made for the product.[8] Another example is a product that was manufactured primarily in the United States (and last substantially transformed there) but sent to Canada or Mexico for final assembly. This product can have a US origin claim, but it should be qualified to disclose the assembly that took place outside the United States.[9]

B. The Second Factor is the Proportion of US Manufacturing Costs

If the product is assembled or otherwise completed in the United States, the FTC will also examine the percentage of total cost of manufacturing that is attributable to US costs, such as parts and processing, and to foreign costs.  Where the percentage of foreign content is very low, it is more likely for the FTC to consider the product all or virtually all made in the United States. However, there is no fixed point at which products suddenly meet the “all or virtually all” standard. Instead, the FTC conducts the inquiry on a case-by-case basis and balances the proportion of US manufacturing costs with the other factors discussed. The FTC also considers the nature of the product and the consumers’ expectations in determining whether an enforcement action is warranted.[10] When a product has an extremely high amount of US content, potential consumer deception resulting from the unqualified “Made in USA” claim is unlikely. Therefore, the costs of bringing an enforcement action would likely outweigh any benefit that might accrue to consumer and competition.

To calculate manufacturing costs, manufacturers should ordinarily use as their measure the cost of goods sold or finished goods inventory cost, because those terms are used in accordance with generally accepted accounting principles.  Such costs will generally include (and be limited to) the cost of manufacturing materials, direct manufacturing labor, and manufacturing overhead. In determining the percentage of US content, marketers should look far enough back in the manufacturing process that a reasonable marketer would expect that it had accounted for any significant foreign content. [11]

C. The Final Factor is the Remoteness of Foreign Content

The FTC will also consider how far removed from the finished product the foreign content is. For this analysis, raw materials[12] are neither automatically included nor automatically excluded in the evaluation or whether a product is all or virtually all made in the United States. Whether or not a product whose parts and processing are of US origin would meet the “all or virtually all” standard because the product incorporated imported raw materials, like any other input, depends on what percentage of the cost of the product the raw materials constitute and how far removed from the finished product the raw materials are.[13]

For example if gold in a gold ring or clay used to make ceramic tile was imported, an unqualified “Made in USA” claim for the ring or tile would be inappropriate because of the significant value the gold and clay are likely to represent relative to the finished product because gold and clay are only one step back from the finished articles and are integral components for those articles.[14]

However, contrast this with plastic that was made from imported petroleum in the plastic case of a clock radio that was otherwise met the “all or virtually all” standard.  Suppose the petroleum was far enough removed and was an insignificant input. In this case, it is still likely appropriate to label the clock radio with an unqualified “Made in USA” claim.

Additionally, because raw materials, unlike manufactured inputs, may be inherently unavailable in the United States, the FTC will also look at whether or not the raw material is indigenous to the United States, or available in commercially significant quantities. When the material is not found or grown in the United States, consumers are likely to understand that a “Made in USA” claim on a product that incorporates such materials means that all or virtually all of the product, except for those materials not available here, originated in the United States. However, if the imported material constitutes the whole or essence of the finished product, for example the rubber in a rubber ball or the coffee beans in ground coffee, it would likely mislead the consumers to label the final product with an unqualified “Made in USA” claim.