Co-Authored by Denise Calle
Chemence Inc., a glue maker, is once again in a sticky situation with The Federal Trade Commission (FTC) for allegedly making deceptive claims that its products are made in the United States. In a proposed Consent Order, Chemence agreed to pay $1.2 million for its violation of the FTC Act for violating a 2016 federal court order to cease deceptive marketing tactics, as well as mandated an annual compliance report. The FTC now seeks Public Comment on the proposed consent agreement. The comment period closes on February 8, 2021. Thereafter, FTC will decide whether it should withdraw from the agreement or make it final and force Chemence to pay the $1.2 million penalty.
The FTC filed suit against Chemence, Inc., and company president James Cooke (individually and as an officer), for deceptively advertising, labeling, selling, and distributing superglue products as made in the United States. FTC’s complaint against the company contends that the products were manufactured and supplied to trade customers as “all or virtually all” made in the United States, even though significant proportions of the chemical inputs, and overall costs are attributable to foreign materials. FTC alleges that in various instances, foreign materials accounted for more than 80% of materials costs and more than 50% of overall manufacturing costs. FTC maintains that, by distributing promotional materials containing misrepresentations regarding the U.S. origin of their products, the company and officer provided trade customers the “means and instrumentalities” to commit deceptive acts or practices.
Lessons Learned from the Consent Order Under Public Comment
The Consent Order is a learning point for other companies that are assessing their own Origin Statement and whether it is products are qualified to use the “Made in USA” claim. The Consent Order has provisions that are meant to prevent the company and officer in this case from engaging in similar acts and practices in the future based on FTC’s Enforcement Policy Statement on U.S. Origin Claims. The following is a summary of the Consent Order and lessons learned:
Part I prohibits the violators from making U.S. origin claims for their products unless the product meets the “all or virtually all” standard or uses qualifying U.S. origin claims or has been substantially transformed.
- (1) The final assembly or processing of the product occurs in the United States, all significant processing that goes into the product occurs in the United States, and all or virtually all ingredients or components of the product are made and sourced in the United States;
- (2) a clear and conspicuous qualification appears immediately adjacent to the representation that accurately conveys the extent to which the product contains foreign parts, ingredients or components, and/or processing; or
- (3) for a claim that a product is assembled in the United States, the product is last substantially transformed in the United States, the product’s principal assembly takes place in the United States, and United States assembly operations are substantial.
- Lessons Learned: Ensure you comply with the “Made in the USA” Use this previously published blog on the Made in the USA standard for tips on how to compliantly label product with “Made in the USA” claims.
Part II prohibits the violators from making any country-of-origin claim about a product or service unless the claim is true, not misleading, and violators have a reasonable basis substantiating the representation.
- Lessons Learned:Ensure you have a reasonable basis substantiating the representation being made. Products bearing unqualified “Made in USA” claims should contain only a de minimis, or negligible, amount of foreign content. There is no single “bright line” to establish when a product is or is not “all or virtually all” made in the United States. The Commission turns to factors such as:
- Whether the final assembly or processing of the product took place in the United States.
- The portion of the product’s total manufacturing costs that are attributable to U.S. parts and processing; and
- How far removed from the finished product any foreign content is.
Part III prohibits violators from providing third parties with the means and instrumentalities to make the claims prohibited in Parts I or II.
- Lessons Learned: In this case, the FTC’s heavily relied on the means and instrumentalities provided to third parties and manufacturers used to market the product as Made in the USA as these marketing tools were direct evidence of the deceptive acts or practices undertaken. Companies should verify that its product meet the FTC “Made in the USA” standard prior to providing third parties with marketing material. All product labels are available on the FTC’s proceedings webpage. An example of Chemence’s packaging, including both unqualified Made in the USA claims and use of the American Flag, is below:
Parts IV through VI are monetary provisions. Part IV imposes a judgment of $1,200,000. Part V includes additional monetary provisions relating to collections. Part VI requires the violators to provide sufficient customer information to enable the Commission to administer consumer redress, if appropriate. Part VII requires violators to identify and notify certain third-party trade customers of the FTC’s action and submit reports to the FTC regarding their notification program.
- Lessons Learned: Not only will this company be forced to potentially pay the largest settlement amount in the history of FTC judgements; also the company’s tarnished reputation may result in a negative impact on its resources, business, long-term profitability; especially when the tarnished reputation must be shown to customers.
Parts VIII through XI are reporting and compliance provisions, requiring violators to provide a copy of the order to certain current and future principals, officers, directors, and employees. Part IX requires annual compliance reports be filed with the FTC.
- Take Away: This order goes beyond a monetary sanction as the FTC is clearly acting against this repeat offender to set an example and discourage other company employees from engaging in similar unlawful acts; especially by charging an officer individually. For twenty years, the company will have to provide the order to all future employees etc.
FTC enforcement for Made in the USA violations is on the uptick with steep penalties on the table for small and large business. The FTC has launched the Made in USA fraud program and is targeting large companies. While for decades, there was bipartisan consensus at the FTC that Made in USA fraud should not be penalized; in 1994, Congress authorized the FTC to impose penalties and damages for Made in USA fraud. In 2020, Williams-Sonoma was required to pay $1 million to the FTC for Made in USA deceptive practices and now Chemence is facing a 1.2 million penalty. Commissioner Rohit Chopra issued a statement describing the recent FTC actions as “real consequences” and “another step forward in protecting the Made in USA brand and restoring the Commission’s law enforcement credibility.”
Diaz Trade Law assists small and large companies assess whether their product complies with the “Made in the USA” standard. Companies are encouraged to use the FTC’s Enforcement Policy Statement on U.S. Origin Claims for guidance and confirm their product’s foreign parts are adequately assessed to avoid potential FTC “Made in USA” enforcement actions. Our attorneys are available to assist you and can be contacted at 305-456-3830 or firstname.lastname@example.org