by Melissa Miller Proctor, Esq., Sandler, Travis and Rosenberg, P.A.
In late October, the U.S. District Court for the Southern District of California denied a motion to dismiss a class action lawsuit filed against Nordstrom and AG Adriano Goldschmied that shines a spotlight on the apparent conflict between the "Made in the USA" rules enforced by the Federal Trade Commission and the version that was enacted by the state of California. The plaintiff in Paz v. AG Adriano Goldschmied, Inc. et al1 alleges that a pair of jeans he purchased in a Nordstrom store in San Diego was incorrectly labeled "Made in the USA" because, although assembled in the United States, the jeans contained imported fabrics, components and trim items. Accordingly, the plaintiff argues that the "Made in the USA" label is a deceptive marking that violates Section 17533.7 of the California Business and Professions Code. In their motion to dismiss the case, both Nordstrom and AG Adriano Goldschmied argued that the lawsuit was preempted by federal law.
By way of background, the FTC rule, which applies to all products advertised or sold in the United States, permits a product to be labeled "Made in the USA" if it is all or virtually all made in the United States. The phrase "all or virtually all" means that the significant parts of the product and its processing must be of U.S. origin, and that the end item should contain no amounts (or merely negligible amounts) of foreign content. With respect to textile apparel articles in particular, they may be labeled "Made in the USA" if the end items are made completely in the United States of materials that were also made in the United States. If imported greige goods that are dyed, printed and finished in the United States are used, the end item may be labeled "Made in the USA" as long it contains the appropriate qualifying language2 (e.g., "Made in the USA of Imported Fabric," "Knitted in the USA of Imported Yarn," etc.); however, items such as zippers, buttons and other trim items that are not subject to the FTC's rules do not need to be considered in this analysis. Similarly, items that are manufactured abroad using U.S. fabric or that are assembled outside the United States using U.S.-manufactured components must be labeled to show both the foreign and U.S. manufacturing process. Where processing takes place in both the U.S. and another country, the label must then identify both locales of production – e.g., "Made in Sri Lanka, Finished in the USA," "Comforter Filled, Sewn and Finished in the USA with Shell Made in Malaysia," "Assembled in the USA of Imported Components," or "Made in China/Fabric Made in the USA." Nonetheless, an imported apparel article that undergoes substantial transformation in the United States and is considered a U.S.-origin good under the U.S. Customs Regulations will still be prohibited from being marked with an unqualified "Made in the USA" label under the FTC rules.
In stark contrast to the FTC rules stands Section 17533.7 of the California Business and Professions Code, which provides as follows –
It is 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.
Thus, where even the smallest part or component in a product that is marketed and sold in California is subject to manufacturing outside the U.S., Section 17533.7 would prohibit the use of a "Made in the USA" label – even where the finished article would fully comply with the FTC rule. Two recent court decisions illustrate the application of the California "Made in the USA" rule –
In Colgan v. Leatherman,3 certain tools were alleged to have been illegally labeled "Made in the USA" because some of the processing operations (i.e., grinding and polishing of the parts and components) had taken place outside the United States. Even though the design work, testing, assembly and other manufacturing processes were performed in the United States, the court still held that the foreign processing was "substantial" and therefore the "Made in the USA" label violated California's Section 17533.7.
In Benson v. Kwikset,4 certain deadbolt and locksets were alleged to have violated the California "Made in the USA" rules because they contained screws and other parts that were manufactured in Taiwan and some of the sub-assembly operations were performed in Mexico. Even though the labor and parts used in the locksets were U.S.-origin, the court still concluded that the labeling violated Section 17533.7 because the locksets contained parts that were substantially made outside the United States. Later, in 2011, after an appeal of the case, the California Supreme Court considered the question as to whether an individual has standing to sue a company under Section 17533.7.5 The California Supreme Court held that Mr. Benson had standing to file suit against Kwikset because he had suffered "lost money or property" in that he paid more for the locksets than he may have been willing to pay if the locksets were properly labeled.
As mentioned at the outset of this article, Nordstrom and AG Adriano filed a motion to dismiss the pending class action lawsuit because the FTC Act and Textile Fiber Production Identification Act preempted California law. The motion argued that companies are required by the latter act to label textile apparel products "Made in the U.S.A." even where the items include foreign-made materials that are prohibited under California law. However, the court did not agree and denied that motion thereby allowing the case to proceed. Note that federal preemption only exists where it is impossible for a company to comply with both the applicable federal and state laws. Here, the court stated that the Textile Fiber Production Identification Act does not require companies to use unqualified "Made in USA" labeling if the product contains imported materials; rather, qualified language should be used in those situations which would not violate California's Section 17533.7. The court also held that it was possible for companies to comply with both the FTC rule and California's Section 17533.7, even if additional burdens are ultimately imposed on such companies. That is, companies may use the "Made in the USA" labels outside California while refraining from such labeling for products marketed and sold in California.
In addition to the case filed against Nordstrom and AG Adriano, a similar class action was also filed against jeans retailer Citizens of Humanity and several California jeans companies have also received notices of pending litigation threatening to bring additional class-action lawsuits.
Importers, manufacturers and retailers doing business in the state of California should closely monitor the class action lawsuits against Nordstrom, AG Adriano, and Citizens of Humanity and other potential claims that may be filed in the near future. They should also take steps now to carefully review the FTC rules and Section 17533.7 as well as the Colgan and Kwikset decisions, in order to assess how their products, operations, and current labels (including the use of any unqualified "Made in the USA" labels for products marketed in California) are impacted by these diverging requirements.
 Case No. 3:14-cv-01372 (U.S. District Court for the Southern District of California).
 For flat goods (e.g., sheets, towels, comforters, handkerchiefs, scarves, napkins, and other "flat" goods), the products' labels should identify both the U.S. and the country of origin of the fabric in order to satisfy the U.S. Customs and FTC requirements, such as "Made in the USA of Fabric Made in China," "Fabric Made in China, Cut and Sewn in the USA").
 See Colgan v. Leatherman, 135 Cal. App. 4th 663 (2006).
 See Benson v. Kwikset Corp., 152 Cal. App. 4th 1254 (2007).
 Kwikset Corp. v. Super. Ct. (Benson), No. S171845, 2011 WL 240278 (Cal. Jan. 27, 2011).
Melissa Miller Proctor is a Partner with Sandler, Travis and Rosenberg, P.A., resident in the firm's Arizona office. With significant experience in export controls, customs laws and regulations, and international trade, Melissa works closely with clients to expand their markets while ensuring their regulatory compliance. She may be reached at (480) 305-2110 or via e-mail at email@example.com.
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