Federal Trade Commission Received Documents June 28, 1996 P894219 B18354900173 GRUNFELD, DESIDERIO, LEBOWITZ & SILVERMAN LLP COUNSELORS AT LAW 1500 K STREET, N. W. - SUITE 680 WASHINGTON, DC 20005 June 28, 1996 Office of the Secretary Federal Trade Commission Room 159 Sixth Street and Pennsylvania Ave., NW Washington, DC 20580 Re: Made in USA Policy Comment F.T.C. File No. P894219 Dear Mr. Secretary: On behalf of Dynacraft Industries, Inc. ("Dynacraft"), a major importer of bicycles from China, we submit herewith six paper copies of written comments in response to the Commission's April 26, 1996 Federal Register notice (61 FR 18600). We also provide Dynacraft's comments on 3.5" disk, in Wordperfect v5.1, formatted for DOS. If you have any questions, please contact the undersigned. Sincerely, GRUNFELD, DESIDERIO, LEBOWITZ & SILVERMAN LLP Bruce M. Mitchell Jeffrey S. Grimson Encl. BEFORE THE FEDERAL TRADE COMMISSION Washington, DC ________________________ "MADE IN USA" CLAIMS IN PRODUCT LABELING FTC File No. P894219 AND ADVERTISING _______________________ COMMENT'S OF DYNACRAFT INDUSTRIES, INC. REGARDING "MADE IN USA" CLAIMS Of Counsel: Bruce M. Mtchell Jeffrey S. Grimson GRUNFELD, DESIDERIO LEBOWITZ & SILVERMAN, LLP 1500 K Street, NW Suite 680 Washington, DC 20005 tel. 202-783-6881 fax 202-783-0405 June 28, 1996 Dynacraft industries, Inc. ("Dynacraft") is a Massachusetts corporation which is in the business of selling bicycles at wholesale to mass merchandisers and discount retailers throughout the United States. Dynacraft's bicycles are produced in China, imported into the United States by Dynacraft, and sold under the trademark MAGNA. Dynacraft also manufactures and sells bicycles under popular US licenses, such as Teenage Mutant Ninja Turtles and Fischer-Price. Dynacraft regularly competes against bicycles which are misleadingly labeled as "Made in USA!', when, in fac those bicycles contain substantial foreign content and components. As set forth herein and in Dynacraft's previous written comments and views expressed at the Workshop, Dynacraft urges the Commission to adhere to its long-standing policy of treating unqualified "Made in USA" claims as representing that the products are "wholly of domestic origin" or made in the United States of "all or virtually all" domestic parts and labor. If, however, the Commission does eventually adopt a percentage content standard, then Dynacraft provides comments on the calculation methodology in Part 11 herein. I. THE COMMISSION SHOULD ADHERE TO THE "ALL OR VIRTUALLY ALL" DOMESTIC CONTENT STANDARD Although Dynacraft neither manufactures bicycles in the USA nor labels or advertises its bicycles as "Made in USA," Dynacraft is keenly aware of the significance of the "Made in USA" issue. Dynacraft regularly competes against major US-based bicycle manufacturers(1) who aggressively market their bicycles as "Made in USA," when, in fact, almost all of these bicycles contain significant foreign parts and components, such as brake systems, derailleur systems, tires and tubes, chains, saddles and other significant components. Hence, the "Made in USA" claims made in connection with the sale of such bicycles are literally false and are, in Dynacraft's view, misleading to American consumers. Indeed, the Commission's 1991 survey found that 59% of consumers viewing a Huffy advertisement containing a "Made in USA" claim thought that the bicycles contained 90% U.S. parts and labor.(2) In its more recent study, the FTC found that 75% of consumers agree (either "strongly" or "somewhat") with a "Made in USA' label on a hypothetical product containing 90% U.S. parts and labor.(3) On the other hand, at a 50% U.S. content level which has been advocated by the BMA and others,(4) 46% of consumers disagreed with an unqualified "Made in USA" label. The Commission considers a claim deceptive if even a "significant minority' of consumers are misled.(5) Based on the study findings, the ____________________ (1) The three principal US bicycle manufacturers are Huffy Bicycle Company (a division of Huffy Corporation) ("Huffy"), The Murray Ohio Manufacturing Company ('Murray"), and Roadmaster Corporation ("Roadmaster"). (2) Request for Public Comment in Preparation for Public Workshop Regarding "'Made in USA" claims in Product Advertising and Labeling, 60 Fed. Reg. 53922, 53929 n. 13 (October 18, 1995). (3) Summary of Gallup and Robinson Study at Table 1. (4) See, BMA's 1994 Hyde Comments; Testimony of Michael Kershow, Esq. on behalf of the BMA at the March 26, 1996 Workshop, Transcript at 158. (5) Kraft Inc., 114 F.T.C. 40, 122 (1991), aff'd 970 F.2d 311 (7th Cir. 1992), cert. denied, 507 U.S. 909 (1993). 2 Commission must reject the BMA's proposed 50% domestic content standard. The domestic bicycle companies' misleading "Made in USA" claims are causing significant harm not only to consumers, but also to Dynacraft Three of the five largest national mass merchandisers for bicycles, Wal-Mart, K-Mart and Sears, have "Buy American" policies or preferences.(6) In the recently completed antidumping investigation,(7) which was filed by Huffy, Murray and Roadmaster, over a three-year period, those three companies reported sales of approximately 10.4 million bicycles to retailers who have "Buy American" policies.(8) These sales accounted for approximately 28 percent of total U.S. producers' shipments. Of course, Dynacraft has been unable to compete in the lucrative 'Buy American" market because Dynacraft's bicycles are foreign-made. Dynacraft's problem is that the domestic bicycle companies exploit their position as US-based companies to gain them unquestioned entrance into the "Buy American" market on the basis, Dynacraft believes, of exaggerated or misleading "Made in USA" claims. Dynacraft has not sat idly by in the face of such unfair competition. On November 21, 1995, Dynacraft filed a lawsuit in the United States District Court in ____________________ (6) Bicycles From China, USITC antidumping Inv. No. 731-TA-731(F), Staff Report (Pub. Version) at I-4 (May 21, 1996). These five national mass merchandisers account for over two-thirds of all bicycles sold in the United States. (7) On June 4, 1996, the U.S. International Trade Commission voted to dismiss the antidumping case because the U.S. bicycle industry was not injured or threatened with injury by unfairly traded Chinese imports. The Department of Commerce had earlier made a final determination that Dynacraft's Chinese supplier was a fair trader under the legal limits of the dumping statute. (8) Id. At II-6. 3 Massachusetts against Huffy, Murray and Roadmaster, alleging that those companies have falsely represented their goods in violation of Section 43(a)(1)(B) of the Lanham Act and have engaged in deceptive practices in violation of Massachusetts Gen. L. ch. 93A  2 and 11.(9) Dynacraft win continue to aggressively seek such private legal remedies for the unfair competitive advantages which the domestic bicycle manufacturers gain by false and misleading "Made in USA" claims. In the context of the Commission's inquiry, many companies have supported a relaxation of the "all or virtually all" standard of domestic origin. For example, the BMA has argued that the Commission should allow an unqualified "Made in USA" claim on a product containing as little as 50 percent domestic content. Many of these companies argue that the "all or virtually air, standard conflicts with other regulatory standards, such as country of origin marking standards under U.S. Customs and NAFTA rules. The Commission should reject these efforts to "harmonize" FTC standards with those of other agencies or even foreign countries. The FTC is uniquely charged with preventing unfair methods of competition and unfair or deceptive acts or practices in commerce. It is in this context that the Commission conducts research on consumers" perceptions of the meaning of "Made in USA" claims. It is these consumers' perceptions, and not the mandate of other regulatory agencies or foreign countries,(10) which should ___________________ (9) A copy of the complaint in that case was provided to the Commission as Exhibit B to Dynacraft's January 16, 1996 written comments. (10) The Commission is considering the benefits of harmonizing its standards with those of the WTO concerning whether a 'substantial transformation' has occurred. 61 Fed. Reg. 18600, 18602 (April 26, 1996). The WTO standards will not be finalized for (continued...) 4 determine FTC standards for origin labeling and advertising. Furthermore, if the so-called "domestic' bicycle companies are compelled to disclose the foreign content in their bicycles by using qualified "Made in USA" statements, this would not conflict with any statute or regulation of which Dynacraft is aware. Reducing the domestic content requirement to a 50% level would be contrary to the Commission's own findings in the 1991 survey that 59% of consumers viewing a Huffy advertisement containing a "Made in USA" claim thought that the bicycles contained 90% U.S. parts and labor,(11) and with the Commission's more recent findings that 75% of consumers agree (either "strongly" or "somewhat') with a "Made in USA" label on a hypothetical product containing 90% U.S. parts and labor.(12) Contrary to the BMA's assertions, the hardships involved with compliance with the Commission's existing "all or virtually all" standard are irrelevant to the Commission's duty to protect consumers from misleading advertisements. The Commission should also reject the BMA's argument that the "all or virtually all" standard does not apply to bicycles. The BMA argues that a 1961 Commission stipulation in Standard Cycle Stip. No. 9460, 59 F.T.C. 1492 (1961), gives the bicycle ____________________ (10) ( ... continued) several years. If such a harmonization is appropriate (Dynacraft believes that it is irrelevant to the Commission's statutory mandate), then the proper course is for the Commission to continue to adhere to its current standard until the WTO standard is finalized and can be evaluated vis-a-vis U.S. consumers, perceptions. (11) Request for Public Comment in Preparation for Public Workshop Regarding "Made in USA" Claims in Product Advertising and Labeling, 60 F.R. 53922, 53929 n.13 (October 18, 1995). (12) Summary of Gallup and Robinson Study at Table 1. 5 manufacturers special license to label bicycles as "Made in USA" when discrete and substantial individual components of foreign origin are "clearly and conspicuously disclosed." BMA's 1996 Comments at 2. In BMA's view, if a consumer can inspect the individual parts on the retailer's floor and determine that the tires are made in Taiwan, for example, then the consumer is not being misled by a "Made in USA" label on the "finished product."(13) Dynacraft disagrees. The BMA arguments do not address the significant issue of when a seller may advertise its product as "Made in USA." In the price-sensitive segment of the bicycle industry in which Dynacraft competes with the members of the BMA, the advertisements are extremely important because price-conscious consumers will comb the advertisement inserts in the newspaper, for example, to decide whether to buy a $129 bicycle at Wal-Mart versus Toys-R-Us. Huffy's advertisement in the Wal-Mart circular, for example, will show a bold, unqualified "Made in USA" claim. See, e. g., Exhibit "Cell D" to 1991 Consumer Survey. On the other hand, Dynacraft's MAGNA advertisement in the Toys-R-Us circular makes no country of origin claim. Everything else being equal a consumer with a "Buy America" preference will likely rely on Huffy's 'Made in USA" claim and choose to shop for bicycles at Wal-Mart. The "Made in USA!' claim serves the important marketing advantage of getting the consumer to the store floor. Once the customer is in the store and sees an American flag or "Made in USA" label, it is unlikely that the consumer will inquire further. _______________ (13) While it is true that tires may be conspicuously marked, many components are either not marked at all or are not marked conspicuously. 6 BMA's claim that consumers are not misled because they can inspect each component to determine the country of origin is far-fetched. Consumers are being lured into the stores in the first instance by exaggerated "Made in USA" claims. Getting the consumer into the store is the hardest part of the sale. The BMA has stressed the importance of being able to market bicycles as "Made in USA": BMA strongly believes that the rules employed in the proposed [1994 Hyde] consent agreement overlook the competitive realities of today's international marketplace and will work an unfair hardship on bona fide U.S. manufacturers who need and deserve the marketing advantage of being able to label their products as "Made in USA" in order to distinguish them clearly from products made by foreign manufacturers. BMA's 1994 Hyde Comments at 1-2 (italics in original) (underline supplied). Dynacraft agrees with the BMA that the "Made in USA" claim provides a "marketing advantage" to the US bicycle manufacturers, gaining them access to the lucrative "Buy American" market segment and allowing them to lure consumers into the stores. Dynacraft has no qualms about competing with the domestic bicycle manufacturers when consumers are fully and accurately informed. However, when the domestic manufacturers advertise a bicycle as 'Made in USA," they are trading on the perception of the substantial majority of consumers who, according to the FTC's 1991 study believe that 90% of the bicycle is of domestic parts and labor. In reality, once the BMA gets that customer into the store by using exaggerated "Made in USA" claims in advertisements, BMA wants to sell them a bicycle with only 50% domestic parts and labor. It is outrageous for the BMA to expect the Commission to sanction this classic 7 "bait-and-switch" advertising tactic. The Commission should continue to adhere to, and to enforce the "all or virtually" all standard by which "Made in USA" means just what it says and just what the consumer understands. II. COMMENTS ON CALCULATION ISSUES IF THE COMMISSION ADOPTS A PERCENTAGE CONTENT STANDARD As set forth above, Dynacraft believes that the Commission should adhere to its "all or virtually all" standard, which comports with the evidence concerning consumers' perceptions. First, Dynacraft urges the Commission to reject the so-called "one-step back" rule, which is not appropriate within the context of the bicycle industry. Dynacraft believes that bicycle manufacturers know the country of manufacture of the parts and components they use in the manufacture and assembly of a bicycle. Hence, a seller should look back to the place of manufacture to determine the country of origin. Domestic content should be calculated based on all stages of production. Where, as in the bicycle industry, manufacturers know the country of origin of each part, the "one step basic" rule would be unnecessary and inappropriate and could lead to circumvention of the standard.(14) Second, if a percentage content method is adopted, then the Commission should pay careful attention to the following calculation issues: _______________ (14) If the Commission were to adopt a "one-step back" rule, an unscrupulous party could restructure its sourcing to purchase through middlemen in the United States and then claim that the part is US-origin. 8 The calculation should include only manufacturing costs. Non- manufacturing costs (selling, general & administrative and overhead expenses) such as advertising and management salaries should be excluded from the calculation. Whether Huffy, Murray or Roadmaster spend millions on advertising or executive salaries should have no impact on whether the bicycle produced is "Made in USA." Fixed factory overhead should not be included in the calculation at all. Such overhead is not directly related to the finished product. If fixed factory overhead is included in the equation, then only that percentage of the total fixed overhead of the finished product attributable to domestic parts should be included in the numerator and the denominator. Variable ("direct") factory overhead should be itemized and apportioned according to the source. For example, consumables such as glue, staples, screws, etc., used in the assembly of a bicycle and included in variable factory overhead should only be considered "domestic" if they are not imported. All costs associated with the outside packaging of a bicycle should not be included in the calculation. This includes outside packaging materials and labor. The value of foreign parts and components should include all costs 9 incurred in getting the foreign part from the source to the US factory. For example, these items would include, ocean and US inland freight, as well as landed charges such as duty and brokerage fees. Although Dynacraft strongly urges the Commission not to adopt a percentage content approach, the foregoing suggestions would help to mitigate the harm to US consumers if such approach were adopted. We appreciate the opportunity to present these comments. We would be pleased to answer any questions the Commission may have. Respectfully submitted, GRUNFELD, DESIDERIO, LEBOWITZ & SILVERMAN LLP Bruce M. Mitchell Jeffrey S. Grimson Counsel to Dynacraft Industries, Inc. June 28, 1996 10