labeling

Proving a Negative

** Plaintiffs in a Putative Class Action Successfully Rely on Internet Articles on Homeopathy to Support Their Falsity Claims **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            .

Close up of the word HOMEOPATHIE in an old French dictionary. Selective focus and Canon EOS 5D Mark II with MP-E 65mm macro lens.

One of the few dependable defenses on which nutritional supplement/homeopathic drug makers facing consumer class actions can rely is that false advertising claims cannot rest on an allegation that the advertising lacks substantiation .  In the ground-breaking case of Nat’l Council Against Health Fraud, Inc. v. King Bio. Pharm., Inc., 107 Cal. App. 4th 1336 (2003), the California Court of Appeals held that it is not enough for a plaintiff to allege that the defendant’s products were ineffective because there is “no scientific basis for [their] efficacy.”  Id. at 1340-41.  In King Bio. Pharm, the plaintiff advocated that the defendant should bear the burden of proving its homeopathic remedies worked.  The California Court of Appeal disagreed, finding that — while regulatory agencies are legally authorized to demand substantiation — private parties are not, id. at 1345.  This is an eminently reasonable decision — otherwise, the plaintiffs’ bar would bring “ready, shoot, aim” lawsuits.

The question arises, of course, as to what level of “proof” is necessary for a putative class representative to sustain a claim of false advertising/labeling.  Must plaintiff’s counsel hire experts to perform double blind studies?  Or is a literature review all that is necessary?  This issue is front and center and may have reached its logical extreme in an important case in the U.S. District Court for the Southern District of California, Hammock et al. v. Nutramarks Inc. et al., case number 3:15-cv-02056 (2015) – a case that implicitly threatens the entire homeopathic medicine industry.

Homeopathy is the brain child of the German alternative physician, Samuel Hahnemann (1755-1843), who has a fabulous monument dedicated to him on Scott Circle in D.C.  Hahnemann developed the concept similia similibus curantur – or “like cures like.”  The idea is that a disease causes symptoms, and by treating patients with a substance that causes the same symptoms as the disease, the disease can be cured – like cures like.  By way of example, homeopathic medicines intended to remedy colds may include onions because onions cause watery eyes and runny noses – the precise symptoms of the common cold.

Dr. Hahnemann, however, did not want his medicines to produce the same symptoms the patient was already suffering from so he created a preparation protocol known as “extreme dilution.”  The active ingredient would be diluted with water or alcohol and the container would then be banged against an elastic surface (usually, a leather book) to the point that few of the molecules of the active ingredient remained.  In the world of homeopathic medicine, the more diluted the remedy, the  higher its potency and more effective it is.

Homeopathic medicine was heralded upon its entry into the United States in 1835, primarily because –unlike traditional medicine of the time – it didn’t kill patients (like mercury tinctures) and wasn’t gross (like leaching).  As modern medicine evolved, however, homeopathy came to be branded by the “traditional” medical industry as quackery.  Nevertheless, to this day, homeopathic drugs are treated (as opposed to nutritional supplements) by the FDA under Section 201(g)(1) of the Food, Drug and Cosmetic Act.

Which brings us back to the Nutramarks case.  In Nutramarks, the plaintiffs allegedly purchased NatraBio® Smoking Withdrawal, Leg Cramps, Restless Legs, Cold and Sinus Nasal Spray, Allergy and Sinus, Children’s Cold and Flu Relief, and Flu Relief homeopathic products.  Did the plaintiffs’ lawyers conduct any independent research to determine whether these products were effective prior to filing the lawsuit?  Of course not.  Did the plaintiffs’ lawyers cite any previously published studies about the challenged products?  Nope.  Did the plaintiffs’ lawyers cite any research on the efficacy of the ingredients in the products?  Nyet.  So what did the plaintiffs use to satisfy their plausibility burden under Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009)?  Answer:  Internet articles challenging homeopathy as a whole.

Nutramarks pushed back on the complaint asserting in a motion to dismiss that relying on internet articles that did not involve its products or the constituents of its products was not enough, citing Murray v. Elations Co., No. 13-CV-02357-BAS WVG, 2014 WL 3849911, at *7 (S.D. Cal. Aug. 4, 2014) (studies “must have a bearing on the truthfulness of the actual representations made by Defendants”).  Nutramarks also argued that, because some experts believe that homeopathic remedies are effective, the action must be dismissed under In re GNC Corp., 789 F.3d 505, 516 (4th Cir. 2015), in which the court held that “[i]n order to state a false advertising claim on a theory that representations have been proven to be false, plaintiffs must allege that all reasonable experts in the field agree that the representations are false.”

In Nutramarks, Chief Judge Moskowitz rejected these arguments and denied the motion to dismiss as it pertained to the products’ effectiveness.  (The Court dismissed plaintiffs’ claims for injunctive relief and breach of implied warranty.)  Judge Moskowitz saw nothing deficient in the plaintiffs’ failure to cite studies relating to defendants’ products or the ingredients in its products: “Although the Complaint only concerns the effectiveness of Defendants’ Products, Plaintiffs are alleging that homeopathy in general is ineffective.  Should Plaintiffs prove this allegation later on, Defendants’ Products would likewise be proven to be ineffective.”  As to Nutramarks’ “all reasonable experts” argument, the Court distinguished the Fourth Circuit’s opinion in In re GNC Corp. on the basis that In re GNC Corp dealt with false advertising and Nutramarks concerns alleged false labeling.  This latter holding is a stretch.  Indeed, the plaintiffs didn’t make the argument for it in their opposition — although they cited the same language from In re GNC Corp that Judge Moskowitz relied on.

The language from In re GNC Corp reads, “Our holding today should not be interpreted as insulating manufacturers of nutritional supplements from liability for consumer fraud.  A manufacturer may not hold out the opinion of a minority of scientists as if it reflected broad scientific consensus.  Nevertheless, we need not decide today whether any of the representations made on the Companies’ products are misleading, because Plaintiffs chose not to include such allegations in the [complaint].”  The most important sentence in this dicta is the second because it highlights the precise representation – be it on a print advertisement or on the bottle, itself — that the Fourth Circuit didn’t want its opinion to absolve — a manufacturer falsely claiming that  there is broad consensus supporting its health claim when it is really only the opinion of a minority of scientists.  This claim appears nowhere on any of Nutramarks’ packaging challenged by the plaintiffs.

In the end, it is clear from the Fourth Circuit’s opinion in In re GNC Corp that the panel was convinced that there really would be an impermissible “battle of the experts” as to the efficacy of glucosamine and chondroitin for joint health if the case were to proceed past the motion to dismiss.  The label of one of the challenged products referenced a private study showing the effectiveness of the ingredients.  In a footnote, the Court stated (with just a bit of sarcasm), “Although Plaintiffs were free to allege that the study cannot have been conducted in a reasonable or reliable way (because all reasonable experts support the opposite conclusion), they failed to do so.  We decline to speculate as to why, if the evidence is as clear and unequivocal as they claim, Plaintiffs exhibited such hesitation.”

Of course, all is not lost for Nutramark or the homeopathic medicine industry in general.  Just last year, a California jury returned a verdict in favor of a manufacturer of homeopathic products for, among other things, allergies, leg cramps, migraine headaches and sleeplessness finding that the plaintiffs could not sustain their burden of showing lack of efficacy.  Allen et al. v. Hyland’s Inc. et al., 2:12-cv-01150 (Central District).

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The New Naturals

** Where are Class Action Claims Against Consumer Food and Personal Product Companies Trending in 2016?**                                                                                                                                                                                                                                                        PrintWe have blogged in the past about some of the “usual suspects” in the consumer class action line-up – particularly for food, beverage, cosmetics and related industries – for example, the “all-natural” case – the “evaporated cane juice” case – and the “handmade” or “craft beer” case.   Trends come and go – as Plaintiffs run out of companies to sue and as companies change their labeling and advertising in response to the litigation risks.

Which begs the question:  Where are the current litigation trends leading?  We have surveyed recent filings to identify some of the tropes and traps that plaintiffs lawyers are currently focusing on:

As we have discussed in the past, the attractiveness of the all-natural class claim lies in the gaps between FDA guidance and labeling law and the vagaries of the reasonable consumer standardThat gap may be closing with the FDA taking comments and perhaps looking to expand its policy on “natural” foods.  As the term “Natural” loses some of its vagueness, the term “healthy” appears to be taking its place – particularly in so far as the term has the required “eye of the beholder” quality necessary to support class action claims (although in some respects the term “healthy” is regulated see e.g.,  21 CFR 101.65(d)(2)) .  For example in  Kaufman v. CVS Caremark Corp., No. 16-1199, 2016 WL 4608131, at *1 (1st Cir. Sept. 6, 2016) (reversing district court dismissal on Rule 12), CVS Pharmacy, Inc. was sued for its Vitamin E dietary supplement because its label touts the product as supporting “heart health.”  Plaintiff argues that this is misleading because the medical literature does not support a link between consuming vitamin E and cardiovascular health.  Kaufman v. CVS Caremark Corp., No. CV 14-216-ML, 2016 WL 347324, at *1 (D.R.I. Dkt. No. 1 at 7) (and in some studies cited by Plaintiff – Vitamin E dosage increases the rate of heart failure).  In Hunter v. Nature’s Way Prod., LLC, No. 16CV532-WQH-BLM, 2016 WL 4262188, at *1 (S.D. Cal. Aug. 12, 2016) (denying motion to dismiss), Plaintiff alleges that Nature’s Way’s coconut oil is advertised with various health claims (such as its “Variety of Healthy Uses”, “ideal for exercise & weight loss programs”, “fuel a[] healthy lifestyle”), but according to Plaintiff, coconut oil products are not “healthy” . . . “but rather their consumption causes increased risk of CHD, stroke, and other morbidity.” (Dkt. No. 1-5 Compl. at ¶ 118).  In Campbell v. Campbell Soup Co., No 3:16-cv-01005 (S.D. Cal. August 8, 2016) (Dkt 18) (Def. Mot. to Dismiss), Campbell’s Soup Co is defending against Plaintiff’s claims that its Healthy Request® soups are not “healthy” because they contains partially hydrogenated oil (PHO).  Notably, Campbell’s soups are somewhat unique from other food labelling cases because they contain more than 2% meat or poultry and therefore are USDA regulated (see 21 U.S.C. § 451, et seq.) and their labelling is pre-approved (see 21 U.S.C. § 457; accord 21 U.S.C. § 607).  Campbell’s has doubled-down on that argument – moving for Rule 11 sanctions.  No 3:16-cv-01005 (S.D. Cal. August 29, 2016) (Dkt 18).  In Lanovaz v. Twinings N. Am., Inc., No. 5:12-CV-02646-RMW (N.D. Cal. September 6, 2016) (dismissing remaining claims), Twinings successfully defended against claims that the labeling of its tea as a “healthy tea drinking experience” and having “antioxidant” benefits were misleading.  In particular Plaintiff claimed that Twinings’ health benefits could not be substantiated and  were contrary to FDA regulations.  No. 5:12-CV-02646-RMW (N.D. Cal. Dkt. Nos. 1, 24).  It appears that “Healthy” is the new “Natural.”

Plaintiff’s lawyers are also taking a close look at ingredients – to determine if touted anchor ingredients are prominent enough.  For example in Coe v. Gen. Mills, Inc., No. 15-CV-05112-TEH, 2016 WL 4208287, at *1 (N.D. Cal. Aug. 10, 2016) (Order denying Mot. to Dismiss), Plaintiffs argued (successfully at the pleading stage) that General MillsCheerios Protein product labeling is misleading because it implies that the product is essentially the same as normal Cheerios but with added protein.  While Plaintiffs acknowledge that Cheerios Protein does have more protein than regular Cheerios (Plaintiffs calculate that 200 calories of Cheerios contains 6 grams of protein, whereas 200 grams of Cheerios Protein contains 6.4 or 6.7 grams of protein), they argue that this smidgen of an increase is so immaterial as to be misleading.  In another example, in Nazari v. Gen. Mills, Inc., No. 2:16-cv-02015 (E.D. Cal. Aug. 23, 2016), the Plaintiff sued Target with a proposed class action alleging the retailer’s up & up™ Green Aloe Vera Gel lacks traces of Aloe Vera.  Plaintiff alleges that while the product is labelled as an “aloe vera gel” with “pure aloe vera,” its laboratory testing (which it contends would have revealed acemannan, the key compound in aloe vera) could detect no active aloe ingredient.  In another example, in Torrent v. Thierry Oliver., No. 2:15-cv-02511 (C.D. Cal. Sept. 2, 2016) (denying motion to dismiss), Plaintiff survived dismissal on claims that Natierra brand Himalania Goji berries are misleadingly labeled because they are not berries from the Himalayan mountain region in China – which was inferred by the “Himalania” brand name.  In labelling, as in everything else, attention to detail counts.

We will update you on these trends as they progress.

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No Pay, No Play

** District Court Rejects Settlement Deal That Extracts a Broad Release of Claims But Provides No Money to Class Members **

Pay writing on Keyboard

It is not common for judges to reject class settlements, usually because lawyers for the opposing sides — putting aside their adversary roles — are savvy enough not to give the judge cause.  That was not the case recently, however, in a long running homeopathic product false advertising case in the Southern District of California.  Allen v. Similasan Corp., No. 12-CV-376-BAS-JLB, 2016 WL 4249914, at *1 (S.D. Cal. Aug. 9, 2016).

The allegations in this case, which are similar to those of other recent homeopathy cases (see e.g., Nat’l Council Against Health Fraud v. King Bio Pharms., 107 Cal. App. 4th 1336, 1348 (2003); Herazo v. Whole Foods Mkt., Inc., No. 14-61909-CIV, 2015 WL 4514510, at *1 (S.D. Fla. July 24, 2015); Conrad v. Boiron, Inc., No. 13 C 7903, 2015 WL 7008136, at *1 (N.D. Ill. Nov. 12, 2015)) complain that Similasan engaged in false advertising by omission by not including on its products’ labels statements to the effect that (i) the product was not FDA approved as medically effective and (ii) the active ingredients were diluted.  Notably, neither of those disclaimers is required on homeopathic products – but even so, many companies voluntarily include them.

In Similasan, after four years of hard fought litigation  the Defendant had successfully narrowed the claims by summary judgment [Dkt. No. 142] and Plaintiffs had certified  a class [Dkt. No. 143].  Similasan, however, filed a motion to decertify, arguing that Plaintiffs would not be able to prove materiality or falsity with their expert witnesses’ survey evidence [Dkt. No. 164].  With the motion to decertify pending, the parties settled and sought judicial approval of their agreement [Dkt. No. 196].  But the settlement was not a cure the district court could swallow.  Judge Bashant noted her role in the fairness hearing was to look for “subtle signs that class counsel have allowed pursuit of their own self-interests and that of certain class members to infect the negotiations.” (2016 WL 4249914, at *3 citing In re Bluetooth Headset Prods. Liab. Litig., 654 F.3d 935, 947 (9th Cir.2011)).  In this case, the signs were not subtle, and it was not a close call for the Court to deny approval.

In particular, Judge Bashant took exception to the following features of the proposed agreement:

  • The remedy for the unnamed class was injunctive relief only. While the company agreed to add the disclaimers that Plaintiffs’ counsel had complained were omitted, Similasan was not required to compensate class members;
  • The only money went to the class representatives who would pocket $2,500.00 each and Plaintiff’s counsel who secured a clear-sailing agreement which would permit an award of fees in excess of $550,000.00;
  • In exchange for injunctive relief, class members released Similasan from all claims identified in the complaint;
  • The release covered a nationwide class even though the Court had certified a California class only.

These settlement terms were not good enough for the Court.  The class was being asked to give up the right to sue but receiving nothing in return.  Indeed, to the extent the remedy was an injunction, a class member who opted out would receive the same benefit without forfeiting any rights.  Tellingly, eight State Attorneys General (Arizona, Arkansas, Louisiana, Michigan, Nebraska, Nevada, Texas and Wyoming) filed an amicus curiae brief urging the Court to reject the proposed settlement. [Dkt. No. 219].

The Court also discussed the role that notice (or lack thereof) played in its decision making.  The Court observed that the proposed class would have been in the tens of thousands [Dkt. No. 216], but the settlement notice prompted only 136 views of the settlement information website and 21 phone calls to the settlement hotline.  The Court attributed this lackluster response to the weakness of the notice, which consisted of a single ad in USA Today and some incidental online placements.  But the reality is the paucity of the economic return (i.e. zero) likely resulted in mass indifference.

 

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Sugar By Any Other Name Not Just As Sweet – Says FDA

** FDA concludes its study on “Evaporated Cane Juice” – issues guidance that it is a misleading description for mere Sugar **                                                                                                                                                                                                                

Candy shop at local bazaar in Barcelona, Spain.

On May 25, 2016, the Food and Drug Administration (FDA) issued guidance that it is false or misleading to describe sweeteners made from sugar cane as “evaporated cane juice.” Guidance for Industry: Ingredients Declared as Evaporated Cane Juice.

The FDA promised guidance before the end of 2016 – so they under-promised and over-delivered.  The FDA’s guidance reasoned that the term “cane juice”— as opposed to cane syrup or cane sugar—calls to mind vegetable or fruit juice, see 21 CFR 120.1(a), which the FDA said is misleading as sugar cane is not typically eaten as a fruit or vegetable.  See U.S. Department of Agriculture, Center for Nutrition Policy and Promotion. “Added Sugars.”  As such, the FDA concluded that the term “evaporated cane juice” fails to disclose that the ingredient’s “basic nature” is sugar. Guidance, Section III.  As support, the FDA cited the Codex Alimentarius Commission — a source for international food standards sponsored by the World Health Organization and the United Nations — which defines “raw cane sugar” in the same way as “evaporated cane juice.” Codex 212-1999.1.  The FDA therefore advised that “‘evaporated cane juice’ is not the common name of any type of sweetener and should be declared on food labels as ‘sugar,’ preceded by one or more truthful, non-misleading descriptors if the manufacturer so chooses.” Guidance, Section III.  The FDA’s decision comes after a 2009 draft guidance advising against using the term “evaporated cane juice” and a host of lawsuits against food companies that ignored the guidance.  Draft Guidance for Industry: Ingredients Declared as Evaporated Cane Juice (2009).

The FDA’s decision does not bode well for pending cases on this point.  As we have blogged about recently, many evaporated cane juice lawsuits are currently stayed awaiting the outcome of the FDA’s guidance, see, e.g., Gitson, et al. v. Clover-Stornetta Farms, Inc., Case No. 3:13-cv-01517-EDL (N.D. Cal. Jan. 7, 2016); Swearingen v. Amazon Preservation Partners, Inc., Case No. 13-cv-04402-WHO (N.D. Cal. Jan. 11, 2016).  And some have been revived on appeal – just in time – see Kane v. Chobani, LLC, No. 14-15670, 2016 WL 1161782, at *1 (9th Cir. Mar. 24, 2016) (overturning 2014 order from Northern District of California dismissing case).  These suits (and others) are now set to proceed in the wake of the FDA’s guidance.  Bear in mind, the guidance is not binding on courts and, in of itself, does not create a private right of action.  21 U.S.C. § 337(a) (“[A]ll such proceedings for the enforcement, or to restrain violations, of [the FDCA] shall be by and in the name of the United States”); see POM Wonderful LLC v. Coca-Cola Co., 573 U.S. ___ (2014); Buckman Co. v. Pls.’ Legal Comm., 531 U.S. 341, 349 n.4 (2001); Turek v. Gen. Mills, Inc., 662 F.3d 423, 426 (7th Cir. 2011); see also Smith v. U.S. Dep’t of Agric., 888 F. Supp. 2d 945, 955 (S.D. Iowa 2012) (holding that there is no private right of action regarding USDA statute).

In most false advertising cases, the governing test is what consumers, themselves, think – not what the FDA does.  For example, in Mason v. Coca-Cola Co., plaintiffs alleged that “Diet Coke Plus” was misleading because the word “Plus” implied the product was “healthy” under FDA regulations.  774 F. Supp. 2d 699 (D.N.J. 2011).  The court begged to differ: “At its core, the complaint is an attempt to capitalize on an apparent and somewhat arcane violation of FDA food labeling regulations . . .  not every regulatory violation amounts to an act of consumer fraud . . . . It is simply not plausible that consumers would be aware of [the] FDA regulations [plaintiff relies on].”  Id. at 705 n.4; see also Polk v. KV Pharm. Co., No. 4:09-CV-00588 SNLJ, 2011 WL 6257466, at *7 (E.D. Mo. Dec. 15, 2011);  In re Frito-Lay N. Am., Inc. All Natural Litig., No. 12-MD-2413 RRM RLM, 2013 WL 4647512, at *15 (E.D.N.Y. Aug. 29, 2013) (“[T]he Court [cannot] conclude that a reasonable consumer, or any consumer, is aware of and understands the various federal agencies’ views on the term natural.”)  Defendants in evaporated cane juice cases often assert that “evaporated cane juice” is a more accurate term than sugar to describe a type of sweetener that is made from sugar cane but undergoes less processing than white sugar.  See e.g., Morgan v Wallaby Yogurt Company, No. CV 13-0296-CW, 2013 WL 11231160 (N.D. Cal, April 8, 2013) (Mot. to Dismiss).  Those issues aside, many commentators believe the guidance will spur settlements – and they may be right.  The guidance may also spur a round of label changes for those who have not already abandoned the controversial term.

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Enhanced Food Labelling Guidelines

** FDA refreshes its Nutrition Facts label for packaged foods  **                                                                                                                                                      

Corn on spoon

On May 27, 2016, the FDA updated its “nutrition facts label” rule for packaged food products sold in the US.  See 81 FR 33741, 21 CFR 101.  The stated goal of the rule-making is to provide “updated nutritional information for most packaged foods sold in the United States, that will help people make informed decisions about the foods they eat and feed their families.

The new Nutrition Facts label will maintain its traditional look and feel, but will be updated to include, amongst other things:

  • A new design increasing the type size for “Calories,” “servings per container,” and the “Serving size” declaration, and bolding the number of calories and the “Serving size” declaration to highlight this information.
  • A mandatory footnote explaining “*The % Daily Value tells you how much a nutrient in a serving of food contributes to a daily diet. 2,000 calories a day is used for general nutrition advice.”
  • New requirements for “Added sugars” to be listed both in grams and as percent Daily Value.
  • New mandatory nutrients are included – Vitamin D and potassium are now required – and the rule drops the requirement for Vitamins A and C to be listed (which research has shown very few people are deficient in).
  • Removal of the “Calories from Fat” line item (as research shows that the type of fat is more important than the amount) – the requirement to list “Total Fat,” “Saturated Fat,” and “Trans Fat” remain.
  • In line with new research that indicates that prior “serving size data” underestimates the typical amount consumed, the rule updates the reference amount for different types of foods – for example, the reference amount used to set a serving of ice cream was previously ½ cup but is changing to ⅔ cup. The reference amount used to set a serving of soda is changing from 8 ounces to 12 ounces.
  • And where a products is larger than the reference size for a single serving – but where the item could be consumed in one sitting or more multiple sittings — manufacturers will need to provide “dual column” labels to indicate the amount of calories and nutrients on both a “per serving” and “per package”/“per unit” basis.

A comparison between the original vs. the new labels makes the effect of the changes clear:

lable 

Most food manufacturers will be required to use the new label by July 26, 2018.  However, manufacturers with less than $10 million in annual food sales will have an additional year to comply.

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“Virtually All” Made in The USA Guidance

made-in-usa-2

**Federal Trade Commission Staff Provide Guidance on Regulations Proscribing the “All or Virtually All” Standard for Made in the USA labeling** . . .                                                                                                                                                                                         

The Federal Trade Commission (FTC) has a role in regulating “Made in the USA” labeling.  15 U.S.C. § 45aSee prior post.  Under FTC regulation if “virtually all” of a product is made in the United States, then it is permissible to use the Made in the USA label.  62 FR 63756-01 at pp. 63757, 63764–65.  Unfortunately, this “virtually all standard” is vague – and the FTC has declined to come up with a bright line test for manufacturers.  Id.  The FTC’s Enforcement Policy Statement informs that in making a “virtually all” determination, the FTC will look at factors such as:  (1) the portion of manufacturing costs attributable to foreign parts and processing; (2) whether the foreign parts and processing are significant to the final product; and (3) how far back in the manufacturing process the foreign content is.  Even with this broad guidance, a case by case analysis is needed on “Made in the USA” labeling.

Fortunately, when the FTC closes an enforcement proceeding on a case, it often provides a closing letter to the target.  Such a closing letter may contain an explanation of the findings of the investigation and the rationale for why the case was closed.  A number of these FTC Closing Letters are available on the FTC website: https://www.ftc.gov/enforcement/cases-proceedings/closing-letters-and-other-public-statements/staff-closing-letters.  Recent  FTC Closing Letters regarding “Made in the USA” labeling have highlighted the importance of the second factor (see above) — whether foreign parts and processing are significant to the final product.  With respect to Loctite glue made by the German multinational Henkel, the FTC looked at the cost and function of cyanoacrylate (an ingredient imported and added to the U.S. manufacturing of the glue).  Because both the cost and function of cyanoacrylate were significant in the glue, the FTC decided that it was inappropriate for Henkel to use an unqualified “Made in the USA” label.  A similar finding was made with respect to Gorilla Glue earlier this year.  In another recent closing letter concerning the product Spray Pal (a cloth diaper cleaning device) that included a foreign-made clip used to fasten the diaper to the device, the FTC determined that, while the cost of the clip may be small relative to overall manufacturing costs, it nevertheless was essential to the function of the product.  As such, an unqualified claim of “Made in USA” was not permissible.  Companies need to be mindful that the FTC is not looking merely at the cost factor.  If an inexpensive foreign component is integral to the design and function of the product, it may be significant enough to  negate a claim of “Made in the USA.”

 

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Made in the USA: In California

**California re-casts its labeling standards for “Made in the USA” labels – bringing it closer in line with Federal Trade Commission Regulations and the “Virtually All Standard” ** . . .                                                                                                                                                                                                                                                                                                                                                                    

The California legislature has not been shy in being the outlier in consumer protection law. It’s Made in the USA statute is no exception.  Since 1961, California has expressly prohibited the designation of products as “Made in the USA” or “Made in America” when the product or “any article, unit, or part thereof, has been entirely or substantially made, manufactured, or produced outside of the United States.” Cal. Bus. & Prof. Code § 17533.7 (emphasis added).  Accordingly, to comply with California law, companies have had to ensure that every component of their products be made domestically – “down to the last screw.”  Benson v. Kwikset Corp., 152 Cal. App. 4th 1254, 1285 (2007) (dissenting opinion).  With diversified and international supply chains the norm, complying with this standard has been problematic if not impossible.

Under Federal law, the Federal Trade Commission (FTC) has power to regulate Made in the USA labeling.  15 U.S.C. § 45a.  Notably, the FTC’s standard is not as strict as the California standard. Under FTC regulations, under the “virtually all standard” if almost all of the product is made in the United States, then it complies.  62 FR 63756-01 at pp. 63757, 63764–65.  That is, negligible or early stage components of products assembled or processed in the United States do not offend the law.  Id.  California’s law had no similar latitude, meaning a product could comply with FTC regulations but still run afoul of California law.

This has been a significant irritant for consumer companies, requiring them to create multiple sets of labels – or more commonly – having to apply the higher California standard across all of their U.S. marketing and labeling.  California courts have not been particularly sympathetic to this dissonance finding that at least hypothetically it is possible to comply with both laws simultaneously and, therefore, there is no federal preemption.  See Clark v. Citizens of Humanity, LLC, No. 14-CV-1404 JLS WVG, 2015 WL 1600679, at *5 (S.D. Cal. Apr. 8, 2015).  A bill currently before Congress, S. 1518., the “Reinforcing American-Made Products Act of 2015” proposes to clarify the impasse by specifically articulating that the federal government has complete control over country-of-origin labels and would specifically preempt all conflicting state standards.

California legislators have spoken first.  Taking effect January 1, 2016, Senate Bill 633, will allow manufacturers to label a product as “Made in the USA” if the foreign made parts do not constitute more than 5% of the final value of the product (or 10% if the foreign parts are not available from a domestic source).  Senate Bill 633, introduced by Senator Jerry Hill, a San Mateo Democrat, was signed into law on September 1, 2015.  This change shifts California from its unique position on labeling and more closely aligns it with the labeling standards used by the Federal Trade Commission (“FTC”).  There is not perfect alignment, however, and marketers selling products in California will still have to deal with different standards.  Nevertheless, the California bright line test provides some welcome clarity.

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