Draft FTC Origin Guides -----------------------------------------------------------------------

(1) Were last "substantially transformed" in the United States, and whose "U.S. manufacturing costs" constitute at least 75% of total manufacturing costs; or
(2) Undergo two levels of "substantial transformation" in the United States, that is, the product's last "substantial transformation" took place in the United States, and the last substantial transformation of each of its "significant inputs" took place in the United States.

1. Purpose of the Guides
        FTC guides represent the agency's administrative interpretations of the law. They are intended for the guidance of the public, and "provide the basis for voluntary compliance with such laws by members of industry." However, theGuides are not formal regulations, and do not have the force andeffect of law.

2. Scope of the Guides
        The FTC's origin guide, if adopted, would apply to all U.S. origin claims made on labels, advertising, promotional materials and all other forms of marketing. However, the guides would not apply to claims made for any product subject to products subject to the Textile Fiber Products Identification Act, the Wool Products Labeling Act, or the Fur Products Labeling Act.

3. Structure of the Guides
        The FTC's draft Origin Guides is structured as a series of "principles" governing the use of "Made in USA" labeling claims, followed by examples which illustrate proper, and potentially deceptive, methods of marking. The Guides also address the relationship of the FTC's origin labeling rules with Customs' origin rules and other agency requirements.

4. Review of Guides
        The FTC generally reviews its industry Guides every ten (10) years, but has indicated that it will review its Origin Guides within five (5) years after adopting them. The agency will also review guides upon a petition by interested members of industry.

5. Definitions
        The proposed Origin Guide establishes definitions for various terms, including foreign content, input, marketer, substantial transformation, total cost and total manufacturing costs. Definitions of particular interest include the following:

Substantial Transformation: means a manufacturing process which results in an article's having a new name, character and use different from that which existed prior to the processing. For purposes of these Guides, a good will be considered to have been substantially transformed if (1) it will be considered to be substantially transformed under 19 CFR [Part] 134 and the rulings of the U.S. Customs Service and decisions of the United States Courts issued pursuant thereto; or (2) it undergoes an applicable change in tariff classification and/or satisfies other applicable requirements set out in the NAFTA Marking Rules, 19 CFR [Part] 102.

Total costs or total manufacturing costs: means the total cost of all manufacturing materials, direct manufacturing labor, and manufacturing overhead, whether U.S. or foreign. Generally, total costs will be equivalent to finished-good inventory cost or the cost of goods sold, as those terms are used in accordance with generally accepted accounting principles.

U.S. costs or U.S. manufacturing costs: mean those costs attributable to U.S. manufacturing materials, U.S. direct manufacturing labor and U.S. manufacturing overhead.

7. Relation of FTC Guides with Other Agencies' Requirements
        The FTC's Origin Guides are intended to govern a marketers's voluntary use of a "Made in U.S.A." claim in connection with the sale or advertisement of a product. It does not affect requirements imposed by Section 304 of the Tariff Act of 1930 [19 U.S.C. Section 1304] that each imported article be marked permanently, legibly and in a conspicuous place so as to indicate "to an ultimate purchaser" in the United States the English name of the article's foreign country of origin.
Furthermore, the FTC proposes that "where an article is deemed to be of foreign origin for marking purposes under the Tariff Act, making a U.S. origin claim for the article or its container, or making such a claim without clearly and prominently disclosing the foreign manufacture of the article, may, in some circumstances, constitute a deceptive act or practice under Section 5 of the FTC Act". Moreover, the FTC cautions against making any claim of U.S. origin in print or other advertising in respect of goods which are required by Section 304 of the Tariff Act to be marked to show a foreign country of origin.

8. Unqualified U.S. Origin Claims: "Safe Harbor" Rules
        As noted above, a marketer can make an unqualified claim of U.S. origin for a product if it possesses a reasonable basis to substantiate that the product is "substantially all made in the United States". However, the proposed Origin Guides would create two "safe harbor rules," as follows:

Safe Harbor 1: "Substantial Transformation", Plus 75% U.S. Content
        A marketer will not be considered to be engaged in a deceptive practice which would justify FTC enforcement action if, at the time it makes its claim, it can demonstrate that (1) the product was last "substantially transformed" in the United States, and (2) U.S. manufacturing costs constitute 75% of the total manufacturing costs of the products.
In computing U.S. or total manufacturing costs, the Guides recommend that the marketer "look far enough back in the manufacturing process that a reasonable marketer would expect that it had accounted for any significant foreign content." For simple products, a marketer may only need to look "one step back", that is, to the materials which it used. Furthermore, for inputs that undergo their last significant manufacturing step in the U.S., the marketer may count 100% of their costs as U.S. cost. For more complex products, however, the marketer may need to look further back, considering the amount of foreign and domestic content in the inputs themselves. For example, a computer manufacturer who purchases a motherboard assembled in the United States may need to inquire concerning where the components of the motherboard were sourced.

Safe Harbor 2: Two Levels of "Substantial Transformation".
        As a second "safe harbor", a marketer can make an unqualified "Made in USA" claim if it can show that (1) the product was last substantially transformed in the United States, and (2) all significant inputs into the final product were last substantially transformed in the United States.
For example, if a tape recorder was assembled in the United States from three major subassemblies, and the three major subassemblies were also "substýÿÿÿ‚Guides.
However, the Guides do not furnish any objective or consistent guidance concerning when an origin "roll up" for inputs can be claimed.

9. Qualified U.S. Origin Claims
        Where a product is not "substantially all made in the United States", the proposed Guides require that any claim of U.S. content must be adequately qualified to avoid consumer deception regarding the presence or amount of foreign content. These disclosures should be in clear, legible typeface in a conspicuous place on the article. For example, if a piece of luggage is manufactured in the U.S.A. from Italian-origin leather, it can be marked "Made in the USA of Italian leather". In certain cases, statements such as "Proudly Made in America with U.S. and imported parts" would be acceptable, in the FTC's view.

10. U.S. Origin Claims for Specific Processes or Parts
        Regardless of whether a product is "substantially all made in the United States", a marketer may be allowed to make a claim that a particular process was performed in the United States, or that a particular part or component originated here. For example, where uncut crystal stemware is imported into the U.S. and hand-finished, it could be marked "Hand-Cut in the United States", but not "Made in the United States". [Here again, however, if Customs considered the crystal to be a foreign article subject to marking as such under Section 304 of the Tariff Act, no "Made in U.S.A." claim would be permitted].
Similarly, where software code written in the United States is copied in the United States onto floppy disks manufactured in Japan, the resulting software could be marked "Software written in the United States", according to the FTC guides. [In this case, Customs would consider the software to have been "substantially transformed" in the United States, and no foreign origin would need to be disclosed for the software media].

11. Comparative Claims
        The proposed Guides would require that claims of U.S. origin that include a comparative statement must be truthful and substantiated by competent and reliable evidence. Comparative origin claims may not be stated in a way which exaggerates the amount of U.S. content in a product. Furthermore, ambiguous ("e.g., 30% more U.S. content") or unrevealing ("twice as much U.S. content as before") representations may be considered deceptive.

12. Multiple Sourcing, Price Fluctuations, Sets
        Where materials are sourced from multiple countries, a marketer may gauge its compliance with the FTC's proposed "75% U.S. content" safe-harbor rule with reference to an annual average of the value of all components used. Similarly, where costs of inputs fluctuate over time, a marketer may take as the cost of an input the average price of the input over a period of a year, or some other fixed and reasonable period. Alternatively, the marketer may take a "snapshot" of its actual costs at particular points in the manufacturing year.
Where foreign and domestic goods are packed together, the FTC does not consider the packaging to effect a "substantial transformation". The product must be marked to disclose the origin of the imported contents. An unqualified "Made in U.S.A." claim for the set would be deemed unacceptable.

13. "Origin"USA" Labels: A Separate Standard
        Notwithstanding the other provisions in the Guides, the FTC proposes to permit that certain products, sold in the United States, and abroad, and which are not required to be marked with a foreign country of origin, be allowed to be marked with a label bearing the works "Origin USA". It appears from the agency's proposal that the term "Origin: USA" would be a separate standard, allowing goods to be marked to show U.S. origin even if an unqualified "Made in U.S.A." claims would not be allowed.

The FTC proposes to allow the use of "Origin: USA" labels if:
the product is exported in more than a de minimis quantity to countries requiring that the product be marked to indicate its U.S. origin;
the mark or label is no more prominent than necessary to meet the requirements of the other countr(ies) to which it is being exported;
for consumer products, the existence of substantial foreign content is disclosed to consumers through other means.

        Critics have previously charged that the FTC's traditional view that goods must be made almost entirely with United States labor and materials in order to be marked "Made in USA" has been criticized as being out of step with commercial reality as well as with rules of origin administered by the Customs Service. In an age of global sourcing, the FTC's rule has prevented many United States manufacturers from claiming domestic origin for goods produced in this country by a process of "substantial transformation".
        Furthermore, while the FTC requires products to be substantially all made in the U.S.A. in order to be labeled as such, the rules administered by the Customs Service with respect to the marking of foreign articles are based on "substantial transformation" or "tariff shift" standards, and do not engender the same high expectations. The proposed FTC Origin Guides deal with these problems to a limited extent, narrowing -- but certainly not closing -- the gap between the rules for labeling foreign and domestic goods.
        Moreover, rather than adopting a rule congruent with one administered by Customs, the FTC has created a new, complex rule of origin to U.S. manufacturers to follow.
Notable aspect of the proposed FTC Origin Guides include the following:

1. Retention of "Substantial Transformation" Rule.
        The FTC origin guides define "substantial transformation" as being either (1) Customs' traditional "substantial transformation" test of a change in name, character or use, or (2) the tariff shift principles of the NAFTA Marking Rules. It is interesting that the FTC has embraced the "substantial transformation" concept even as Customs is attempting to jettison it and adopt its tariff-shift NAFTA marking rules as a universal rule of origin. The Courts have suggested that Customs should retain both sets of rules 1, and it would appear that the FTC agrees. It will be interesting to see whether, in light of the FTC proposal, Customs drops its plans to replace the traditional "substantial transformation" test of marking.

2. Unclear Operation of NAFTA Marking Rules
        In adopting by reference the NAFTA Marking Rules, the FTC has by reference adopted many of the peculiar trade-policy-related aspects of those rules. For example, under the NAFTA Marking Rules, certain products (such as foods) are not considered to undergo a sufficient transformation in the United States if they contain very minor ingredients which do not undergo a required change in tariff classification (i.e., the de minimis rule does not apply to these goods). In the FTC context, would the lack of a de minimis exception in a NAFTA marking rule preclude a finding that "substantial transformation" has occurred, or is this consideration irrelevant in light of the FTC's "75% value added" test? The proposed Guides do not speak clearly to this issue.

3. Ambiguity of "75% Value Added "Safe Harbor" Rule
        While the FTC's first "safe harbor" includes a "75% domestic value added" requirement, the Guides do not contain an objective definition of how domestic value should be calculated, indicating only that "generally accepting principles should be used". This contrasts with value-based origin rules administered by Customs, which are governed by largely objective formulae. As the Customs Service has learned in administering NAFTA and its predecessor, the U.S.-Canada Free Trade Agreement, value-content rule are virtually impossible to administer effectively, unless clear and detailed definitions of value are provided.
Assuming that a value-content rule is appropriate at all, the lack of a clear definition can only lead to controversy in the future. Moreover, the existence of a value-content rule provides the FTC with a pretext to conduct extremely detailed audits of manufacturers' cost records.

4. Ambiguity in "Double Substantial Transformation" Safe Harbor
        The FTC's second proposed "safe harbor" also contains considerable ambiguity. The rule requires that a product be "substantially transformed" in the United States, and that each of its major inputs or subassemblies similarly undergo a "substantial transformation". However, the Guides contain no provisions concerning how a manufacturer should identify these "major" inputs. It would be impossible, as a practical matter, for the FTC to attempt to define this concept with respect to the countless varieties of goods produced in the United States; however, the rule appears to direct a manufacturer to "self select" this determination -- under threat of penalty if the FTC disagrees with the manufacturer's selection.

5. Lack of Clear Federal Preemption
        The FTC's proposed Guides indicate that, where a manufacturer can bring itself within one of the "safe harbor" rules, the agency will not consider it in the public interest to bring a deceptive advertising claim against the manufacturer. However, this is merely a statement of FTC enforcement intent. It would not preclude private actions against the manufacturer charging unfair competition, nor apparently would it prohibit state governments from enforcing their own advertising or unfair trade practice laws which adopt a stricter view of the "Made in U.S. standard".
        Some labor and trade groups have already publicly expressed outrage that the FTC is proposing a rule which would permit "Made in USA" labeling for a product having any significant foreign content; if the FTC adopts the Guides as proposed, these opponents might seek to have more restrictive state legislation enacted.

6. "Origin: USA" Labeling
        It appears that the FTC is proposing the "Origin: USA" label as a different, less restrictive standard than the "Made in U.S.A." standard. It remains to be seen whether consumers will perceive any real or meaningful difference between the two concepts. Moreover, there is no clear Federal pre-emption which would prevent a state authority from holding that a product marked "Origin:USA" is deceptively marked in violation of state law, if the product contains significant foreign components or ingredients.

As noted above, the FTC is seeking written comments on the proposed guides through August 22, 1997. This exceptionally long comment period reflects the complexity of the origin guides and the fact that they are likely to be controversial. Interested manufacturers and companies should give serious consideration to submitting comments regarding these important proposals.
Our firm stands ready to furnish any additional information or assistance which may be required with respect to the FTC's proposed Origin Guides, or other marking and labeling issues.

     

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