Overview
Not long after the Supreme Court stripped the Federal Trade Commission (FTC) of its power to seek direct restitution under the FTC Act (see here), the FTC has created a new way to obtain monetary relief by enacting the Made in the USA (MUSA) Labeling Rule. Although, per the FTC’s preamble section, the new rule does not "impos[e] any new obligations on market participants," it does authorize the FTC to collect up to a whopping $43,280 per violation. The new rule became effective on August 13, 2021—retailers should take note of its requirements in order to ensure that their practices comply.
Overview of the New "Made in the USA" Rule
The MUSA rule expressly limits the circumstances in which a business can represent a product as being "Made in USA" or otherwise of domestic origin, without qualifications or limits on the claim. The rule applies to any unqualified claim (express or implied) that a product or service—or any component thereof—is made, manufactured, built, produced, created, crafted, and/or otherwise originates in the USA.
Under the rule, an unqualified MUSA claim may only be used where the following three requirements are satisfied:
i) The product's final assembly or processing occurred within the US.
ii) All significant processing of the item occurred within the US.
iii) All or virtually all of the product’s components are made and sourced within the US.
FTC Commissioner Rohit Chopra, the primary creator of the MUSA rule, issued an official statement characterizing the new rule as a "restatement rule" that formalizes, but does not change, the FTC's longstanding policy that an unqualified MUSA claim may only be used if "the advertised product is 'all or virtually' made in the United States." The new rule codifies this "all or virtually all" standard as well as the FTC’s past enforcement emphasis on domestic assembly and/or processing.
While it is true that the basic tenets of the rule have not changed, the new formal rule drastically expands the applicability of the principles and the potential penalties for noncompliance.
This is the FTC's first exercise of its authority under 15 U.S.C. § 45(a) to issue rules regulating MUSA labeling. Because Congress did not define the word "label" in Section 45(a), the FTC included a definition in the new rule. In addition to product tags and claims on product packaging, the new rule applies to any "label" (whether physical or digital) containing an unqualified representation that a product is made in the USA appearing in: mail order catalogs, online advertisements, and any other materials "used in the direct sale or direct offering for sale of any product or service, that are disseminated in print or by electronic means, and that solicit the purchase of such product or service by mail, telephone, electronic mail, or some other method" whereby the customer does not examine the actual product prior to purchase.
In a dissenting statement echoing comments submitted during the rulemaking process, Commissioner Christine S. Wilson noted that the agency had exceeded its rulemaking authority by defining label "more broadly than any FTC precedent."
Additionally, the new rule also authorizes a broad range of remedies pursuant to the FTC Act, including civil penalties of up to $43,280 per violation where an unqualified MUSA label is found to be deceptive—the maximum amount the FTC was authorized to seek in enforcement actions in 2020 when it published the rule for notice and comment. This amount may increase yearly to account for inflation, pursuant to the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.
Unsuccessful Requests for Bright-Line Guidance from the Retail and Manufacturing Industries
In enacting the rule, the FTC disregarded comments from prominent industry groups—including the Retail Industry Leaders Association (RILA) and the National Association of Manufacturers (NAM)—requesting that the new rule offer clearer guidance as to how much of a product must be made in the US, such as bright-line percentage thresholds (similar to California's Made in the USA law), or aligning the rule with existing customs "substantial transformation" standards. Relying on its past consumer perception survey data, the FTC responded that the rule's "'all or virtually all' and 'significant processing' [standards] intentionally incorporate flexibility" and sufficiently address the myriad ways in which an unqualified MUSA claim might deceive consumers.
Industry groups also requested that the rule include carve outs for product components not available in the United States or a safe harbor for businesses that make good-faith efforts to comply. Commenters specifically noted California, where legislators mirrored the commission’s "all or substantially all" standard but added a bright-line safe harbor rule. Under California's law, a business can make unqualified MUSA claims for products containing foreign components if it can show that those parts are not available in the US and if less than 10% of product costs are attributable to those foreign materials. The new rule does not offer businesses any such protections.
According to the commission, a bright-line rule or carve-out for components not readily available domestically would, in most cases, set the bar too low and permit misleading unqualified MUSA claims. In support, the commission pointed to 1995 data showing that "roughly 30 percent" of Americans "would be deceived by an unqualified MUSA claim for a product where 70 percent of the cost was incurred in the United States," and (admittedly "limited") evidence from 2013 that 33% of consumers believed that 100% of a product must be made in the USA for it to be labeled as MUSA. Based on this eight and 26-year-old evidence, the commission expressed concern that there is a risk of consumer deception any time a company makes MUSA claims for a product containing foreign parts – even where manufacturing concerns necessitated those components.
The FTC also acknowledged, however, that in particular instances not accounted for in the commission’s surveys, "application of the rule’s requirements" may not always be "necessary to prevent [deceptive] acts or practices." To avoid "chill[ing] certain non-deceptive claims," the final rule includes a new exemption provision for advertisers that can demonstrate, with "relevant consumer perception evidence and data," that an unqualified MUSA claim would not deceive consumers even if the advertised product(s) required more than de minimis foreign components, assembly, and/or processing.
The FTC views its new exemption provision as further justification for its "flexible approach," as it will "allow marketers to substantiate their [MUSA] claims consistent with consumer perception of their particular products." Although the FTC did not provide any examples of when it might grant an exemption to all or part of the new rule's requirements, it implied that the submitted consumer perception evidence must, at minimum, establish that less than 25% of consumers would be misled by an unqualified MUSA claim. Advertisers may submit this evidence along with a formal petition to the FTC, requesting exemptions to some or all of the new rule's requirements.
FTC Compliance Guidance
In issuing the new rule, the FTC provides some clarifications for businesses and advertisers:
First, the rule explicitly acknowledges all existing FTC guidance regarding the 1997 Enforcement Policy—such as letters, enforcement documents, statements, and orders—remain relevant to the new rule. Consistent with the agency's prior statements, marketers may therefore continue to rely on specific information provided in good faith by their suppliers about the origins of product elements and the location of product assembly. To help position themselves under this "good faith" provision, marketers should ask their manufacturers what percentage of a product originated domestically, rather than relying on their conclusory assurances that a product is made domestically.
Second, when evaluating whether a product has satisfied the "all or virtually all" standard, the FTC will consider a number of factors including: where materials were sourced; where product components were assembled and/or processed; where the final item was assembled and/or processed; how much of the product's manufacturing costs can be attributed to domestic parts and processes; how "far removed from the finished product" any non-US elements are, and the significance of any foreign materials, assembly, or processing to the item’s ultimate form and function. Retailers should consider these factors when examining unqualified MUSA labels for compliance with the new rule.
Finally, enforcement will generally be reserved "for intentional, repeated, or egregious offenders."
Takeaways from the FTC's Renewed Focus on "Made in the USA" Claims
Since President Biden's inauguration, the FTC has embarked on a new era of aggressive enforcement, and will likely apply the same approach to its new rule—the first to be passed since FTC Chair Lina Khan assumed office.
While Commissioner Chopra has been appointed as the head of the Consumer Financial Protection Bureau and will leave the FTC if he is confirmed by the Senate, the agency is unlikely to abandon this new rule or the significant penalties it authorizes. Two other commissioners, in addition to Chopra, voted to finalize the rule—including Chairwoman Khan. Moreover, despite her dissent on the rule's expanded definition of "label," Commissioner Wilson concurred with her colleagues as to the rule’s substantive requirements, and noted her support for strong enforcement and "prosecution of MUSA fraud."
Although Chairwoman Khan remains focused on using FTC resources for antitrust investigations and violations, historically, the agency has achieved significant success with MUSA enforcements. Earlier this year, prior to the rule’s adoption, the FTC obtained a nearly $150,000 settlement with Gennex Media LLC, an e-commerce retailer of novelty customizable promotional products. In 2020, the agency settled an action against glue manufacturer Chemence, Inc. for $1.2 million—the largest MUSA settlement the FTC has obtained to date. In its complaint, the FTC had alleged that Chemence: applied unqualified MUSA labels to products despite foreign components accounting for more than 80% of materials cost, and 50% of overall manufacturing costs; represented that its private label products were MUSA, causing third-party sellers to perpetuate false claims; and had violated a previous 2016 settlement regarding identical actions.
In light of the agency's pro-enforcement stance, the new rule's broad scope, and the risk of significant penalties, retailers should evaluate all unqualified MUSA labels and claims, including those appearing in online advertisements and social media hashtags.
While the FTC has stated that its new rule only applies to "labels appearing in all contexts" and not "all advertising," the agency has not articulated explicit limits to what it considers to be a "label." Retailers should therefore consider consulting counsel experienced in this area to offer guidance, especially as the new rule has yet to be enforced or interpreted.
