Substantiating "Made in USA" Claims for Dietary Supplements

August 15, 2013
John E. Villafranco

Like other product benefit claims, the Federal Trade Commission (FTC) has jurisdiction to act against deceptive acts and practices over any U.S. origin claim (e.g., “Made in USA”) that is expressly or impliedly conveyed in product labeling or advertising. U.S. origin claims can be conveyed not only by statements regarding the domestic origin of products and product components, but through the use of U.S. symbols, geographic references, or other symbols or statements that suggest a connection between the product and domestic origin (e.g., U.S. flags, outlines of U.S. maps, patriotic symbols, etc.). A U.S. origin claim, like any other objective advertising claim, must be truthful and substantiated.

In order to make an unqualified U.S. origin claim, the FTC has long held that an advertiser must “possess and rely upon a reasonable basis that the product is in fact all or virtually all made in the United States.”1 The FTC has issued guidance regarding how it will apply this standard, but the guidance is heavily focused on electronics, tools, sports equipment, household appliances, and other products with manufacturing processes that are very different from the manufacturing processes for dietary supplements;2 therefore, it may be more difficult for dietary supplement companies to determine whether a U.S. origin claim will be considered deceptive.

FTC’s Standard for “Made in USA” Claims

The “all or virtually all” standard for unqualified U.S. origin claims has three essential requirements: (1) the last substantial transformation must have taken place in the United States; (2) the final assembly or processing, except for de minimis finishing, must have taken place in the United States; and (3) the amount of foreign content must be negligible or non-existent.

If a product is not “all or virtually all made in the United States,” advertisers can still make claims regarding U.S. origin for certain components, processes, or both, provided the claim is “adequately qualified to avoid consumer deception about the presence or amount of [U.S. or] foreign content.”3 These qualified claims may be general, indicating simply the existence of unspecified foreign content (e.g., “Made in USA of U.S. and Imported Ingredients”), or more specific to limit the claim to specific components or processes (e.g., “60% U.S. content,” “Made in USA from Imported Leather,” “Made in France from U.S. Ingredients,” “Packaged in USA”).

Substantial Transformation

“Substantial transformation” is a term used by the U.S. Customs and Border Protection (CBP) to determine the country of origin. Under the Tariff Act of 1930, imported goods, including dietary supplements, must be marked with a foreign country of origin (e.g., “Made in China”).4 When an imported product contains components or ingredients from more than one country, the country of origin is determined to be the country where the last “substantial transformation” took place. Substantial transformation is defined as a “manufacturing process that results in a new and different product with a new name, character, and use that is different from that which existed before the change.”5 Determining where a product was last substantially transformed is very fact-specific and will be made on a case-by-case basis by the CBP. The FTC has advised that advertisers should check with the CBP to determine if their product should be marked with a foreign country of origin.

Where U.S. processing does not substantially transform a product, an advertiser may be able to make a qualified U.S. origin claim; but in order to use a statement that implies general U.S. origin, even if the statement is qualified to explain that some components are imported (e.g., “Made in USA of U.S. and Imported Ingredients”; “Assembled in USA of Imported and Domestic Ingredients”), the FTC has stated that the product must have undergone its last substantial transformation and its final assembly or processing in the United States. The FTC considers terms such as “manufactured” and “produced” to also convey general U.S. origin. Dietary supplement companies whose products were not last substantially transformed in the United States could explain the specific processes that took place in the United States (e.g., “Bottled in the U.S. from Imported Ingredients”; “Encapsulated in the U.S. from Imported Ingredients”) or the specific amount of U.S. content (e.g., “60% U.S. content”).

On the other hand, if a product is last substantially transformed in the United States, the FTC has indicated that a general U.S. origin claim that discloses the presence of imported content (and does not overstate the amount of U.S. content), such as “Made in USA of Imported Ingredients,” would be appropriate-even for products with a minimal amount of U.S. components.6 Thus, for dietary supplement products that undergo substantial processing in the United States, an advertiser likely can still make a fairly broad claim touting the amount of U.S. processing because of the significant manufacturing and assembly work that took place in the United States.

Final Assembly or Processing

In addition to the requirement that a product must be last substantially transformed in the United States, the FTC has indicated that an unqualified “Made in USA” claim for a product is deceptive if that product undergoes its last assembly or processing (beyond de minimis finishing processes) outside of the United States.7 For example, the FTC has stated that for a disposable razor, where the blade and other parts are made in the United States, but the final screwdriver assembly takes place abroad, an unqualified “Made in USA” claim would not be appropriate.8 Based on this example, it is likely that the FTC could find an unqualified “Made in USA” claim deceptive where final bottling of a dietary supplement, for example, took place abroad-even where other processing and ingredients are of domestic origin. A qualified claim still could be made regarding the extent of the U.S. content, such as “Finished in [name of country] with U.S. Ingredients.”

Domestic Content

The third prong of the FTC’s “all or virtually all” standard to make an unqualified U.S. origin claim requires that the amount of foreign content must be negligible or non-existent. Important factors in determining the amount of foreign content include the following: (1) the proportion of the product’s total manufacturing costs that are attributed to U.S. parts/ingredients or processing; and (2) the remoteness of foreign content from the finished product.

To calculate manufacturing costs, advertisers should use generally accepted accounting principles and can include the total cost of all manufacturing materials, direct manufacturing labor, and manufacturing overhead in the calculation.9 Advertisers should look far enough back in the manufacturing process to be reasonably sure that any significant foreign content is included in the assessment of costs.10 For dietary supplements, this will generally require advertisers to know not only the origin of the ingredients they acquire to make finished dietary supplements, but also the origin of the sub-components of those ingredients.

The FTC has recognized that where a raw material is not indigenous to the United States or available in commercially significant quantities, an unqualified “Made in USA” claim could still be made because “consumers are likely to understand that a ‘Made in USA’ claim on a product that incorporates such materials means that all or virtually all of the product, except for those materials not available here, originated in the United States.”11 For example, the FTC has indicated that this exception may apply to the vanilla beans in vanilla ice cream; thus, a vanilla ice cream product could be marketed with an unqualified “Made in the USA” claim if all or virtually all other components are of U.S. origin.12 But, the FTC also has cautioned that this consideration is not applicable where the imported raw material “constitutes the whole or essence of the finished product (e.g., the rubber in a rubber ball…).”13

This exception to the FTC’s “all or virtually all” standard appears to only apply to the amount of domestic content, not the substantial transformation test; thus, if a product is not last substantially transformed in the United States, the FTC would still consider an unqualified “Made in USA” claim to be inappropriate. Given these limitations, this guidance is most helpful for advertisers whose dietary supplement products are last substantially transformed in the United States and contain multiple ingredients-all of which are of domestic origin except for one or two ingredients that cannot be produced domestically. While not stated in FTC’s guidance, it would be advisable to possess evidence that an ingredient is not available domestically, or only available in limited quantities, to help defend a claim if challenged.

There is no bright-line rule regarding the amount of foreign content that the FTC will consider too high to support an unqualified “Made in USA” claim, but the FTC has indicated that this type of claim for a product with at least 15 to 20% foreign content would not be appropriate.14 As discussed above, if a product does not meet the domestic content standard for an unqualified U.S. origin claim, an advertiser still may be able to make a qualified U.S. origin claim.

Other Considerations

When making a U.S. origin claim, advertisers should not forget the effect of state law on their marketing practices, as U.S. origin claims could trigger consumer class actions under state consumer protection statutes or state enforcement. While most states follow a standard that is similar to the FTC, California has created a standard that is even more stringent than the FTC’s “all or virtually all” standard. California prohibits unqualified “Made in USA” claims “when the merchandise or any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.”15 Companies should account for compliance, not only with FTC standards, but with standards that are more stringent under state law. 

 

References
1. Federal Trade Commission, “Enforcement Policy Statement on U.S. Origin Claims,” December 1997, at 63756, 63768, http://www.ftc.gov/os/1997/12/epsmadeusa.htm. In addition to the 50 states and the District of Columbia, the product may be made in U.S. territories or possessions.
2. FTC Bureau of Consumer Protection, “Complying with the Made in USA Standard,” December 1998, http://business.ftc.gov/documents/bus03-complying-made-usa-standard.   
3. FTC, “Enforcement Policy,” at 63769.
4. 19 U.S.C. 1304, “Marking of Imported Articles and Containers,” Washington, DC: Government Printing Office, 2006.
5. FTC Bureau of Consumer Protection, “Complying with the Made in USA Standard,” at 15.
6. FTC Bureau of Consumer Protection, “Complying with the Made in USA Standard,” at 10. (Explains that a treadmill that is made almost entirely of foreign parts, but where those parts underwent significant processing to be last substantially transformed in the United States, could be marketed as “Made in U.S. from Imported Parts”).
7. FTC, “Enforcement Policy,” at 63678.
8. FTC, “Enforcement Policy,” at 63770, n. 120.
9. FTC Bureau of Consumer Protection, “Complying with the Made in USA Standard,” at 7.
10. FTC, “Enforcement Policy,” at 63679.  
11. FTC, “Enforcement Policy,” at 63679, n. 117.
12. FTC, “Enforcement Policy,” at 63679, n. 117.
13. FTC, “Enforcement Policy,” at 63679, n. 117.
14. FTC Bureau of Consumer Protection, “Complying with the Made in USA Standard,” at 1
15. California Business & Professions Code 17533.7. See e.g., Kwikset Corp. v. Superior Court, 52 Cal. 4th 310, 317-318 (2011), finding that various lock sets were deceptively advertised as “Made in USA” because the products “either contained screws or pins made in Taiwan or involved latch subassembly performed in Mexico.”

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