Existing law makes it unlawful for any person, firm, corporation, or association to sell, or offer for sale, merchandise that advertises itself as being made or manufactured in the United States when any article, unit, or part of the merchandise has been entirely or substantially made, manufactured, or produced outside of the United States.

This bill would instead make it unlawful for any person, firm, corporation, or association to sell, or offer for sale, merchandise that advertises itself as being made or manufactured in the United States unless the merchandise has been all or virtually all made in the Unites States, and provides that all or virtually all has the same meaning as a specified policy statement of the Federal Trade Commission. The bill would also state the intent of the Legislature in enacting the bill.

ASSEMBLY THIRD READING

ATR Bill Id:AB 312

Author:(Jones)

As Introduced Ver:February 12, 2015

Majority vote

SUMMARY:

Aligns California with the federal domestic content standard for use of the terms "Made in U.S.A.," "Made in America," "U.S.A." or similar words on merchandise, by requiring merchandise to have been 'all or virtually all' made in the United States (U.S.). Specifically, this bill:

1. Requires all or virtually all of any merchandise with the words “Made in U.S.A.,” “Made in America,” "U.S.A.,” or similar words to have been made in the U.S., and deletes an existing prohibition on such labels on merchandise, or any article, unit or part thereof, that has been entirely or substantially made, manufactured or produced outside the U.S.

2. Defines merchandise that is “all or virtually all” made in the U.S. as having the same meaning as that provided in the Enforcement Policy Statement on U.S. Origin Claims issued by the Federal Trade Commission (FTC) (62 Code of Federal Regulations 63756 (December 2, 1997)).

3. States the intent of the Legislature to clarify existing state law with respect to federal law in order to improve the state’s ability to successfully compete with other states and nations for jobs, investments, and manufacturing.

4. Makes other technical and nonsubstantive changes.

FISCAL EFFECT:

None. This bill is keyed non-fiscal by the Legislative Counsel.

COMMENTS:

1. Purpose of this bill. This bill is intended to apply a looser federal domestic content standard for lawful use of the "Made in U.S.A." designation, to the exclusion of California's own stricter – and unique – domestic sourcing law. Proponents argue that such a change would harmonize California's standard with the rest of the nation and incentivize manufacturers to make greater efforts to domestically source their products, while opponents contend that this move would actually reduce the incentive to manufacture domestically while misleading consumers. This bill is author-sponsored.

2. Author's statement. According to the author's office, "[T]here is an inconsistency between California and 49 other states, all of whom hold to federal labeling laws for 'Made in America' products. This discrepancy results in complications for manufacturers because products legally labeled for sale in the rest of the country that come into the California marketplace may not legally be sold here. This places the retailer and manufacturer at risk, increases costs to the manufacturer to separately label products for sale in California, and deprives California consumers of the right to know which products they are considering for purchase were 'Made in America'…This bill – by statute – will define if a product meets guidelines as established by the FTC, it would, meet the requirements for 'Made in America' labeling."

3. The FTC's "all or virtually all" standard. California is unique within the U.S. for having its own statutory standard for use of the term "Made in U.S.A." California's law is different from – and, in practice, stricter than – the federal standard laid out in the FTC's December 1997 Enforcement Policy Statement on U.S. Origin Claims (the "FTC Standard").

4. The FTC's standard requires that for any unqualified "Made in U.S.A." claim, the product must be "all or virtually all" made in the U.S. According to the FTC, "all or virtually all" means that "all significant parts and processing that go into the product must be of U.S. origin. That is, the product should contain no – or negligible – foreign content." The precise meaning of "negligible" is not provided, meaning that it will be understood and applied on a case-by-case basis. Any unqualified claim must have a reasonable basis in fact.

The FTC's "all or virtually all" standard does require that the product's final assembly or processing take place in the U.S. The FTC also considers other factors as well, including how much of the product's total manufacturing costs can be assigned to U.S. parts and processing, and how far removed any foreign content is from the finished product. Costs should be calculated based on the cost of goods sold or the inventory costs of the finished goods. Costs are generally limited to the total cost of all manufacturing materials, direct manufacturing labor, and manufacturing overhead.

5. The New Balance settlement. As evidence of the relative weakness of the federal standard, the Consumer Federation of California (CFC) cites a 1996 settlement between shoe manufacturer New Balance and the FTC over the company's improper "Made in America" claims.

According to a September 6, 1996, press release from the FTC, the FTC's enforcement action led to a consent decree in which the company agreed not to label as “Made in U.S.A.” shoes that were entirely made overseas. However, the proposed settlement did not address false advertising claims related to shoes made from both foreign and domestic parts and labor. CFC contends that New Balance afterwards continued to sell shoes with that label when they had as much as 30% foreign content - without further enforcement action or opposition from the FTC.

6. California's domestic sourcing standard. Conversely, California's Business and Professions Code (BPC) states that it is unlawful to sell or offer merchandise in California with the words "Made in U.S.A." or similar wording when the merchandise or any part thereof "has been entirely or substantially made, manufactured, or produced outside of the U.S." This provision was added to the BPC in 1961.

Courts have interpreted this requirement strictly, holding that any merchandise containing even one part that is foreign made or assembled may not be marketed as "Made in U.S.A." (Colgan v. Leatherman Tool Group, Inc. (2006) 135 Cal.App.4th 663). As such, California's domestic production standard for use of the "Made in U.S.A." designation is effectively 100%.

7. Arguments in support. According to Small Business America, "AB 312 would provide an opportunity for small businesses in California to successfully compete with other states and nations for jobs and investments without removing consumer protections. Small businesses are concerned that without a 'virtually all' standard, there is no incentive to make the majority of the product in the USA if held to an 'each and every part' standard."

The California Chamber of Commerce writes "[the FTC standard] takes into account that not all parts or components of a product are made in the United States. All other states use this interpretation with the exception of California. This discrepancy has the unintended consequence of putting manufacturers and retailers at risk if their products are labeled according to federal guidelines and sold in California. Our members make, market and sell products in California, across the nation and the world. Having California law conform to federal law in this instance removes obstacles for labeling merchandise made or sold into California."

8. Arguments in opposition. According to the CFC, "Assembly Bill 312…overrides a 2011 ruling of the California Supreme Court and would allow products to be offered for sale in California falsely bearing a 'Made in the USA' label. Specifically, this bill lowers the California standard for 'Made in the USA' labeling and relies on a significantly lower standard set by the Federal Trade Commission (FTC) that does not consistently define the amount of foreign content that can pass its 'substantially made, manufactured, or produced within the USA' test...AB 312 would upend this law, establishing a standard that can include foreign content as 'Made in the USA.' "

The California Teamsters Public Affairs Council contends, "AB 312 would change the California labeling standard for use of the term 'Made in the USA' and, in our view, weaken protection for consumers and California's workers…Simply put, AB 312 would allow businesses to mislead the public by allowing the 'Made in the USA' label on products with substantial foreign content."

Analysis Prepared by: Hank Dempsey / P. & C.P. / (916) 319-2200 FN: 0000104

Date of Hearing: April 7, 2015

ASSEMBLY COMMITTEE ON PRIVACY AND CONSUMER PROTECTION

Gatto, Chair

ABPCA Bill Id:AB 312

Author:(Jones) – As Introduced Ver:February 12, 2015

SUBJECT:

Advertising

SUMMARY:

Aligns California with the federal domestic content standard for use of the terms "Made in U.S.A.," "Made in America," "U.S.A." or similar words on merchandise, by requiring merchandise to have been 'all or virtually all' made in the United States (US). Specifically, this bill:

1. Requires all or virtually all of any merchandise with the words “Made in U.S.A.,” “Made in America,” "U.S.A.,” or similar words to have been made in the US, and deletes an existing prohibition on such labels on merchandise, or any article, unit or part thereof, that has been entirely or substantially made, manufactured or produced outside the US.

2. Defines merchandise that is “all or virtually all” made in the United States as having the same meaning as that provided in the Enforcement Policy Statement on U.S. Origin Claims issued by the Federal Trade Commission (FTC) (62 Fed. Reg. 63756 (Dec. 2, 1997)).

3. States the intent of the Legislature to clarify existing state law with respect to federal law in order to improve the state’s ability to successfully compete with other states and nations for jobs, investments, and manufacturing.

4. Makes other technical and nonsubstantive changes.

EXISTING LAW:

1. Generally protects consumers from unlawful, unfair and fraudulent business practices. (Business and Professions Code (BPC) Section 17200, et seq.)
   
   

2. Generally protects consumers and competitors against false or misleading advertising. (BPC 17500, et seq.)

3. Makes it unlawful for any person, firm, corporation, or association to sell, or offer for sale, merchandise that advertises itself as being made or manufactured in the US when any article, unit, or part of the merchandise has been entirely or substantially made, manufactured, or produced outside of the US. (BPC 17533.7)
   
   

4. Provides that the following are unfair methods of competition and unfair or deceptive acts or practices:

1. Using deceptive representations or designations of geographic origin in connection with goods or services; and,

2. Misrepresenting the source of goods or services. (Civil Code Section 1770)

5. Authorizes the FTC to regulate claims of US origin pursuant to authority granted to it under the FTC Act, which prohibits “unfair or deceptive acts or practices.” (15 United States Code (USC) Section 45)
   
   

6. Requires that a “Made in U.S.A.” label be consistent with orders and decisions of the FTC. (15 U.S.C. 45 (a))
   
   

7. Provides, in the form of a policy statement, that a product may be labeled as “Made in U.S.A.” if the product is all or virtually all made in the US; however, a product using such a label may contain—in a negligible amount—components made outside of the US. (“Enforcement Policy Statement on U.S. Origin Claims,” FTC, 62 Federal Regulations Section 63756 (Dec. 2, 1997))

FISCAL EFFECT:

None. This bill is keyed non-fiscal by the Legislative Counsel.

COMMENTS:

1. Purpose of this bill. This bill is intended to apply a looser federal domestic content standard for lawful use of the "Made in USA" designation, to the exclusion of California's own stricter – and unique – domestic sourcing law. Proponents argue that such a change would encourage California manufacturers to make greater efforts to domestically source their products, while opponents contend that this move would actually reduce the incentive to manufacture domestically while misleading consumers. This bill is author-sponsored.
   
   

2. Author's statement. According to the author's office, "[T]here is an inconsistency between California and 49 other states, all of whom hold to federal labeling laws for 'Made in America' products. This discrepancy results in complications for manufacturers because products legally labeled for sale in the rest of the country that come into the California marketplace may not legally be sold here. This places the retailer and manufacturer at risk, increases costs to the manufacturer to separately label products for sale in California, and deprives California consumers of the right to know which products they are considering for purchase were 'Made in America'…This bill – by statute – will define if a product meets guidelines as established by the Federal Trade Commission, it would, meet the requirements for 'Made in America' labeling."
   
   

3. The FTC's "all or virtually all" standard. California is unique within the US for having its own statutory standard for use of the term "Made in U.S.A." California's law is different from – and, in practice, stricter than – the federal standard laid out in the FTC's December 1997 Enforcement Policy Statement on US Origin Claims (the "FTC Standard").
   
   The FTC is charged with preventing deception and unfairness in the marketplace. Federal law gives the FTC power to bring enforcement actions against false or misleading claims that a product is of US origin. The FTC's standard requires that for any unqualified "Made in U.S.A." claim, the product must be "all or virtually all" made in the US. According to the FTC, "all or virtually all" means that "all significant parts and processing that go into the product must be of US origin. That is, the product should contain no – or negligible – foreign content." The precise meaning of "negligible" is not provided, meaning that it will be understood and applied on a case-by-case basis. Any unqualified claim must have a reasonable basis in fact.
   
   The FTC's "all or virtually all" standard does require that the product's final assembly or processing take place in the US. The FTC also considers other factors as well, including how much of the product's total manufacturing costs can be assigned to US parts and processing, and how far removed any foreign content is from the finished product. Costs should be calculated based on the cost of goods sold or the inventory costs of the finished goods. Costs generally are limited to the total cost of all manufacturing materials, direct manufacturing labor, and manufacturing overhead.
   
   The FTC offers two illustrative examples of its standard: First, a propane barbeque grill's major components are made in the US, but the knobs and tubing are made in Mexico. According to the FTC, a "Made in U.S.A." claim "is not likely to be deceptive because the knobs and tubing make up a negligible portion of the product's total manufacturing costs and are insignificant parts of the final product."
   
   Second, a table lamp may be assembled in the US from American-made brass, with an American-made lampshade but an imported base. The base accounts for a small percent of the total cost of making the lamp. Nevertheless, the FTC writes that "[a]n unqualified 'Made in U.S.A.' claim is deceptive for two reasons: The base is not far enough removed in the manufacturing process from the finished product to be of little consequence and it is a significant part of the final product."
   
   

4. California's domestic sourcing standard. Conversely, California's Business and Professions Code states that it is unlawful to sell or offer merchandise in California with the words "Made in U.S.A." or similar wording when the merchandise or any part thereof " has been entirely or substantially made, manufactured, or produced outside of the United States." This provision was added to the BPC in 1961.
   
   Courts have interpreted this requirement strictly, holding that any merchandise containing even one part that is foreign made or assembled may not be marketed as "Made in U.S.A." (Colgan v. Leatherman Tool Group, Inc. (2006) 135 Cal.App.4^th 663). As such, California's domestic production standard for use of the "Made in USA" designation is effectively 100%.
   
   

5. The Kwikset decision and enforcement of false advertising law. In January 2011, the California Supreme Court issued its decision in Kwikset v. Benson (51 Cal.4^th 310), in which the court held that four California consumers had standing to bring an action against Kwikset for falsely labeling its locks as “Made in U.S.A.” in California. While the decision largely addressed a separate legal question, the Court also discussed the importance of truthful claims of origin, stating:

"In particular, to some consumers, the 'Made in U.S.A.' label matters. A range of motivations may fuel this preference, from the desire to support domestic jobs, to beliefs about quality, to concerns about overseas environmental or labor conditions, to simple patriotism. The Legislature has recognized the materiality of this representation by specifically outlawing deceptive and fraudulent 'Made in America' representations… The object of section 17533.7 'is to protect consumers from being misled when they purchase products in the belief that they are advancing the interests of the United States and its industries and workers… The Legislature evidently recognized some companies were using or might be tempted to use inaccurate 'Made in America' labeling, that some consumers might be deceived by and rely on it, and that consumers and competitors who honestly made their wares in the United States and marketed them as such were being or would be harmed." (citations omitted) (Kwikset Corp. v. Benson (Jan. 27, 2011) 51 Cal.4^th 310, 329.)

The practical import of the Kwikset case is that it made clear that consumers "who can truthfully allege they were deceived by a product's ['Made in America'] label into spending money to purchase the product, and would not have purchased it otherwise" have a right to bring suit under the Unfair Competition Law for violations of BPC 17533.7.

6. The New Balance settlement. As evidence of the relative weakness of the federal standard, the Consumer Federation of California (CFC) cites a 1996 settlement between shoe manufacturer New Balance and the FTC over the company's improper "Made in America" claims.

According to a September 6, 1996, press release from the FTC, the FTC's enforcement action led to a consent decree in which the company agreed not to label as “Made in USA” shoes that were entirely made overseas. However, the proposed settlement did not address false advertising claims related to shoes made from both foreign and domestic parts and labor.

In its same 1996 press release, the FTC stated that the question of whether or not unqualified "Made in USA" claims for products made partially from foreign content could be made was "currently under review by the FTC, following a public workshop the FTC held in March [1996]". Charges against the company for the claims related to shoes with 30% foreign content were withdrawn by the FTC pending conclusion of the review and never reinstated. CFC contends that New Balance afterwards continued to sell shoes with that label when they had as much as 30% foreign content - without further enforcement action or opposition from the FTC.

According to the California Attorney General's office, the FTC did not ultimately change its standard upon conclusion of its review.

7. “Made in America” products sold in California. CFC has compiled a list of 28 products or brands that carry a Made in USA label and are sold in California. According to CFC, "[t]hese are a few examples of California-based companies who succeed in bringing manufacturing jobs to California and the US by meeting the higher labeling standards in our state".
   
   Those products or brands are: American Apparel; Blue Canoe clothing; Chippewa boots; Carhartt clothing; Loggerhead Apparel; Occidental Leather; Rag and Bone apparel; Slainte Bags; Stetson hats; True Religion jeans; Vermont flannel; Wigwam socks; 9b Apparel; Kiehl’s beauty products; California North beauty products; Lodge cookware; Nordic Ware cookware; Kirby vacuum cleaners; Pyrex glass; Tide detergent; Channellock hand tools; Duraflame logs; Aspen Fishing Reels; Crayola crayons; Louisville Slugger wooden bats; Mead envelopes; Kong dog toys; and Post-It notes.

8. Questions for the Committee. As noted above, this bill replaces California's standard with the FTC's "virtually all" domestic production standard, effectively applying the more flexible federal content standard in the stead of California's stricter requirement. The key question for consideration is whether or not this lower standard would, on the whole, encourage more California companies to domestically source their products, or simply degrade the existing incentive to achieve 100% compliance and mislead consumers to boot.
   
   Proponents of this bill contend that California's standard, as interpreted by the courts, is simply too strict; so "unrealistically rigid [and] anachronistic," in fact, that it discourages some manufacturers who sell here in California from making best efforts at domestically sourcing their products to earn the "Made in U.S.A." label because California's standard is prohibitively difficult to meet.
   
   Conversely, opponents argue that this bill would dilute California's tougher standard with an "inconsistent," "inferior" and "vague standard that invites mislabeling." Opponents also fear that the federal standard could lead to situations where manufacturers enter into settlements with the FTC that would permit companies to use the "Made in U.S.A." label when a substantial minority of the product is foreign sourced, with the end result being increased outsourcing of product parts and the resulting loss of California manufacturing jobs. Finally, opponents point out that goods made in other states would still be held to the same high standard when sold here in California, so there is no economic disadvantage to manufacturers here in the state.
   
   

Given that California likely does have the toughest domestic sourcing standard in the country, and has had such a standard for a number of years, the Committee may wish to inquire of the author as to the level of "Made in U.S.A." labeled manufacturing occurring over time in California versus the rest of the country. The Committee may also wish to inquire of the author as to whether or not there are any econometric studies or data showing a relationship between a tougher standard and a decline in domestic sourcing or a disproportionate loss of manufacturing vis-à-vis other states.

9. Arguments in support. According to Small Business America, "AB 312 would provide an opportunity for small businesses in California to successfully compete with other states and nations for jobs and investments without removing consumer protections. Small businesses are concerned that without a 'virtually all' standard, there is no incentive to make the majority of the product in the USA if held to an 'each and every part' standard."
   
   The California Chamber of Commerce writes "[the FTC standard] takes into account that not all parts or components of a product are made in the United States. All other states use this interpretation with the exception of California. This discrepancy has the unintended consequence of putting manufacturers and retailers at risk if their products are labeled according to federal guidelines and sold in California. Our members make, market and sell products in California, across the nation and the world. Having California law conform to federal law in this instance removes obstacles for labeling merchandise made or sold into California."

10. Arguments in opposition. According to the CFC, "Assembly Bill 312…overrides a 2011 ruling of the California Supreme Court and would allow products to be offered for sale in California falsely bearing a 'Made in the USA' label. Specifically, this bill lowers the California standard for 'Made in the USA' labeling and relies on a significantly lower standard set by the Federal Trade Commission (FTC) that does not consistently define the amount of foreign content that can pass its 'substantially made, manufactured, or produced within the USA' test...AB 312 would upend this law, establishing a standard that can include foreign content as 'Made in the USA.' "
    
    "Permitting a manufacturer to advertise a product with a 'Made in the USA' label if any part of that product is not American puts those businesses that go the extra mile to keep jobs and manufacturing in the USA at a disadvantage. CFC has found several examples of products, which include audio equipment, clothing, home goods, outdoor and sporting goods, pet products, skin care products, tools, and many more, where businesses are able to meet the higher standard and label their product as 'Made in the USA' in California without outsourcing materials and manufacturing jobs.
    
    

"AB 312 would replace a truth-in-advertising law that protects consumers who care about the origin of the products they buy with a vague standard that invites mislabeling."

The California Teamsters Public Affairs Council contends, "AB 312 would change the California labeling standard for use of the term 'Made in the USA' and, in our view, weaken protection for consumers and California's workers…Simply put, AB 312 would allow businesses to mislead the public by allowing the 'Made in the USA' label on products with substantial foreign content."

11. Related legislation. SB 633 (Hill) states that it is the intent of the Legislature to enact legislation that would update California’s “Made in U.S.A.” labeling standard, which was enacted in 1961, to allow California based companies that manufacture their products within the state while employing state residents to utilize the “Made in the U.S.A.” label even if their products contain insignificant components that are not available in the US. SB 633 is currently pending in the Senate Rules Committee.

12. Previous legislation. SB 661 (Hill) of 2014 would have allowed merchandise made, manufactured or produced in the United States that has an article, unit, or part from outside of the US may be sold in California as “Made in U.S.A.” or “Made in America” if the manufacturer certifies that article, unit or part cannot be produced or sourced domestically for reasons other than cost, and the article, unit, or part is only a negligible part of the final product. SB 661 failed passage in the Senate Judiciary Committee.
    
    AB 890 Jones of 2013 would have set the domestic production standard for use of the "Made in U.S.A." label in California at 90% of total manufacturing cost with no more than 10% sourced from outside the US because of problems with availability, and with the last substantial transformation occurring in the US. AB 890 failed passage in the Senate Judiciary Committee.
    
    

AB 858 (Jones) of 2012 would have provided that a product which is made all or virtually all in the US within the meaning of the federal policy statement shall be deemed to have been entirely or substantially made in the United States. AB 858 was held in the Senate Judiciary Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

California Chamber of Commerce

California Manufacturers and Technology Association

California Retailers Association

Small Business California

Opposition

California Conference Board of the Amalgamated Transit Union

California Conference of Machinists

California Teamsters Public Affairs Council

Consumer Attorneys of California

Consumer Federation of California

Del Mar Law Group, LLP

Engineers and Scientists of California

International Longshore and Warehouse Union

Professional and Technical Engineers

UNITE-HERE, AFL-CIO

Utility Workers Union of America

Analysis Prepared by:

Hank Dempsey/P. & C.P./(916) 319-2200