FTC: Made In The USA Comments Concerning TIMEX Corporation--P894219
FEDERAL TRADE COMMISSION
MADE IN USA POLICY COMMENT
FTC FILE NO. P894219
Submitted on Behalf of:
Park Road Extension
Frank A. Sherer, Jr.
August 8, 1997
Timex Corporation submits the following comments on proposed guidelines for U.S. origin claims. These comments are being submitted in response to the Commission's request for comments published in May 1997.
Timex Corporation believes the proposed guidelines generally afford a reasonable balance between consumer concerns, customs marking requirements and other considerations involved in making U.S. origin claims. As is more fully set forth below, Timex believes that the proposed safe harbors for "Made in USA" claims would not enable deceptive "Made in USA" claims with respect to watches. Timex notes, however, that the guides do not appear to address products manufactured in the U.S. Virgin Islands. Several companies in the United States Virgin Islands manufacture watches; Timex expresses no opinion as to whether "Made in USA" claims with respect to watches made in the U.S. Virgin Islands would be deceptive.
In addition to the guidance for use of "Made in USA" claims, the Commission has indicated that it is considering authorizing unqualified use of the phrase "Assembled in USA" for products that do not meet the requirements for a "Made in USA" claim. The Commission also is considering permitting the use of "Origin: USA," on products that are not required to be marked with a foreign country of origin under the Customs rules if certain other conditions are met. Timex is concerned that consumers will not recognize a distinction between products marked as "Assembled in USA" or "Origin: USA" and products marked "Made in USA," and that identification of products as "Assembled in USA" or "Origin: USA" without further explanation would effectively permit misleading claims of US origin for products that do not qualify for a "Made in USA" claim.
There are two basic types of watches: analog watches and digital watches. Both are made by assembling a number of small parts; the assembly process and intermediate products are, however, different for the different types of watches. Timex therefore will explain the process for each type of watch. (There also are so-called "combo" watches -- watches with both analog and digital displays. As their name implies, these watches are created by, in essence, combining an analog watch assembly and a digital watch assembly in a single case.)
An analog watch is made by combining a "movement" with a watch dial and hands to create what Timex calls a "fit-up," assembling the "fit-up" into a watch case to create a "watch head," and attaching the strap, band, chain or other attachment to the watch head to create a complete watch. The movement is a commodity in and of itself that is made up of a collection of small parts and subassemblies. Analog movements are sold, with or without batteries, on the open market, and can be used in the manufacture of timing products such as mini-clocks and watches, and in many other industrial and instrument products -- even, potentially, bombs. The "fit-up" is made by combining the movement (and battery for most watches) with dial and hands. At this point, there is a product with which a person can tell time. The product is not, however, a watch -- nor will it necessarily become one. As noted above, an analog movement that is suitable for a watch may also be suitable for, for example, a mini-clock or timing device for the instrument panel of an airplane. The "fit-up," similarly, may be used for a mini-clock just as easily as for a watch. It is only when the "fit-up" is assembled into the watch case, to create a watch head, that there is a product recognizable as a watch. While the product may still need a strap, band or other attachment in order for it to be worn, Timex does not believe these attachments are always needed in order for a consumer to recognize the product as a watch (many pocket watches, for example, are sold without attachments).
Cases for analog watches are, like movements, sold on the open market. Many case vendors make and sell only cases. The design and manufacture of the watch case is an important aspect of watch manufacture, as the design and construction of the watch case is the primary factor in establishing the shock resistant and water resistant properties of the finished watch. The case also is one of the most important parts of the watch from an aesthetics perspective.
A digital watch is created by combining a module -- essentially the equivalent of an analog watch fit-up -- with a watch case. The display of a digital watch (usually a liquid crystal display) is an integral part of the watch module; unlike the analog watch movement, dial and hands, the "mechanical" portion of the module and display generally are not sold separately. Instead, the entire module, including display, is assembled and then sold as a single unit. As with an analog "fit-up," the digital module is suitable for use in a variety of non-watch products, such as pens, calculators, desk sets, and mini-clocks, as well as in watches.
The design and manufacture of a digital watch case can be a more significant task than the manufacture of an analog case, as the manufacture of the case is likely to involve incorporation of more components and subassemblies than are typically incorporated into analog watches. Analog watches typically have one or two "controls" -- the crown, which is used to set the time, and, in some cases, a push button used to turn on a light to illuminate the watch or operate other functions of the watch. Digital watches, on the other hand, frequently incorporate a number of functions that are controlled by "buttons" in the watch case. Each of these buttons usually includes an external cap, a metal shaft, a spring and a clamp, and must be oriented to touch a contact point on the module in order to control the module's functions. The manufacture of a water resistant, attractive digital watch case, and incorporation of the buttons into the case, is an exacting task, with very low tolerance for error. As with analog cases, the design and manufacture of the case is the most important feature in determining the appearance, shock resistance and water resistance of the finished watch. (Timex notes that, for customs purposes, the crown of an analog watch and push buttons of a digital watch are regarded as part of the movement/module. In the manufacturing process, however, the buttons of a digital watch are assembled as part of the watch case and the "temporary crown and stem " of an analog movement are removed so the stem can be modified and reassembled with a crown designed to match the watch case.)
"Made in USA" claims
The proposed guides state that "a marketer making an unqualified U.S. origin claim should, at the time it makes the claim, possess and rely upon a reasonable basis that substantiates that the product is substantially all made in the United States," and describe two "safe harbors" in which it will not be considered a deceptive practice for a marketer to make a "Made in USA" claim. The first safe harbor is where (1) U.S. manufacturing costs constitute 75% of the total manufacturing costs for the product; and (2) the product was last substantially transformed in the United States. The second safe harbor is where (1) the product was last substantially transformed in the United States; and (2) all significant inputs into the final product were last substantially transformed in the United States. "Substantial transformation" is defined as "a manufacturing process which results in an article's having a new name, character and use different from that which existed prior to the processing." The Commission has stated that, for purposes of these guides, "a good will be considered to have been substantially transformed if (1) it would be considered to be substantially transformed under 19 CFR 134 and the rulings of the U.S. Customs Service and decisions of the United States courts issued pursuant thereto; or (2) it undergoes an applicable change in tariff classification and/or satisfies other applicable requirements set out in the NAFTA marking rules, 19 CFR 102."
Timex believes that the guidelines proposed adequately protect against the possibility that a watch could be advertised as "Made in USA" even though the watch is not substantially all made in the United States.
The U.S. Customs service considers the country of origin of a watch to be the country of manufacture of the watch movement (or, in the case of a digital watch, module). Implicit in this view is a view that the movement does not undergo any "substantial transformation" when it is combined with dial and hands to create a fit-up or when it is incorporated into the watch case to create a watch. Under NAFTA, as with the U.S. Customs service, the country of origin for a watch is considered to be the country in which the movement or module is manufactured.
Timex is not convinced that the country of manufacture of the movement or module is properly considered the country in which the last "substantial transformation" takes place for purposes of "Made in USA" claims -- or for Customs purposes. Assuming, however, that the Commission's proposed guides limit the definition of "substantial transformation" to the circumstances described under U.S. Customs regulations and NAFTA, Timex has little doubt that the proposed safe harbors will enable only those whose watches truly are "substantially all" made in the United States to advertise the watches as being "Made in USA." The movement/module is comprised of a large number of parts; requiring that the movement/module be made in the United States in order to substantiate a "Made in the USA" claim, coupled with a requirement that the cost of the US input into the watch be at least 75% of the watch or, alternatively, that all significant inputs into the movement/module also be made in the United States should be sufficient to ensure that "Made in USA" claims are not deceptive when applied to watches.
Timex submits that it may be appropriate to consider the assembly of the watch movement into the watch case to form a watch head as a "substantial transformation." Most countries define the place of origin of a watch as the place where the module is put in the case and, as noted above, the watch movement or module can be used in products other than watches. It is not until the movement/module has been assembled into a watch case that there is a product that is unquestionably a watch. Moreover, accepting the assembly of the watch movement into the watch case to form a watch head as a "substantial transformation" should not open the door to deceptive "Made in USA" claims. Timex' costs for assembling movements/modules into watch cases average less than 10% of the total cost of manufacturing a watch. For manufacturers of luxury watches, whose costs for various watch components will be higher than Timex' costs because of the materials they use (e.g., gold watch cases), the cost of final assembly is likely to be an even smaller percentage of the cost of the watch. To achieve the 75% US costs required under the first safe harbor, therefore, a watch manufacturer would have to do more than final assembly in the United States. Thus, recognizing assembly of a watch movement into a watch head as a "substantial transformation" would not permit a marketer to make a "Made in USA" claim for a watch comprised of a non-US module or movement (including dial and hands) and case under the first "safe harbor" proposed by the Commission.
Recognizing the assembly of the watch movement/module into a watch case as a "substantial transformation" also would not afford a basis for deceptive "Made in USA" claims under the second safe harbor proposed by the Commission. The second safe harbor requires that (1) the product was last substantially transformed in the United States and (2) all significant inputs into the final product were last substantially transformed in the United States. Timex submits that the significant inputs into a watch are the movement or module and, perhaps, the watch case. To require that these components be "substantially transformed" in the United States would mean, in essence, that they must be assembled in the United States. Timex does not believe that any consumer would feel deceived by a "Made in USA" claim for a watch that was assembled in the United States using a movement that also was assembled in the United States, and therefore believes that the second safe harbor also would not create a loophole allowing misleading "Made in USA" claims with respect to watches even if the assembly of the watch movement/module into a watch case is recognized as a "substantial transformation." If, however, the Commission is concerned that a "Made in USA" claim would be deceptive under these circumstances, the Commission might consider adding a lower cost threshold (such as 51% US costs) to the second safe harbor.
As noted above, the proposed guides for "Made in USA" claims do not address such claims with respect to products made in the U.S. Virgin Islands. There are a number of watch manufacturers in the United States Virgin Islands who manufacture movements/modules from imported parts and assemble these movements/modules into imported watch cases. The U.S. Customs service has stated that watches made with movements that are assembled in the United States Virgin Islands using non-US parts are considered products of the United States Virgin Islands for customs purposes and are therefore exempt from the country of origin marking requirements of 19 U.S.C. 1304 even if the completed movement is shipped to another country where a foreign-made case, dial and strap are assembled together with the movement to make the finished watch. Letter Opinion No. HQ 735486 dated July 22, 1994 (copy attached). The Customs service explicitly deferred to the Federal Trade Commission, however, on whether a "Made in USA" marking on such watches would be considered false or deceptive.
"Assembled in USA" claims
The Commission has indicated that it is considering authorizing unqualified use of the phrase "Assembled in USA" for products that do not meet the requirements for a "Made in USA" claim. The Commission also has noted its concern that consumers might perceive an unqualified "Assembled in USA" claim as the equivalent of a "Made in USA" claim and, therefore, that unqualified use of the phrase "Assembled in USA" would be deceptive. Timex believes the Commission's concern is justified, and that "Assembled in USA" claims should be permitted only with modifying phrases that clearly reflect the non-US origin of the product (e.g., "Assembled in USA of foreign parts"). For some products it may be appropriate to permit the modifying phrase to indicate only the country of origin of a significant, identified component. Thus, for example, it may not be considered deceptive to market a watch that undergoes final assembly in the US as "Assembled in USA; Philippines movement." Such a marking also would satisfy marking requirements in almost every other country (most of which identify the place of origin of a watch as the place of final assembly), and would therefore resolve -- for watches -- the concerns that have prompted the Commission to consider an "Origin: USA" marking for certain products.
"Origin: USA" markings
The Commission also has indicated that it is considering authorizing use of the phrase "Origin: USA" in certain limited circumstances in order to permit uniform labeling of products for sale both in the United States and abroad. The goal of permitting uniform labeling of products for sale both in the United States and abroad is an important goal to Timex. Timex is concerned, however, that the proposed "Origin: USA" marking would be equated with "Made in USA" by consumers and, even with the additional marking requirements for products sold in the USA, would be misleading. If watches were substituted for shoes in the circumstance described in Example 2, for example, a consumer likely would have made the decision to purchase, and perhaps even completed the purchase, without seeing the packaging with the clarification concerning origin. This is because watches frequently are displayed without packaging; packaged products are pulled from a storage cabinet or shelf once the consumer has decided which watch to purchase. Because Timex believes consumers will equate "Origin: USA" with "Made in USA" and will not necessarily see qualifying language before making a purchasing decision under the guidelines proposed, Timex does not support this proposed new marking. Timex also notes that the additional marking requirements for those products sold in the US effectively creates a dual marking requirement and may not, therefore, resolve the uniform labeling concern.
Timex appreciates the opportunity to comment on the proposed guides and would be pleased to assist in any further consideration of proposed guides for the use of U.S. origin claims.