CA’s ‘Made in USA’ Safe Harbors Don’t Guarantee FTC Compliance

Two California federal district courts recently held that the Federal Trade Commission’s standard for making “Made in USA” claims isn’t in conflict with–and therefore doesn’t preempt–safe harbors in California’s MUSA law.

Inconsistency between the FTC’s and California’s MUSA standards is a longstanding challenge for marketers. While the FTC expects MUSA products to be “all or virtually all” made in the US, in California the claim for products containing foreign inputs accounting for 5%-10% of the product’s wholesale value, depending on whether comparable inputs are available domestically.

On their face, the California rulings appear to bring clarity. If there’s no conflict between the two standards, it must be the case that marketers can label products falling into California’s safe harbors as MUSA without risking an FTC enforcement action.

There’s one big problem: It isn’t at all clear the FTC would agree. Here’s what to know.

FTC Standard

The FTC has actively regulated MUSA claims since the 1940s. While the wording has evolved, the underlying standard has remained consistent: a claim that a product is MUSA is deceptive unless the product is “all or virtually all” made in the US. That is, marketers should have a reasonable basis demonstrating the product contains no more than a de minimis amount of foreign content.

The FTC memorialized this approach in its 1997 enforcement policy statement and recently updated companion business guidance. In 2021, it codified the “all or virtually all” standard into the Made in USA Labeling Rule. Under the rule, it’s illegal to make an unqualified MUSA claim on a product label unless the product meets that high threshold.

When adopting the rule, the FTC emphasized that the standard continues to align with how consumers understand MUSA claims.

California

As the FTC continued to enforce its standard, California moved in a different direction. In 1961, as part of the False Advertising Law, the state enacted Section 17533.7, making it illegal to market a product as MUSA if any part of it was “entirely or substantially made, manufactured, or produced outside of the United States.”

A trace of foreign content–such as imported threads–could disqualify a product from being labeled MUSA in California, even if it complied with the FTC’s more flexible standard.

The intent was protectionist. But as global supply chains expanded, California’s hardline stance became increasingly problematic. Marketers whose claims were accepted everywhere else in the US faced class action lawsuits in California.

The solution came in 2015, when California added two safe harbors to Section 17533.7 to allow claims for products containing foreign content:

• Not exceeding 5% of the product’s final wholesale value, or
• Not exceeding 10% where the foreign input cannot be produced or sourced domestically are now exempt from the law.

Squaring the Two

On the surface, amended Section 17533.7 looks consistent with the FTC’s standard. After all, 5%-10% of wholesale value sounds de minimis, and it often is.

But cost isn’t the only factor the FTC considers. Even if a product’s foreign content de minimis by cost, the FTC will still analyze the importance of that content to the product’s form or function.

The business guidance gives a clear example involving a watch entirely manufactured in the US except for its movement, which is imported. A movement often represents a small proportion of the cost to make a watch, but it’s the essential component that makes the watch tell time. According to the FTC, an unqualified claim for such a watch would likely deceive consumers. Because the watch can’t function without the imported component, the watch isn’t “all or virtually all” MUSA.

This illustrates the tension. For that narrow category of products where foreign content is minor by cost but critical to form or function, California may permit a MUSA claim while the FTC wouldn’t.

Litigation

California class actions alleging violations of Section 17533.7 are common, so it was only a matter of time before courts faced the direct question: Does the FTC’s standard preempt the law’s safe harbors? Both the Eastern and Southern Districts of California said no.

In McCoy v. McCormick & Co., Inc, the plaintiff alleged McCormick violated Section 17533.7 by advertising mustard as “Crafted and Bottled in Springfield, MO, USA” and “American flavor in a bottle,” even though it contained imported ingredients. McCormick moved to dismiss, arguing the complaint failed to allege the product fell outside the statute’s safe harbors. The plaintiff countered that the FTC’s rule preempted those safe harbors altogether.

The magistrate judge rejected that argument. The court found no inconsistency between the safe harbors and the standard, noting the plaintiff had not presented evidence that foreign content accounting for 5%-10% of a product’s wholesale value was more than de minimis.

Corona v. It’s a New 10, LLC followed a similar pattern. The plaintiff challenged “Made in USA” claims on hair care products with allegedly imported content. The defendant moved to dismiss for failure to plead the product didn’t fall into one of California’s safe harbors. And the plaintiff again argued the safe harbors were preempted because they provide less protection than the FTC’s rule.

Again, the court disagreed, holding that the rule didn’t preempt the safe harbor provisions. The court found the rule and statute share similar consumer-protection goals, and, as in McCoy, the plaintiff failed to make a meaningful showing that the two conflict.

Questions Remain

These decisions make one point clear: In California, class actions alleging violations of Section 17533.7, plaintiffs must plead with particularity that a product does not fall into one of the safe harbors. Simply arguing they are preempted by the FTC’s rule won’t save a complaint from a motion to dismiss.

What the rulings don’t address is whether the FTC agrees that its rule is consistent with the California safe harbors. And that’s where the risk lies.

The California decisions are noteworthy, but they don’t insulate marketers from FTC enforcement. If you’re relying on Section 17533.7’s safe harbors, pause and evaluate FTC risk before making an unqualified claim.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Julia Solomon Ensor is counsel at Reed Smith, helping clients navigate complex advertising and consumer protection challenges.

Write for Us: Author Guidelines