Yesterday, the Federal Trade Commission (FTC) announced reaching a settlement in its lawsuit against Chemence, Inc., which the FTC alleged made “misleading unqualified claims that its strong, fast-acting glues are made in the United States,” when in fact “approximately 55 percent of the costs of the chemical inputs to Chemence’s glues are attributable to imported chemicals.” Though the company admits no wrong-doing, Chemence has ceased making Made-in-USA claims and has agreed to pay $220,000 to resolve the lawsuit, which the FTC filed this past February in the U.S. District Court for the Northern District of Ohio.
Overview of the Dispute
The company initially positioned itself to fight the FTC’s charges on the grounds that the agency was wrongfully and arbitrarily holding it to the same labeling standards as its competitors. In a May 23 federal court filing, Chemence described itself as “the only chemical processor that makes its glue in the United States” and explained that it “pays higher costs [than its competitors] to process glue in the United States and prides its resulting superior glue products.” Chemence took issue that its competitors “falsely claim that their super adhesives are ‘Made in the USA’” when that is not the case, but were not sued by the FTC. Chemence also argued that “[t]he FTC has never promulgated rules or issued clear standards about the use of ‘Made in USA’ claims on products.”
If Chemence’s imported chemical inputs do represent 55% of its material costs, then it’s Made in USA claims certainly fall squarely within the FTC’s published enforcement standards. In December of 1998, the FTC published a guidance document entitled Complying with the Made in USA Standard. In the guide, the FTC discusses the impermissible use of unqualified claims that products are “Made-in-USA” without disclosing that components making up a significant percentage of the cost are imported. By contrast, the FTC discusses the permissible use of qualified claims, which indicate that a given product is not “entirely of domestic origin” by describing “the extent, amount or type of a product’s domestic content or processing.” The FTC provides examples in the guide illustrating that Chemance was on notice that it should have disclosed its use of imported materials.
Where Chemence’s objection to the FTC’s lawsuit may have some merit, is regarding the FTC’s failure to prosecute Chemence’s competitors for also making Made-in-USA claims that violate FTC policy. In a February 5, 2016 Business Wire article announcing the FTC’s lawsuit, Chemence’s President Hugh Cooke expressed concern over the FTC permitting its competitors “who merely import and repackage cyanoacrylate glues to market such glue as ‘Made in USA with Domestic and Imported Material.’” The FTC’s guidance on Made in USA compliance explicitly provides that “[s]tating Made in USA on the package [of an imported and repacked product] would deceive consumers about the origin of the product inside.” In defending the FTC’s lawsuit, Chemence identified some of its competitors as engaging such conduct, specifically Gorilla Glue Company, Adhesive Systems, Inc., Royal Adhesives and Sealants LLC and Toagosei America, Inc.
Implications for Litigation
Taking all of this together, country-of-origin mislabeling appears quite possibly to be a rampant practice in the U.S. super glue market. This presents significant potential for private litigation by both competitors and consumers.
Competitors: Businesses have standing to sue their competitors under the Lanham Act for unfair competition arising from false designation of geographic origin. Specifically, § 43(a)(1)(B) of the Lanham Act, provides that: “[a]ny person who . . . uses in commerce . . . any false designation of origin, . . . which . . . in commercial advertising or promotion, misrepresents the . . . geographic origin of his . . . goods, . . . shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.” Despite the broad language of the statute, only competitors—and not consumers—have standing to bring Lanham Act charges, which can yield very hefty awards due to the potential availability of treble damages.
While both Chemence and the group of competitors it specifically identified in the litigation would each have to weigh the risks of counterclaims before initiating such an action against the other, a super glue manufacturer that has avoided making Made in USA claims seems well positioned to pursue claims against both sides.
Competitors looking to bring Lanham Act cases should be mindful that the window for bringing such claims can close fast. For example, in Rocky Brands v. Red Wings, the Southern District of Ohio found that similar claims were barred under the doctrine of laches based on the state’s two-year limitation period for physical injury and property damage claims.
Consumers: Purchasers of super glue could pursue relief under state law, particularly in the State of California. Many states have unfair competition laws that provide a private right of action for consumers to sue companies for false advertising. Those states generally follow the FTC’s standards, so the FTC’s action against Chemence makes the company a particularly attractive defendant for a follow-on class action lawsuit.
California is unique in that it has a specific statute for litigating Made-in-USA claims. The state’s Bus. & Prof. Code, § 17533.7 makes it illegal to label merchandise as Made in U.S.A. if parts constituting more than 10% of the final wholesale value of the manufactured product were imported.
Recently, there has been an uptick in private Made-in-USA claim litigation and plaintiffs have fared well. A California company that makes basketball hoops recently paid out more than $1.3 million to such plaintiffs. Nordstrom and AG Adriano Goldschmied settled a proposed class-action lawsuit based on Made-in-USA claims for more than $4 million. True Religion Apparel, Weber Grill and Land’s End have also settled similar suits in the last year and several pet food, energy drink and denim apparel companies are currently facing similar litigation.