Request for Public Comment in Preparation for Public Workshop Regarding ``Made in USA'' Claims in Product Advertising and Labeling

FEDERAL TRADE COMMISSION

Request for Public Comment in Preparation for Public Workshop

Regarding ``Made in USA'' Claims in Product Advertising and Labeling

AGENCY: Federal Trade Commission.

ACTION: Request for public comment in preparation for proposed Federal

Trade Commission workshop on the use of ``Made in USA'' claims in

product advertising and labeling.

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[[Page 53923]]

SUMMARY: On July 11, 1995, the Federal Trade Commission announced that

it will conduct a comprehensive review of consumers' perceptions of

``Made in USA'' claims in product advertising and labeling. As part of

this review, the Commission will invite representatives of consumers,

industry, government agencies, and other groups to attend a public

workshop to exchange views on the issues. Among other things, the

Commission will be determining (i) whether it should alter its legal

standard regarding the use of unqualified ``Made in USA'' claims, and

(ii) how domestic content should be measured under any future standard.

The Commission plans to hold the workshop in Washington, D.C., in

February or March 1996, and has undertaken a consumer perception study

for use in that workshop. Today's notice seeks written comment on the

issues that will be addressed at the workshop.

The Commission will consider comments of all persons, including

non-participants in the workshop. However, any person who expects to

apply for participation in the workshop must file a written comment at

this time. The Commission will issue a second Federal Register notice

setting the date and specific location of the workshop and requesting

applications for participation, once a projected finish date for the

study is established.

DATES: Written comments must be submitted on or before January 16,

1996.

ADDRESSES: Six paper copies of each written comment should be submitted

to the Office of the Secretary, Federal Trade Commission, Room 159,

Sixth and Pennsylvania Avenue, N.W., Washington, D.C. 20580. To

encourage prompt and efficient review and dissemination of the comments

to the public, all comments also should be submitted, if possible, in

electronic form, on either a 5\1/4\ or a 3\1/2\ inch computer disk,

with a label on the disk stating the name of the commenter and the name

and version of the word processing program used to create the document.

(Programs based on DOS are preferred. Files from other operating

systems should be submitted in ASCII text format to be accepted.)

Individuals filing comments need not submit multiple copies or comments

in electronic form. Submissions should be captioned: ``Made in USA

Policy Comment,'' FTC File No. P894219.

FOR FURTHER INFORMATION CONTACT: Robert Easton, Special Assistant,

Division of Enforcement, Federal Trade Commission, Washington, DC

20580, telephone 202-326-2823.

SUPPLEMENTARY INFORMATION:

Introduction

The Commission is directed to prevent ``unfair or deceptive acts

and practices'' under section 5 of the Federal Trade Commission Act

(``FTC Act''), 15 U.S.C. 45. A deceptive act or practice is one that is

likely to mislead consumers acting reasonably under the

circumstances.1 It is under this general authority to prevent

deceptive acts or practices that the Commission addresses ``Made in

USA''2 claims in product advertising and labeling.

FTC deception law does not require manufacturers to disclose the

degree of domestic content in their products.3 If manufacturers

choose to advertise the domestic origin or content of their products,

however, the claims must be truthful and substantiated. Thus, FTC law

prohibits sellers from making affirmative claims that exaggerate the

domestic content of their products. As a result, manufacturers whose

products are not entirely domestic and who claim their products are

Made in USA may be required to qualify the Made in USA claims. An

example of a qualified claim would be ``Made in USA of foreign and

domestic components.''

Historically, the Commission has treated unqualified Made in USA

claims as implying that products are ``wholly of domestic

origin.''4 In recent years, the Commission also has taken action

against firms that allegedly deceived consumers by concealing the fact

that their goods were manufactured in foreign countries.5 Over the

last few decades, however, the Commission has not, until recently,

brought enforcement actions against those making Made in USA claims for

products assembled in the United States. Nonetheless, older Commission

cases and advisory opinions clearly required these products also be

wholly domestic in origin.6

On September 20, 1994, the Commission published for comment a

consent agreement subject to final approval in Hyde Athletic

Industries, Inc. (F.T.C. File No. 922-3236).7 On the same day, the

Commission issued a complaint in New Balance Athletic Shoe, Inc.

(F.T.C. Docket No. 9268).8 In both matters, the proposed complaint

alleged that the sellers represented that their goods are ``made in the

United States, i.e., that all, or virtually all, of the component parts

of the [goods] are made in the United States, and that all, or

virtually all, of the labor in assembling the [goods] is performed in

the United States.'' The representations were alleged to be false

because (1) a substantial portion of the firms' product lines was

assembled overseas of foreign parts, and (2) a substantial portion of

the products assembled in the U.S. was composed of foreign components.

In its announcement of the Hyde consent agreement, the Commission noted

that its decision was based in part on ``extrinsic evidence obtained by

the Commission regarding consumer perceptions of `Made in USA'

claims,'' and invited commenters to submit their own consumer

perception evidence.9

Over 150 commenters responded to this request for comment. Many

commenters objected to the ``all or virtually all'' standard as being

too stringent. Commenters argued that, with increased globalization of

production, most consumers today do not assume that ``Made in USA''

products contain ``all or virtually all'' U.S. parts and labor.

Commenters also argued, among other things, that the Commission's

standard was inconsistent with other government standards (e.g., U.S.

Customs Service requirements), could not be met by many sellers today,

and would make it difficult for sellers to promote the use of United

States labor in products.

Recognizing the public interest in these issues, the Commission on

July 11, 1995 announced it would conduct a comprehensive review of

consumers' perceptions of Made in USA advertising claims. The

Commission also announced it would hold a public workshop to allow a

variety of interested parties to exchange views on relevant

issues.10

Commission staff are conducting a research project to help

determine how consumers currently view Made in USA and related claims.

The Commission will place the results on the public record for use by

workshop participants and the general public. Once the project is

sufficiently advanced to allow a prediction of its completion date, the

Commission will announce the date, specific location, and details of

the workshop in a new Federal Register notice. At that time, the

Commission also will solicit applications for participation in the

workshop. No applications should be submitted except in response to

that later notice. Notwithstanding the later date for applications,

interested parties must submit written comments in response to today's

Federal Register notice in order to participate in the workshop.

A summary of the subjects on which the FTC is soliciting comments

appears in Part V of this notice. As discussed further in Part V, all

written comments, including those from non-participants, will be made

available to the public, both through the FTC's Public Reference Room

and over the Internet, and will be

[[Page 53924]]

considered by the Commission in formulating its future policy regarding

Made in USA claims.

The issues on which the Commission desires comment are as follows.

I. Consumer Perception of Made in USA Claims and the New Global Economy

A. Direct Evidence of Consumer Perception

A primary objective of the Commission's consumer protection mission

is to enhance consumer choice. In exercising its authority to prohibit

deceptive acts or practices, the Commission seeks to ensure that

consumers can choose products on the basis of accurate

information.11 This policy applies to claims regarding the country

of origin of products.

In determining whether a representation is deceptive, the

Commission first must determine what that representation (whether in an

advertisement or a label) expressly states or implies to consumers.

Claims may be made expressly, through direct representations, or they

may be implied. With respect to implied claims, the Commission often is

able to conclude that an advertisement (or label) contains an implied

claim by evaluating the content of the ad and the circumstances

surrounding it. When the Commission cannot do so, the Commission will

not find the advertisement to have made an implied claim unless

extrinsic evidence allows it to conclude that such a reading of the

advertisement is reasonable. Such evidence can include such sources as

reliable results from methodologically sound consumer surveys, evidence

respecting the common usage of terms, generally accepted principles

drawn from market research, and expert opinion.12

Whether an unqualified Made in USA claim means ``all or virtually

all'' domestic content or some lesser proportion depends on the implied

message in the advertisement or label. Thus, direct or extrinsic

evidence of how consumers view Made in USA claims can contribute

significantly to the Commission's analysis.

The Commission already possesses some extrinsic evidence regarding

Made in USA claims. In 1991, the Commission performed a consumer

perception study that asked consumers general questions about Made in

USA claims, as well as questions about the use of such claims in

specific advertisements. The results of that study suggest that many

consumers view ``Made in USA'' claims as representing that products

possess high domestic content. For example, approximately 77% of the

consumers stated that, in general, Made in USA references mean ``all or

nearly all'' parts and labor are domestic.13

The Commission placed this consumer perception study on the public

record on July 11, 1995, and now invites comment on the study. The

Commission also invites the public to submit any other direct evidence

of consumer perception of Made in USA claims for placement on the

record and discussion at the workshop.

B. The Impact of Increased Globalization of Production on Consumer

Perception

Some commenters in Hyde offered circumstantial evidence in support

of a more lenient standard for Made in USA claims. They noted that the

world economy has changed significantly since the Commission's standard

was first adopted. Consumers now recognize that many products are no

longer made wholly in the United States. Thus, it was argued, many

consumers no longer believe that a Made in USA claim means the product

is ``all or virtually all'' domestic in origin.

The Commission recognizes that substantial changes in the domestic

production of goods have occurred since the time that the Commission's

first Made in USA cases were brought. For many products, the

globalization of production is so advanced that it is difficult to

identify any one unique country of origin for the product. There also

is little question that some consumers are aware that many goods

assembled here have foreign parts.

In the workshop, an important issue will be how this increased

awareness of foreign sourcing affects consumer perceptions when

consumers are confronted with specific Made in USA claims in

advertising or product labeling. On the one hand, it may be that

consumers today more readily ``discount'' or take alternative meanings

from unqualified Made in USA claims. For example, there may be product

categories where consumers know through the media that most product

parts come from other countries. At the same time, there is reason to

question whether consumers now view Made in USA claims differently than

in the past. Consumers may have a generalized knowledge of product

origin, but not enough information about specific brands to assess a

particular seller's country-of-origin claims.14 In addition, to

the extent that consumers are generally aware of increased foreign

manufacture, this may, in some circumstances, actually strengthen the

appeal of a Made in USA claim. An aggressive Made in USA claim for a

product of a kind known typically to be made abroad may suggest to

consumers not only that the advertised product is domestically

manufactured, but that it is unusual in this respect.15

The Commission invites commenters to submit any circumstantial

evidence or other arguments addressing how consumers currently view

Made in USA claims. In particular, the Commission is interested in how

the following factors might affect such perceptions: (1) The type or

complexity of the product; (2) general consumer knowledge of the

foreign sourcing for the type of product; (3) the frequency or

prominence of the claim (e.g., an aggressive advertising campaign

versus an inconspicuous claim); and (4) the presence of express or

implied claims that the seller is superior or unique with respect to

the domestic content of its product.

II. The Costs and Benefits of an ``All or Virtually All'' Standard

Compared to Other Standards

A. Impact on Domestic Commerce

Some commenters in Hyde contended that the ``all or virtually all''

standard set forth initially in the proposed Hyde consent agreement is

unattainable and deprives manufacturers of a selling tool that could

help preserve American jobs. Many of these commenters argued that few

sellers today have products with high domestic content. One solution

offered by such commenters was for the Commission to permit Made in USA

claims when the products are made with at least 50% domestic parts and

labor.

Firms that wish to retain or increase American labor content in the

face of possibly lower foreign labor costs may need an effective

advertising message to compete. ``Made in America'' and similar phrases

have a cachet and simplicity that may make them effective tools in

advertising and product labeling. However, a much smaller percentage of

products assembled in the United States today is comprised of all or

virtually all U.S. parts and labor, compared to previous decades, and

this trend is likely to continue.

At the same time, there is reason for caution in adopting a

substantially lower threshold of domestic content for Made in USA

claims. A lower threshold could permit deceptive claims if consumers

still believe that Made in USA claims imply high domestic

content.16 In this regard, the Commission seeks comment on the

relative costs and benefits of an ``all or virtually all'' standard and

a lower threshold, such as 50%.

[[Page 53925]]

Implicit in the above arguments for a lower domestic content

standard is the assumption that sellers of products with relatively

high domestic content cannot tout this advantage with qualified claims,

because it is impractical to convey such qualifications or because they

lack commercial appeal. Accordingly, the Commission also invites

comment on the costs and benefits to business of using qualified,

rather than unqualified, Made in USA claims. Commission doctrine

permits sellers to make truthful and nonmisleading claims concerning

the amount of domestic content in their products, in both absolute and

comparative terms. The Commission requests comment on whether and to

what extent qualified Made in USA claims--e.g., ``Made in USA of

domestic and imported parts,'' ``Made in USA with at least 70% U.S.

parts and labor,'' or ``The most U.S. content of any leading brand''--

unduly burden an advertiser's domestic content message. The Commission

also requests comment on the practical considerations in using

qualified claims, including the problem of space limitations. In

particular, do even relatively short qualifications--e.g., ``80% US

parts''--present practical problems in fashioning advertisements or

labels, and would such problems inhibit the use of domestic content

claims?17

In addition, the Commission seeks comment on specific domestic

origin phrases or messages that might adequately convey the amount or

presence of foreign content in products, yet address practical

concerns. For example, one alternative claim that has been suggested is

``Assembled in USA.'' The Commission is interested in receiving

information as to what meaning consumers take from this phrase and

whether use of the term would avoid undue inferences of domestic

content.18

B. Impact on International Trade

Some commenters in Hyde have suggested that strict FTC standards

for unqualified Made in USA claims could lead to conflicting

requirements (and thus manufacturing inefficiencies) for U.S. companies

that sell their goods both here and abroad. For example, some

commenters claimed that foreign customs officials permit (or even

require) simple Made in USA labels in circumstances where the FTC would

require qualified claims. Where such labels are permanently affixed to

or incorporated in the item, the manufacturer may have to run separate

production runs for the same product, one for foreign sales (``Made in

USA'') and one for domestic sales (``Made in USA from foreign and

domestic parts'').

In this regard, the Commission invites comment on consumers' and

businesses' experience with foreign customs laws and practices with

respect to qualified Made in USA claims. The Commission also wishes to

explore alternatives for granting sellers the flexibility to comply

with both FTC law and foreign customs, while avoiding deceptive

labeling practices. One possible option would be to permit sellers to

place unqualified labels on products (e.g., ``USA'') to be shipped to

both foreign markets and within the United States, as long as sellers

disclose foreign content to U.S. consumers by other means, such as

packaging or hangtags.19

C. The Costs and Benefits of Adopting the Country-of-Origin Rules of

Other U.S. Government Agencies

U.S. Customs Service. The Tariff Act requires, specifically for

purposes of quotas and duties, that products entering the United States

bear ``the English name of the country of origin of the article,'' and

that one foreign country be designated as the country of origin.20

Generally speaking, Customs law requires a foreign origin marking on

the imported article unless the imported item will be ``substantially

transformed'' in the United States.21 Although Customs law imposes

no requirements regarding the disclosure of domestic content and

therefore does not address preconditions for Made in USA claims,22

some commenters in Hyde urged the Commission to apply the substantial

transformation test to Made in USA claims.23

The latter approach would have the benefit of applying one set of

rules to both claims of domestic origin and claims of foreign origin.

However, the substantial transformation test is principally aimed at

determining a country of origin for purposes of tariffs and quotas, not

anticipating the degree of domestic content that consumers would attach

to affirmative Made in USA claims. Products substantially transformed

in the United States could still contain higher foreign content than

consumers might be led to believe by affirmative Made in USA labels or

advertisements.

Other Laws and Regulations. Other statutes and regulations involve

country-of-origin determinations as well. For example, the Buy American

Act requires that federal agencies purchase only such products as were

mined or produced in the United States, or are at least 50% domestic in

value.24 However, the law does not deal with advertising or

labeling, and its definition does not appear to be tailored to consumer

perception of Made in USA claims. Another example of a law involving

country-of-origin determinations is the American Automobile Labeling

Act,25 which requires that each automobile manufactured on or

after October 1, 1994 for sale in the United States bear a label

disclosing, among other things, where the car was assembled, the

percentage of equipment which originated in the United States and

Canada, the country of origin of the engine, and the country of origin

of the transmission. The Commission invites comment on whether, and in

what respect, any aspect of these laws or other laws are relevant to

the development of the Commission's Made in USA advertising and

labeling policy.

III. Issues Regarding the Computation of Domestic Content

The Commission's advertising substantiation doctrine requires that

any objective claim be supported by a ``reasonable basis''26--

commonly defined in Commission orders as ``competent and reliable

evidence'' that substantiates the representation.27 Thus, whatever

threshold for domestic content is adopted, an advertiser making a Made

in USA claim must have substantiation that its product in fact meets

that threshold.

Some commenters in the Hyde matter, however, stated that the

Commission's current standard gives little guidance as to how domestic

content is to be computed. Commission staff also routinely receive

inquiries on this subject from consumers and businesses seeking

guidance. Therefore, the Commission solicits comment on alternative

methods of calculating domestic content.

A. A Proposed Formula for Measuring Domestic Content

In defining the appropriate method of measuring domestic content,

whether the threshold for Made in USA claims is ``all or virtually

all'' or some lesser proportion, several approaches are possible. For

example, it might be possible to measure the proportion of labor hours,

proportion of total labor cost (wages), or to impose separate

requirements for minimum labor and minimum parts costs.

For discussion purposes, one possible formula for computing

domestic content is as follows:

Before making Made in USA claims, sellers must demonstrate that

their products contain X percent domestic content. This percentage

shall be computed by (i) dividing DOMESTIC CONTENT (purchase

cost28 of U.S. parts +

[[Page 53926]]

cost of U.S. labor and direct overhead in final assembly) by (ii) TOTAL

PRODUCT COST.

The Commission invites comment on this formula, and any alternative

approaches.

In addition, whatever approach is adopted, it is likely to require

resolution of the following issues.

1. The ``Domestic Content'' Determination: Identifying ``U.S. Parts''

at the Component and Subcomponent Level

A central issue in calculating domestic content is determining how

far back in the production process to search. May the seller simply

determine the origin of product parts ``one step back'' in the

production process? What if a large number of subcomponents within the

supposedly U.S. parts are made in foreign countries?

Below, the Commission offers for discussion a number of options for

measuring ``U.S. parts.'' The Commission requests comment on the

reasonableness of each approach and any alternatives.

a. Computation at All Stages of Production: Under this approach,

the manufacturer of the final product would need to find out from parts

suppliers, or through other reliable evidence, where the component

parts of the product were made and where the subcomponents of these

parts were made. A seller who wished to make an unqualified Made in USA

claim would need to proceed with this inquiry as far back in the

production process as necessary to determine whether the threshold for

domestic content (whether 100%, 50%, or something else) was met.

Although this may appear a formidable task, the ease of applying

this rule likely will depend on the type of product and the necessary

threshold. Through experience, many manufacturers know the origin of

the components and subcomponents in their products.29 The simpler

the product, the simpler the determination. The most difficult

circumstance may be where the company manufactures a complex product

with many tiers of production and it appears that the product is close

to meeting the domestic content threshold. Manufacturers who frequently

change from domestic to foreign parts suppliers also may find it

difficult to make these determinations.30

b. ``One or Two Steps Back'': Another approach would be to require

specific determination of the country of origin of all parts and

subcomponents, but only one or two steps back in the production

process. Under a one step back approach, for example, a lawn mower

manufacturer would determine whether the basic parts in final

assembly--e.g., engine, wheels, platform, handle--were assembled in

plants in the United States.31 This approach may result in

reasonable determinations of domestic content, if consumers only take

Made in USA claims as meaning ``basic parts were made here.'' This

approach is already used in the textile area.32 In many

circumstances, it may also have the advantage of ease of application--

although some difficulties may arise in determining what constitutes a

single ``step'' (or two ``steps'') back in the manufacturing

process.33

If, however, consumers are concerned with the true proportion of

labor or profit that can be attributed to U.S. workers and firms, then

the approach of looking only ``one step back'' may open the door to

misleading Made in USA claims. Automobiles (although separately

regulated by the American Automobile Labeling Act) provide an obvious

example. Examining only the basic parts put together in the final stage

of assembly--e.g., assembled engine, transmission, etc.--would mask

enormous added foreign value in some instances. The same could be said

of many complex products.

2. Adding ``Domestic Content'' at the Final Stage of Assembly

The cost of parts is not the only measure of domestic value. At

final assembly, there is the addition of labor on the assembly line,

packaging, and other direct costs of producing the particular item

(e.g., energy use).

One issue is whether domestic content can be further amplified by

allocating any portion of general overhead to the manufacture of the

product. Another issue is whether sellers can make Made in USA claims

for products that have high domestic content, but do not undergo final

assembly in the United States.34 Such products may sufficiently

contribute to U.S. wealth and labor creation to satisfy consumer

expectations of Made in USA claims. However, consumers also may find it

material whether final assembly took place in the United States.35

3. The Definition of ``Total Product Cost''

The final step in the formula is to divide the domestic content

figure into ``total product cost.'' The latter obviously will be a

higher figure than ``domestic cost'' when the product contains foreign

components. On the simplest level, total product cost would be the

total purchase price of foreign parts plus all the domestic costs added

previously. However, the Commission invites comment on whether any

additional elements should be added to the total cost of the product.

B. ``Reasonable Basis'': an Alternative Approach

Rather than, as suggested above, adopting a particular formula for

calculating domestic content, one alternative would be simply to

require that advertisers possess a ``reasonable basis'' for an express

or implied claim that their products contain a proportion of domestic

content, as required generally by the Commission's substantiation

doctrine. Such an approach would permit advertisers greater flexibility

in determining how to substantiate their claims, and might be less

restrictive of truthful Made in USA claims. However, a ``reasonable

basis'' standard, unelaborated upon, also provides less certain

guidance to businesses and consumers. The Commission invites comment on

the costs and benefits of utilizing a reasonable basis standard versus

specifying a particular method for calculating domestic content.

IV. Form of Guidance

At the conclusion of the workshop, the Commission will have several

options for giving guidance to the public on Made in USA claims.

Possible options include, among others, case-by-case enforcement, an

enforcement policy statement, interpretive guides, or a rulemaking

under the Crime Bill. The Commission seeks comment on the form of

guidance that would be most useful.

One question is whether it would be preferable for the Commission

to state a general rule (e.g., ``all or virtually all,'' ``substantial

domestic content'') or a bright-line percentage threshold for Made in

USA claims.36 A related question is whether the Commission, were

it to adopt a non-numeric rule, should also provide for safe harbors

for firms whose products meet some minimum percentage threshold for

domestic content. The Commission requests comment on the foregoing

issues.

V. Information for Interested Persons

A. Invitation to Comment

Interested persons, including those who may wish to participate in

the public workshop, are requested to submit written comments on any

issue of fact, law or policy that may have bearing upon the

Commission's policy on Made in USA claims. Although the Commission

welcomes comments on any aspect of its policy regarding Made in USA

claims, the Commission is particularly interested in comments on

[[Page 53927]]

the issues discussed above. Specifically, the Commission wishes comment

on the following questions:

1. When consumers see product advertisements or labels stating or

implying that products are ``Made in USA,'' ``Made in America,'' or the

equivalent, what amount of U.S. parts and labor do they assume are in

the products?

a. Are there surveys, copytests, or other direct evidence of

consumer perception that will aid the analysis?

b. How has increased consumer knowledge of foreign imports or

foreign components affected such perceptions? How much knowledge of

foreign sourcing of components do consumers have?

c. How much, if at all, is consumer perception of Made in USA

claims affected by the type of product, complexity of the product, or

other factors?

d. Do consumers attach higher domestic content to products claimed

to be Made in USA when the claims are presented with greater prominence

or frequency? When they are featured in advertising, as opposed to

merely on labels?

2. What are the costs and benefits of an ``all or virtually all''

threshold for Made in USA claims, versus a lower threshold (e.g., 50%)?

a. What are the precise benefits of being able to make unqualified

Made in USA claims for lower domestic-content products? What impact

would this have on firms that now meet the higher standard? On firms

that might be able to raise their domestic content to meet a lowered

threshold?

b. What difficulties are there in making truthful comparative or

qualified claims that reveal that the product is not wholly domestic?

Is qualifying claims more difficult in this context than in other

advertising or labeling contexts (e.g., ``30% lower in fat than the

leading brand'')? Do advertising and labeling pose the same

considerations?

c. What are the costs and benefits of alternative thresholds (e.g.,

50%, 75%, products ``substantially transformed'' in the United States)?

d. What are the costs to consumers, when the actual domestic

content in ``Made in USA'' products is lower than consumers are led to

believe?

e. If adding qualifications to Made in USA claims sometimes is

impractical or costly due to space limitations, are there alternative

phrases that meet this concern and also adequately inform consumers of

foreign content? Do such formulations as ``USA 80%,'' ``Made in USA

(80%),'' or similar formulations satisfy these concerns?

f. What do consumers understand the phrase ``Assembled in USA'' to

mean? Would consumers view such terms as ``Assembled in USA'' as

suggesting that the product may have substantial foreign content? How

much foreign content? What are the costs and benefits of allowing such

a claim for a product where there is only minimal domestic assembly?

3. What are the costs and benefits of using the same tests for Made

in USA claims as those imposed by U.S. Customs requirements

(``substantial transformation''), the Buy America Act (50% cost), and

other domestic content statutes or rules?

4. Do foreign customs officials prohibit the addition of qualifying

phrases on Made in USA labels? If so, does the traditional FTC

requirement that labels make disclosures of substantial foreign content

add significant manufacturing costs where sellers wish to sell a single

item in domestic and foreign markets? Would an option of stating

qualifying disclosures only on packages, hangtags, etc. at time of sale

in the U.S. market significantly reduce such costs?

5. How should the proportion of domestic content be measured with

respect to Made in USA claims?

a. In determining the U.S. value added by parts and components, is

it sufficient to determine the purchase cost of parts and components

made in U.S. plants? Do other measures better measure the U.S. content

from the consumer's perspective?

b. Should the determination of U.S. value added by parts and

components exclude raw materials? If so, what should be the definition

of raw materials?

c. What are the costs and benefits of requiring sellers to

determine the source of all components and subcomponents before making

Made in USA claims?

d. What are the costs and benefits of permitting Made in USA claims

where the seller has determined that a sufficient percentage of parts

and components ``one step back'' in the manufacturing process were made

in U.S. plants? Two steps back? At some other stage in production?

e. What types of costs, other than direct labor costs, should be

added to the domestic content measure at the stage of final assembly?

Only direct overhead? If general overhead (e.g., real estate taxes,

administrative costs), how can the measure be defined to avoid sellers

from artificially inflating the domestic content of products for this

purpose?

f. Should the profit to the final U.S. assembler of the product be

counted toward domestic content?

g. What are the costs and benefits of a case-by-case determination

that requires sellers to have a ``reasonable basis'' for their Made in

USA claims, rather than requiring a particular method of computing

domestic content? Would this lesser certainty provide insufficient

guidance or fail to deter misleading Made in USA claims?

6. What form of guidance should the Commission offer with respect

to Made in USA claims?

a. Should the form of guidance be case-by-case enforcement, an

enforcement policy statement, guides, or a rulemaking? Are there other

forms of guidance that would be more useful or cost efficient?

b. Should the Commission offer a bright-line test whereby sellers

can make Made in USA claims only if the product contains a specific

percentage of domestic cost? If a non-numerical threshold for permitted

claims is adopted, would it be helpful to establish safe harbors within

that threshold to establish what types of claims always would be

permitted?

The Commission requests that commenters provide representative

factual data in support of their comments. Individual firms'

experiences are relevant to the extent they typify industry experience

in general or the experience of similar-sized firms. Comments should,

if possible, suggest specific alternatives to various proposals and

include reasons and data that indicate why the alternatives would

better serve the Commission's statutory mandate of protecting consumers

against deception.

Written comments submitted will be available for public inspection

in accordance with the Freedom of Information Act, 5 U.S.C. 552, and

Commission regulations, on normal business days between the hours of

8:30 a.m. to 5:00 p.m. at the Public Reference Room 130, Federal Trade

Commission, 6th and Pennsylvania Ave., N.W., Washington, D.C. 20580.

In addition, the FTC will make this notice and, to the extent

technically possible, all comments received in response to this notice

available to the public through the Internet. To access this notice and

the comments filed in response to this notice, access the World Wide

Web at the following address: http://www.ftc.gov.

At this time, the FTC cannot receive comments made in response to

this notice over the Internet.

[[Page 53928]]

B. Public Workshop

The Commission's staff will conduct a public workshop to afford

Commission staff and interested parties an opportunity to discuss the

foregoing issues and other relevant issues raised in the written

comments.

As stated previously, the Commission is conducting a consumer

research project regarding consumer perception of Made in USA claims.

Although the Commission has commenced work on this project, it is not

yet clear when the results will be available. However, the Commission's

goal is to have the work finished in time so that the workshop could be

held in Washington, D.C., in February or March 1996. The Commission

will issue a new Federal Register notice announcing the date and

specific location of the workshop once staff has a projected finish

date for the study.

The Commission recognizes that interested parties may not be able

to determine whether they can participate in the workshop until they

are informed of the specific dates. Therefore, the Commission will not

solicit applications for participation at this time. However, the

Commission will only accept applications for participation from parties

who also have submitted written comments in advance of the proceeding.

Accordingly, any party who expects to submit an application for a

workshop should submit a written comment in response to this Federal

Register Notice.

The next Federal Register notice will describe the workshop in more

detail. In general, the Commission expects to conduct the workshop as

described below.

The intent of the workshop will not be to achieve a consensus of

opinion among participants, or between participants and Commission

staff, with respect to any issue raised in this proceeding. However,

the Commission will consider the views and suggestions made during the

workshop, in addition to any written comments, in formulating its

future policy regarding Made in USA claims.

If the number of parties who request to participate in the workshop

is so large that including all requesters would inhibit effective

discussion among the participants, then Commission staff will select as

the participants a limited number of parties to represent the interests

of those who submit written comments. The selections will be made on

the basis of the following criteria:

1. The party submits a written comment by January 16, 1996.

2. In response to the next Federal Register notice announcing the

date of the workshop, the party notifies Commission staff of its

interest and authorization to represent an affected interest by the

workshop notification date.

3. The party's attendance would promote a balance of interests

being represented at the conference.

4. The party's attendance would promote the consideration and

discussion of the issues presented in the workshop.

5. The party has expertise in issues raised in the workshop.

6. The party adequately reflects the views of the affected

interest(s) which it purports to represent.

7. The party has been designated by one or more interested parties

(who timely file requests to participate and written comments) as a

party who shares group interests with the designator(s).

8. The number of parties selected will not be so large as to

inhibit effective discussion among them.

If it is necessary to limit the number of participants, those not

selected to participate, but who submit both requests to participate

and written comments, will be afforded an opportunity at the end of the

session to present their views during a limited time period. The time

allotted for these statements will be determined on the basis of the

time necessary for discussion of the issues by the selected parties, as

well as by the number of persons who wish to make statements.

A neutral, third-party facilitator may be retained for the public

workshop. Prior to the conference, the participants will be provided

with copies of the written comments received in response to this

Notice. The discussion during the workshop will be transcribed and the

transcription will be placed on the public record.

Authority: 15 U.S.C. 41 et seq.

By direction of the Commission, Commissioner Starek dissenting.

Donald S. Clark,

Secretary.

Notes

1. See Cliffdale Associates, Inc., 103 F.T.C. 110 (1984),

reprinting as an appendix letter dated Oct. 14, 1983, from the

Commission to The Honorable John D. Dingell, Chairman, Committee on

Energy and Commerce, U.S. House of Representatives (``Deception

Statement'').

Under settled Commission doctrine, claims are deemed deceptive

if even a ``significant minority'' of consumers are misled. ``An

interpretation may be reasonable even though it is not shared by a

majority of consumers in the relevant class, or by particularly

sophisticated consumers. A material practice that misleads a

significant minority of reasonable consumers is deceptive.'' Kraft,

Inc., 114 F.T.C. 40, 122 (1991), aff'd, 970 F.2d 311 (7th Cir.

1992), cert. denied 113 S.Ct. 1254 (1993).

2. In this notice, ``Made in USA'' refers to any message in

which the terms, text, phrases, images, or other depictions refer

solely to the United States as the country of origin, without

disclosing the extent or fact of foreign components or labor. ``Made

in America,'' ``U.S.-Made,'' and ``All American'' are examples of

equivalent terms. However, the proceeding also will address the

circumstances under which other terms, e.g., ``Assembled in USA,''

``Crafted in the USA,'' etc. might convey the same message and

therefore have to satisfy the same threshold of domestic content.

3. Some statutes require disclosure of domestic origin or

domestic content. See, e.g., Textile Products Identification Act, 15

U.S.C. 70; Wool Products Labeling Act, 15 U.S.C. 68 (both enforced

by the FTC).

4. See, e.g., Windsor Pen Corp., 64 F.T.C. 454 (1964); Vulcan

Lamp Works, Inc., 32 F.T.C. 7 (1940). From the 1940's through the

1960's, Commission cases uniformly stated that such unqualified Made

in USA claims implied that the product was wholly domestic. In

addition, the Commission in the late 1960's and early 1970's issued

numerous public advisory opinions stating that a manufacturer could

claim that a product was Made in USA only if the product was

comprised wholly of domestic parts and labor. See Foreign Origin, 3

Trade Reg. Rep. (CCH) para.7551 (1988) (discussing FTC advisory

opinions and cases on country-of-origin issues).

In a related line of cases, the Commission has also imposed a

requirement that sellers affirmatively disclose foreign content,

rather than remain silent, when the cost of the product is

substantially (50 percent or more) foreign in origin and this

failure to disclose would mislead consumers as to the product's

origin. See Manco Watch Strap Co., 60 F.T.C. 495 (1962). The

Commission's different traditional threshold for Made in USA claims

(requiring wholly domestic content, rather than 50%) is based on the

fact that the seller, rather than remaining silent, has made an

affirmative Made in USA claim suggesting high domestic content. By

contrast, the seller's silence on origin may suggest a wider range

of scenarios regarding foreign versus domestic content.

5. See Nikki Fashions, Ltd., No. C-3404 (1992) and Richard B.

Pallack, Inc., No. C-3333 (1991)(alleged removal of foreign origin

labels); Manzella Productions, Inc., No. C-3503 (alleged

substitution of Made in USA labels for foreign origin labels); El

Portal Luggage, Inc., No. C-3499 (alleged removal of foreign origin

labels in store featuring prominent Made in USA signs).

6. In September 1994, Congress, citing instances where foreign-

made goods were labeled as Made in USA, enacted a domestic origin

labeling provision in section 320933 of the Violent Crime Control

and Law Enforcement Act of 1994, P.L. 103-322, 108 Stat. 2135

(``Crime Bill''). Section 320933 sets no substantive standard for

Made in USA labeling claims. Instead, the provision makes clear that

such claims are to be consistent

[[Page 53929]]

with section 5 of the FTC Act, and that the Commission is free to alter

its legal standard as circumstances warrant.

7. Commissioner Azcuenaga and Commissioner Owen dissenting.

8. Commissioner Azcuenaga dissenting. Because the New Balance

matter is now the subject of an order to show cause proceeding, see

discussion infra note 10, it would be inappropriate for the

Commission to discuss the merits of the case in this notice.

9. 59 FR 48,892, 48,894 (1994).

10. On the same day, the Commission (Commissioner Starek

dissenting) also voted to direct staff to renegotiate a revised

consent agreement with Hyde to remove the ``all or virtually all''

allegation and corresponding consent agreement terms. In addition,

the Commission (Commissioner Starek dissenting) stayed the

administrative proceeding in New Balance, and required New Balance

and FTC complaint counsel to show cause why the FTC's complaint and

notice order should not be amended in similar fashion.

11. In addition, the Commission, in acting against deception,

seeks to protect competition in the marketplace by ensuring that

firms that promote their products truthfully are not subject to

unfair competition from competitors who engage in deceptive

advertising.

12. See Kraft, Inc., 114 F.T.C. at 121-22.

13. The consumer perception study (the ``Smith-Corona test'')

involved 400 participants. The specific advertisements shown

consumers advertised Smith Corona typewriters and Huffy bicycles.

The Smith Corona advertisement showed a typewriter with various

claims in headlines and text, plus a relatively small ``Made in

USA'' reference under a company logo in the right margin. The Huffy

advertisement showed a picture of bicycles with price information

and claims in the upper left corner, plus a small ``Huffy, Made in

USA'' reference at the bottom.

With respect to the specific advertisements, 59% of the

consumers viewing Huffy bicycle advertisements thought that ``Made

in USA'' meant the bicycles contained over 90% U.S. parts and labor.

For typewriters, 49% of respondents viewed the claim as meaning the

product contained over 90% parts and labor. Consumers held this view

despite the fact that bicycle and typewriter industries have

experienced substantial foreign imports for many years, and that the

Made in USA references in the advertisements were quite modest and

made no express uniqueness or superiority claims regarding U.S.

content.

Nonetheless, the study suggests that consumer perceptions are

influenced by the nature of the claims and product. Whereas 77% of

participants thought that Made in USA claims, in the abstract,

implied that all or almost all the product was domestic in origin,

somewhat fewer took a ``90% or more'' message from the specific

advertisements--and here too there was some difference in perception

between the two ads. With respect to the typewriter advertisement,

participants explained the lower estimate of domestic content based

on such factors as the Canadian company address on the advertisement

and that ``most electronic parts [are] made abroad.''

14. Many consumers do not have ready access to any specific

information on component sourcing. For example, participants in the

Smith-Corona test who viewed ``control'' bicycle and typewriter

advertisements that lacked any Made in USA references held widely

differing views regarding the foreign content of these products. Ten

percent of the participants stated the products were 100% domestic;

21% said they ``do not know;'' and 45% said that at least 50% parts

and labor were provided by U.S. workers. Smith-Corona Test, Tables

10 and 12.

15. In determining what claim is made in an advertisement, the

Commission looks to the overall, net impression of the ad rather

than to any single element. Stouffer Foods Corp., Docket No. 9250,

(September 26, 1994) slip op. at 4; Kraft, 114 F.T.C. at 790. Thus,

a prominent Made in USA claim in an ad that featured American flags

and references to employing American workers might convey to

consumers a stronger claim of domestic content than would an ad

focused on other product features that contained an inconspicuous

``Made in USA'' in the corner.

16. It is unclear whether lowering the domestic content

threshold would in fact create greater incentives for American job

creation. Under a new lower standard (e.g., 50% domestic), any

producer now having higher domestic content would have the incentive

to lower the American labor and parts content to that new level

(assuming unqualified Made in USA claims are a distinct marketing

advantage and foreign production costs are lower). At the same time,

there could be offsetting effects. A new class of producers having

relatively low domestic content might find it advantageous to

increase domestic content just enough to reach the new threshold.

17. In this regard, the Commission notes that garment

manufacturers appear to have successfully adapted to the similar

requirements of the Textile Labeling Rule, 16 CFR 303.33, placing

qualifications on one-inch or smaller tags. The Commission also

observes that sellers have fashioned commercially appealing claims

in comparative terms in other contexts (e.g., ``50% lower in fat

than the leading brand'').

18. In this regard, the Commission cautions that literally true

statements at times can carry deceptive implications. See Kraft v.

FTC, 970 F.2d 311 (7th Cir. 1992), cert. denied, 113 S. Ct. 1254

(1993). Thus, the Commission invites comment on whether, for

example, an ``Assembled in USA'' advertising campaign might be

deceptive where the product is made almost entirely of foreign

components and there is minimal domestic assembly, and whether

consumers assume that an ``Assembled in USA'' product contains a

minimum amount of domestic labor or parts.

19. By analogy, FTC opinions have permitted foreign products

themselves to remain unlabeled (i.e., thereby possibly implying

domestic origin on the product itself) where space limitations

prevented proper disclosures, as long as country-of-origin

disclosures instead appeared on packaging. Hoover Ball & Bearing

Company, 62 F.T.C. 1410, 1413 (1963). See also Delaware Watch

Company, Inc., 63 F.T.C. 473 (1963) (permitting the use of a

separate tag or label on watches for disclosing foreign origin).

There are a number of constraints on this flexibility, however.

Deceptive representations cannot be cured by disclosures provided

substantially later in time. Deception Statement, 103 F.T.C. at 180.

Thus, for example, the use of unqualified Made in USA claims in

advertisements or store displays cannot be remedied by

qualifications that the consumer may or may not detect upon

receiving the package. Any disclosure also must be clear and

prominent. Id. at 180-81.

20. 19 U.S.C. 1304(a).

21. 19 CFR 134.1(b), 134.1(d)(1), and 134.35. As construed by

some courts, substantial transformation occurs when ``as a result of

processes performed in that country a new article emerges with a new

name, use or identity.'' Belcrest Linens v. United States, 741 F.2d

1368, 1371 (Fed. Cir. 1984).

22. The U.S. Customs Service, however, has jurisdiction to take

action where a required foreign origin marking has been removed and

replaced with a ``Made in USA'' marking. The Tariff Act declares it

unlawful for anyone (whether importer, wholesaler, or retailer) to

cover or remove a foreign-origin label that is already on a product.

19 U.S.C. 1304(i); 19 CFR 134.4.

23. Reportedly, some importers assume that whenever the U.S.

Customs Service determines that an imported product will be

substantially transformed in the United States and therefore need

not bear a foreign marking, that the importer then is free to place

a Made in USA label on that product. This view has no support in FTC

doctrine or U.S. Customs law. A Made in USA label only would be

permitted in that circumstance if it met the FTC's domestic content

requirements for Made in USA claims.

24. The Act specifically states that the products must be made

here or be ``substantially all'' from products mined or produced in

the United States. 41 U.S.C. 10a. The Act does not define what

``substantially all'' means for manufactured goods. However,

Executive Order 10582 (19 FR 8723 (1954)) defines ``foreign origin''

under a 50% of cost rule. See also 48 CFR 25.101 et seq. The

Department of Defense and the General Services Administration are

the two Federal agencies with prime responsibility for enforcing the

Buy American Act.

25. 15 U.S.C. 1950.

26. FTC Policy Statement Regarding Advertising Substantiation at

6, reprinted as appendix to Thompson Medical Co., 104 F.T.C. 648

(1984) (``Substantiation Statement'').

27. Depending on the nature of the claim, the Commission may

require a particular level of substantiation, such as ``competent

and reliable scientific evidence,'' defined as ``tests, analyses,

research, studies or other evidence based on the expertise of

professionals in the relevant area, that has been conducted and

evaluated in an objective manner by persons qualified to do so,

using procedures generally accepted in the

[[Page 53930]]

profession to yield accurate and reliable results.'' E.g., Nature's

Bounty, Inc., F.T.C. Docket No. C-3593 (July 21, 1995); Mattel,

Inc., F.T.C. Docket No. C-3591 (June 23, 1995).

28. This exclusive emphasis on total ``purchase cost'' of

components and subcomponents bought from U.S. plants--rather than

singling out only the U.S. labor hours or labor costs upstream in

production--offers a number of advantages. One is ease of

measurement. Another is that measuring the total purchase cost of

all components and subcomponents made in U.S. plants captures not

only the total U.S. labor cost but also profit to U.S. component

manufacturers. Studies have shown that many consumers have a

preference for American-made goods not only out of concern for

American labor, but also to increase U.S. wealth and take advantage

of American quality. See The Wirthlin Report, February 1992

(survey); Foote, Cone & Belding, ``The Buy America Issue,'' May

1992; ``East v. West; What Americans Really Think About Imports,''

Chain Store Age, January 1988, pp. 13-15 (Leo J. Shapiro &

Associates survey); Smith-Corona test, Tables 3, 5.

29. The total burden to industry of making these determinations

will depend, in part, on where the threshold is set. If it is true

that most complex products today contain substantial foreign

components, then such manufacturers presumably would know that any

information search would be fruitless under a high standard.

30. In determining how far back in the process to inquire, a

further issue is whether raw materials, or only processed goods,

should be counted in this or other measurement schemes. For some

products, raw materials may be so removed from the final stage of

production that they cease to have meaning to consumers as a

cognizable product component (e.g., petroleum in plastic products,

iron ore in steel products). Computing domestic content down to the

raw materials stage also could greatly increase the information-

gathering burden for sellers. At the same time, excluding raw

materials possibly could lead to anomalous results for products

wherein raw materials are a high proportion of cost (e.g., a diamond

ring). Obviously, some amount of American labor and wealth flows

from basic farming, mining, and other raw materials production. In

addition, excluding raw materials from the calculation would require

a workable definition of raw materials.

31. One question also is whether it is enough for the part to

have been finally assembled in the United States to qualify as a

``U.S. part,'' or must have been substantially transformed here as

defined by U.S. Customs rules.

32. See Textile Labeling Rules, 16 CFR 303.33(b). The operation

of the one step back rule in the textile area can be illustrated as

follows. Wool yarn is made in Australia and sold to a U.S. cloth

maker. This cloth maker sells the cloth to a U.S. manufacturer of

wool suits. The labels would be: yarn (``Made in Australia''); cloth

(``Made in U.S. of foreign yarn''); and garment (``Made in USA'').

The Commission notes that the textile industry is somewhat unique in

that Congress has mandated the placement of Made in USA labels on

all covered textile products manufactured here. Thus, there is

exceptional need for administrative convenience and a bright-line

rule.

33. This is not an issue in the textile context, where the

governing regulation sets out the various ``steps'' in the

production process. For other products, however, what constitutes

one step (or two steps) back in the production process may not be so

evident.

34. For example, one form of globalization is the development of

``maquiladoras'' in Mexico. These are plants primarily owned by U.S.

firms that provide labor-intensive assembly of components. It is

reported that 98% of the raw materials and components used in

products assembled by maquiladores are produced in the United

States. U.S. International Trade Commission, Review of Trade and

Investment Liberalization Measures by Mexico and Prospects for

Future United States-Mexican Relations: Phase I: Recent Trade and

Investment Reforms Undertaken by Mexico and Implications for the

United States, Inv. No. 332-282, USITC Pub. 2275 (April 1990), pp.

5-14.

35. An additional issue is whether not only cost, but also

profit to the U.S. assembler, should be counted in determining the

proportion of domestic origin of the product. Profit to foreign

parts suppliers is implicitly counted toward foreign value, as part

of total purchase price of foreign components. Including profits at

final assembly also addresses consumers' concerns over U.S. wealth

creation. At the same time, some profits in U.S. assembly operations

might be diverted to foreign owners, and there are complications in

defining profit. The Commission invites comment on the foregoing

issues.

36. A minimum percentage would provide the most certain

guidance. However, the evidence thus far does not suggest that

consumers attach a precise percentage boundary to Made in USA

claims. A bright-line percentage also might be more arbitrary for

other reasons. For example, products with unchanged domestic parts

and labor content could pass back and forth over the cost threshold,

based merely on foreign exchange fluctuations.

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Dissenting Statement of Commissioner Roscoe B. Starek, III in the

Matter of Request for Public Comment in Preparation for Public Workshop

Regarding ``Made In USA'' Claims in Product Advertising and Labeling,

Matter No. P894219

For the reasons stated in my dissenting statement in Hyde Athletic

Industries, Inc., File No. 922-3236, I oppose spending Commission

resources on a broad examination of whether and how to change the

Commission's standard for unqualified ``Made in USA'' claims. Case-by-

case enforcement is the appropriate means to evaluate ``Made in USA''

claims. If consumer perceptions of ``Made in USA'' claims vary from

industry to industry or support some other standard, the most promising

way to develop that evidence is by litigating individual cases in which

the particular ads at issue are copy tested.1 The Commission

regularly addresses in individual cases complex public policy concerns

within the scope of its competition and consumer protection missions,

with the benefit of arguments, evidence, and a record on which a fully

developed opinion can be based. I find no persuasive reason--only,

perhaps, some miscalculated conception of expediency--for abandoning

case-by-case enforcement in favor of a resource-intensive,

unnecessarily broad review more typical of a rulemaking.

\1\The extensive copy testing now planned in preparation for

this workshop could provide the Commission with additional evidence

of consumer perceptions that may be useful in the assessment of

future enforcement actions against a variety of domestic content

claims.

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As I have stated previously, in order to reduce firms' costs of

making ``Made in USA'' claims in compliance with the law, I support

providing guidance on the level of substantiation that the Commission

will require for those claims. It is unnecessary and ill-advised,

however, to drop enforcement efforts against clear violations of

Section 5 of the FTC Act while such guidance is being developed.

[FR Doc. 95-25887 Filed 10-17-95; 8:45 am]

BILLING CODE 6750-01-P