22 Dec 2014

'Made in the USA' labels must not mislead

Inaccurate 'Made in the USA' labelling can trigger class actions in California. Katherine Gasztonyi, associate, and Simon Frankel, partner, in the global Branded Goods practice at Covington & Burling, discuss recent litigation.

'Made in the USA' labels must be accurate ledinka

What does it mean when merchandise is labelled “Made in the U.S.A.”?  As with so much in the law, the answer turns out to be “it depends." In this instance, it depends on where the merchandise is sold. In October 2014, a federal judge in the Southern District of California agreed that California’s requirements for labelling clothing as “Made in the U.S.A.” are stricter than those of the federal government and found that the state’s labelling registration is not preempted by federal law (Paz v. AG Adriano Goldschmeid, Inc). The result, the court explained, is that companies that comply with the federal (but not the California) standards can use the “Made in U.S.A.” labels outside of California, but “inside California, they c[an]not.” 

Plaintiff David Paz purchased designer AG Adriano Goldschmeid, Inc (AG) brand jeans from a Southern California Nordstrom, Inc.  The jeans were marked with the label “Made in the U.S.A.,” which Paz claimed he relied upon in making his purchase. Under California law, the “Made in the U.S.A.” label can only be affixed if the product and all articles, units, and parts thereof are “entirely or substantially made, manufactured, or produced” in the United States.

 Paz alleged that AG acted contrary to California law in labelling the jeans as “Made in the U.S.A.” because the component parts of the jeans—including the fabric, thread, buttons, rivets, and certain subcomponents of the zipper assembly of the jeans—were actually manufactured outside of the United States.  Based on this assertion, Paz brought claims against AG and Nordstrom on behalf of a class of all persons who purchased AG products bearing a “Made in the U.S.A.” label under the California Consumer Legal Remedies Act, the California Unfair Business Practices Act and California Business and Professions Code §17533.7. Defendants Nordstrom and AG moved to dismiss the complaint on the grounds that the Plaintiff’s claims were preempted by federal laws on labeling; in particular, the Federal Trade Commission Act (FTCA) and the Textile Fiber Products Identification Act (TFPIA). 

FTCA Section 45(a) requires that all products bearing a “Made in the U.S.A.” label “be consistent with the decisions and orders of the Federal Trade Commission” regarding such labelling.  The FTC has issued guidance on the label, providing that, to use the label, marketers should “possess and rely upon a reasonable basis that the product is all, or virtually all, made in the United States.”  The FTC further explained that a product is “all or virtually all” made in the United States when “all significant parts and processing that go[ ] into the product are of U.S. origin.” 

Thus, while the California statute requires that all parts of a product be entirely or substantially made, manufactured, or produced in the United States, the FTC requires only that all significant parts be of United States origin—a somewhat looser standard.

Preemption

Nordstrom and AG argued that the FTCA preempted the California law on theories of both conflict preemption and field preemption.  In order for there to be conflict preemption, it must either be impossible to comply with both state and federal law, or the state law must be an obstacle to the accomplishment and execution of the federal law.  The court found that, although the California standard was harder to meet than the FTC standard, “it would not be impossible for defendants to comply with both laws”—only more burdensome.  In addition, the court found that the California law aids the accomplishment and execution of the FTCA, as both “are meant to serve the same purpose, namely to prevent the deceptive marketing and promotion of products as ‘Made in U.S.A.’”  Thus, the state law is not an obstacle to the execution of the FTCA.

The court also disagreed with the defendants’ field preemption theory.  First, the court noted that consumer protection laws, such as the California law at issue here, were traditionally in the hands of state law enforcement.  Because consumer protection is a historical State police power, the court went on, such laws are not to be superseded by federal laws unless it is the clear and manifest purpose of Congress to do so.  Because the court found no evidence that that the delegation of authority to the FTC to regulate “Made in U.S.A.” labels demonstrated a clear purpose to supersede state laws on such labels, the court found no field preemption.  

The defendants also argued conflict preemption by the TFPIA, asserting that the TFPIA required them to use a “Made in the U.S.A.” label even if the garment included foreign-made materials, whereas the California law prohibited the use of the label in the same circumstances.  Again, the court disagreed, finding that the TFPIA does not require an unqualified “Made in the U.S.A.” label.  The court provided some practical guidance on this point, suggesting that the use of the label “Made in U.S.A. of imported fabric and components” would satisfy both standards.  

Paz v. AG Adriano Goldschmeid warns that inaccurate or noncompliant “Made in the U.S.A” labelling can lead to class action claims in California.  The case cautions companies to think carefully before applying a “Made in the U.S.A.” label to their products, particularly when such products are sold in California.  The decision also suggests that companies should explore the use of qualified lin order to meet both state and federal requirements and ensure that there is no  basis for consumers to claim they are misled through deceptive marketing.

The authors can be reached via sfrankel@cov.com and kgasztonyi@cov.com. Covington’s Branded Goods team can be found blogging at www.covbrands.com

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