Power Lunch: Are Your Products Really 'Made in the USA'?

There are some certainties in life. Does pizza taste good? You bet it does. Does money grow on trees? No, but cocoa beans do. Can you label a food or beverage product as “Made in the USA” as long as the product is manufactured in the United States? Well, it depends.

Food and beverage manufacturers face many hurdles selling products in California. From Proposition 65 litigation (litigation arising out of California’s regulations requiring businesses to inform Californians about exposures to chemicals known to cause cancer, birth defects or other reproductive harm) to “all natural” and “slack fill” consumer class action lawsuits, there is no doubt that California is a legal battlefield. Fortunately, recent developments in California law have alleviated some of the burden on manufacturers who make “Made in the USA” representations on their products’ labels and in their marketing and advertising.

California is the only state to specifically regulate “Made in the USA” labeling claims, and food and beverage manufacturers selling products in the state must comply with its law or risk becoming embroiled in potentially costly litigation, which often arises in the form of consumer class action lawsuits seeking millions of dollars in damages.

Prior to 2016, California’s old “Made in the USA” labeling law prohibited manufacturers from representing their products as “Made in the USA” if “the merchandise or any article, unit or part thereof has been entirely or substantially made, manufactured, or produced outside the United States.” California courts strictly interpreted this provision as prohibiting any amount of foreign content.

This put California law at odds with the more liberal Federal Trade Commission (FTC) standard, which allows manufacturers to make unqualified “Made in the USA” claims if their products are “all or virtually all” made in the United States -- meaning that all significant parts and processing that go into the products are of domestic origin. Under the FTC standard, other rules apply for qualified Made in the USA claims, such as "Made in the USA from Imported Parts" or "Assembled in the USA." Importantly, manufacturers selling products in California must comply with California’s “Made in the USA” law and the FTC standard.

Fortunately, California acknowledged that its strict “all or nothing” policy was no longer possible in today’s global economy and amended its law to allow for certain amounts of foreign content for products marketed as “Made in the USA.” Under the current law, which went into effect on Jan. 1, 2016, a product may be labeled as “Made in the USA” provided that not more than 5 percent of the “final wholesale value of the manufactured product” is derived from foreign ingredients. The permissible amount of foreign ingredients increases to 10 percent if the manufacturer can show that the foreign content cannot be produced or obtained in the United States, irrespective of cost.

Critically, both the California law and the FTC standard require manufacturers to perform a “traceback analysis” to determine the true origin of each ingredient. An ingredient is not considered to be of domestic origin merely because the supplier of the ingredient is located within the U.S.

While California’s amended statute is a welcome change that brings the state more in line with the FTC standard and the rest of the country, it leaves unanswered the questions of what constitutes “final wholesale value” and how it should be calculated. Indeed, the statute itself is silent on this issue, and the courts have not yet interpreted this provision of the new law. Manufacturers, however, may be able to rely on guidance associated with California’s “Made in California” program, which uses similar “wholesale value” language. According to that guidance, “wholesale value” is defined as “direct material cost, direct labor cost and overhead (indirect material and indirect labor costs).” Manufacturers should also consider employing generally accepted accounting principles to determine the wholesale value of their products, keeping in mind that these calculations are not static and must be reassessed as market conditions change, such as fluctuations in ingredient, material and labor costs.

Thus, manufacturers should consider engaging the services of accountants and legal counsel to ensure continued compliance with California’s “Made in the USA” law as well as the FTC standard. Substantiation of “Made in the USA” and other labeling and advertising claims is essential, and the investment in continuing compliance programs pales in comparison to the costs associated with defending against consumer class action lawsuits and regulatory enforcement actions.

It is not too late to perform the requisite traceback analysis to ensure compliance with applicable regulations. Recently, the Ninth Circuit Court of Appeals -- the circuit encompassing federal courts in California -- concluded that California’s amended “Made in the USA” statute applies to any newly filed and existing cases, regardless of whether the purchase of the subject product(s) occurred before or after the amendments took effect. Good business practice, therefore, includes at least the following:

• Ensure records exist fully documenting each ingredient that is included in the final product and the country of origin of each ingredient.
• Obtain confirmation from raw ingredient suppliers regarding the ultimate origin of their ingredients.
• Retain the services of a CPA to ensure that all manufacturing, labor and overhead costs are accounted for.
• Retain the services of an attorney with experience in “Made in the USA” labeling claims to determine compliance with California’s 5 and 10 percent thresholds for foreign content and the FTC standard.

As economic protectionism increases, consumer and competitor challenges to “Made in the USA” labeling practices will continue to burden manufacturers. Those in the food and beverage industry should be mindful of implementing best practices for ensuring compliance with all applicable labeling and advertising laws. And while strict compliance with the law does not guarantee immunity from frivolous consumer-driven lawsuits, it will undoubtedly militate against the risk of litigation. This too represents another certainty in life.