Consumer Products Companies Should Take Care to Comply with California “Made in USA” Labeling Law

New cases are being brought by plaintiff attorneys under the California “Made in USA” labeling law, which prohibits use of that claim or similar language if the "merchandise or any article, unit, or part thereof" was made outside the United States. Business & Professions Code Section 17533.7. Consumer products companies should take note of these cases, as a recent Wall Street Journal article and numerous association member notifications are warning of this new trend.

Most recently, on October 29, 2014, Lands’ End was sued for indicating that certain of its men’s ties were “Made in USA” despite having been made in China. The Lands’ End case follows other pending cases under this section of the law. Previous cases have focused on sometimes seemingly insignificant, foreign-sourced component parts, including foreign thread, buttons, fabric and zippers in jeans and jean apparel; an internal rubber ring and light bulbs in a flashlight; a net on a basketball hoop; parts of a Swiss army knife; and balloons accompanying helium tanks.

Most of these cases are being brought as purported class actions, on behalf of all Californians who purchased the products. See, Andrew Hecht-Nielsen v. Lifetime Products, Inc. and The Sports Authority (Case No. 37-2011-00089380-CU-BT-CTL) and Saman Afrouznia v. Lifetime Products, Inc. and the Sports Authority (Case No. 37-2012-00087934-CU-BT-CTL) (both cases filed in San Diego County Superior Court and covering a five-year span), which settled for restitution to each member of the class in the form of gift cards or products ranging in value from $12.50 to $30.00 depending on the value of the class member’s original purchase, attorneys’ fees in the amount of $485,000, a charitable donation of $325,000, and awards of $4,500 and $3,500 to the two plaintiff class representatives. The Wall Street Journal noted that Lifetime paid its own attorneys an additional $535,000 to defend against the lawsuit.

California law differs from the federal country of origin labeling law. Federal law permits a “Made in USA” claim if the product is substantially transformed in the United States. There is a deep body of law around “substantial transformation” under the federal labeling statutes, which focuses on manufacture versus assembly and the proportion of work completed in the United States relative to foreign work completed. There are several legal tests that may be used to determine when a substantial transformation has occurred. In general terms, a substantial transformation may occur when the article at issue is changed such that it has a new name, character or use, with a name change given the least weight.

Importantly, a San Diego Federal Judge in Paz v. Goldschmied, Case No. 3: 2014 cv 01372 (S.D. Cal 2014), just denied a motion to dismiss on federal preemption grounds. The Court rejected the defendant's argument that the California law conflicts with the federal law and, therefore, cannot be enforced. A second Southern District case is also considering the preemption argument. Clark v. Citizens of Humanity, LLC, Case No. 3:2014 cv 01404 (S.D. Cal 2014). With the California law intact, manufacturers need to comply.

Potential damages include restitution, plus attorneys’ fees and costs, in addition to injunctive relief. “Made in USA” claims under § 17533.7 have typically been brought as purported class action suits on behalf of purchasing consumers, but they are not necessarily class actions. The class action vehicle is attractive because the damages to individuals are usually so small. As § 17533.7 is part of the California statutory scheme of unfair competition laws, a competitor may also bring suit under § 17533.7. The California Attorney General also has the right to enforce the requirements of § 17533.7 but, as of yet, has not done so.

If your product labels are consistent with federal “Made in the USA” laws as interpreted by the Federal Trade Commission but nonetheless include any foreign sourced components, you likely do not comply with California law if your product includes a “Made in USA” label.

For example, in Colgan v. Leatherman Tool Group, Inc., 135 Cal.App.4th 663, 687-88 (2006), the Court upheld summary judgment in favor of the plaintiff as defendant had violated § 17533.7 by labeling tools “Made in the USA” where component parts had been made abroad. In Colgan, the products at issue were multi-purpose, multi-component tools (“Swiss army knives”) that included components such as pliers, knives and screwdrivers, among other things. The defendant knife-manufacturer argued that although a few of the knife’s components were made outside the United States, the remainder of the parts was domestically manufactured and the tools were assembled in the United States, so that a “Made in USA” label was proper. The Court rejected the defendant’s position that a product may be labeled as “Made in USA” even if a substantial number or a majority of its parts are made in the United States, but some of its component parts are made outside the United States. (The court, however, noted that its analysis was not directed at a situation where a single screw or de minimis component of a larger product might have been made outside of the United States while the remainder of the product was made in the United States) In summary, the Colgan court’s focus was on where each component part was made as opposed to where the tool, as a whole, was finally assembled or manufactured (noting that this analysis differs from the FTC’s Enforcement Policy, which focuses on where the product was finally manufactured or assembled). Under Colgan, where component parts are made outside the United States, the product as a whole cannot be labeled as “Made in USA.” The Kwikset court similarly found that “when merchandise consists of two or more physical elements or pieces, § 17533.7, also applies to any distinct component of merchandise that is necessary for its proper use or operation.” Benson v. Kwikset Corp., 152 Cal.App.4th 1254, 1273 (2007).

Legislative efforts to modify the California law have failed, as recently as this year.

In conclusion, given the enhanced, recent private enforcement efforts, consumer product companies should review their products with “Made in USA” labeling and determine whether any part or component of their product is foreign sourced, thereby requiring any labeling changes.