California usually goes its own way in regulating businesses, but it just reversed course on a significant irritant for consumer product companies, amending its arduous standard for labeling products as American-made. Senate Bill 633, which takes effect January 1, 2016, will allow manufacturers to label a product as American-made as long as foreign parts compromise no more than 5 percent of the product, or 10 percent if the manufacturer can establish that the part is not domestically made. This change shifts California from its outlier position on “Made in the USA” labeling standards to one more closely-aligned with the labeling standards used by the Federal Trade Commission (“FTC”) and the other 49 states.
California’s previous labeling standard went into effect in 1961 and prohibited the use of the “Made in the U.S.A.” label if any part of the product was made, manufactured, or produced outside of the United States. The purpose was to prevent manufacturers from passing foreign products off as American-made. As we have often discussed on this blog (for example, here, here, here, and here), this standard was significantly more arduous than its federal and state counterparts. For example, the FTC standard only requires that “all or virtually all” of a product’s parts be manufactured domestically and that its final assembly must occur within the United States.
California’s stricter standard created practical and legal challenges for manufacturers. The standard contradicted its purpose by discouraging manufacturers and suppliers from labeling their products, constructed primarily from domestic parts, as American-made to avoid being targeted by increasing waves of consumer class actions. As we recently discussed, California courts have historically not been sympathetic to the burdens on manufacturers to reconcile the FTC and California requirements, finding that compliance with both standards is not “impossible.”
Members of Congress have even recognized these differing standards as an issue of national importance, introducing the “Reinforcing American-Made Products Act of 2015” this summer. The Act proposes giving the federal government complete control over country-of-origin labels and would specifically preempt all conflicting state standards.
While it’s not clear whether California was swayed by this pending federal legislation, the new labeling standard represents a significant shift: state law now allows a product to be labeled as “Made in the U.S.A.” if foreign parts do not constitute more than 5 percent of the final wholesale value of the product. Alternatively, if a manufacturer can establish that the foreign parts used cannot be obtained or produced domestically, it may use foreign parts for up to 10 percent of the final wholesale value of the product. SB 633 also clarifies that goods sold or offered for sale outside of California are not mislabeled as long as the labels conform to the law where they are sold or offered for sale, thus anticipating challenges on dormant commerce clause grounds.
This is a significant practical change for manufacturers and suppliers. Under the previous standard, if any product used a single foreign part, it could not be labeled American-made, even if its manufacturing is largely performed by American employees. For example, if a product needed a semiconductor—a part that is often not available domestically— the product could not be labeled as American-made under California’s prior standard.
Of course, the California and FTC standards still differ from each other, but California’s new law largely eliminates a trap for the unwary manufacturer by requiring an analysis similar to the FTC standard. The FTC, of course, has avoided adopting a bright line rule and instead makes each determination on a case-by-case basis, leading many companies to adopt qualified claims such as “Made in the U.S.A. of primarily domestic components.” It is at least conceivable that products that meet the FTC standard may not automatically meet the California standard, and vice versa. But with the change in California law, we can expect to see more products labeled as “Made in USA.”