BILL ANALYSIS                                                                                                                                                                                                    Ó





                             SENATE JUDICIARY COMMITTEE
                         Senator Hannah-Beth Jackson, Chair
                            2015 - 2016  Regular  Session


          SB 633 (Hill)
          Version: April 14, 2015
          Hearing Date: May 12, 2015
          Fiscal: No
          Urgency: No
          TH


                                        SUBJECT
                                           
                     Consumer Protection: "Made in U.S.A." Label

                                      DESCRIPTION  

          Existing law prohibits the sale of any merchandise labeled "Made  
          in U.S.A.," "Made in America," "U.S.A.," or similar words if the  
          merchandise or any article, unit, or part thereof, has been  
          entirely or substantially made, manufactured, or produced  
          outside of the United States.  This bill would instead make it  
          unlawful to sell merchandise that advertises itself as being  
          made or manufactured in the United States unless the merchandise  
          has been all or virtually all made in the United States.

                                      BACKGROUND  

          The Legislature has long considered consumer protection to be a  
          matter of high public importance.  State law is replete with  
          statutes aimed at protecting California consumers from unfair,  
          dishonest, or harmful market practices.  The Consumer Legal  
          Remedies Act (Civ. Code Sec. 1750 et seq.), for example, was  
          enacted "to protect the statute's beneficiaries from deceptive  
          and unfair business practices," and to provide aggrieved  
          consumers with "strong remedial provisions for violations of the  
          statute."  (Am. Online, Inc. v. Superior Court (2001) 90  
          Cal.App.4th 1, 11.)  Similarly, California's Unfair Practices  
          Act (Bus. & Prof. Code Sec. 17000 et seq.) has protected  
          California consumers from "unlawful, unfair or fraudulent  
          business act[s] or practice[s]" for over 70 years.  (Bus. &  
          Prof. Code Sec. 17200.)









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          Consumer protection regarding country of origin labeling is no  
          less a matter of fundamental public policy.  Since 1961,  
          California has expressly required that businesses meet certain  
          standards before they can claim that their products are "Made in  
          U.S.A."  California law prohibits a product from being labeled  
          and sold in California as "Made in U.S.A." or "Made in America"  
          when the product, or any article, unit, or part of the product,  
          has been entirely or substantially made outside of the United  
          States.  California courts have observed that "[this law] does  
          not state . . . that a product may be represented as "Made in  
          U.S.A." if a substantial number or a majority of its parts are  
          made in the United States," but rather that "merchandise cannot  
          be represented as "Made in U.S.A." if the merchandise, or any  
          article, unit, or part of that merchandise, was entirely or  
          substantially made, manufactured, or produced outside of the  
          United States."  (See e.g. Colgan v. Leatherman Tool Group, Inc.  
          (2006) 135 Cal.App.4th 663, 684 [emphasis added].)  Because the  
          law prohibits the use of the label if any component part of a  
          product is entirely or substantially made outside the United  
          States, California law essentially requires a product to be  
          entirely made in the United States in order to be labeled as  
          such.

          This bill would lower California's domestic content threshold  
          for labeling a product as "Made in the U.S.A." by making it  
          lawful to sell merchandise with this label so long as all or  
          virtually all of the product was made in the United States.   
          This bill would specify that the "all or virtually all" standard  
          has the same meaning as in the Enforcement Policy Statement on  
          U.S. Origin Claims issued by the Federal Trade Commission.

          This bill is substantially similar to SB 661 (Hill, 2014), AB  
          890 (Jones, 2013), and AB 858 (Jones, 2013), all of which failed  
          passage in this Committee.

                                CHANGES TO EXISTING LAW
           
           Existing law  protects consumers and competitors against  
          unlawful, unfair or fraudulent business acts or practices and  
          unfair, deceptive, untrue, or misleading advertising.  (Bus. &  
          Prof. Code Sec. 17200 et seq.)

           Existing law  makes it unlawful for any person, firm, corporation  
          or association, or any employee thereof, to make or disseminate  
          before the public in this state, in any newspaper or other  







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          publication or in any other manner or means whatever, any  
          statement concerning personal property which is untrue or  
          misleading, and which is known, or which by the exercise of  
          reasonable care should be known, to be untrue or misleading.   
          (Bus. & Prof. Code Sec. 17500 et seq.)

           Existing law  provides that the following are unfair methods of  
          competition and unfair or deceptive acts or practices:  (1)  
          using deceptive representations or designations of geographic  
          origin in connection with goods or services; and (2)  
          misrepresenting the source of goods or services.  (Civ. Code  
          Sec. 1770.)

           Existing law  makes it unlawful for any person, firm, corporation  
          or association to sell or offer for sale in this state any  
          merchandise on which merchandise or on its container there  
          appears the words "Made in U.S.A.," "Made in America," "U.S.A.,"  
          or similar words when the merchandise or any article, unit, or  
          part thereof, has been entirely or substantially made,  
          manufactured, or produced outside of the United States.  (Bus. &  
          Prof. Code Sec. 17533.7.)

           Existing federal law  authorizes the Federal Trade Commission to  
          regulate country of origin claims pursuant to authority granted  
          to it under the Federal Trade Commission Act, which prohibits  
          "unfair or deceptive acts or practices."  (15 U.S.C. Sec. 45.)   
          Existing federal law requires that a "Made in U.S.A." label be  
          consistent with orders and decisions of the Federal Trade  
          Commission.  (15 U.S.C. Sec. 45a.)

           Existing federal policy  provides that a product may be labeled  
          as "Made in U.S.A." if the product is all or virtually all made  
          in the United States, however a product using such a label may  
          contain-in a negligible amount-components made outside of the  
          United States.  (Federal Trade Commission, Enforcement Policy  
          Statement on U.S. Origin Claims, 62 Fed. Reg. 63756, 63765 (Dec.  
          2, 1997).)

           This bill  would make it unlawful for any person, firm,  
          corporation or association to sell or offer for sale in this  
          state any merchandise on which merchandise or on its container  
          there appears the words "Made in U.S.A.," "Made in America,"  
          "U.S.A.," or similar words unless the merchandise has been all  
          or virtually all made in the United States.








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           This bill  would specify that merchandise that is "all or  
          virtually all" made in the United States has the same meaning as  
          in the Enforcement Policy Statement on U.S. Origin Claims issued  
          by the Federal Trade Commission (62 Fed. Reg. 63756 (Dec. 2,  
          1997)).
          
                                        COMMENT
           
           1.Stated need for the bill
           
          The author writes:

            Under existing California law (Section 17533.7 of the Business  
            and Professions Code), a product may not be sold in California  
            as "Made in U.S.A." or "Made in America" if the product, or  
            any article, unit, or part of the product, has been entirely  
            or substantially made, manufactured, or produced outside of  
            the United States.

            California's "Made in USA" labeling standard was created in  
            1961 to "prevent foreign firms from taking advantage of 'buy  
            American' promotions."  This was a different era, when the  
            global economy was nascent.  The statute establishes a 100  
            [percent] domestic requirement, meaning that all products used  
            in a manufactured product must come from domestic sources.  In  
            today's complex and global economy this is an unrealistic  
            threshold for many modern companies that manufacture products  
            with many different components, some of which may not be  
            available domestically.  

            California is the only state in the country that establishes a  
            100 [percent] domestic requirement.  All 49 other states and  
            the federal government use the more flexible "all or virtually  
            all" standard for determining when a product is eligible to be  
            labeled as "Made in USA."  This standard requires that the  
            significant parts of a final manufactured product come from  
            domestic sources.  But, the standard also allows a product to  
            contain a negligible amount of foreign sourced material.  As  
            an example, New Balance sneakers are made from roughly 70  
            [percent] domestic sources and the Federal Trade Commission  
            allows them to advertise as "Made in USA."   

            Even if a company goes out of their way to meet California's  
            100 [percent] "Made in USA" labeling threshold, it is not  
            always possible due to the nature of our global economy.   







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            Certain components are simply not available in the U.S. . . .

            To help promote manufacturing in California, to encourage the  
            establishment of small businesses, and to help create jobs in  
            the state, SB 633 amends Section 17533.7 of the Business and  
            Professions Code to make the "Made in USA" labeling standard  
            consistent with the "all or virtually all" standard used by  
            all 49 other states and the federal government.  By making  
            this change, SB 633 will also eliminate the burden on  
            California companies of having to create two separate product  
            packing lines for their products.

           2.Bill would adopt a misleading standard for "Made in America"  
            claims
           
          Since 1961, California law has prohibited products from being  
          sold as "Made in U.S.A." or "Made in America" when the product,  
          or any article, unit, or part of the product, has been entirely  
          or substantially made outside of the United States.  This bill  
          would lower the standard for labeling a product as "Made in  
          America" by instead requiring that all or virtually all of the  
          product be made in the United States in order to bear this  
          label.  The bill's proposed "all or virtually all" standard is  
          drawn from the Federal Trade Commission's (FTC) current federal  
          standard for labeling products as "Made in U.S.A."  Under  
          federal law, it is permissible to label a product with an  
          unqualified "Made in U.S.A." label if the product is all or  
          virtually all made in the United States.  In its guidance on  
          interpreting the "all or virtually all" standard, the FTC has  
          stated that a product may still employ an unqualified "Made in  
          U.S.A." label even though it contains a "de minimis, or  
          negligible, amount of foreign content."  (Federal Trade  
          Commission, Enforcement Policy Statement on U.S. Origin Claims,  
          62 Fed. Reg. 63756 (Dec. 2, 1997.))  The FTC has rejected a  
          percentage benchmark approach to determining whether a product  
          is all or virtually all made in the United States, and has  
          declined to craft any specific "bright-line" standard for  
          evaluating U.S. origin claims, stating instead that "[g]iven the  
          complex and varied factual scenarios that present themselves in  
          this area, and the wide range of product for which U.S. origin  
          claims may be made, there are necessarily issues that will  
          continue to be more appropriately resolved on a case-by-case  
          basis." (Id., 62 Fed. Reg. 63756, 63765.)  

          As noted in Comment 1, the FTC's "all or virtually all" standard  







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          has been satisfied in cases where products contained only 70  
          percent domestically manufactured components.  Consequently,  
          this bill's "all or virtually all" standard would implement a  
          labeling requirement that allows manufacturers to claim American  
          origin for goods containing, in some cases, up to 30 percent  
          foreign content.  Put another way, this bill would permit  
          products sold in California to be labeled as "Made in America"  
          when, in fact, that statement is not entirely true.

          The policy question raised by this bill is whether it is  
          appropriate to adopt a standard for labeling products as "Made  
          in America" that permits manufacturers whose products contain  
          overseas content to enjoy the economic benefits of the label,  
          but which could result in less truthful and less accurate  
          product labels.  In general, the legislative preference has been  
          to ensure that California laws are strong and sufficiently  
          protect consumers, in this case, against unfair and deceptive  
          business practices, including false or misleading advertising.  

           3.Ensuring consumers get the benefit of their bargain and  
            assuring consumer confidence  

          California's "Made in U.S.A." law, along with California's other  
          strong statutes on false advertising and misrepresentation, are  
          intended to protect both consumers and competitors in the  
          marketplace.  Collectively, these statutes promote fair  
          competition and help to ensure that consumers have the  
          information that they need to make informed purchasing  
          decisions.  The key to ensuring that consumers are able to make  
          informed purchasing decisions and get the benefit of their  
          bargain-i.e. get what they pay for-is to make sure that product  
          labels are accurate and truthful, including labels stating that  
          a product is "Made in America."

          Many consumers have indicated that whether or not a product is  
          American-made is important to them, and market research  
          indicates that they are willing to pay more for a product if  
          they know that it is made in the United States.  These consumer  
          sentiments came to light when, in 1997, the FTC considered  
          revising its "Guides for the Use of U.S. Origin Claims" in a way  
          that would have weakened the federal standard.  Overwhelmingly,  
          consumers opposed the proposed revisions and "generally  
          supported an 'all or virtually all' standard or advocated a  
          specific percentage, usually 90 percent or, more often, 100  
          percent."  (Federal Trade Commission, Enforcement Policy  







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          Statement on U.S. Origin Claims, 62 Fed. Reg. 63756, 63758 (Dec.  
          2, 1997).)  The FTC noted that "[s]everal commenters asserted  
          that changing the current standard would confuse consumers who  
          wish to buy American products, leaving them unable to determine  
          whether a product was truly made in the United States."  (Ibid.)  
           One commenter noted:

            If a product is only partially made in our Country, I want to  
            know.  I do not wish to purchase items made in other countries  
            and falsely labeled "Made in America."  I want the entire  
            truth on the label.  I don't want to be tricked into buying an  
            item I think is made here when in fact it is not.  (Ibid.)
          Another commenter wrote:

            The concept of "Made in the U.S.A." has been specific and  
            definite for the last 50 years.  Please leave it as it is.  If  
            manufacturers want to say an item is "Made in the U.S.A." then  
            make sure it is exactly that.  "Made in the U.S.A." should  
            mean that an item is 100 [percent] manufactured in the United  
            States of America and not in another country.  (Ibid.)

          In January 2011, the California Supreme Court further described  
          the importance of truthful and accurate claims of domestic  
          origin, stating: 

            In particular, to some consumers, the "Made in U.S.A." label  
            matters.  A range of motivations may fuel this preference,  
            from the desire to support domestic jobs, to beliefs about  
            quality, to concerns about overseas environmental or labor  
            conditions, to simple patriotism.  The Legislature has  
            recognized the materiality of this representation by  
            specifically outlawing deceptive and fraudulent "Made in  
            America" representations. . . .  The object of section 17533.7  
            "is to protect consumers from being misled when they purchase  
            products in the belief that they are advancing the interests  
            of the United States and its industries and workers."  (Sen.  
            Holmdahl, sponsor ? letter to Governor Brown, May 23, 1961)  
            ['There are many Americans who feel that American-made  
            articles are of higher quality, and who rely on the "Made in  
            U.S.A." label'].) . . ."  The Legislature evidently recognized  
            some companies were using or might be tempted to use  
            inaccurate "Made in America" labeling, that some consumers  
            might be deceived by and rely on it, and that consumers and  
            competitors who honestly made their wares in the United States  
            and marketed them as such were being or would be harmed.   







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            (Kwikset Corp. v. Benson (2011) 51 Cal.4th 310, 329 [citations  
            omitted].)

           4.Bill could have the effect of increasing the percentage of  
            overseas labor or overseas materials in goods and products  
            that have the "Made in America" label
           
          Some proponents of SB 633 argue that existing California law  
          disincentivizes companies from making their products in  
          California because California's labeling standards are so  
          strict.  For example, the San Francisco Chamber of Commerce  
          writes:

            This update of California's labeling standard reflects today's  
            complex global economy in which many companies manufacture  
            products with components supplied from countries around the  
            world.  The "all or virtually all" standard still requires  
            that significant parts of a final manufactured product come  
            from domestic sources while allowing for a negligible amount  
            of foreign sourced material . . . This flexibility in labeling  
            will promote manufacturing in California while encouraging the  
            growth of small manufacturing businesses.

          However, staff notes that because the "Made in America" label  
          has such marketing significance, a more accurate labeling  
          standard than the one proposed would arguably provide more  
          incentive for companies to make their products here in America,  
          thus creating domestic jobs.  As the California Supreme Court  
          noted in the Kwikset case, "[s]imply stated: labels matter:"

            The marketing industry is based on the premise that labels  
            matter, that consumers will choose one product over another  
            similar product based on its label and various tangible and  
            intangible qualities they may come to associate with a  
            particular source.  An entire body of law, trademark law (see,  
            e.g., 15 U.S.C. [Sec.] 1051 et seq. [Lanham Act]), exists to  
            protect commercial and consumer interests in accurate label  
            representations as to source, because consumers rely on the  
            accuracy of those representations in making their buying  
            decisions. (Kwikset Corp. v. Benson (2011) 51 Cal.4th 310,  
            328; citations omitted.)

          Given that this bill would permit companies who sell their goods  
          in California to use a certain quantity of overseas components  
          in their products and still derive the potential benefits of a  







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          "Made in America" label, this bill arguably reduces current  
          market incentives for manufacturers to find ways to source all  
          of their components in the United States.  By reducing these  
          existing market incentives through the use of less stringent  
          labeling standards, this bill could bring about an overall  
          increase in the percentage of overseas labor or overseas  
          material contained in products labeled "Made in America."

           5.Existing unfair competition laws protect businesses as well  

          California's laws against false and deceptive advertising also  
          protect businesses by ensuring that unfair and deceptive  
          business practices do not take hold in the marketplace.  As a  
          result, the laws incentivize businesses to engage in truthful  
          and accurate advertising, which is critical to ensuring that  
          businesses play on a level playing field.  This bill would  
          potentially upend that playing field, placing businesses that  
          have found ways to make 100 percent of a product in America at a  
          competitive disadvantage with a competitor who outsources a  
          certain quantity of their product's components to overseas  
          suppliers.

          Additionally, it should be noted that this bill would not give  
          California businesses any more of a competitive advantage or  
          disadvantage based on product labeling than they currently  
          receive under existing law.  California's labeling laws create a  
          level playing field for all manufacturers who sell goods in this  
          state, and impose no more of a burden on manufacturers who  
          choose to locate in California than on those who choose to  
          locate in another state, country, or continent.  As the Consumer  
          Federation of California, in opposition, states:

               [The law] applies to every product "offered for sale" in  
               our state, regardless of the location where the product was  
               manufactured.  A business manufacturing products in Nevada,  
               Mississippi or another state that does not have a  
               comparable labeling law gains no labeling advantage over a  
               California-based manufacturer, should that out-of-state  
               manufacturer offer its products for sale in California.   
               Similarly, a California manufacturer has no labeling  
               disadvantage if it is manufacturing products that will be  
               offered for sale only outside our state.

           6.Existing law already permits businesses to label their  
            products with a qualified country of origin claims  







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          It is important to note that there is nothing in existing law  
          that would preclude businesses and manufacturers from employing  
          truthful qualified claims for products that contain overseas  
          contents and are not truly "Made in America."  For example,  
          labels that truthfully state "90 percent Made in America,"  
          "Assembled in the U.S.A.," "Assembled in California," "Designed  
          in California," or "Assembled in California with 85 percent  
          U.S.A. content" would all be permissible under existing  
          California law.  California's existing product labeling statutes  
          only prohibit the use of the pure "Made in America" label when  
          the product at issue is not truly made in the United States.
                                                           
          Qualified country of origin claims accurately inform consumers  
          that, although a product was mostly made in one country, parts  
          of the product were made in another.  A manufacturer that labels  
          their product with a qualified claim is able to gain the  
          advantage of advertising the degree to which their product was  
          truly "Made in America" without deceiving consumers.  Further, a  
          qualified country of origin claim would arguably satisfy  
          existing California and federal law, allowing manufacturers who  
          use them to uniformly label products offered for sale in all 50  
          states.


           Support  :  California Association of Independent Business;  
          California Chamber of Commerce; California Manufacturers and  
          Technology Association; California Retailers Association;  
          Chamber of Commerce of the Santa Barbara Region; National  
                                             Federation of Independent Businesses; Oxnard Chamber of  
          Commerce; San Francisco Chamber of Commerce; Silicon Valley  
          Leadership Group; Small Business California

           Opposition  :  Consumer Federation of California; Del Mar Law  
          Group, LLP

                                        HISTORY
           
           Source  :  Author

           Related Pending Legislation  :  AB 312 (Jones, 2015) is  
          substantially similar to SB 663 (Hill, 2015).  This bill is  
          pending on the Assembly Floor.

           Prior Legislation  :







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          AB 2624 (Medina, 2014) would have made it unlawful to sell any  
          product that contains the words "Made in North America," "North  
          American Made," or similar words on the product or its container  
          unless all or virtually all of the product was made in the  
          United States, Canada, or Mexico.  This bill would have also  
          added misrepresenting a product as made in North America to the  
          list of unfair methods of competition and unfair or deceptive  
          acts or practices actionable under the Consumers Legal Remedies  
          Act.  This bill died on the Senate Inactive File.

          SB 661 (Hill, 2014) would have provided that merchandise made,  
          manufactured, or produced in the United States that has an  
          article, unit, or part from outside of the United States may be  
          labeled and sold in California as "Made in U.S.A." or "Made in  
          America" if the following requirements are met:  (1) the  
          manufacturer of the merchandise certifies that it can neither  
          produce the article, unit, or part within the United States nor  
          obtain the article, unit, or part of the merchandise from a  
          domestic source; (2) the manufacturer's determination that the  
          article, unit, or part cannot be produced or obtained within the  
          United States from a domestic source is not based on the cost of  
          the article, unit, or part; and (3) the article, unit, or part  
          of the merchandise obtained from outside the United States  
          constitutes only a negligible part of the final manufactured  
          product.  This bill failed passage out of the Senate Judiciary  
          Committee on a 2-5 vote.

          AB 890 (Jones, 2013) would have provided that a product sold in  
          California could carry the label "Made in U.S.A." if it was  
          substantially made, manufactured, or produced in the United  
          States as measured by the following criteria: at least 90  
          percent of the components, parts, articles, or units of the  
          merchandise were manufactured in the United States; United  
          States manufacturing costs constitute at least 90 percent of the  
          total manufacturing costs for the merchandise; and the  
          merchandise was last substantially transformed or assembled in  
          the United States.  This bill failed passage out of the Senate  
          Judiciary Committee on a 2-5 vote.

          AB 858 (Jones, 2012) was substantially similar to SB 663 (Hill,  
          2015).  This bill failed passage out of the Senate Judiciary  
          Committee on a 2-3 vote.

          ABX6 8 (Beall, 2010) which was identical to AB 858, was  







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          introduced in the Sixth Extraordinary Session but was never  
          referred to a policy committee.

          SB 1004 (Holmdahl, Ch. 676, Stats. 1961) codified California's  
          "Made in the U.S.A." law, making it unlawful for any person,  
          firm, corporation, or association to sell or offer for sale any  
          merchandise that advertises itself as being made or manufactured  
          in the United States when any article, unit, or part of the  
          merchandise has been entirely or substantially made,  
          manufactured, or produced outside of the United States.

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