Wednesday, April 15, 2015

Preemption and dormant commerce clause challenges to Cal. Made in US law fail

Clark v. Citizens of Humanity, LLC, No. 14–CV–1404, 2015 WL 1600679 (S.D. Cal. Apr. 8, 2015)
Plaintiffs bought Citizens of Humanity jeans marked with “Made in the USA,” but alleged that the products contained component parts made outside the US, including the fabric, thread, buttons, subcomponents of the zipper assembly, and/or rivets.  Plaintiffs alleged that the jeans therefore were “of inferior quality” and “less reliable” than jeans actually made entirely in the United States and that they overpaid in reliance on the claims. They brought the usual California claims.
Defendants argued that California’s Made in the USA law was conflict preempted by virtue of the FTC’s Made in the USA regulations and that it violated the dormant commerce clause; the court disagreed.
Preemption: California law provides:
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 the 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.
Cal. Bus. & Prof.Code § 17533.7. California courts have interpreted this section strictly: “if the merchandise consists of separate, identifiable components, section 17533.7 requires ‘any article, unit, or part’ of the merchandise to be ‘entirely or substantially made, manufactured, or produced domestically to qualify for use of a ‘Made in U.S.A.’ or similar label.” So, “a product, like [the aircraft carrier] the U.S.S. Ronald Reagan, can be overwhelmingly and substantially ‘made in the United States’ but could not be claimed to have been ‘made in the United States’ unless is contained absolutely 100 percent American parts, down to the last screw.”
The FTCA says:
To the extent any person introduces, delivers for introduction, sells, advertises, or offers for sale in commerce a product with a ‘Made in the U.S.A.’ or ‘Made in America’ label, or the equivalent thereof, in order to represent that such product was in whole or substantial part of domestic origin, such label shall be consistent with decisions and orders of the Federal Trade Commission issued pursuant to section 45 of this title.
15 U.S.C. § 45a. The FTC’s standard, as adopted, is that “manufacturers shall be permitted to use the ‘Made in the U.S.A.’ label on products that are ‘all or virtually all’ made in the United States.” There is no bright line, but if foreign-made component parts comprise a “negligible portion of the product’s total manufacturing costs and are insignificant parts of the final product,” then the item will be considered to have been made in the United States.
Defendants argued that this regulation had two purposes: preventing consumer deception and encouraging manufacture in the US by allowing manufacturers to use the powerful “Made in the USA” label.  California’s law conflicted with the latter.  The FTCA, however, says that “[n]othing in this section shall preclude the application of other provisions of law relating to labeling.” §45(a).  Nor is compliance with both laws impossible.  Also, plaintiffs argued that the second alleged purpose wasn’t actually a purpose, and that the goal of consumer protection was served by California’s more vigorous law.
The court found that it wasn’t impossible to comply with both laws; they could use the “Made in the USA” label only to items entirely made in this country, or by using a distinct label for clothing sold in California. In addition, the court agreed that both laws were aimed at preventing consumer deception. And even if promoting US manufacture was a secondary objective, “it cannot be said that § 17533.7 stands as an obstacle to promoting it because surely § 17533.7 encourages some manufacturers to complete all of their manufacturing in the United States.”  (I’ve written about this problem before with respect to “organic.”  The trouble is figuring out the balance between manufacturers who find it worthwhile to meet the purity standard because of the greater payoff, and those who would be willing to invest extra in a lesser standard but just give up and go fully conventional/foreign if they can’t use the label.)
In addition, the regulation doesn’t bar use of “Made in the USA,” only the use of an unqualified label in California unless the product is 100 percent made in the United States. Manufacturers can still use the unqualified label in other states.
Separately, the Federal Textile Fiber Products Identification Act (TFPIA) requires that any garment that is “processed or manufactured” in the United States include a “Made in the U.S.A.” label, regardless of whether component parts are manufactured outside of the United States. Such labels may be accompanied by additional language such as “of imported fabric.” Defendants argued that the TFPIA required what California law barred, and that California law didn’t allow qualified labels.  Plaintiffs argued that California law would allow qualified claims such as “Made in USA of globally sourced component parts.” The court agreed: “using detailed labels that indicate which component parts are foreign and which are domestic allow a manufacturer or retailer to comply with both state and federal law.”  The law’s goal, after all, was accurate labeling to protect and inform consumers, and qualified labels promoted that objective.  Manufacturers who chose to employ a qualified label nationwide “would not be able to avail themselves of the lower standard required by the FTC regulation as the labels would have to comply with the stricter California standard,” but they could use different labels in California. Compliance with both standards might be inconvenient, but wasn’t impossible.
As for the dormant commerce clause, evenhanded regulation with indirect effects on interstate commerce is okay if the state’s interest is legitimate and the burden on interstate commerce does not clearly exceeds the local benefits. For a court to find that a facially neutral statute violates the dormant commerce clause, “the burdens of the statute must so outweigh the putative benefits as to make the statute unreasonable or irrational.”
Defendants argued that the California law had no public benefit, given that, according to the FTC’s findings, a significant portion of consumers around the country are willing to accept that products labeled “Made in the USA” may contain component parts made in foreign countries. Plus, the California law might encourage manufacturers to give up and move everything overseas, harming the public. The burden on interstate commerce was significant because manufacturers had to choose among (1) not selling in California, (2) labeling all their products for sale to California, thus losing the benefits of the “Made in the USA” label, or (3) labeling separately for California.
Plaintiffs responded that there was a fourth alternative: qualified “Made in the USA” labels. That alternative put a minimal burden on interstate commerce.
The court first found that there was a legitimate state interest in combating deceptive advertising. Defendants’ disagreement with the California legislature over whether consumers were protected by limiting the use of unqualified “Made in the USA” labels was insufficient.
“[T]he California legislature decided that there is an important difference between items completely or substantially made in this country.”
Once qualified labels were allowed, there was no undue burden on interstate commerce. Manufacturers could use a qualified label nationwide, or a different label for products sold in California.

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