Recent FTC “Made in USA” Enforcement Actions

Dear Friends,

We are writing to let you know about increased enforcement activity at the federal level related to “Made in USA” claims.

In the past few weeks, the Federal Trade Commission (FTC) has resolved two administrative complaints filed against U.S. companies for allegedly making false U.S.-origin claims. 

In February, the FTC published an agreement containing a consent order involving a water filtration company based in Georgia.  The FTC’s complaint alleged that the company deceived its consumers with claims that its systems and parts are “Built in USA”, “Proudly Built in the USA” and “Built in USA Legendary brand of water filter” when in fact the company either imported its products or built them using significant imported components. 

Similarly, earlier this week, the FTC published an agreement containing a consent order involving a Texas company that sells metal pulleys for industrial use.  The complaint alleges that the company advertises its products online, in stores, at trade shows, through social media, etc. and uses unqualified U.S. origin claims, such as “Made in USA”, “Made in the USA American Product” and graphical depictions of the American flag, on the product and in its advertising.  The FTC alleged that many of the company’s products contained significant imported components (and some of the parts were imported from abroad already stamped “Made in USA”).

Without admitting wrong-doing, both companies agreed to enter into consent orders with the FTC to resolve the matters. These orders mandate compliance with the FTC’s Enforcement Policy Statement on U.S. Origin Claims going forward, and include certain reporting and recording requirements.  Each consent order remains in effect for 20 years.  Violations of the consent orders lead to significant monetary fines.  Additional information about each case can be found here and here.

These actions are important, as they may signal increased enforcement of this issue at the federal level.  As you know, the FTC has adopted strict guidelines for making unqualified U.S.-origin claims – the ‘all or virtually all’ U.S. content standard.  In recent years, however, there has not been a great deal of enforcement at the federal level.  These actions may signal that this will be changing.  Accordingly, every company should review its product markings, as well as its advertising (including social media), to make sure that any U.S.-origin claims (unqualified or qualified) comply with the FTC’s guidelines.  If your claims are in compliance, you should also consider reviewing the types of claims your competitors are making to help ensure there is a level playing field for everyone.

We regularly advise clients on these issues (and have represented companies in FTC enforcement actions) and would be happy to discuss this with you further.  If such a discussion would be helpful, just let us know.

We hope this is helpful.

Best regards,
Ted

Recent NAFTA Penalty Decision

Dear Friends,

We are writing to let you know about an all-too-common misunderstanding of the law by U.S. Customs and Border Protection that, as the attached penalty decision demonstrates, can be an expensive trap for the unwary.

The issue involves claims made under NAFTA that are later corrected/revoked by the importer after being informed by the exporter that the goods no longer qualify – and more specifically what the importer is liable for in such a situation.

In the situation involved in the attached decision, a U.S. company imported goods from a related party in Mexico and claimed NAFTA preference based on a NAFTA Certificates of Origin provided by the exporter/producer.  The NAFTA eligibility of the goods hinged on the fact that a key component was itself NAFTA originating.  The exporter/producer had a NAFTA Certificate of Origin covering this component from an unrelated supplier.  Based on the applicable rule of origin, the finished goods would originate, provided that this component originated.  Since it had a NAFTA Certificate of Origin from the unrelated component supplier, the exporter/producer certified that the finished goods were originating and the importer made claims based on the exporter/producer’s NAFTA Certificate of Origin.

Years after the claims were made, the unrelated component supplier advised that its component was actually of Chinese origin and revoked its NAFTA Certificates of Origin.  This resulted in the finished goods no longer qualifying for NAFTA.  After confirming this analysis, the exporter/producer notified the U.S. importer that the goods it had previously certified as being NAFTA originating no longer qualified.  The U.S. importer then filed a corrected declaration with CBP at the appropriate Port of entry pursuant to 19 C.F.R. §181.21(b).  The corrected declaration identified all of the effected entries over multiple years.  In terms of duties, however, the importer only tendered the duties and Merchandise Processing Fees on the unliquidated entries.  The importer’s position was that it had acted with reasonable care when it relied on the NAFTA Certificate of Origin voluntarily provided by the exporter/producer (and the exporter/producer acted reasonably when it relied on a facially valid NAFTA Certificate of Origin for the component voluntarily provided by the third-party supplier).  The fact that the supplier revoked its certification years after the fact does not make those claims negligent acts.  If the importer was not negligent, there was no basis to reopen the liquidated entries.

The Port disagreed and chose to treat the corrected declaration as a prior disclosure (i.e., an admission of a culpable violation of the law).  Since the importer did not tender all of the duties covered by the “prior disclosure,” it was deemed to be invalid and the Port initiated a penalty action.  The Port sought duties and MPF of approximately $400,000 and a penalty based on a claim of negligence of approximately $800,000.  After much back and forth, the importer was ultimately able to get the case referred to CBP Headquarters for a decision.  As you will see from the attached, CBP Headquarters confirmed that an importer that relies on a facially-valid NAFTA Certificate of Origin is exercising reasonable care and that, if that certificate is later revoked, the importer is not liable for the duties or MPF on the liquidated entries.  The Port’s $1.2 million demand was remitted in full.

This an issue that any company that imports under NAFTA should be aware of, as the approach taken by the Port involved here is not an isolated instance.  We have 3 similar cases currently pending at other Ports and are aware of at least one other situation handled by another firm.  Importers should remember (particularly since CBP seems not to) that NAFTA (unlike our more recent FTAs) is an exporter-based agreement, which means that an importer who relies on a facially-valid NAFTA Certificate of Origin voluntarily provided by the exporter has a good argument that it exercised reasonable care.  If that certificate later turns out to be incorrect, then the importer will be liable for the duties and fees on the unliquidated entries (i.e., the past 10 months or so), but not on the liquidated ones.  As demonstrated by the attached, remembering this can help ensure that the company does not tender monies to the government unnecessarily.

We hope you find this helpful.  If you have any questions, please let us know.

Best regards,
Ted

FTC Challenge to “Made in USA” and Other U.S. Origin Claims

Dear Friends,

We wanted to let you know about a lawsuit the Federal Trade Commission (FTC) recently filed contesting an Ohio company’s use of U.S.-origin claims.

The complaint, filed earlier this week in U.S. District Court for the Northern District of Ohio, alleges that the company deceived consumers by making unqualified U.S.-origin claims.  More specifically, the complaint alleges that the company used unqualified “Made in the USA” and “Proudly Made in the USA” claims for its glue products, when a significant proportion of the cost of the chemical inputs (~55%) are attributable to imported chemicals.  A copy of the complaint can be found here.

As you know, the FTC has strict requirements for making unqualified U.S.-origin claims, such as “Made in USA”.  Specifically, the FTC rules require, among other things that the product contain “all or virtually all” U.S. content (generally, viewed as 95%+ US content by cost) in order to be eligible for an unqualified U.S.-origin claim.

This case is important for a couple of reasons.

First, the case serves as an important reminder to all companies that utilize U.S.-origin claims on their products (or that sell other companies’ products that contain U.S.-origin claims) that they need to be extra vigilant in this area.  Given that the rules for making such claims can seem counterintuitive (e.g., just because a product is made, or even last substantially transformed, here in the United States does not automatically mean it can be labeled “Made in USA”), such claims are often a trap for the unwary.

Second, it is important to note that the FTC is pursuing this action through litigation.  Typically, the FTC’s policy is to police these types of claims administratively (i.e., closing the case without action if there is no violation, or getting the company to enter into an administrative consent order if there is a violation).  Here, the FTC could not resolve the matter administratively, so is forced to sue the company in U.S. district court.  This could result in the court considering whether the FTC’s “all or virtually all” U.S.-content test is appropriate/sustainable.

We will continue to monitor this case as it develops and keep you informed.  In the meantime, if you have any questions about making U.S.-origin claims (unqualified or qualified), please let us know.

Best regards,

Ted

False Designations of Origin on GSA Advantage!

Dear Friends,

We thought you might be interested in a letter Sen. Charles Schumer (NY-D) recently sent to the General Services Administration regarding potential misstatements of origin on GSA-Advantage!  As you may know, GSA Advantage! is the on-line shopping site for federal agencies.  A copy of Sen. Schumer’s letter can be found here.

In the letter, Senator Schumer alleges that GSA Advantage! contains numerous products with potentially false designations of origin.  This is an issue because in order to be listed on GSA Advantage!, products are required to comply with the country of origin requirements contained in the Trade Agreements Act of 1979 (“TAA”).  This generally means that the products must be manufactured/last substantially transformed in the United States or in a TAA country in order to be listed/acquired.  TAA countries do not include countries like China, India, Malaysia, etc.

If a product is not TAA eligible, it is not supposed to be listed on GSA Advantage!  In practice, however, this is not very well enforced.  Generally, if a product is listed by the offeror as TAA eligible, such representation is not questioned by GSA.  Since products are often offered for sale to the government by third-party resellers (i.e., many companies do not themselves list products on GSA Advantage!), there can be a disconnect between the actual origin and what is included by the reseller.

We expect the GSA Administrator to take Sen. Schumer’s request seriously.  While the request was focused on a particular industry, we believe that the review will likely expand to other products.  We encourage all companies to do a quick search on GSA Advantage! to see if their products are included (you can search by your company name) and, if so, whether the origin is identified correctly (e.g., is “Made in:  United States of America” correct?).  If not, please let us know.  We have helped clients in the past clear up potential misstatements of origin made to GSA by third-party resellers.

We hope this is helpful.  If you have any questions, please let us know.

Best regards,

Ted

Government Procurement Rule of Origin-Related Qui Tam Action

We are writing to let you know about the settlement of a False Claims Act (“FCA”) case, involving country of origin claims for construction contracts funded by the U.S. government.

Earlier this week, the U.S. Department of Justice (“DOJ”) announced that a U.S. manufacturer of glass space frames agreed to pay $3 million ($500,000 criminal fine, $2.5 million civil fine) to resolve allegations that it improperly used foreign materials on construction projects involving federal funds.  A copy of the DOJ press release is available here.

As you know, contracts funded by the U.S. government are generally subject to laws requiring the use of domestic materials (e.g., the Buy America Act, the Federal Transit Administration’s Buy America provision, §1605 of the American Recovery and Reinvestment Act, etc.).  Here, the underlying complaint alleged that from 2004 to 2013, the Company knowingly – and in violation of its contractual obligations – used noncompliant foreign materials on several federally funded construction projects.  More specifically, the complaint alleged that the Company repackaged materials and falsified documents relating to certain federally funded construction projects in order to hide that the materials used were noncompliant foreign materials.

There are several key takeaways from this settlement.

First, this settlement underscores the government’s continued interest (and willingness) to prosecute government procurement rule of origin violations.  In announcing this settlement, the U.S. Attorney reiterated that “domestic preference statutes are designed to promote American businesses and to protect U.S. economic interests.  When companies subvert those interests by violating ‘Buy American’ provisions…and when they undertake efforts to conceal that they have done so…the U.S. Attorney’s Office will pursue all appropriate criminal and civil sanctions”.

Second, this case underscores the growing trend of private parties initiating their own trade enforcement actions.  Here, the suit was initiated by a former employee, who provided evidence regarding the knowing use of noncompliant foreign materials on several specific federally-funded projects.  The former employee stands to receive approximately $400,000 from the settlement.

Third, as part of the settlement agreement, the Company agreed not to contest debarment from federally funded projects.  While the Company stated that Buy America requirements applied to only a small part of its business, such a disbarment could have severe consequences for companies whose business includes a meaningful amount of government procurement sales/contracts.

To that end, it is more important than ever that companies have documented controls of their government sales.  With good internal controls, most companies will be able to protect themselves from these types of costly enforcement actions.

We hope this is helpful.  We have regularly advise clients on compliance with government procurement related rules of origin (including implementing effective controls to prevent situations like the one described above).  If you have any questions about the settlement or these issues more broadly, please let us know.

Best regards,

Ted

Retaliatory Duties On US Exports to Canada and Mexico Are A Step Closer to Becoming Reality

Dear Friends,

Further to the below, the WTO arbitrator issued its report today in the COOL dispute between the US, Canada and Mexico.  In short, the report concludes that the United States’ COOL program harms Canada in the amount of $1.054 billion annually (the $1.054 billion is CAD (not USD).  At today’s exchange rate, that comes to approx. $781 million USD), and harms Mexico in the amount of $227.758 million annually.  See here for more info.

This was the last major hurdle before Canada (and possibly Mexico) imposed retaliatory duties on imports from the United States.  We expect that Canada will proceed to impose such duties soon (i.e., in days or weeks).  The list of products to be subject to such duties, as originally published in 2013, is below.  We also expect that Mexico will identify the products it intends to sanction shortly.  We expect both countries to adopt a “carousel” approach, which means that the list of products subject to these retaliatory duties will change periodically (to exert maximum political pressure on the US).

In that regard, earlier this year, the House of Representatives passed legislation repealing COOL.  That effort stalled in the Senate, however.  It will be interesting to see how the Senate reacts once the sanctions are actually put into place.

If you have any questions about this development, please let us know.

Best regards,

Ted

Update: “Made in USA” and Other US Origin Claims

Dear Friends,

We are writing to provide an update on recent changes to California’s “Made in U.S.A.” standards.  As you may have heard, the Governor of California recently signed legislation which will go into effect January 1, 2016, amending California Business and Professions Code to allow products containing some non-U.S. content to be labeled “Made in USA.”

The amended provision is intended to close the gap between California’s previous “Made in U.S.A.” standard and the federal “Made in U.S.A.” standard—curing a discrepancy which existed on paper for many decades, but which only took on commercial significance in recent, as the plaintiffs bar filed a number of lawsuits challenging various companies compliance with the stricter California provision.

While the goal of the new California law is clear enough, whether it will be successful is another matter.  Interestingly, the new California statute does not replicate the fairly succinct and straightforward federal standard (which allows unqualified U.S. origin claims for products “all or virtually all made in the United States”).  The new California statute (attached) is a bit more cumbersome.  Stretching for several paragraphs, the new law:

  • retains the prohibition on U.S. origin claims for products entirely or substantially manufactured outside the U.S. (or containing parts which are entirely or substantially manufactured outside the U.S.);
  • creates an exception to that prohibition for products containing up to 5% non-U.S. content;
  • creates an exception to that prohibition for products containing up to 10% non-U.S. content, when the non-U.S. content is domestically unavailable; and
  • specifies that merchandise offered for sale outside of California “shall not be deemed mislabeled if the label conforms to the law of the forum state or country within which they are sold or offered for sale.”

Whether there remains any actionable daylight between these provisions will be up to the plaintiffs’ bar.  In the meanwhile, particularly in light of that final provision, cautious optimism seems reasonable.

If you have any questions about the impact of these developments on your business, please let us know.

Best regards,
Ted