Federal Trade Commission Received Documents June 28, 1996 P894219 B18354900172 LAW OFFICES ROSS & HARDIES JOHN B. PELLEGRINI Direct Line (212) 418-0607 July 12, 1996 Via Courier Office of the Secretary Federal Trade Commission Room 159 Sixth Street and Pennsylvania Avenue, N.W. Washington, D.C. 20580 "Made in USA" - Policy Comment FTC File No. P894219 Dear Mr. Clark: These are the post-workshop comments of the Footwear Distributors and Retailers of America ("FDRA"). FDRA is an association of some 70 retailers, importers, distributors and producers of footwear who, in the aggregate, account for approximately three-quarters of footwear sales in the United States. FDRA participated in the workshop. These post-workshop comments address some of the questions which were not resolved during the course of the workshop. Consumer Surveys Numerous consumer surveys were presented in the course of the workshop. The surveys did not distinguish clearly among raw materials, fabricated materials, components, subassemblies and finished products. Where the surveys referred to input the references usually were to parts or components and not to materials, raw materials, fabricated materials or subassemblies. Accordingly, to the extent that the consumer data provides any meaningful guidance, they suggest very strongly that consumers read the "Made in USA" label to mean that all of the major parts and components were produced in the United States and final assembly took place in the United States. There is no suggestion in these surveys that consumers understand the "Made in USA" label to mean that all of the material inputs, whether raw materials (hides) or fabricated materials (leather) are of United States origin. It should be noted, however, that the surveys are not conclusive on this point and that there is a great deal of confusion within the surveys as to exactly what the term parts means. Nevertheless, the thrust of the consumer surveys is that consumers do not read the "Made in USA" label as meaning that all or virtually all of the inputs are of United States origin. We read the surveys as limiting this concept to parts, components and, perhaps, subassemblies, but not materials, whether fabricated materials or raw materials. Deception The underlying issue here is whether "Made in USA" on a product which has foreign inputs is deception. In general, The Commission has found an act or practice deceptive if there is representation, omission, or practice that is likely to mislead consumers acting reasonably under the circumstances, and the representation, omission, or practice is material. See Cliffdale Associates, Inc. et.al., 103 F.T.C. 110, 164 (1984). FDRA proposes a standard based on processing. This standard will not deceive consumers, but on the contrary, will educate them about the site of assembly of a product and the origin of its components. Where the manufacture of major components and final assembly of a product occurs in the United States, the unqualified label "Made in USA" is not deceptive. It is evident that the public does not perceive the "Made in USA" label to mean that every minor component and all raw materials are domestic in origin. Thus, the unqualified label is likely to meet consumers expectations. In determining whether advertising has a tendency or capacity to deceive, consideration must be given to its audience. U.S. v. Reader's Digest Association, Inc., 464 F. Supp. 1037 (D.Del.1978). As the surveys indicate, the vast majority of consumers equate origin with place of assembly. Consequently, consumers desirous of purchasing domestic-made goods are not likely to be deceived about the origin of an item because some minor components are not domestic in origin. What matters most to consumers is where an article was manufactured. The failure to qualify a claim of United States origin when there are foreign inputs is not material since most consumers understood that the product likely contains raw materials or minor components from abroad. However, if one or more of the major components originates outside the United States, an appropriate qualification is necessary to avoid deception. An advertisement or label which fails to disclose material information may be false or deceptive even though it does not state false facts. Katherine Gibbs School, Inc. v. F.T.C., 612 F.2d 658, rehearing denied, 628 F.2d 755 (2nd Cir.1979). Representation of a product which consists of major foreign components as "Made in USA" without proper qualification is likely to deceive consumers who have a right to know that although the article was assembled into a final product in this country, major components were manufactured abroad. If an appropriate qualification is not included on the label, consumers wishing to purchase "Made in USA" products are likely to be misinformed. Misrepresentation of material facts made to induce the purchase of goods or services constitutes "unfair or deceptive acts or practices". F.T.C. v. Kitco of Nevada, Inc., 612 F.Supp.1282 (D.Minn.1985). Consumers who purchase an article whose label states "Made in USA," will be surprised to learn that, although the article was assembled in the United States, some of the major components were manufactured outside this country. Therefore, qualified labels are necessary to avoid deception or misrepresentation. "All or Virtually All" Discussions at the workshop by proponents of the "all or virtually all" standard reveal that, in their view, with the exception of some proponents who would agree that imported raw materials could be used, the product must be entirely United States in content and this includes raw materials, fabricated materials, and all labor. The statements of the American Hand Tool Coalition (the "Coalition"), one of the proponents of continuing the "all or virtually all" standard illustrates why this standard is unworkable. Some of the hand tools of interest to the Coalition are plated with chromium. Chromium is not produced in this country. The chromium content in a finished hand tool, if our recollection is correct, is less than ten percent. The Coalition would agree that the presence of a de minimis (not defined) foreign content would not preclude use of a "Made in USA" label on a hand tool completely manufactured in the United States with domestic inputs, except for chromium. They would agree to this approach only if the chromium represented a de minimis element in the full cost of the hand tool. (TR. at 554-556) However, if the cost of chromium increased, the Coalition took the position that if the increase led to a situation where the chromium value was more than de minimis, the "Made in USA" label should not be allowed. While this position is consistent, it does illustrate the essential unreasonableness of the current standard. A chromium-plated wrench is a product of the United States whether or not the chromium represents more, or less, than a de minimis percent of the total cost. The same processing is done in the United States. The same amount of labor is performed in the United States. The only difference is an increase in the cost of chromium and that could be the result of a change in the relative value of currencies. A standard which leads to such anomalous results is not useful and should be abandoned. The Commission should adopt a standard based on processing. FDRA, and others, urged the Commission to adopt a more realistic standard. This standard is expressed in different ways, but it essentially comes down to a standard which permits the use of the "Made in USA" label whenever most of the manufacturing processes (major component production and final assembly) takes place in the United States. Thus, an article of footwear manufactured in this country by cutting and sewing imported leather to make an upper, insole, outsole and other components, could be marked "Made in USA" without qualification. On the other hand, footwear manufactured in this country using an imported outsole, assembled to an upper made in this country could not be labeled "Made in USA" without there being some mention of the fact that imported components were used in the manufacturing process. This standard was described by some as processing and by others as a "one-step back" approach. This standard is not based upon the Customs rules relating to substantial transformation. This approach is based on common sense and it is consistent with the plain meaning of the consumer survey results. The standard proposed by FDRA would permit a wider use of the "Made in USA" label. It would not, however, permit the use of the "Made in USA" label on products which have substantial foreign content in terms of processing. This is a reasonable standard. This standard will not deceive consumers. This approach will permit United States producers who do most of the work in this country to label their products as "Made in USA". On the other hand, it will not permit use of that label for products which are essentially foreign. Substantial Transformation There was some discussion at the workshop on whether the Customs rules, referred to as the "substantial transformation" rules, should be adopted by the Commission. FDRA's position is that these rules are not applicable to merchandise which is subject to the Commission's jurisdiction. The question addressed by the Commission is not whether a product is deemed to be one of United States origin. The question is whether an unqualified "Made in USA" claim is deceptive. Even if the Commission decided to adopt the "substantial transformation" approach, it would not eliminate the necessity of looking at each product to determine whether the unqualified claim is deceptive under the circumstances. For example, under the substantial transformation rules, an article of footwear assembled in this country using both imported uppers and imported outsoles would qualify as having been substantially transformed in this country. Therefore, under the "substantial transformation" approach, the product could be marked "Made in USA". If the "substantial transformation" standard applies, the claim would not have to be qualified. However, we believe that most consumers would not understand this claim to mean that only assembly took place in this country and that both of the major components were imported. Accordingly, the "substantial transformation" approach does not offer a reliable standard, at least in the footwear industry. FDRA urges that the Commission take a new approach. The Commission should look at processing. When all of the processing necessary to manufacture the major components and to assemble the final product takes place in the United States, that product clearly is within the common meaning of the term manufactured in this country and should be allowed to bear an unqualified "Made in USA" claim. Products which are only assembled in this country or which are assembled in this country with one or more major components of foreign origin should be permitted to use the "Made in USA" claim with an appropriate qualification. This is the standard the Commission should adopt. General Guides Requirements will vary from industry to industry. It may not be realistic to expect that the Commission would provide specific rules for each industry. However, the Commission could set forth general guides which would serve as a basis for determining whether a particular producer had a "reasonable basis" on which to make the unqualified "Made in USA" claim. Given the complexities involved, and the number of industries involved, this may be the only realistic approach available to the Commission. FDRA appreciates the opportunity to comment on these important topics and urges that its views be adopted by the Commission. Respectfully submitted, ROSS & HARDIES John B. Pellegrini In Five Copies and Diskette JBP/bb cc: Footwear Distributors and Retailers of America ENDNOTES