California SB 633 May Be a Gift for U.S. Companies, But Using Unqualified “Made in the USA” Labels Still Poses Risks

By Melissa Miller Proctor

On January 1, 2016, the State of California amended Section 17533.7 of the California Business and Professions Code to allow goods sold in California to labeled “Made in the USA” if: (1) the finished product is manufactured in the United States; and, (2) any foreign materials or parts contained in the finished product do not exceed 5% of the final wholesale value of the merchandise. The amendment was rolled out through enactment of SB 633, which replaces the previous, more restrictive requirements that put California law squarely at odds with the Federal Trade Commission’s “Made in the USA” rules. However, despite SB 633, the FTC and California rules are still not identical, and it is likely that some products bearing “Made in the USA” labels may pass the FTC test while failing the California standard. Therefore, companies are urged to exercise caution and reflect carefully before proceeding with unqualified “Made in the USA” claims for products sold in the state of California.

By way of background, the Federal Trade Commission (“FTC”), which exercises jurisdiction at the federal level over all products that are advertised or sold in the United States, permits a good to be labeled "Made in the USA" if it is all or virtually all made in the United States. The phrase "all or virtually all" means that the significant parts of the product and its processing must be of U.S. origin, and that the end item should contain either zero amounts or merely negligible amounts of foreign content.

In contrast, Section 17533.7 of the California Business and Professions Code, imposed the following restriction on companies selling merchandise in the state of California:

It is unlawful for any person, firm, corporation or association to sell or offer for sale in this State any merchandise on which merchandise or on its container there appears the words “Made in U.S.A.” “Made in America,” “U.S.A.,” or similar words when the merchandise or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.

This rule was far more stringent than the FTC standard, and meant that even the smallest foreign part or component contained in a product that was manufactured in the US, and marketed and sold in California, could disqualify the finished good from being marked “Made in the USA.” Thus, goods that fully satisfied the FTC’s “Made in the USA” requirements failed the California standard, resulting in great frustration and agitation on the part of companies that marketed their products nationwide. Section 17533.7 also ushered in a flood of class action lawsuits against companies that had made “Made in USA” claims resulting in costly settlements.

The changes made by SB 633 were of course warmly received by companies tasked with finding ways to comply with both the FTC and California “Made in the USA” rules. However, both rules are still not mirror images of one another. For example, the California rule contains specific de minimis percentages for foreign origin inputs, while the FTC rule provides a more subjective all or virtually all standard for unqualified claims. In addition, SB 633 fails to define the term “wholesale value,” and does not provide any guidance as to how the de minimis thresholds should be calculated. Thus, differing outcomes as to whether a product complies with both rules are still possible.

So, even though companies doing business in the state of California welcomed the favorable news on the “Made in USA” front, they should still consider carefully whether it is wise to proceed with an unqualified “Made in the USA” claim, or alternatively use a safer, more conservative qualified claim, such as “Made in the USA of U.S. and imported parts.”