FTC: Made In The USA Comments Concerning Counsel for the American Hand Tool Coalition--P894219 BEFORE THE FEDERAL TRADE COMMISSION "Made in USA" Policy
Comment COMMENTS OF THE AMERICAN HAND TOOL COALITION August 11, 1997 Jeanne S. Archibald Counsel for the American Hand Tool Coalition The American Hand Tool Coalition (the "Coalition") hereby responds to the Federal Trade Commission's (the "Commission") request for comments on its "Proposed Guides for the use of U.S. Origin Claims" (the "Proposed Guides"). (1)/ The Coalition consists of ten U.S. hand tool manufacturers with facilities in fourteen states. Coalition members manufacture the vast majority of their hand tools using all or virtually all U.S. materials, parts, and labor. The companies have made substantial investments in U.S. sourcing and production to be able to meet consumers' expectations and long-standing Commission policy that "Made in USA" products contain at most de minimis foreign content. The Coalition joins the overwhelming majority of individual consumers who have submitted comments to the Commission and 145 members of Congress in opposing the Commission's proposal to weaken the standard for "Made in USA" claims from "all or virtually all" U.S. content to "substantially all" U.S. content. I. OVERVIEW The Proposed Guides represent an unprecedented departure from long-standing Commission policy, which holds that a material practice that misleads even a significant minority of reasonable consumers is deceptive. (2)/ The Commission's own findings indicate that at least one third of consumers would be misled under the proposed "substantially all" standard. Moreover, the Commission's findings, which rely on a flawed analysis of a single consumer perception study, understate the likely level of consumer deception. A balanced examination of all the consumer perception evidence before the Commission indicates that the proposed "substantially all" standard would result in deception of a majority of American consumers. The likelihood of widespread deception under the "substantially all" standard is compounded by the two proposed safe harbors to establish a reasonable basis for making a U.S. origin claim. Neither safe harbor would ensure that a product contains "substantially all" U.S. content, much less comports with consumers' expectations that a "Made in USA" product has all or virtually all U.S. content. Contrary to the Commission's own conclusions regarding consumers' expectations, the safe harbors would allow a "Made in USA" claim for products with far less than 75% U.S. content, products made from 100% foreign parts, and products with minimal U.S. processing. For these reasons, the Coalition strongly urges the Commission to reconsider its decision to weaken the standard for making an unqualified U.S. origin claim and to withdraw the Proposed Guides. The Coalition commends the Commission for its efforts to develop workable guidelines for qualified U.S. origin claims and urges the Commission to issue those guidelines together with a reaffirmation of the all or virtually all standard for unqualified claims. II. THE PROPOSED "SUBSTANTIALLY ALL" STANDARD The Proposed Guides provide that "a marketer making an unqualified U.S. origin claim should, at the time it makes the claim, possess and rely upon a reasonable basis that substantiates that the product is substantially all made in the United States." (3)/ As set forth below, the Commission's own findings and all of the consumer perception evidence before it demonstrate that this proposed standard would result in widespread consumer deception. A. The Substantially All Standard Violates The Commission's Deception Policy Under the Commission's Deception Policy Statement, a representation, omission or practice is deceptive if it is "likely to mislead reasonable consumers under the circumstances." (4)/ The Deception Policy Statement further provides that: An interpretation may be reasonable even though it is not shared by a majority of consumers in the relevant class, or by particularly sophisticated consumers. A material practice that misleads a significant minority of reasonable consumers is deceptive. (5)/ The Commission has reaffirmed the Deception Policy Statement, including the significant minority standard, in numerous cases alleging deceptive advertising practices. (6)/ The Commission has not set a numerical threshold for a "significant minority," but past cases have found a violation of the FTC Act based on a practice that misleads less than 20% of consumers. (7)/ Although the Commission made passing reference to the Deception Policy Statement in the Proposed Guides, it did not mention the significant minority standard. (8)/ The Commission did not even consider what percentage of consumers would be deceived as a result of weakening the "Made in USA" standard. Instead, it simply shrugged off the fact that the Proposed Guides are likely to mislead "some" American consumers: Some consumers may hold views or understand claims differently from what is set forth in the "substantially all" standard. The Commission, however, believes that, as a general matter, it would not be in the public interest to bring a law enforcement action under section 5 of the FTC Act if a marketer satisfied either one of the safe harbors for meeting this standard. (9)/ Regardless of the Commission's failure to consider the issue, its own findings suggest that weakening the "Made in USA" standard would result in deception of a substantial percentage of consumers. (10)/ The sole evidence that the Commission cited in support of the conclusion that today's consumers expect "Made in USA" products to contain more than de minimis foreign content is the 1995 Attitude Survey: [T]here have been vast changes in the international economy since the Commission first required that goods labeled "Made in USA" be wholly domestic. Increasing globalization of production suggests that a requirement that even minor parts be all made in the United States is outdated and inflexible. Consumers appear to understand this as well. In the Commission's 1995 Attitude Survey 67% were willing to agree with a "Made in USA" label on a product where foreign inputs accounted for 30% of the total cost if the rest of the product was U.S.-made and final assembly took place in the United States. (11)/ Thus, the Commission decided to weaken the "Made in USA" standard based on its finding that 67% of consumers would be "willing to agree with" a lower standard. Even if the Attitude Survey were a reliable test of consumers' interpretation of "Made in USA" (which it is not), and even if the Commission's interpretation of the Attitude Survey were correct (which it is not ), the determination to weaken the "Made in USA" standard is contrary to the Deception Policy Statement. By the Commission's own calculation, 33% -- one out of every three -- American consumers would not accept a "Made in USA" label for a product with only 70% U.S. content. Moreover, the Commission's findings indicate that at least 25% of consumers would not agree with a U.S. origin claim for a product with 90% U.S. content. (12)/ Accordingly, the Commission's analysis of the consumer perception evidence demonstrates that weakening the "Made in USA" standard would result in deception of at least a "significant minority" of consumers. For these reasons, the Proposed Guides constitute an unprecedented and ill-considered departure from the Commission's long-standing interpretation of the FTC Act. B. The Consumer Perception Data Does Not Support the Commission's Conclusion that Consumers No Longer Expect "Made in USA" Products to Contain All or Virtually All U.S. Content Many commenters argued that the "Made in USA" standard should be weakened to reflect the increasingly global nature of production. But, increasing globalization of production is relevant to the standard for unqualified U.S. origin claims only "insofar as it has affected consumer understanding of 'Made in USA' claims." (13)/ As the Commission conceded, there is no reason that consumers would expect the definition of "Made in USA" to change even if fewer products meet the definition. "That consumers may recognize that many products are no longer wholly made in the United States, however, does not necessarily indicate that consumers expect that products labeled 'Made in USA' have significantly less U.S. content." (14)/ None of the consumer perception surveys tested whether consumers take globalization of the economy into account when presented with a "Made in USA" label. Nevertheless, as noted above, the Commission relied on the 1995 Attitude Survey to find that consumers' understanding of "Made in USA" has changed. The Commission's reliance on the Attitude Survey to the exclusion of all the other consumer perception evidence was misplaced in light of the survey's methodology. Moreover, the Commission's conclusions were distorted by ignoring meaningful distinctions in the Attitude Survey's responses. The Attitude Survey did not directly ask for respondents' interpretation of "Made in USA" claims. Instead, it presented consumers with a series of scenarios regarding the percentage of the cost of a product attributable to the United States and, in some cases, the location of its assembly. The U.S. content scenarios varied from 90% to 10%. Respondents were asked to rate their agreement or disagreement with the use of a "Made in USA" label based on each scenario. The Commission itself observed that the results of the consumer perception studies depended on how the study attempted to probe consumers' understanding of "Made in USA." "In looking at how much of a product that is labeled 'Made in USA' consumers believe is made in the United States, the answer appears to depend in part on how the question is asked." (15)/ The Attitude Survey's methodology -- how it asked the question -- did not test consumers' unaided interpretation of "Made in USA." By providing detailed information regarding the origin of products that consumers would not receive under the Proposed Guides, it obscured the very question that the Commission sought to answer: how do consumers interpret the unqualified claim "Made in USA." In addition, the Attitude Survey's format biased the respondents' reaction to the scenarios in at least two ways. First, the survey suggested that the appropriate level of U.S. content for a "Made in USA" product is below the all or virtually all standard by setting the highest U.S. content at 90%. Second, the phrasing of the survey questions in terms of respondents' agreement with factual scenarios did not test how respondents would define "Made in USA." Instead, as described by the Commission, the Attitude Survey tested consumers' "willing[ness] to accept" a U.S. origin claim when presented with detailed information regarding the content of a product. (16)/ Willingness to accept a given set of facts cannot be equated with consumers' personal definition of "Made in USA." For these reasons, it was not appropriate for the Commission to rely solely on the Attitude Survey to find a change in consumer perception of "Made in USA" claims. The Commission further skewed its analysis by disregarding the full range of responses in the Attitude Survey. The Attitude Survey asked respondents to rate their agreement with each factual scenario as "strongly agree, somewhat agree, somewhat disagree, or strongly disagree." (17)/ Given the suggestive format of the Attitude Survey and the phrasing of its questions, the distinction between "strongly agree" and "somewhat agree" is meaningful. The respondents who stated "somewhat agree" clearly did not consider the proposed scenario entirely consistent with the "Made in USA" label. Nevertheless, in calculating the percentage of respondents who were "willing to accept" a given "Made in USA" claim, the Commission combined the "strongly" and "somewhat" agree categories. (18)/ As a result, it vastly overstated the level of acceptance of the diluted "Made in USA" claims. The problems with the Commission's analysis of the Attitude Survey become clear when the "strongly agree" and "somewhat agree" responses are separated. Of the 67% of respondents that the Commission found were "willing to accept" a U.S. origin claim for a product with 70% U.S. content and U.S. assembly, only 26% expressed strong agreement. The remaining 41% responded "somewhat agree." (19)/ Thus, the bulk of the responses counted by the Commission did not reflect acceptance of the "Made in USA" claim. The Attitude Survey therefore does not support the Commission's finding that consumers' expectations regarding the meaning of "Made in USA" have changed in recent years. C. The Consumer Perception Data Demonstrates that Weakening the Made in USA Standard Would Deceive a Majority of American Consumers An analysis of all the consumer perception evidence before the Commission demonstrates that a majority of consumers expect a "Made in USA" product to have "all or virtually all" U.S. content and therefore would be deceived under the proposed "substantially all" standard. That fact is supported by each survey that asked the direct question "what percentage of a "Made in USA" product do you believe is U.S. origin?": Bourget Survey: In response to the question what percentage of a hand tool labeled "Made in USA" is made in the United States, 53% of the participants stated 100%. (20)/ No other interpretation received a response level higher than 9%. (21)/ FTC Copy Test: When asked what a "Made in USA" label suggests or implies about how much of the total cost of making a product was from the United States, 57.8% of the respondents answered 100%. (22)/ 1991 FTC Survey: When asked about the meaning of a "Made in USA" label, 77% of the participants stated that all or almost all of the product was made in the United States. (23)/ When asked specifically about the percentage of parts and labor that were provided in the United States for a "Made in USA" product, 54% stated 100%. (24)/ When properly analyzed, the Attitude Survey results correspond precisely with the results of these surveys. Even in response to the 90% U.S. content and U.S. assembly scenario, fewer than half (42%) of the Attitude Survey's respondents expressed strong agreement with the U.S. origin claim. A majority of the respondents (58%) expressed only partial agreement or outright disagreement with the use of a "Made in USA" label based on those facts. (25)/ That consumers expect "Made in USA" products to contain all or virtually all U.S. content is further confirmed by the comments of the overwhelming majority of the individual consumers who expressed a view. (26)/ American consumers did not request a change in the standard for U.S. origin claims. On the contrary, they expressed a strong preference for maintaining the current standard: 147 out of the 182 individual consumers who submitted comments to the Commission wrote in support of the all or virtually all standard. Thus, the record before the Commission demonstrates that a majority of consumers understand "Made in USA" to mean that a product is all or virtually all U.S. origin and therefore support the current rule. In light of that evidence, the proposed "substantially all" standard is comparable to allowing a marketer to use the claim "all natural" for a product with 25% artificial flavoring. The weakened standard for "Made in USA" claims would allow "Made in USA" claims that are simply untrue and that would deceive a majority of consumers. III. THE PROPOSED SAFE HARBORS The Proposed Guides state that "it will not be considered a deceptive practice for a marketer to make an unqualified U.S. origin claim" for a product if (1) U.S. manufacturing costs represent 75% of the total manufacturing costs for the product and the product was last substantially transformed in the United States; or (2) the product was last substantially transformed in the United States and all significant inputs were last substantially transformed in the United States. (27)/ The Commission argues that each proposed safe harbor ensures that a product complies with the proposed substantially all standard and with consumer expectations regarding "Made in USA" claims. (28)/ As set forth below, however, the proposed safe harbors would not ensure that a product complies with the Commission's own findings that: "[C]onsumers continue to understand 'Made in USA' claims as representing a significant level of U.S.-derived content." (29)/ "[M]any consumers do consider parts to be an important element of the 'Made in USA' definition." (30)/ The site of assembly -- i.e., the location of processing -- "makes a significant difference to consumers in deciding whether a product is 'Made in USA.'" (31)/ A. The 75% U.S. Content Safe Harbor Would Not Ensure that a Product Contains Significant U.S. Content Despite its name, the 75% U.S. content safe harbor would not ensure that a "Made in USA" product will contain 75% U.S. content. (32)/ A close examination of the rules for calculating U.S. content reveals that a product with significantly less than 75% U.S. content could satisfy the safe harbor. Accordingly, the proposed safe harbor would not ensure that a "Made in USA" product is "substantially all" U.S. origin. (33)/ The Proposed Guides define total cost(s) or total manufacturing cost(s) as "the total cost of all manufacturing materials, direct manufacturing labor, and manufacturing overhead, whether U.S. or foreign." (34)/ U.S. cost(s) or U.S. manufacturing cost(s) "means those costs attributable to U.S. manufacturing materials, U.S. direct manufacturing labor and U.S. manufacturing overhead." Although these definitions appear to require a manufacturer to identify the origin of all manufacturing costs, a caveat to the 75% safe harbor expressly negates that obligation. The safe harbor states: "[i]n computing U.S. or total manufacturing costs, the marketer should look far enough back in the manufacturing process that a reasonable marketer would expect that it had accounted for any significant foreign content." (35)/ Thus, a marketer's obligation to trace the origin of parts and materials extends only to parts and materials that are likely to contain "significant" foreign costs. The term "significant" is not defined numerically or qualitatively and therefore is left to an individual marketer's determination. The safe harbor further limits a marketer's obligation to identify foreign costs by establishing a "one step back" rule for many products: For simple products, or for products that undergo most of their processing by the final manufacturer, the marketer may, in many cases, have to look only "one step back," i.e., the marketer may look only at the immediate inputs into the finished product, and for those inputs that undergo their last significant manufacturing step in the United States, the marketer may count 100% of their cost as U.S. costs. (36)/ So long as a given input underwent its "last significant manufacturing step" (which is not defined and therefore left to the marketer's determination) in the United States, a marketer can treat the input's entire cost as U.S., regardless of its actual content. (37)/ The examples illustrating the 75% safe harbor confirm that a manufacturer may treat an input as 100% U.S., even if the manufacturer knows that some or all of the input is imported. In Example 6, a manufacturer purchases plastic inserts that account for 2% of the overall cost of making a wallet. The manufacturer knows that the inserts are likely to be made from foreign plastic. Nevertheless, the Proposed Guides state that the manufacturer can count the entire cost of the insert as U.S., because the cost of the foreign plastic is likely to be insignificant in relation to the overall cost of the wallet. (38)/ The examples further indicate that the one step back rule is not limited to low-cost inputs. The only example that provides numerical guidance suggests that an input's foreign content must account for a high percentage of a product's total manufacturing cost before a marketer is obligated to account for its foreign content. (39)/ In example 1, a lawn mower manufacturer purchases an engine that accounts for 50% of the total manufacturing costs of the finished product. The engine is assembled in the United States, and contains 40% foreign content. (40)/ As a result, the foreign content of the completed lawn mower is 20% (40% x 50%). In these circumstances, the Proposed Guides indicate that the manufacturer must account for the engine's foreign content in calculating the U.S. content of the finished lawn mower. In the absence of a definition of "significant foreign content," this example suggests that a marketer may treat an input as entirely U.S. origin unless its foreign content is likely to be 20% or more of the finished product's total manufacturing cost. Thus, a product could have as little as 56% U.S. content and still fall within the 75% U.S. content safe harbor. (41)/ The Proposed Guides set no limit on the number of components to which a manufacturer may apply the one step back rule. Thus, a manufacturer that purchases numerous minor components from U.S. suppliers may assume that each of the components is 100% U.S. origin. The marketer has no obligation to determine the cumulative foreign content of all the components. Thus, the actual U.S. content of the completed product may be far less than 75%. For these reasons, the 75% safe harbor runs contrary to the Commission's own finding that consumers expect "Made in USA" products to incorporate a "high degree" of U.S. content. (42)/ B. The 75% U.S. Content Safe Harbor Would Not Ensure that a "Made in USA" Product Contains Primarily U.S. Parts or Labor As noted above, the Commission found that consumers consider both parts and labor to be important in defining "Made in USA." (43)/ The consumer perception data confirms that consumers expect at least a majority of the parts and labor that go into a "Made in USA" product to be U.S. origin. (44)/ In fact, the Commission expressly rejected a 50% U.S. content standard because it would not ensure that the majority of a product's parts and labor are U.S. origin: [I]f one includes the costs of final assembly in the U.S. cost calculation, a product for which U.S. costs constitute 50% of total production costs may well have less than half its inputs, by value, be of U.S. origin. Furthermore, because of the potentially lower wages paid to workers in other countries, a 50% cost standard does not ensure that 50% of the work (in terms, for example, of labor hours) was performed in the United States. (45)/ But that observation applies equally to the 75% U.S. content safe harbor. The safe harbor does not specify that a product must contain at least 50% U.S. inputs. On the contrary, it is possible to meet the safe harbor using 100% foreign parts. For example, based on standard costs within the hand tool industry, a 9/16" full-polish combination wrench made from a semi-finished forging from China could meet the 75% U.S. content safe harbor. The imported forging would cost $0.28, which would include the cost of the raw materials, forging, sand blasting, trimming, edge polishing and semi-finish polishing. Finishing the combination wrench in the United States would require punching and broaching the ends, stamping the handle with the brand name and size, and then heat treating, polishing and plating the wrench. (46)/ The cost of these U.S. operations would range from $0.82 to $1.00. (47)/ Even at the lowest U.S. cost, the finished wrench -- incorporating 100% foreign materials and substantial foreign labor -- would satisfy the 75% U.S. content safe harbor. (48)/ Similarly, the safe harbor does not require that at least 50% of the labor involved in manufacturing the product must occur in this country. So long as the final U.S. processing is sufficient to meet the substantial transformation test, a product can qualify as "Made in USA." As the Commission itself observed, substantial transformation "may . . . reflect a relatively unsophisticated final assembly process putting together parts made elsewhere or it may be met by a process that in fact changes the nature of the product, but requires little U.S. work." (49)/ Accordingly, the 75% U.S. content safe harbor is no more effective than a 50% standard at ensuring that a "Made in USA" product complies with consumers' expectations regarding the origin of parts and labor. (50)/ C. The 75% U.S. Content Safe Harbor Would Lead to Conflicting Results and Consumer Confusion In addition to its failure to ensure a high level of U.S. content, the 75% U.S. content safe harbor would produce inconsistent results and would deny consumers' the ability to identify truly "Made in USA" products. First, the safe harbor would produce conflicting results depending upon the country of origin of foreign parts and labor. Assume, for example, that one manufacturer sources parts from China and a second manufacturer sources the same parts from Germany. Because China is a much lower cost market than Germany, the percentage U.S. content will differ even if the manufacturers perform the same U.S. processing at the same cost. The company that sources from China would be able to claim "Made in USA" while the company that sources from Germany would not. In effect, therefore, the ability to market a product as "Made in USA" under the 75% U.S. content safe harbor depends on the cost of the foreign inputs and processing rather than the value or amount of U.S. inputs and processing. Second, two special averaging rules would allow a marketer to make a "Made in USA" claim regardless of the actual U.S. content of a specific product. Under the provisions relating to "multiple sourcing" and "price fluctuations," a marketer can average costs over a period of time to determine whether it meets the "Made in USA" standard. So long as the average satisfies the 75% U.S. content safe harbor (which as noted can be met with less than 75% U.S. content), all of the products can be marked "Made in USA." As a result, some products that do not even meet the weakened U.S. origin standard, nevertheless could be marked as "Made in USA." Consumers would have no basis to determine which products actually meet the standard and which do not. Third, because the safe harbor allows an unqualified "Made in USA" claim for products with less than all or virtually all U.S. content, consumers who prefer products with all or virtually all U.S. content would not be able to distinguish such products from those that meet the weakened standard. The Commission itself acknowledged that qualified claims such as "100% U.S. Made" or "Wholly Made in USA" are not sufficiently distinct from the unqualified "Made in USA" claim to enable consumers to distinguish products that meet the higher standard. (51)/ D. The Two Levels of Substantial Transformation Safe Harbor Conflicts with the Commission's Findings regarding Consumers' Understanding of "Made in USA" As noted above, the Commission conceded that the substantial transformation test does not ensure that a product contains significant U.S. content or even that the product underwent significant U.S. processing. (52)/ Nevertheless, the Commission contends that the two level substantial transformation safe harbor would ensure that a product meets consumers' expectations regarding the origin and content of "Made in USA" products: The requirement in this safe harbor that there be an additional level of substantial transformation works to remedy these limitations. By requiring that all of a product's significant inputs have undergone substantial transformation in the United States, the safe harbor minimizes the vagaries of the substantial transformation standard and ensures that a product coming within the safe harbor is likely to meet consumer expectations for U.S. content. (53)/ Contrary to the Commission's suggestion, simply doubling the substantial transformation standard does not cure the test's inherent flaws and "vagaries." The Proposed Guides define substantial transformation to include both the traditional case-by-case analysis that Customs applies to most countries and the tariff shift regulations that Customs applies to NAFTA countries. (54)/ These two tests are not consistent for all products. Moreover, because the case-by-case analysis is subjective, the Customs and court rulings alone include numerous conflicting results. (55)/ Therefore, incorporating the concept of "substantial transformation" does not ensure consistent or predictable results. (56)/ On the contrary, the Proposed Guides allow a marketer to pick and choose among the various conflicting rules to reach a favorable result under the safe harbors. A single Customs ruling or court case -- no matter how suspect in light of subsequent decisions -- can establish a basis for substantial transformation under the Proposed Guides. Nor does the two level substantial transformation test ensure that a product complies with the Commission's findings regarding consumers' understanding of "Made in USA." The substantial transformation test examines whether processing of an article changes its "name, character, and use." (57)/ The test does not take into account the value of U.S. processing or inputs and therefore does not ensure any minimum level of U.S. content. (58)/ Requiring two substantial transformations does not change that result. The Proposed Guides make clear that a product can satisfy this safe harbor even if it would not meet the 75% U.S. content safe harbor. In example 3, imported materials are used to make a compact disk in a process that constitutes a substantial transformation. The disk is encoded with music, resulting in a second level of substantial transformation. The Proposed Guides state that the disk can be marketed as "Made in USA," "even if the imported materials used in the manufacture of the compact disk account for more than 25% of the total manufacturing costs." (59)/ In fact, under the Proposed Guides, the compact disk could be labeled "Made in USA" even if the foreign materials account for a majority of the total manufacturing costs. The examples illustrating the two levels of substantial transformation safe harbor also make clear that a product assembled from 100% foreign parts can qualify as "Made in USA." Example 1 describes a tape recorder that is made up of three major subassemblies and a few minor parts. "The assembly of each of the subassemblies as well as the final assembly would be considered substantial transformations under the Tariff Act." (60)/ Although the example states that the subassemblies contain "primarily imported components," the result would be the same if the subassemblies contained all imported parts. Therefore, contrary to the Commission's finding that consumers believe that the "Made in USA" includes a product's parts, a product that is made of 100% foreign parts or materials can qualify as "Made in USA." Within the hand tool industry, the same result is possible for a ratchet made from all imported parts. The significant inputs of a ratchet consist of a handle forging, a toothed ratchet wheel, and a reversible pawl. So long as these parts are imported in semi-finished form and subject to minor machining, they would provide one level of substantial transformation. (61)/ A second level of substantial transformation would occur as a result of assembling the significant inputs with various minor parts that could be imported in finished form. (62)/ The final assembly operation can take as little as thirty seconds, but it nevertheless qualifies as a substantial transformation. The finished ratchet could be labeled "Made in USA" even though all of its parts were imported. Because the substantial transformation test does not examine the relative amount of processing, the two level substantial transformation test does not ensure that most of the labor used to make a product is U.S. origin. As the Commission acknowledged, substantial transformation can include processes that require little work, such as assembly of completed parts or imprinting software onto a computer disk. (63)/ Thus, it is possible for a product to meet the safe harbor as a result of two minor U.S. processing steps that account for less than half of the overall processing or labor that went into the product. IV. THE PROPOSED "ORIGIN USA" LABEL The Proposed Guides create a special "Origin: USA" label for products that (1) do not meet the proposed "substantially all" standard for unqualified "Made in USA" claims, (2) are not required to bear a foreign country of origin under Customs rules, and (3) are exported to a country that requires it to be labeled as a product of the United States. (64)/ The Coalition strongly opposes this proposed label as likely to result in consumer deception and confusion. The "Origin: USA" label presents a substantial risk of widespread consumer deception. The Commission itself acknowledged that the proposed mark is likely to deceive consumers. "[C]onsumers may potentially be misled by an 'Origin: USA' label and confuse it with a 'Made in USA' claim." (65)/ The scope of such deception is impossible to estimate because none of the consumer perception surveys tested how U.S. consumers would interpret an "Origin: USA" label. Despite the risk of consumer deception it poses, the Commission proposed the "Origin: USA" label out of "sensitiv[ity] to the costs that may be imposed on manufacturers where different countries impose different labeling requirements." (66)/ Thus, the proposed mark is an attempt to accommodate some commenters' concern that the Commission's standard for unqualified "Made in USA" claims prevents the use of multi-lingual labels that would be acceptable in countries around the world. This accommodation, however, places the convenience of international marketers above the interests of U.S. consumers, contrary to the Commission's mandate under the FTC Act. The Commission's endorsement of the "Origin: USA" label without first determining its potential impact on U.S. consumers is particularly troubling because of the lack of information indicating a need for such a mark. The Commission itself found little evidence that companies routinely face conflicting labeling requirements or that the "Made in USA" standard is the reason for such conflicts: The extent of this problem is not clear. Few other countries impose the sort of universal marking requirements on imported goods that are mandated in the United States. Nonetheless, even where marking requirements are not universal, many countries appear to impose marking requirements on at least some (and sometimes many) categories of products. . . . In addition, only limited information was submitted concerning whether other countries would accept or reject qualified statements of U.S. origin (e.g., "Made in USA of U.S. and imported parts") on imported products. Nor is it clear to what extent manufacturers must use different labels for exports in any event, because of language differences or other regulatory requirements of the foreign government. (67)/ Moreover, there is no indication that the "Origin: USA" proposal would eliminate the potential for conflict. On the contrary, in an effort to minimize consumer confusion and deception, the Proposed Guides expressly require consumer products bearing the "Origin: USA" mark in this country to include a prominent disclaimer indicating the presence of substantial foreign content. (68)/ The presence of conflicting claims on a single product is likely to increase, rather than decrease, consumer confusion. Moreover, the disclaimer requirement undermines the intention of the "Origin: USA" label to allow uniform packaging in the United States and other countries. For this reason, there is no justification for risking widespread deception of U.S. consumers by adopting the proposed "Origin: USA" label. V. QUALIFIED U.S. ORIGIN CLAIMS The Proposed Guides include provisions regarding the use of qualified claims for products that do not satisfy the standard for an unqualified "Made in USA" claim. Stressing the potential utility of such claims, the Commission observed: Qualified claims permit marketers for whose products an unqualified Made in USA claim would be deceptive to nonetheless inform consumers about the U.S. content in their products. By the same token, they allow consumers to receive such information and to distinguish between goods that are manufactured entirely abroad and those that are partially made in the United States. Marketers making efforts to use U.S. inputs when available and practical may tout the U.S. content they do use, and (at least in media allowing for lengthier discussion) explain their efforts to consumers. Moreover, the limited data available from the 1995 FTC Copy Test suggest that consumers viewing qualified U.S. origin claims did not misinterpret such claims and, in fact, had somewhat better recall of such claims than of unqualified Made in USA claims. (69)/ The Coalition wholeheartedly agrees with the Commission that qualified claims (including claims relating to specific parts or processes and comparative claims) provide valuable information to consumers. For this reason, the Coalition fully supports the Commission's efforts to develop guidelines for the use of non-deceptive, workable, and effective qualified U.S. origin claims. Indeed, the proposed guidelines concerning qualified claims demonstrate that there is no need to weaken the unqualified "Made in USA" standard to enable manufacturers to advertise the U.S. content of their products. All of the reasons cited by the Commission for promoting the use of qualified claims apply equally in conjunction with the all or virtually all standard for unqualified claims. In fact, maintaining the all or virtually all standard for unqualified U.S. origin claims is likely to increase the use and effectiveness of qualified claims and thereby increase the information available to consumers. VI. CONCLUSION The proposal to weaken the standard for U.S. origin claims from "all or virtually all" U.S. content to "substantially all" U.S. content is contrary to the consumer perception data before the Commission and would result in deception of a majority of American consumers. In addition, the proposed safe harbors to meet the standard would not ensure that a product contains at least "substantially all" U.S. content or comports with consumers' interpretation of "Made in USA." For these reasons, the Coalition strongly urges the Commission to withdraw the Proposed Guides and reaffirm the "all or virtually all" standard for U.S. origin claims. In lieu of the Proposed Guides, the Coalition urges the Commission to expand its proposed guidelines for qualified claims, which provide an effective and non-deceptive alternative to unqualified Made in USA claims. Respectfully submitted, _______________________ Jeanne S. Archibald Counsel for the American Hand Tool Coalition TABLE OF CONTENTS
I. OVERVIEW II. THE PROPOSED "SUBSTANTIALLY ALL" STANDARD
III. THE PROPOSED SAFE HARBORS
IV. THE PROPOSED "ORIGIN USA" LABEL V. QUALIFIED U.S. ORIGIN CLAIMS VI. CONCLUSION
1995 Attitude Survey Responses to Scenarios Specifying U.S. Assembly
Exhibit 1 1. / 62 Fed. Reg. 25020 (May 7, 1997) (hereinafter "Proposed Guides"). 2. / Letter from the Commission to the Honorable John D. Dingell, Chairman, Committee on Energy and Commerce, U.S. House of Representatives (Oct. 14, 1983) (hereinafter "Deception Policy Statement") reprinted in In re Cliffdale Assocs. Inc., 103 F.T.C. 110 app. (1984). 3. / Proposed Guides, 62 Fed. Reg. 25,020, 25,049. 4. / Deception Policy Statement at 7. 5. / Id. at n.20 (emphasis added). 6. / See, e.g., In re Kraft, Inc., 114 F.T.C. 40 (1991); In re Cliffdale Assocs., Inc., 103 F.T.C. 110 (1984). In addition, the Commission implicitly confirmed the continuing applicability of the Deception Policy Statement by citing it in the Proposed Guides. Proposed Guides, 62 Fed. Reg. 25,020, 25,048. 7. / See, e.g., Firestone Tire & Rubber Co. v. FTC, 481 F.2d 246, 249 (6th Cir.), cert. denied, 414 U.S. 1112 (1973) (survey evidence demonstrated that 15.3% of consumers were misled by advertising claim). The Firestone court suggested that an advertisement would qualify as deceptive if it deceived even 10% of consumers. Id. 8. / Proposed Guides, 62 Fed. Reg. 25,020, 25,048. 9. / Id. at 25,041. Similarly, the Commission defended the proposed "substantially all" standard as consistent with the views of a "majority" of consumers in a July 23, 1997 letter to the Honorable John D. Dingell, Ranking Member, Committee on Commerce (hereinafter "July 23, 1997 Letter to the Hon. John D. Dingell"). The Commission stated: It is probably inevitable that, whatever standard the Commission finally adopts, some number of consumers will disagree with the standard. Nonetheless, . . . the Commission staff believes that the proposed standard is consistent with the interpretation of a majority of consumers based on the consumer perception surveys before the Commission. July 23, 1997 Letter to the Hon. John D. Dingell at 8. The Commission thus abandoned the "reasonable consumer" standard for one based on the views of a majority of consumers. 10./ The Commission expressly and properly concluded that "U.S. origin claims are material to many consumers." Proposed Guides, 62 Fed. Reg. 25,020, 25,037. Therefore, the Deception Policy Statement and the significant minority standard apply to such claims. 11. / Id. at 25,040-41. The Commission also relied exclusively on the Attitude Survey to justify the "substantially all" standard to the Committee on Commerce of the United States House of Representatives. See July 23, 1997 Letter to the Hon. John D. Dingell at 5, 10. 12. / Proposed Guides, 62 Fed. Reg. 25,020, 25,036 & n.186. 13. / July 23, 1997 Letter to the Hon. John D. Dingell at 5. 14. / Proposed Guides, 62 Fed. Reg. 25,020, 25,038. 15. / Id. at 25,036. 16. / Id. ("The 1995 FTC Attitude Survey found that the number of consumers who were willing to accept a 'Made in USA' label on a product decreased significantly as the amount of production costs incurred abroad increased.") (emphasis added); Id. at 25,038. ("When presented with specific scenarios, many consumers similarly indicated that they . . . were willing to accept a product labeled 'Made in USA' even if it had some foreign content.") (emphasis added); Id. at 25,040-41 ("In the Commission's 1995 Attitude Survey 67% were willing to agree with a 'Made in USA' label on a product where foreign inputs accounted for 30% of the total cost if the rest of the product was U.S.-made and final assembly took place in the United States.") (emphasis added). 17. / The Attitude Survey also allowed respondents to answer "neither agree nor disagree." 18. / Proposed Guides, 62 Fed. Reg. 25,020, 25,036 & n.186. 19. / A table of the responses to the Attitude Survey for the scenarios involving U.S. assembly is attached as exhibit 1. 20. / Bourget Survey, Question 7, at 15-16; Data Tables at 38. Proposed Guides, 62 Fed. Reg. 25,020, 25,036. 21. / Id. The second most common response was "don't know" at 11%. Id., Data Tables at 39. 22. / FTC Copy Test, Detailed Tables, Question 7a. 11.1% of these respondents stated that they "assumed" or hoped that the percentage was 100%. Id. These percentages reflect only those survey participants who were asked the percentage question based on their responses to other survey questions. The Copy Test summary cites a lower percentage that is calculated based on the total number of participants. That percentage is misleading because not everyone in the sample was asked the question. 23. / 1991 FTC Survey at 19-20. 24. / Id. at 25. 25. / For this reason, the weakened standard would qualify as "deceptive" even under the Commission's apparent new deception standard based on the interpretation of a majority of consumers. See infra n.10 and accompanying text. 26. / See Proposed Guides, Fed. Reg. 25,020, 25,040 ("when given the opportunity, consumers consistently state that they understand 'Made in USA' claims to connote a high degree (though not necessarily 100%) of U.S. content. This conclusion is reinforced by the overwhelming, albeit anecdotal, views of individual consumers who submitted comments."). 27./ Id. at 25,049-50. 28./ "The Commission believes that a 75% safe harbor . . . ensures that a product promoted as 'Made in USA' has substantially all U.S. content and . . . reflects consumer understanding." Id. at 25,041. "[T]he Commission believes that this [two level substantial transformation] safe harbor ensures that a Made in USA label reflects significant U.S. content and is unlikely to be deceptive to consumers." Id. 29./ Id. at 25,040. 30./ Id. at 25,037. 31./ Id. 32./ The Commission justified the 75% safe harbor based on the 1995 Attitude Survey. To support the 75% benchmark, the Commission cited a significant drop in agreement with the "Made in USA" claim when the U.S. content shifts from 70% to 50%. Proposed Guides, 62 Fed. Reg. 25,020, 25,038 & n.193, 25,041. As set forth above, however, the Commission's analysis of the Attitude Survey is flawed. When the "somewhat agree" responses are excluded, a significant drop-off in agreement occurs between 90% U.S. content (42% strongly agree) and 70% U.S. content (26% strongly agree). Accordingly, the Attitude Survey does not support using 75% U.S. content as a safe harbor for U.S. origin claims. 33. / As the Coalition argued following the Made in USA Workshop, the percentage content approach also will be vulnerable to manipulation through accounting assumptions and will create an administrative burden for the Commission. See July 1, 1996 Comments of the American Hand Tool Coalition at 25-28. 34. / Proposed Guides, 62 Fed. Reg. 25,020, 25,048. 35. / Id. at 25,049. 36. / Id. 37. / "Last significant manufacturing step" presumably means something different and less than "substantial transformation," which is a defined term. Accordingly, the one step back rule allows a marketer to ignore the foreign content of an input, even if it was not last substantially transformed in the United States. 38. / Id. at 25,050. 39. / Example 4 describes a computer manufacturer that purchases a motherboard from a U.S. manufacturer. The example does not state the percentage of the computer's total manufacturing cost that the motherboard represents. Instead, it simply states that "components of the motherboard (such as microchips) are likely to represent a significant portion of the motherboard's value" and therefore that the manufacturer cannot assume that the entire cost of the motherboard is U.S. origin. Id. 40. / Id. at 25,049. 41. / Example 1 also could be construed to suggest that a manufacturer need not trace the foreign content of an input unless the input itself accounts for a substantial portion (as much as 50%) of the total manufacturing costs. Under this interpretation, the U.S. content of a product that meets the safe harbor could be lower than 50%. 42. / Proposed Guides, 62 Fed. Reg. 25,020, 25,038. 43. / Id. at 25,037-38. 44. / For example, the National Consumers League Survey found that a majority of consumers expect a Made in USA product to contain all or almost all U.S. parts and labor: [I]n the NCL study, consumers were asked "When you see a product advertisement or label stating "Made in USA," what amount of U.S. parts (i.e. components) do you assume is in the product?" Forty-five percent of respondents stated 100%; an additional 9% of the respondents stated a minimum ranging between 90% and 100%. When respondents to this survey were asked about the minimum amount of U.S. labor they assume is in the product, 58% stated 100%, and an additional eight percent stated a minimum between 90% and 100%. Id. at 25,036. 45. / Id. at 25,041. 46. / Under an existing Customs ruling, these operations would effect a substantial transformation and therefore satisfy the second element of the 75% U.S. content safe harbor. While we question whether this ruling is consistent with the most recent court decision on substantial transformation of hand tools, the Guides would permit a marketer to rely on the letter ruling. See infra p. 26. 47. / The total manufacturing costs thus would range from $1.10 to $1.28. 48. / The 75% U.S. manufacturing cost is the result of the substantial differential between U.S. and Chinese labor costs. The cost of manufacturing a similar forging in the United States would be far higher and therefore would account for a much greater percentage of the total manufacturing costs of the finished wrench. 49. / Id. at 25,041. At the Workshop, Sandra Gethers of the U.S. Customs Service cited the example of programming a PROM (programmable read only memory chip). Although the processing is minor in terms of cost, labor, and time, it qualifies as a substantial transformation because it changes the essential character of the chip. Made in USA Transcript, Case No. 0894219 at 222 (March 16, 1996). 50. / To justify the use of the substantial transformation test, the Commission states that "it reflects consumer expectations that the final processing or assembly of a product labeled 'Made in USA' take place in the United States." July 23, 1997 Letter to John D. Dingell at 11. As noted above, however, the Commission's own analysis of the consumer perception evidence indicates that consumers' expectations are not limited to the location of final assembly or processing. Instead, the Commission concluded that consumers expect that a majority of the labor that went into making a product took place in the United States. See supra n.43-45 and accompanying text. 51. / See Proposed Guides, 62 Fed. Reg. 25,020, 25,041 & n.208. 52. / "By itself, however, substantial transformation does not necessarily ensure that a product contains significant U.S. content. It may, for example, reflect a relatively unsophisticated final assembly process putting together parts made elsewhere or it may be met by a process that in fact changes the nature of the product, but requires little U.S. work (e.g., imprinting software onto a computer disk.)" Id. at 25,041. 53. / Id. 54. / Id. at 25,048. 55. / Indeed, the tariff shift rules were adopted in large part to achieve more predictable results than the subjective case-by-case analysis. 56. / Nor does it provide a "well-established" standard as the Commission contends. See July 23 Letter to the Hon. John D. Dingell (stating that "substantial transformation provides "well-established" and easy to apply standard). 57. / See National Hand Tool Corp. v. United States, 16 C.I.T. 308, 14 I.T.R.D. 1252 (Ct. Int'l Trade 1992), aff'd per curiam, 989 F.2d 1201 (Fed. Cir. 1993). 58. / See July 1, 1996 Comments of the American Hand Tool Coalition at 32 (citing the comments of Sandra Gethers of the U.S. Customs Service at the "Made in USA" Workshop). 59. / Proposed Guides, 62 Fed. Reg. 25,020, 25,050. 60. / Id. 61. / A semi-finished ratchet handle forging would undergo a substantial transformation as a result of minor machining and plating. A ratchet wheel would undergo a substantial transformation as a result of drilling to accommodate a pin and spring. A reversible pawl blank would undergo a substantial transformation as a result of minor machining to create a tooth to engage the ratchet wheel. 62. / The additional ratchet parts typically would include: a reversing lever, a reversing plate, a button, a steel pin, a polished steel ball, two steel springs; and a circlip. 63. / Proposed Guides, 62 Fed. Reg. 25,020, 25,050. 64. / Id. at 25,053 65. / Id. at 25,046. 66. / Id. at 25,039. 67. / Id. 68. / The Proposed Guides permit an "Origin: USA" claim if "For consumer products, the existence of substantial foreign content is disclosed to consumers through other means, such as appropriately qualified claims on packaging, stickers, or hangtags that may be seen by consumers before purchase." Id. at 25,053. 69. / Id. at 25,042. |