From time to time, we have written about the unfair and dated nature of USDA’s Good Delivery Standards in pieces including:
Now, the North American Perishable Agricultural Receivers (NAPAR) has sent us a letter on a related matter:
The language below is from p. 1096 of the Statement of Managers for the 2014 Farm Bill:
“The Managers expect the Secretary to enforce the regulations contained in 7 CFR 46.44, Good Delivery Standards for Lettuce. The Managers are particularly concerned about contracts and invoices that use disclaimers to exempt product from the condition standards for damages due to bruising and discoloration following bruising.
The Managers expect the Secretary to investigate any contracts or invoices that violate standards and leave perishable product receivers no recourse for damages beyond the Good Delivery Standard for Lettuce.”
Over the past year you have written several pointed columns about the negative impact current good delivery standards have on smaller wholesalers/receivers who don’t have the market power to protect themselves from the practices of some large grower-shippers. In general, you take USDA to task for not updating its good delivery standards so they reflect current market practices in a rapidly changing marketplace. The members of NAPAR agree with you wholeheartedly.
In one of your columns, you question whether the receiver community has any real representation on issues like this. You rightly point out that United, which has the Washington muscle needed to accomplish something, is conflicted, because it has a heavy concentration of grower-shippers in its membership.
You also correctly point out that NAPAR, which was founded specifically to represent receivers against the market power of retailers and grower-shippers, is perceived to be too small and underfunded to successfully wage these battles.
Generally, I would agree that NAPAR against the Western Growers or any significant retailer wouldn’t be a fair fight, but it is possible to pick and choose one’s fights wisely and score some points for wholesaler/receivers around the country. Let me share an example with you.
For years, NAPAR’s efforts have been focused on one very important good delivery standard, the only good delivery standard for produce that is actually in statute, the good delivery standard for lettuce – 7 CFR 46.44.
Delivering this highly perishable commodity, especially from growers in the West to receivers in the East, has always been a problem and a matter of contention. The problem was so persistent and divisive that USDA promulgated 7 CFR 46.44 in 1961. Under the regulation, according to USDA, “lettuce sold without a specific grade, regardless of transit time, is permitted to have the following tolerances upon arrival and still make good delivery:
— 15 percent condition defects
— 9 percent serious damage
— 5 percent may be decay affecting any portion of the head exclusive of wrapper leaves
Apparently, the statute only worked for just over a decade. Due to severe weather in the mid- 1970s, the recently formed Central California Lettuce Growers Cooperative voted to unilaterally exempt its companies from the good delivery standard and stamped their invoices with the disclaimer “Good delivery standards apply excluding bruising and/or discoloration following bruising.” Of course, the most common “condition defect” for lettuce, and one that would throw many loads out of good delivery, is “bruising and discoloration following bruising.”
The Central California Lettuce Cooperative soon became defunct, but it left the produce industry with one lasting gift, the disclaimer. Soon every lettuce grower in the West was stamping the disclaimer on its invoices and they continue to do so to the present day.
If a wholesaler received a load of lettuce that had more than 15% condition defects, throwing the shipment out of good delivery, and tried to use the statute for redress, it was told it had agreed to the disclaimer and that was that. If it objected too strongly, it was told to find somewhere else to buy lettuce. Of course, there was no one else to do business with because every grower-shipper used the same disclaimer.
As you point out, most retailers don’t have this problem because they have market power. And some receivers, but just a few, are large enough to exercise market power also. Some don’t have the problem because they have over the years developed excellent business relationships with their lettuce growers, but, overall, typical NAPAR members are at a distinct disadvantage when they complain about condition defects caused by “bruising and discoloration following bruising.”
In the past, prominent NAPAR members have met with the growers of lettuce to complain and ask them to stop using the disclaimer — to no avail. NAPAR members have also met with USDA to ask it to protect smaller receivers by enforcing the statute — also to no avail. Shortly after I arrived at NAPAR, we met with USDA again to ask for help. They understood the market power argument and were sympathetic, but only offered to open a new regulatory proceeding, which could last for years.
NAPAR members became even more concerned when the lettuce disclaimer began to show up on invoices for other produce items like broccoli, romaine and Brussels sprouts.
After repeated attempts to resolve the issue with the grower-shipper community, NAPAR decided to pursue a two-pronged strategy.
— First, we would use the Farm Bill process to educate members and staff of the Agriculture Committees about the problem and urge them to instruct USDA to enforce the good delivery standard for lettuce as written.
— Second, we would seek a legal opinion to see if the grower-shippers who were using the disclaimer were legally vulnerable.
NAPAR retained one of the best antitrust law firms in the country to conduct the legal analysis. Its conclusion was that the grower-shippers who were using the disclaimer, which meant all of them, were potentially vulnerable under several antitrust and anti-competitive laws.
Shortly after receiving this opinion, the Farm Bill delivered the above cited clear message to USDA to enforce the current good delivery standard as written. NAPAR members intend to meet with both USDA and the grower-shipper community to see how quickly we can put an end to the use of the unilateral disclaimer.
While NAPAR may not have the political or financial strength of United Fresh, the Western Growers or other produce associations, it is dedicated to solely representing the interests of the wholesaler/receiver community. As it has in the past with its efforts to insure accurate delivery inspections at reasonable costs, to prevent an increase in the shatter allowance for US No 1 table grapes and to block attempts to lower USDA produce grades, NAPAR will continue to address issues that are important to its members.
Perhaps, if we are finally able to do away with the unilateral disclaimer from the good delivery standard for lettuce, we can turn our attention to pursuing your suggestion that USDA pursue updating its good delivery standards to bring them into line with commercial expectations and protect those in the produce industry who do not have the market power to protect themselves.
—John J. Motley
It seems appropriate to ask for USDA intervention to create appropriate good delivery standards that correspond to trade expectations.
These delivery standards, however, are a default in the absence of other terms negotiated and agreed between the parties. Individual firms have the right to define their own individual terms of sale, and if the buyer is aware and agrees to these terms, as appears to be the case here, then those terms would prevail.
However, legally, sellers have to act like the competing businesses that they are and cannot act collectively and conspire to impose identical terms. Even just two competing businesses agreeing upon these terms among themselves could meet the definition of price fixing and would be a violation of antitrust laws. Under the law, terms of sale, warranties, etc., have the same protections as prices; fixing delivery terms among competitors is equally illegal as fixing dollar prices:
A trade association may or may not be able to share appropriate terms of sale; if at its core it is competitors sharing information or agreeing to terms that would otherwise be illegal, it is probably illegal when done by a trade association:
The other issue is the requirement under the law to offer identical treatment to similarly situated customers. The Robinson-Patman Act was born out of the food industry; it was passed in 1936 in response to suppliers selling to A&P for less than other stores with discounts that were unrelated to the difference in cost of dealing with A&P.
If suppliers ignore their special terms for some customers and end up adjusting invoices or accepting rejections from other customers, while enforcing the special terms against other customers, this may be a violation of Robinson-Patman or state statutes.
No major retailer or foodservice distributor is accepting lettuce with much “bruising or discoloration due to bruising” — wholesalers serve as the distribution centers for independent retailers and restaurants, so to keep these independents viable the wholesalers need to be able to purchase at comparable prices, and these terms are part of the price.
The question is really simple: What is the purpose of USDA good delivery standards? Surely it is not to protect Wal-Mart or Sysco; it is specifically to ensure that buyers without this market heft can be treated fairly. Individual shippers can negotiate their own contracts, but when every single shipper starts stamping identical terms on their invoices, it seems like a restraint of trade.