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.) SB 633 (Hill) Page 2 of ? 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 SB 633 (Hill) Page 3 of ? 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. SB 633 (Hill) Page 4 of ? 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. SB 633 (Hill) Page 5 of ? 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 SB 633 (Hill) Page 6 of ? 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 SB 633 (Hill) Page 7 of ? 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. SB 633 (Hill) Page 8 of ? (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 SB 633 (Hill) Page 9 of ? "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 SB 633 (Hill) Page 10 of ? 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 : SB 633 (Hill) Page 11 of ? 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 SB 633 (Hill) Page 12 of ? 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. **************