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This is our third blog in a series that is examining potential ambiguities in the Federal Trade Commission’s (Commission) Made in USA (MUSA) guidance – ambiguities that become particularly more important now that MUSA claims in labeling are the subject of a new Commission, the violation of which can lead to civil penalties.

Suppose a company really wants to make a MUSA claim and meet the “all or virtually all” standard but just can’t find the material it needs in the United States. Is it just out of luck as far as making any claim? Would you be surprised to hear us respond, maybe?

What does the Commission’s guidance say? First off, if the material you are trying to purchase is not a raw material, you are just out of luck as far as getting any relief from the Commission’s standard. So if the only place that manufactures the particular widget you need is Taiwan, you just have to buy it from there and count it as a non-domestic cost. California, which is getting a surprising amount of praise from us in these blogs, lets you exclude, to some degree, costs associated with any input, regardless of process, that cannot be sourced domestically. That makes a lot of sense to us. Does a typical consumer really look at a MUSA claim and think to themselves, raw materials that can’t be sourced in the U.S. might be excluded from that claim but not other components? To us, sounds more like a policy decision than an attempt to understand how consumers might interpret a claim.

In any event, there is no ambiguity there. The ambiguity arises when you try to decide if you qualify to exempt raw materials that are not available in the U.S. from your cost calculation. The Commission’s guidance notes that you do not need to include raw materials that are not available in the U.S. (or not available in commercially significant quantities) unless the raw materials constitute the “whole or essence” of the finished product. “Whole” is pretty easy to grasp. And the Commission provides examples of the rubber in a rubber ball or the coffee beans in ground coffee. But what makes a raw material the “essence” of a product? Essence is defined as “the intrinsic nature or indispensable quality of something . . . that determines its character.” The Commission’s guidance states that the vanilla flavoring in vanilla ice cream is exempt – so clearly vanilla is not the essence of vanilla ice cream, although one could argue it is indispensable and determines its character. But suppose a company sells vanilla hazelnut syrup (there is such a thing, by the way). Is vanilla the essence of vanilla hazelnut syrup? What test does one apply? Who knows.

California, which is now getting its second shout-out in this blog, avoids all this ambiguity by just giving you a predetermined “break” in the cost calculation. Your domestic content can drop to 90 percent from 95 percent if 5 percent or more of your costs are for materials, whether raw or not, that are not available in the U.S. As we said last time, to the best of our knowledge, this is not a hill on which the Commission has died and brought an enforcement action based on a disagreement over whether a foreign-sourced raw material was the essence of a product. But at the risk of sounding like a broken record, companies facing the prospect of civil penalties deserve clearer guidance.

Made in USA, Part Three – Materials Not Available in the US