California’s New “Made in USA” — Not Stopping Onslaught of New Litigation Based on Prior Conduct

During the 2015 legislative session,  California’s legislature amended its “Made in USA” law (previously discussed here) with SB 633.  Under the new law, effective January 1, 2016, products sold in California may legally be labeled with a “Made in USA” claim as long as certain conditions are met (discussed below).  Unfortunately, however, over the last 6 months, class action plaintiffs’ attorneys have sent hundreds of food and cosmetics companies letters threatening class action lawsuits unless the companies agree to hefty settlements.  And unfortunately, for many of the companies being threatened, it does not seem to matter whether the companies are manufacturing their products in California (or other U.S. states), sourcing their components from U.S. distributors, and otherwise seem to be in compliance with new law…or even the old.  But some companies are not taking it laying down. One such company, EO Products, is seeking legislative assistance and is holding a round table discussion with an Assembly member to discuss what appears to be frivolous litigation.  Would you like to participate?

Under the new law, Business and Professions Code section 17533.7 permits a portion of a product to be obtained from outside the U.S. as long as certain conditions are met.  For example, if an article, unit, or part of the product is not available from a U.S. source, and the manufacturer cannot make the article itself, then up to 10% of the final wholesale value of the finished product may consist of the non-U.S.-available article(s).  If, however, an article, unit, or part of a product is available from U.S. sources, but the manufacture still obtains the article from a non-U.S. source, up to 5% of the final wholesale value of the finished product may consist of this non-U.S. available articles.  Notably, under the non-U.S. available determination, cost of the article cannot be considered in the assessment of whether the article is or is not available from a U.S. source.

Also, as to California manufacturers selling or offering for sale merchandise outside California, as long as the label conforms to the law of the forum state or country within which the merchandise is sold or offered for sale, the product shall not be deemed mislabeled.

Unfortunately, there still remains some significant ambiguities in the new law.  What if a raw material  is grown elsewhere (say corn), shipped into the U.S. and then processed to become a finished good which is then used as an ingredient in a cosmetic formulation (e.g., distilled to become alcohol)?  Is the alcohol in my example a U.S. sourced ingredient?  Under general country of origin analysis it would be because of the “substantial transformation” of the corn into alcohol.

Also, cosmetics seem different than say jeans or deadbolts in determining the break down of the merchandise for assessing the percent of the “components” — or article, units, or parts — of the final merchandise:

Consider a glass jar of eye cream sold in an outer package.  Are the components the (1) the glass jar, (2) the label on the glass jar, (3) the cream inside the jar, and (4) the cardboard outer package? Or alternatively, are the components the (1) the glass jar, (2) the label on the glass jar, (3) the cardboard outer package, (4) ingredient-1, (5) ingredient-2, (6) ingredient-3, (7) ingredient-4, (8) ingredient-5, …..(15) ingredient-12?  In my opinion, rules of statutory construction justify the first option of 4 components — though plaintiffs’ attorney would prefer the latter.

Why does this breakdown matter?  Under the first part of Section 17533.7, as well as the prior version of the section, it is unlawful to sell or offer for sale merchandise with a “Made in USA” claim if:

…the merchandise or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.

If the component breakdown is taken all the way down to the individual ingredients in a cosmetic’s formulation, then a single ingredient made, manufactured, or produced outside the U.S. would arguably cause the “Made in USA” claim to be non-compliant.  However, if the formulation is considered one part of the finished merchandise, then as long as the formulation is “substantially made, manufactured, or produced” in the U.S. the claim would be permissible (assuming the other parts of the product were also likewise from the U.S.).  Moreover, considering the formulation’s country of origin as the U.S., as a single part of the product, is also consistent with the substantial transformation analysis when made or manufactured in the U.S.

As for other ambiguities, what if a company stopped using an unqualified “Made in USA” claim prior to January 1, 2016,–but would have none the less been in compliance under the new law?  Should plaintiffs’ attorneys be allowed to extort significant attorneys’ fees– with little remuneration to actual consumers– for rather minor technical non-compliance issues that arise from these ambiguities?  Shouldn’t U.S. based companies, employing U.S. workers, following U.S. labor laws, and sourcing all their ingredients from U.S. based distributors be given an opportunity to correct such minor violations– particularly when they believed they were following the law in the first place?

These issues will be discussed during the roundtable scheduled to take place in San Rafael, California, on March 22, 2016, at 10:00 am.  Please message me if you would like to attend and I will forward you the contact information for the event.

Take away…(and I have said this before)…If a product’s labels contains an unqualified “Made in the USA” claim, or has other similar origin claims, be sure to audit component suppliers to confirm the source or origin of all ingredients/components.  Where are they sourced?  It is not enough to say the ingredients/components were purchased from a distributor in the U.S.  Instead, to substantiate the “Made in USA” claim, companies should verify up the supply chain the source of each ingredient.  If portions of the product are sourced internationally, then qualify the claim in a manner that is truthful and not misleading.  Also– ATTEND THE ROUNDTABLE.