Tuesday, July 03, 2007

"Made in US" ruling unmade by Prop. 64

Benson v. Kwikset Corp., --- Cal.Rptr.3d ----, 2007 WL 1866454 (Cal.App. 4 Dist.)

In 2000, Benson sued defendants (who include Black & Decker, Kwikset’s parent) on behalf of the general public under California law. He alleged that they violated state laws banning sale of “Made in U.S.A.”-labelled goods containing foreign-made parts or involving foreign manufacture. He prevailed at a 2001 trial against most defendants.

Defendants’ appeal challenged the constitutionality and applicability of the statute, section 17533.7, which makes it unlawful “to sell or offer for sale ... any merchandise on which ... there appears the words ‘Made in 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.” They further challenged the trial court’s interpretation of state law barring deceptive representations of geographic origin.

Defendants lost every significant battle but one. Because this appeal took so long -- the court issued an opinion in 2004, but granted rehearing on its own motion as to whether plaintiff could recover costs; I bet he now wishes he hadn’t fought so hard on that point -- Proposition 64 applied, and the case was remanded to see if Benson could show standing through his own loss of money or property. The arguments the majority of the court rejected, however, are also significant. If Benson can show standing, the judgment below will be affirmed.

Kwikset makes deadbolts, doorknob sets, and similar products. It has plants in the United States, and one in Mexico. Between 1996 and 2000, Kwikset’s labels for its 35 products said “Made in U.S.A.,” “All American Made,” or similar statements. Some included screws and pins made in Taiwan, a latch assembly that was sub-assembled at the Mexico plant, or both foreign made parts and assembly.

Benson testifed that he understood “Made in the USA” to mean “that whatever is in that package should be made - the parts, labor, and the whole component should be made in [the] USA.” Kwikset’s quality reputation, plus his awareness of US manufacture, were what prompted his purchase. Two other witnesses testified similarly. After Benson sued, Kwikset removed country of origin labels from its California products. The FTC investigated (the court says this was unrelated), and defendants entered into a consent order banning them from (1) representing “in any manner ... the extent to which any ... product” distributed in interstate commerce “is made in the United States” unless “all, or virtually all, of the component parts of such product are made in the United States and all, or virtually all, of the labor in manufacturing such product is performed in the United States”; and (2) using “the legend ‘All American Made,’ ... or otherwise represent[ing] that a product is entirely made in the United States unless such product is in fact 100% made in the United States.”

After trial, the court ruled that Kwikset violated section 17533.7’s strict requirements because certain parts were made and/or assembled outside the country. The court further ruled that the general geographic misrepresentation statute applied, but it would only be violated when the misrepresentation deceived consumers. Thus, products that used only a few screws or pins from Taiwan were not deceptively labeled as “Made in USA,” but were deceptively labeled “All American Made.” Using either phrase on the products using latches sub-assembled in Mexico was deceptive.

Defendants argued that section 17533.7 violated the First Amendment because it created a chilling effect and was impermissibly vague. The court first pointed out that the labels were inarguably commercial speech. Since “chilling effects” depend on overbreadth and overbreadth doctrine doesn’t apply to commercial speech, one might have thought that would be the end of it, but the court continued to apply Central Hudson. The first part of the Central Hudson asks whether the speech at issue involves lawful activity and isn’t misleading. Here, the labels were misleading.

Again, that should have been the end of it, since commercial speech that flunks the first step of Central Hudson can simply be banned. But again the court continued, in a fairly pro forma analysis that illustrates why step one is the end of the line for deceptive speech: California has a substantial interest in banning deceptive advertising, and Section 17533.7 “constitutes a legislative determination that representations suggesting merchandise was made in the United States are misleading unless the producer’s manufacturing processes satisfy the strictures of the statute.” Third, though the law is strict, it advances the state’s interest in deterring deception. Fourth, the law is specific enough to be reasonably tailored to serve that interest. As a result, the court found no “chill.”

Likewise, the court rejected the vagueness challenge. Though the statute uses the term “substantially,” that’s clear enough for compliance.

As for whether the statute applied to the defendants’ conduct, the court found it pretty clear that it prohibited “Made in the USA” labels when the merchandise or “any article, unit, or part” of “the merchandise” “has been entirely or substantially made, manufactured, or produced outside of the United States.” The statute excludes raw materials, but covers parts. The court found that “substantially” here covered situations in which the foreign involvement is considerable in amount, value, or worth.

Kwikset’s Taiwanese-made screws and pins are “distinct components clearly necessary to the proper use or operation” of the products; moreover, the district coourt found that the Mexican latch sub-assembly was a substantial portion of the manufacturing process, and the court of appeals deferred to that factual finding. The majority agreed that the statute was broad and might create difficulties at the margin, but found that this was not a marginal case.

The majority also was sympathetic to the dissent’s “angst” about the effect of this law in “an age of global trade,” and about the potential for abuse of the unfair competition law. But it felt it lacked the power to interpret the statute as suggested, for that would amount to rewriting it.

Independently, plaintiff had prevailed under the statute banning misrepresentations of geographic origin in general. The trial court concluded that “Made in the USA” was an important label to some consumers, even if others didn’t care. It assessed deceptiveness from the point of view of those consumers for whom the geographic designation is important, but also “reasonably.” (This is a little unclear, but I think the idea is that the plaintiff has to identify some set of reasonable consumers who care about the labeling at issue, and establish that they were reasonably misled by the label. Defendants, I think, wanted to argue that the labels would only deceive a small number of consumers, because many don’t care about origin, but – especially given that both federal and state legislatures have deemed geographic origin a special concern for consumers – I think the court’s formulation makes more sense. Lots of consumers will ignore any label, but the manufacturer uses labels nonetheless to sway the ones who are paying attention, and we should look at its effect on those consumers.)

Separately, defendants argued the Lanham Act’s false/misleading distinction should apply, requiring survey evidence to prove misleadingness. The court of appeals, like other state courts assessing this argument, rejected its relevance to California unfair competition law. Factfinders are competent to evaluate ads without survey evidence.

The dissent agreed about standing, but wanted to rule for defendants on the substance of the case. Its basic argument is summed up in this example:

Would anyone really dispute the idea that the aircraft carrier U.S.S. Ronald Reagan, built by American shipworkers in Newport News, Virginia, was “made in America”? And yet if we take the statute too literally, the mere fact that a single television monitor in the communications section of the ship came from Taiwan would mean the ship itself was not “made in America.” After all, a “part thereof” was “entirely or substantially made” outside the United States—“part” in a hyper-literal sense at least.

Aside from common-sense issues, “the problem with that interpretation is it reads the word ‘substantially’ out of the statute as it affects the merchandise as a whole,” because by definition merchandise made of parts substantially made in the US would itself be substantially made in the US, so on the majority’s reading there’s no need to have “merchandise” in the statute at all. (Really? What if the US-made parts were assembled in Mexico?) The dissent would hold that “if the merchandise is substantially made in the United States and it is substantially made up of parts made in the United States, then it can still be advertised as made in the United States even though not every single part was (wholly or substantially) made in the United States.”

The dissent ended by arguing that the majority’s interpretation gives producers an incentive to relocate overseas. I take it the argument goes like this: If they can’t use some foreign parts – which may be unavailable or prohibitively expensive from US sources – and still use the “made in US” label to drive sales, they might as well move the entire production out of the country, where it will at least be cheaper.

This is plainly a concern, but the problem for judicial interpretation is that it might be true at every level of foreign content. Producers who could use “made in US” if their products had 40% or even 10% US content might also keep some jobs in the US that would otherwise go overseas. “Substantial,” which is the term in the statute that requires interpretation, is not obviously suited to calibrate the point at which the labeling statute becomes counterproductive in terms of producer incentives. (A separate issue is how to balance producer incentives against consumer deception. If it’s true that consumers expect “made in US” products to be made of US-made parts, then a label that incentivized producers to keep some jobs in the US might still be deceptive.)

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