|July 23, 1997
The Honorable John D. Dingell
Dear Representative Dingell:
Thank you for your recent letter concerning the Federal Trade Commission's proposed Guides for the Use of U.S. Origin Claims. Chairman Pitofsky has asked me to respond to the questions you posed.
As you know, after a lengthy review process, the Commission, on May 5, 1997, issued proposed Guides for the Use of U.S. Origin Claims ("proposed guides"). The proposed guides would permit a product to be labeled or advertised as "Made in USA" only if the product was substantially all made in the United States. The proposed guides further provide for two safe harbors for manufacturers attempting to comply with the "substantially all" standard. The first safe harbor encompasses products whose U.S. manufacturing costs constitute 75% of total manufacturing costs and were last substantially transformed in the United States. The second safe harbor applies to products that have undergone two levels of substantial transformation in the United States: i.e., the product's last substantial transformation took place in the United States, and the last substantial transformation of each of its significant inputs took place in the United States. The proposed guides also address other, related issues, including qualified U.S. origin claims, claims regarding specific processes and parts, multiple item sets, and cost calculation issues. The Commission is accepting public comment on the proposed guides until August 11, 1997.
In your letter, you reiterate your opposition to any lowering of the current standard used by the FTC to evaluate "Made in USA" claims and indicate that you have a number of concerns about the Commission's proposed guides. You also state, however, that you wish to gain a deeper appreciation of the information the FTC used in developing its proposal and so include a list of questions. I am pleased to supply the information you requested.
At your request, your questions, as well as this response, will be placed on the public record as a comment on the proposed guides.
I hope you find this information helpful. Please let me know whenever I can be of service.
Responses to Questions from the Hon. John D. Dingell
1. You have asked about the relevance of the Section 320933 of the Violent Crime Control and Law Enforcement Act of 1994 ("Crime Bill") to the proposed guides and why this provision is not mentioned in the FTC's May 1997 Federal Register notice.
As noted in the Commission's Federal Register notice of October 18, 1995, in which the Commission first solicited public comment on its approach to evaluating "Made in USA" claims, Section 320933 of the Crime Bill does not set out a substantive standard for "Made in USA" claims (this is different, as you know, from other then-pending legislative proposals, which set out specific percent thresholds that products had to meet in order to be called "Made in USA," including in one instance a 60% threshold). Instead, Section 320933 reaffirms the FTC's authority to regulate such claims under Section 5 of the FTC Act, providing simply that "Made in USA" labels shall be consistent with the decisions and orders issued pursuant to Section 5 of the FTC Act. Section 320933 further provides that the Commission "may periodically consider an appropriate percentage of imported components which may be included in the product and still be reasonably consistent with such decisions and orders."
Although not mentioned in the Commission's May 1997 Federal Register notice, Section 320933 is discussed in earlier Federal Register notices published by the FTC. See 60 Fed. Reg. 53922, 53928 n. 6 (October 18, 1995); 60 Fed. Reg. 13158-59 (March 10, 1995). In issuing the proposed guides for U.S. origin claims, the Commission has acted consistently with Section 320933 of the Crime Bill, by formulating the guides in accordance with its mandate under Section 5 of the FTC Act and engaging in the sort of periodic reexamination of its approach in this area that appears to be contemplated by Section 320933.
2. You have asked about the Commission's decision to undertake a comprehensive review of its approach to "Made in USA" claims and the relationship between that decision and the Commission's actions against two footwear manufacturers, Hyde Athletic Industries ("Hyde") and New Balance Athletic Shoe, Inc. ("New Balance"). You have also requested copies of the relevant pleadings in these cases. Accordingly, enclosed herewith are copies of the original and revised complaints, and the original and revised consent agreements, in Hyde, and the original and revised complaints, and the sole consent agreement, in New Balance.
On September 20, 1994, the Commission issued an administrative complaint against New Balance and provisionally accepted a consent agreement with Hyde, alleging among other things, that each had represented its athletic shoes to be "Made in USA" when the shoes were not "all or virtually all" made in the United States. In accordance with statutory requirements, the proposed consent agreement with Hyde was placed on the public record and public comment was accepted for 60 days. In response to the proposed Hyde consent agreement, the Commission received over 150 comments. The vast majority of these comments criticized the "all or virtually all" standard as too stringent, arguing, among other things, that increased globalization of production has led most consumers to no longer assume that a product labeled "Made in USA" was "all or virtually all" made in the United States. In addition, a number of members of Congress expressed their concerns about the Commission's standard for "Made in USA" claims. In light of the significant public interest in a standard, as well as the lack of any direct re-examination of the standard during its 50-year history, the Commission announced on July 11, 1995 that it would conduct a comprehensive review of its standards for evaluating "Made in USA" claims. Such a review necessarily implicated issues raised in the still-open Hyde and New Balance cases, and raised concerns as to the propriety of proceeding against Hyde and New Balance in enforcement actions on the basis of a standard that was simultaneously being re-examined in another forum. Thus, the Commission determined to delete those allegations in the complaints that were based on the "all or virtually all" standard and continue its cases against Hyde and New Balance on the remaining allegations. See New Balance Athletic Shoes, Inc., FTC Docket No. 9268 (December 18, 1995) (Order Amending Complaint and Lifting Stay of Proceedings, attached hereto). To my knowledge, at no time prior to the Commission's decision to review the "Made in USA" standard were there any discussions with either Hyde or New Balance concerning the possibility of a comprehensive review of the standard.
3. You have asked about the FTC's decision to change its standard for "Made in USA" claims from a "wholly domestic" standard and whether accomplishing this through guides rather than rulemaking is consistent with Section 320933 of the Crime Bill.
As noted in the response to Question 1, Section 320933, by providing that "Made in USA" labels "shall be consistent with decisions and orders of the Federal Trade Commission issued pursuant to section 5 of the Federal Trade Commission Act," does not mandate use of a particular substantive standard for "Made in USA" claims but instead reaffirms the FTC's authority to regulate such claims under Section 5 of the FTC Act. Section 320933 further permits, but does not, in our view, require, the FTC to issue rules in this area. Specifically, this section permits the FTC to engage in rulemaking under 5 U.S.C. § 553 ("notice and comment" rulemaking) rather than under the more extensive rulemaking procedures that would ordinarily apply pursuant to Section 18 of the FTC Act.
The FTC, as you know, may enforce and provide guidance under Section 5 through a number of means, including individual enforcement actions (litigated cases or consent agreements), advisory opinions, enforcement policy statements, guides, or rules. The current standard for "Made in USA" claims -- that a product be "wholly domestic" or "all or virtually all" made in the United States -- developed as a result of individual enforcement actions and advisory opinions dating back to the 1940's, and may be modified through any of the listed means, as long as the modification is consistent with Section 5. Guides, such as the proposed guides for the use of U.S. origin claims, are administrative interpretations of the law. They are intended to provide the public with guidance as to how the Commission will apply Section 5 to a particular issue (i.e., "Made in USA" claims). Unlike rules, guides do not, however, have the force and effect of law. Thus, if the Commission believes that a company has violated the principles set out in the guides, the Commission must still bring an individual enforcement action and show that the company committed an unfair or deceptive act or practice in violation of Section 5.
These guides also are, in part, an enforcement policy statement, reflecting those circumstances where the Commission believes it is likely to be appropriate to bring an enforcement action in this area.
While Section 320933 permits (but does not require) the Commission to engage in rulemaking in this area, guides, I believe, have the advantage here of providing the Commission with greater flexibility in responding to the facts of a particular case and to address changes in this complex area.
4. You have raised some concerns about how the "internationalization of production" is relevant to the Commission's proposal to modify its standard for evaluating "Made in USA" claims. As you note, the Commission is empowered under Section 5 of the FTC Act to act against deceptive acts and practices. In determining whether a claim is deceptive, the Commission looks to how consumers are likely to understand that claim. The globalization of the economy is relevant to this determination insofar as it has affected consumer understanding of "Made in USA" claims.
The Commission has followed its mandate to protect consumers by proposing a standard which reflects consumer perception of "Made in USA" claims. The proposed standard sets forth a high threshold for "Made in USA" claims in accordance with consumers' expectations that goods labeled "Made in USA" contain a high amount of U.S. content. It also takes into account consumers' understanding that in today's economy, U.S. manufacturing is far more complex and more likely to incorporate foreign inputs than was the case when the "wholly domestic" standard was first articulated. Specifically, the determination that today's consumers are willing to accept a "Made in USA" label on goods that are not wholly of domestic origin is based in part on a two-part consumer perception study commissioned by the FTC which examined consumer understanding of "Made in USA" claims. For example, the Attitude Survey, which you cite in your letter, indicates that many consumers believe that a "Made in USA" label is appropriate on goods that were primarily made in the United States but had some amount of foreign content. Thus, when consumers were presented with a scenario in which a product had 70% U.S. content and was assembled in the United States, two-thirds said they somewhat agreed or strongly agreed with a "Made in USA" label on that product.
In proposing a "substantially all" standard, the Commission has acted, pursuant to Section 5 of the FTC Act, to protect consumers by ensuring that a "Made in USA" designation continues to accurately reflect their perception of these claims. The FTC Act also obligates the Commission to act in the public interest. Thus, consistent to the extent practicable with consumer perception, the proposed guides attempt to minimize certain practical difficulties marketers face in determining whether their products comply with the "substantially all" standard, such as by providing guidance and flexibility in how marketers may calculate manufacturing costs.
5. You have asked a number of questions about the results of the Commission's 1995 Attitude Survey (one part of the two-part consumer perception study commissioned by the FTC). The answers to these questions are as follows:
a.) You have asked for information on consumers' responses in the Attitude Survey to the open-ended question "What does a 'Made in USA' label mean?" A large majority of the consumers surveyed did not define "Made in USA" in any specific manner when asked this question: 60.8% simply repeated back the phrase in the question, saying that "Made in USA" meant "Made in USA." The data also show that among this group, 68.9% of those who were presented with a scenario in which a product had 70% U.S. content and was assembled in the United States agreed with a "Made in USA" label for that product, thereby further indicating that the open-ended questions may not have fully elicited consumers views. In addition, approximately 20% of all the respondents gave answers to the open-ended questions such as a "Made in USA" label means the product is of good quality or it means the product benefits the U.S. economy. The answers to your specific questions are as follows:
(i) The percentage of the total respondents who said that a product with a "Made in USA" label meant that it was partially made in the U.S. but did not quantify "partially": 0.6%
(ii) The percentage who said that such product was 50% or more made in the U.S.: 1.6%
(iii) The percentage who said that such a labeled product meant generally that it was "Made in the U.S.": 60.8%
The percentage who said that such a labeled product meant that it was "All Made in the U.S.": 6.3%
b.) You have asked about use of the words "production" and "assembly" in the Attitude Survey and about which term the respondents were asked. Respondents to the Attitude Survey were presented with scenarios that incorporated two distinct variables: site of final assembly and total U.S. manufacturing costs (sometimes described in the Federal Register text accompanying the proposed guides as production costs). With respect to site of final assembly, approximately one-third of respondents were told the product was assembled in the United States, approximately one-third were told the product was assembled in a foreign country, and approximately one-third were not told anything about where the product was assembled. With respect to U.S. manufacturing costs, each respondent was presented with a series of scenarios in which the percentage of total manufacturing costs attributable to U.S. costs (assembly and parts) ranged from 10% to 90%. Thus, for example, one question was:
This [product name] is assembled in the United States using U.S. and foreign parts. The foreign parts account for 30% of the total cost of making the [product name]. The U.S. parts and the U.S. assembly together account for 70% of the total cost. If this product had a label stating that the product was "Made in the USA" how much would you agree or disagree with the label? Would you (i) Strongly agree, (ii) Somewhat agree, (iii) Neither agree nor disagree, (iv) Somewhat disagree, or (v) Strongly disagree.
In this manner, respondents were asked about scenarios involving both site of final assembly and total U.S. manufacturing costs. These terms were intended to have, and were defined for respondents as having, distinct meanings.
c.) You have asked about the sample size and margin of error for two tables of results from the Attitude Survey, one table involving a series of scenarios that is reprinted at footnote 186 in the Federal Register notice of May 7, 1997, and one table captioned "What Does a 'Made in USA' label Mean" (this table appears in the Made in USA study summary of results that FTC staff provided to your staff). Each of these tables involves a sample size of 316 respondents. In the table involving the scenarios, however, respondents were divided into three groups who were each presented with different information about the site of final assembly of the product (as explained in the answer to 5.b., above); thus the percentages set forth in this table are each based on approximately one-third of the total sample size. The margin of error for the table captioned "What does a 'Made in USA' label Mean" is approximately ± 6% (at a 95% confidence level); the margin of error for the scenarios table (based on a subsample of 100 respondents) is approximately ± 10% (at a 95% confidence level).(1)
d.-f.) You asked for certain information involving the responses of Attitude Survey participants who were asked about a scenario in which U.S. costs accounted for 70% of the total cost of a product and the product was assembled in the United States. In particular, you posed a number of questions concerning the breakdown of those who agreed or disagreed with a Made in USA label on such a product into those who "strongly" agreed/disagreed and those who "somewhat" agreed/disagreed. The responses to this scenario, broken down in this manner, are as follows:
Specifically, you asked how many people strongly agreed with a "Made in USA" label in this circumstance compared to how many people somewhat agreed with a "Made in USA" label. As you can see, 26% (26 respondents) strongly agreed while 41% (41 respondents) somewhat agreed. In addition, you asked how many respondents strongly agreed (26%, as noted above) compared with how many respondents either strongly or somewhat disagreed (a total of 31% or 31 respondents). Please note further that in the direct comparison, 67% of respondents agreed, either strongly or somewhat, with a "Made in USA" label, while 31% disagreed, either strongly or somewhat, with such a label.
6. You have raised a number of questions about whether the proposed guides are consistent with consumer perception in light of the public comments received from individual consumers. You have also expressed concern that the proposed standard requires safe harbors and examples of which the public is unlikely to be aware.
It is probably inevitable that, whatever standard the Commission finally adopts, some number of consumers will disagree with that standard. Nonetheless, as discussed in response to Questions 4 and 5, the Commission staff believes that the proposed standard is consistent with the interpretation of a majority of consumers based on the consumer perception surveys before the Commission. In the May 7, 1997 Federal Register notice, the Commission acknowledged that "[s]ome consumers may hold views or understand claims differently from what is set forth in the 'substantially all' standard." 62 Fed. Reg. 25020, 25041. The Commission further indicated, however, that it "believes that, as a general matter, it would not be in the public interest to bring a law enforcement action under section 5 of the FTC Act if a marketer satisfied either one of the safe harbors for meeting this standard." Id.
Moreover, even those consumers who identify themselves as favoring a wholly domestic standard may not expect that literally 100% of the product is produced in the United States. For example, consumers favoring a wholly domestic standard may not expect that the raw materials in a product are of U.S. origin. Thus, for example, in their public comments to the Commission, a coalition of state attorneys general who strongly favored retention of the "all or virtually all" standard, nonetheless indicated that they would exclude raw materials from the calculation and that they were willing to accept as much as a 10% tolerance in the standard (i.e., that only products found to have less than 90% U.S. parts and labor would be excluded from using an unqualified "Made in USA" label). Similarly, the United Auto Workers, another strong proponent of the "all or virtually all" standard, indicated in its written comments that, while it did not believe there should be a blanket exemption for raw materials, looking two steps back in the production process (i.e., to parts suppliers (1st step) and to the suppliers to those parts suppliers (2nd step), but not including foreign materials further back in the process) would in most cases be sufficient.
The proposed guides include two safe harbors for marketers endeavoring to comply with the "substantially all" standard, as well as numerous examples throughout. Detailed guidance on the application of the standard is likely to significantly reduce the cost of compliance and help ensure more widespread compliance with the proposed standard. As a result, consumers will be able to rely on a more consistent meaning of "Made in USA." Furthermore, virtually any standard adopted by the Commission is likely to require similar guidance. Indeed, even under the current "wholly domestic" or "all or virtually all" standard, Commission staff routinely receives questions from firms seeking to apply the standard to their product and seeking guidance on issues such as what amount of U.S. content constitutes "virtually all" or how far back in the production process to look in accounting for U.S./foreign content.
Whatever standard the Commission ultimately adopts, steps will be taken to ensure that consumers are fully informed. The Commission will make the information available on-line and in the Federal Register. In addition, Commission staff hopes to develop consumer education materials that will aim to reduce any confusion and provide consumers with more information on which to base their purchasing decisions.
Finally, citing Section 320933 of the Crime Bill, you have asked why consumers should have to accept a lesser standard for "Made in USA" claims when there are alternatives (presumably, qualified claims) that reveal the fact of foreign origin. The proposed guides permit and indeed encourage qualified claims such as appear to be contemplated by Section 320933. Section IX of the proposed guides, for example, sets out various alternative ways in which qualified U.S. origin claim may (or may not) be made. Nonetheless, to the extent that an unqualified "Made in USA" label on a product that is "substantially all" made in the United States is not likely to deceive consumers, a manufacturer whose product meets this standard should be entitled to make the claim without qualification.
7. You have raised a number of questions concerning the first safe harbor set out in the proposed guides, which would permit an unqualified "Made in USA" claim where U.S. costs constitute at least 75% of the total manufacturing costs of producing the product and the product has been last substantially transformed in the United States. Among other things, you have asked why a percentage higher than 75% was not considered and why the FTC abandoned a de minimis foreign content criterion.
As set forth in the Commission's Federal Register notices of April 26, 1996 and May 7, 1997, the public comments received by the Commission, as well as the views expressed at the Commission's public workshop, largely fell into one of three groups: those supporting an "all or virtually all" standard, those supporting a percentage content standard (the large majority of whom favored a 50% standard) and those favoring a "substantial transformation" standard such as is used by U.S. Customs in determining a foreign country of origin. The Commission gave serious consideration to each of these standards, as well as to other proposals put forward. In addition, in conducting the Attitude Survey, Commission staff sought consumer response to a variety of scenarios, ranging from products with 10% U.S. content to products with 90% U.S. content.
Thus, in establishing a percentage content safe harbor, the Commission considered thresholds both higher and lower than 75%. The determination that a 75% threshold be proposed as part of the first safe harbor (along with the requirement that the product be last substantially transformed in the United States) was based in large measure on the consumer perception evidence before the Commission. As discussed above, this consumer perception evidence suggested that while consumers generally expected a product labeled "Made in USA" to have a high amount of U.S. content, a majority of consumers agreed with a "Made in USA" label on a product that contained as much as 30% foreign content if the product was assembled in the United States.
8. You have asked which definitions in the proposed guides are statutorily based. You have also asked whether the definition of a "product" in the proposed guides is narrower than the term used in Section 320933.
Among those terms specifically defined in the proposed guides, none is statutorily based. However, the definition of "substantial transformation," while not taken from statutory language, does incorporate U.S. Customs Service regulations set out at 19 C.F.R. §§ 102 and 134. In addition, in defining the term "United States," the proposed guides borrow language used in various FTC-administered regulations, including the rules promulgated under the Textile Fiber Products Identification Act, 16 C.F.R. § 303.
While "product" is not specifically defined in the proposed guides, Section II of the guides indicates that the proposed guides apply to all products sold or marketed in the United States, with the exception of those products already subject to the country-of-origin labeling requirements of the Textile Fiber Products Identification Act (15 U.S.C. § 70), the Wool Products Labeling Act (15 U.S.C. § 68), or the Fur Products Labeling Act (15 U.S.C. § 69). Section 320933 of the Crime Bill does not appear to define the term product, but no exceptions are indicated.
9. You have asked about use of the term "substantial transformation" in the proposed guides. Specifically, you have asked why the Commission considers this term appropriate in interpreting its proposed standard when it previously indicated that the Tariff Act does not apply to "Made in USA" claims; whether the FTC plans to defer to the Customs Service in applying the term "substantial transformation"; and whether this is consistent the FTC's Deception Policy Statement.
While "substantial transformation" is one element in the safe harbors set out in the proposed guides, the "substantially all" standard is conceptually quite distinct from the substantial transformation standard used by the Customs Service. The FTC and its staff have consistently taken the position that, because of the divergent purposes served by the Tariff Act and Section 5 of the FTC Act, it is not necessarily appropriate for the FTC to apply to "Made in USA" claims the substantial transformation test that is applied by the U.S. Customs Service to foreign country of origin labeling. Indeed, in the current proceeding, although a number of commenters and participants in the public workshop advocated that the FTC permit "Made in USA" claims as long as a product was last substantially transformed in the U.S., this approach was expressly rejected by the Commission, 62 Fed. Reg. at 25041 (Section V: Overview of Proposed Guides), in part because this standard alone did not appear to meet consumer expectations. Instead, the Commission has proposed in its guides two safe harbors that incorporate substantial transformation as one of their requirements; each safe harbor is significantly more rigorous than a mere last substantial transformation standard would be. Thus, the first safe harbor requires that a product be last substantially transformed in the U.S. and that the product have at least 75% U.S. content, and the second safe harbor requires that a product be last substantially transformed in the U.S. and that the each of the significant inputs into the product be last substantially transformed in the U.S.
Incorporation of a requirement that a product be last substantially transformed in the U.S. into the proposed guides' two safe harbors serves several purposes. First, it ensures that a product that has to be labeled with a foreign country of origin (e.g., "Made in China") may not be labeled "Made in USA," regardless of how much U.S. content it may contain (this is because Customs Service regulations provide that only a product that is to be last substantially transformed in the United States is exempt from the mandatory country-of-origin labeling). Second, it reflects consumer expectations that the final processing or assembly of a product labeled "Made in USA" take place in the United States. Finally, it makes use of a standard that is already well-established and familiar to industry and so reduces compliance burdens.
Under the proposed guides, the FTC will defer to the Customs Service's determinations as to what processes constitute a "substantial transformation." In this manner, the FTC can take advantage of the extensive, existing body of law on this subject that has been developed by the Customs Service rather than add to existing regulatory burdens by attempting to create its own parallel rulings.
As noted, the requirement in both safe harbors that a product be last substantially transformed in the United States reflects in some measure the common expectation among consumers that a product labeled "Made in USA" will have undergone its last significant processing or assembly in the United States. In addition, the substantial transformation requirement is part of safe harbors (and the "substantially all" standard they are intended to implement) that, taken as a whole, are designed to be consistent with consumer perception. Thus, the incorporation of the term "substantial transformation" into the proposed guides appears to be fully consistent with the Commission's 1983 Deception Policy Statement.
10. You have asked whether the proposed new standard for evaluating Made in USA claims will make the FTC's enforcement in this area more complicated than under the current standard and whether, given the FTC's limited budget, it will be able to vigilantly enforce the proposed new standard.
Under either the existing or proposed standard (and, indeed, under almost any standard), similar questions arise as to how to apply the standard: how much foreign content can be included (e.g.,what does "virtually all" made in USA mean: 1% foreign content? 5%? 10%?); how far back in the manufacturing process to look (e.g., does it matter that the raw materials were obtained from a foreign country); does the marketer have substantiation for the amount of U.S. content it is claiming? Moreover, even under an "all or virtually all" standard, marketers may still make qualified claims (e.g., "70% Made in USA") that must be truthful and substantiated. Thus, staff expects that the choice between these standards is likely to have little impact on the FTC's administrative burden.
The prohibition on deceptive "Made in USA" claims will be enforced in the same manner as the prohibition on any other deceptive advertising claim, whether it is a health claim or an environmental claim or a claim about high octane gasoline. While budgetary and other constraints prevent the FTC from taking action against all potentially deceptive claims in any one of these areas, the FTC can nonetheless have a significant impact by carefully selecting enforcement targets. In addition, the fact that the proposed guides include detailed guidance and examples is likely, staff believes, to reduce confusion and encourage more widespread compliance with its provisions.
1. Note that margin of error can be computed only for true probability samples. Although great care was taken to ensure that the Attitude Survey sample was representative of the general population, it was obtained using a mall-intercept methodology, which is not a true probability sample. Therefore, the margin of error should be interpreted with care.