Legal and Business Guide for Specialty Crop Producers December 2010 Legal and Business Guide for Specialty Crop Producers

AG1263 Legal and Business Guide for Specialty Crop Producers December 2010 Legal and Business Guide for Specialty Crop Producers

Contributing Authors

Ronald L. Rainey, Agricultural Economics and Agribusiness Department Steven C. Seideman, Food Science Department Harrison Pittman, National Agricultural Law Center Shannon Mirus, National Agricultural Law Center Rusty Rumley, National Agricultural Law Center Elizabeth Rumley, National Agricultural Law Center

Authors acknowledge the Arkansas Agriculture Department for their assistance in developing this guide and their financial support through the Specialty Crop Block Grant Program.

i Preface

The Specialty Crops Competitiveness Act of 2004 Agricultural Economics and Agribusiness Department authorized the United States Department of Agricul­ and the University of Arkansas Institute of Food ture to make grants available to provide assistance for Science and Engineering. specialty crops, while the 2008 Farm Bill amended the act and authorized the USDA to provide grants to The information contained within this book is enhance the competitiveness of specialty crops. This intended for use solely as an educational tool and book is the result of one of those grants and is meant to research aid. It is not intended to be legal advice, nor is address a wide range of legal and business opportuni­ it intended to be a substitute for legal services from a ties and challenges faced by specialty crop producers in competent professional. To obtain legal advice, please the state of Arkansas. It includes chapters on contract contact and consult with a licensed, practicing attorney. laws, food safety, food labeling, agricultural labor, busi­ Further, the information provided in this publication is ness organizations and the application of the Perishable educational in nature and, as such, contains hypotheti­ Agricultural Commodities Act. In addition, since the cals and other information for purely educational industry is also confronted by other unique challenges value that is fact-sensitive and results in different that directly affect competitiveness, it also includes a outcomes based on varying circumstances. Readers of chapter addressing the marketing of various types of this publication are encouraged to contact the authors specialty crops and one discussing the third-party for additional questions that may arise based on the audit system. educational content of this publication.

Coordinators on this project include the This book will also be available online in the National Agricultural Law Center and the University of National Agricultural Law Center Reading Room on Arkansas Division of Agriculture. Other contributors Specialty Crops at www.nationalaglawcenter.org and on and collaborators on this project include the Coopera­ the eXtension Community of Practice for Agricultural tive Extension Service, the University of Arkansas Law at www.extension.org.

ii Table of Contents

Chapter 1: Marketing ...... 1 Transformation of the Farmers’ Market ...... 1 Marketing Strategies ...... 2 Strategically Capturing Local Markets ...... 4 Chapter 2: Contracts and Contracting ...... 6 Parts of a Contract ...... 6 Remedies ...... 7 Statute of Frauds ...... 7 UCC: History and Scope ...... 7 UCC Definitions ...... 7 UCC Article 2: Contract Requirements ...... 8 UCC Article 2: Terms of Contract ...... 8 UCC Article 2: Performance and Breach of Contract ...... 9 UCC Article 2: Anticipatory Repudiation ...... 10 Warranties in the UCC ...... 10 Common Sense Contracting ...... 11 Chapter 3: Perishable Agricultural Commodities Act ...... 13 Key Definitions ...... 13 Unfair Conduct ...... 13 Licensing ...... 14 Statutory Trust ...... 14 Reparations Proceedings ...... 15 Disciplinary Proceedings ...... 16 Prompt Payments ...... 16 Chapter 4: Business Organizations ...... 17 Important Issues ...... 17 Liability Issues ...... 17 Tax Implications ...... 18

iii Business Structures ...... 18 Sole Proprietorship ...... 18 General Partnership ...... 19 Limited Partnership ...... 19 Corporations ...... 20 Limited Liability Company ...... 20 Chapter 5: Agricultural Labor ...... 22 Migrant and Seasonal Agricultural Worker Protection Act ...... 22 Fair Labor Standards Act ...... 23 Occupational Safety and Health Act ...... 23 Federal Insecticide, Fungicide, and Rodenticide Act ...... 24 Immigration Reform and Control Act ...... 25 National Labor Relations Act ...... 25 Other State and Federal Statutes ...... 25 Chapter 6: Food Safety and Specialty Crops ...... 27 The Necessity of Food Safety Regulation...... 27 The Federal Agencies That Regulate Food Safety...... 27 Enforcing Food Safety Regulations on Specialty Crops ...... 28 Current Liability Issues Facing Specialty Crop Growers ...... 28 Chapter 7: Third-Party Audits of Specialty Crop Operations ...... 30 Historical Perspective ...... 30 Hazards in Foods ...... 31 Good Agricultural Practices (GAP) ...... 31 Potential Sources of On-Farm Contamination ...... 31 Third-Party Audits ...... 32 The Future ...... 33 Selected Readings ...... 33 Chapter 8: Food Labeling ...... 34 Nutrition Labeling ...... 34 COOL Labeling ...... 35 Descriptive Labeling ...... 35 Organic Labeling ...... 36 Irradiation Labeling ...... 36 iv Chapter 1 Marketing

We have witnessed the exploding momentum of past decade due largely to the food consumer’s sense advocates and supporters of local food systems over that the local farmer provides a tastier, healthier and the past decade. Today, there exists a plethora of more trusted source of food. sources – books, movies, websites, organizations, etc. – that serve the increasing appetite of consumers, retail­ Since the U.S. Department of Agriculture started ers and farmers interested in actively engaging and publishing the number of farmers’ markets in 1994, the supporting “local” and direct marketing efforts. These reported numbers have consistently grown (see locally based food systems promote many economic, Figure 1). Data revealed 4,685 markets operating in social and even suggest nutritional benefits to 2008, which is an increase of almost 7 percent over the members of their respective communities. The oppor­ last two years. The strong upward trend in market tunities offered by these developing food systems numbers highlights the sustained growth in direct present farmers with many new challenges and require marketing opportunities and local food demand. a business skill set to successfully navigate the marketing expectations and regulatory environment.

There is an ever-increasing myriad of marketing approaches, which are sometimes confusing, used to promote local food products and benefits of the systems. This chapter provides a brief overview of the development of “local” direct food systems. Also presented are some specific strategies that should aid growers in evaluating the viability of engaging this direct marketing channel. Transformation of the Farmers’ Market A farmers’ market is a form of direct marketing in which producers from preferably a local area gather for the purpose of selling their own produce directly to the The recently released 2007 Census of Agriculture consumer. Farmers’ markets are just one of many direct numbers reveal dramatic increases in direct sales of marketing outlets that also include U-pick operations, farm products from 2002 to 2007. Data released Internet sales, buyers’ groups, community-supported showed that direct agricultural product sales to agriculture1 and farm stands. The demand for local and consumers rose to $1.2 billion for 2007. This estimate regional sources of food has been an emerging niche represents a 49 percent increase over the $812 million market for a number of years, as is evidenced by the estimate reported in 2002. For Arkansas, the 2007 popularity and growth of farmers’ markets. Farmers’ report cited a sales figure of $8.16 million. The growth markets have continued to grow in popularity over the in these numbers represents higher sales at farmers’

1Community-supported agriculture (CSA) is a direct marketing program whereby a farmer offers a set number of “shares” for sale to the consuming public. The shares represent a predetermined amount of product (produce, meats, fish, etc.) at periodic intervals throughout the harvest season. This method is a popular way for consumers to purchase local agricultural products.

1 markets and other nontraditional outlets. The emergence purchasing strategies (Dimitri et al., 2003)2. The system of the Internet and online sales has not evaded farming continues to move large blocks of food from farm to operations. Farms are not only using the Internet to table with relatively greater efficiency. In recent years, promote and sell their products but are also building however, circumstances such as fuel prices, growing relationships with customers highlighting their consumer demand and the environmental challenges superior products and connecting with consumers. facing key food-producing regions have converged to make local and regional procurement systems higher By selling directly to consumers, producers are able priorities for even the largest companies in the food to sell their products at the retail price level. Addition­ supply chain. Most food distribution/retail firms have ally, the direct to consumer social connections that are developed or are in the process of developing sustain- facilitated by farmers’ markets allow producers and ability strategies that target increased use of local food consumers to build relationships that are mutually systems. Retailers, in some instances, have identified beneficial to both in terms of understanding and satis­ sustainable strategies highlighting local procurement as fying each other’s needs. Producers can interact with a business growth strategy. customers to understand specific customer needs or wants in the marketplace and/or changes in taste and Large retailer initial investments into sustainability preferences. On the other hand, consumers gain addi­ strategies at first focused on reducing food miles. Food tional satisfaction from purchasing food produced miles is the distance food travels from its initial locally and like knowing not only who produced their production location to the retail store. The initial food but also the manner in which their food was results of these strategies were transportation savings produced. The local community and economy are and a reduced carbon footprint. Although these the ultimate winners because of the enhanced multi­ savings alone and the reduced environmental impact plier effects as a relatively higher proportion of the justify these investments, retailers are realizing added dollars spent on local purchases recirculation in the gains that support further sustainability efforts. A local economy. recent personal communication with a national procurement firm demonstrates the changing para­ To further intensify discussion about the continued digm. This firm focused on not only sourcing local emergence of local food demand, there seems to be produce but also tracking sales impacts in addition to increased debate between local and organic brands. transportation and logistics savings. To enhance their Research has shown that there are many product local procurement efforts, they worked with growers attributes that resonate with “organic consumers.” and retailers to promote products as local throughout These attributes or characteristics include perceptions the region. The firm’s market research revealed an of relatively higher trust, freshness and healthier prod­ increase in monthly dollar sales of over 20 percent. ucts. Organic markets, which are largely influenced by Not only did units sold increase significantly, but produce sales, have maintained double-digit market sell-through – a measure of spoilage – showed strong growth over the last decade. Cary Silvers, director of improvement. The retailer-driven local strategy also Consumer Insights for Rodale, noted at the 2009 Food resulted in lower markdowns to move the product off the shelves because of the increased consumer interest. Marketing Institute show that shoppers’ new interest in locally grown food reflects their strong desire to purchase fresh fruits and vegetables. During her Marketing Strategies comments at the show, she also noted that there was an emerging battle between organic and locally grown The marketing strategy should be a comprehensive food items. She suggested that local was currently plan of how available resources will be best used to winning the battle because shoppers believed local achieve the stated goals of the business. The strategies growers deliver the freshest produce. should be narrowed down to include only those that are legal, socially acceptable and offer the best opportu­ The U.S. fresh produce industry’s distribution nity for success while achieving a stated goal. An system has evolved over the previous decade as well. example of a marketing strategy is to develop a The transformation resulted in larger market share by brochure highlighting the quality of your product or larger retailers, increased marketing activities by mass service including business’ “satisfaction guaranteed” merchants, consolidation of buyers and changing program. Another example is to market 20 percent of

2U.S. Fresh Produce Markets: Marketing Channels, Trade Practices and Retail Pricing Behavior. Economic Research Service, USDA. September 2003.

2 production volume directly to consumers through you operate, where you stand in relation to the the newly developed business website or competition and in what direction your busi­ community-supported agriculture (CSA). ness or industry is headed. A SWOT analysis can be a useful tool in assessing your situation. As business owners chart the direction of their The SWOT analysis is used to identify trade or business, they have many alternatives to Strengths, Weaknesses, Opportunities and consider and evaluate. As the industry competition Threats concerning your business. intensifies, a farmer’s business analysis skills can be • Marketing Objectives – The marketing as important as his or her production skills. It has often objectives should consist of time-measured been said that marketing plans should drive farmer sub-goals that will enable the operation to planting decisions – for example, variety selection, reach its overall goals. Again, the emphasis is planting dates, etc. – versus growing a crop to sell. on time-specific and measurable goals. Simply Marketing success is influenced by many issues, stated, these objectives must be realized for the including how to gain new customers, how to satisfy business to reach its final goals. Sample market­ loyal existing customers, how to increase market share ing objectives include increase sales volume by and how to expand profit margins. An integral part of 10 percent over the previous year, increase developing marketing success is a comprehensive profits by $5,000 during the fourth quarter and marketing strategy. expand the customer base by 200 clients. Developing a detailed marketing strategy or Marketing objectives should support the busi­ improving on an existing marketing strategy can assist ness’ overall mission statement and should the owner/manager in determining where the business drive the day-to-day activities of the operation. currently is and/or what direction it will be heading in Objectives will foster the development of the future. Basic marketing focuses on a business specific goals in order to meet pre-determined understanding and developing a comprehensive plan “benchmarks.” These objectives should be to coordinate its product(s) and service(s) with pricing clearly defined providing ownership, manage­ and promotion for a given market. A good marketing ment and employees the necessary guidance. plan will help to plot the course of action needed to • Marketing Strategies – The marketing meet the goals of the business. A good plan also estab­ strategy should be a comprehensive plan of lishes guidelines that can be used to measure the how available resources will be best used to success of the operation. achieve the stated goals of the business. Money, people, equipment, services and products are Although marketing plans will vary from company all defined as resources. Marketing strategies to company, there are five fundamental components can originate from various sources, such as an that should be considered when developing a plan. innovative business owner, outside industry These components include mission statement and consultants, team brainstorming sessions or goals, situation analysis, marketing objectives, market­ combinations of the aforementioned sources. ing strategies and marketing programs that include The strategies should be narrowed down to timelines and budgets. include only those that are legal, socially acceptable and offer the best opportunity for • Mission Statement and Goals – The mission success while achieving a stated goal. An statement is an opportunity to distinguish your example of a marketing strategy is to develop a company from others within the industry. The brochure highlighting the quality of your mission statement should not only describe the product/service including business’ “satisfac­ business but also the products and services the tion guarantee” program. Another example is business offers. This statement should include to market 20 percent of production volume the business’ core beliefs and purpose for directly to consumers through the newly serving the market along with goals to drive developed business website. the business. Your business’ goals should consistently reflect the beliefs stated in the • Marketing Programs – Marketing programs mission statement. will consist of the action steps that will be used to implement the decided upon strategies and • Situation Analysis – The situation analysis is a goals. Simply stated the marketing programs determination of where your business is are the specific business tactic that will assist in currently positioned in relation to your the accomplishment of the business objectives. customer base, the trends of the marketplace The marketing programs should outline in

3 detail specific tasks that must be done. These direct marketers have a persuasive story to tell programs will be implemented into various that not only highlights the economic benefit aspects of the business, such as sales, pricing, of supporting local growers/economies but product development, advertising, market also provides unique benefits to customers. penetration, etc. An example of a marketing Promotional efforts should not only discuss program dealing with sales would be to the solid business motivations for sourcing develop a product catalogue with a price guide. locally but also include that educational compo­ Advertising, participation in industry/trade nent that connects your clients to the product. shows and product branding are also examples Each generation has a unique set of cultural of different types of marketing programs. expectations and experiences that marketers must understand in order to make the right Strategically Capturing decisions – in order to remain relevant. There­ fore, it is important to narrow down your focus Local Markets to target your niche customer. For a quick Direct marketers and farmers should seize this overview of generational difference, the follow­ market opportunity by developing relationships with ing categories detail the major players on the their existing and potential customers – households, generational stage, beginning with those who procurement specialists, buyers, retail management. emerged first. Specific strategies should be identified to communicate with and target your segmented audience because • Matures: There are 57.8 million Matures, today’s marketplace is overwhelmed with marketing people born from 1912 through 1945. information. The following paragraphs outline three Matures made up about 20.5 percent of the strategies designed to aid a grower in evaluating the population, according to 2000 Census potential marketing resources and designing a road figures. Some subdivide the Matures into map to capturing this emerging market: (1) connect the GI generation (born 1912-1921), the with your customer, (2) use existing marketing children of the Depression (born 1922­ resources and (3) expand your network. 1927) and the Silents (born 1928-1945). The wealthiest generation, they have an 1. Connect With Your Customer immense economic impact: an estimated $20 trillion. It is important to know your typical customer • Boomers: They were the biggest generation and his/her motivations for making purchases the United States had ever seen. Numbering and to connect with these clients. Innovation 82.8 million people born from 1946 through and differentiation are the key drivers in 1965, boomers represented 29.4 percent today’s fast-paced marketing arena, but educat­ of the U.S. population in 2000, with esti­ ing your customer is a critical piece to the mated annual spending of $900 billion. puzzle. Local food consumers are motivated to shop by different factors. There are opportuni­ • Generation X: A significantly smaller ties through local branding and promotional group, Gen Xers, with a population of strategies to connect consumers to the various 58.9 million in 2000 were born from 1966 value-enhancing marketing components that through 1979. They made up 20.9 percent highlight your products and service. Successful of the population and spend about marketers weave these promotional pieces into $125 billion per year. a compelling story that highlights their farm • Generation Y, also known as Echo and its history, the product offerings or unique Boomers, Millennials, Next Generation, selections and/or the firm’s commitment to Net Generation: Members of Gen Y are quality and integrity. If growers are successful the children of boomers and Gen Xers. in compiling a marketing program that effec­ They were born from 1980 through early tively connects their farm’s history/missions 2000. Numbering about 80.5 million, or with its products and services, it enhances the 28.6 percent of the population in 2000, they ability to strengthen relationship marketing. already represent considerable purchasing Relationship marketing refers to the mutually power: an estimated $105 billion per year. beneficial arrangement wherein both the buyer As they come into their own, their impact and seller recognize the importance of inter­ will rival that of the boomers. acting beyond the transaction. Growers and

4 2. Use Existing Marketing Resources products and supporting area growers. This branding provides growers with an instant There are a number of marketing programs invitation to start building a relationship with operated by universities and state departments new customers. These programs enhance the of agriculture that can enhance growers’ ability of a grower to highlight local products marketing message and overall presence. State by providing a third party source verification branding programs are typically coordinated program. This enhanced transparency by state departments of agriculture and are improves the potential for relationship market­ focused on market development and promo­ ing synergies to develop. Both parties focus on tion of a state’s agricultural commodities value-enhancing activities that ultimately and/or industry. The market development result in a more satisfying exchange. programs include names such “Arkansas Grown,” “Made in Oklahoma,” “Make Mine Growers interested in communicating a Mississippi” and “Pick Tennessee Products,” to consistent marketing message can build on the name a few. To use, growers simply need to sign synergies offered by state branding and up/register with the respective department and marketing programs to enhance their products verify production of products. The programs in the marketplace. Three specific benefits are usually inexpensive and free in some states. growers can use by participation in a state branding program: 1) expanded marketing In addition to allowing growers to use the presence through agricultural department branded logo, the marketing programs typically activities including online presence, 2) an have their own promotional campaigns that opportunity to network and build relationships include a business listing in state marketing directories and potential participation in with outside expertise and training and state/national trade shows and expositions. 3) enhanced marketing avenues to communi­ Additionally, the programs typically offer cate firm value and uniqueness to customers. marketing assistance, training and workshops to participants. One example is a program that 3. Expand Your Network allows participation in an international trade Within each grower’s community, there is a show and exposition. Another example is a collection of networks that includes fellow program that offers participants the opportu­ nity to list their business profile on the state’s growers, consumers, procurement specialists, online marketing directory. advocates, stakeholders, etc. These networks offer growers tremendous opportunities to In addition to the state branding programs, enhance their marketing presence, understand universities and industry trade associations the changing business landscape and enhance also have resources to enhance business production and marketing expertise. Growers marketing efforts. The branding and marketing should become actively engaged within their programs have emerged from purely promo­ local community, strategically thinking about tion of a state’s commodities to regional iden­ ways to use the synergies of these networks to tity branding that is a component of but also a improve their marketing opportunity. The term growing phenomenon distinct from local food community in this context means networking systems. With this transformation, the state with your local food system partners including branding and marketing programs now signal nonprofit organizations, academic institutions, specific attributes to consumers and, in the civic groups and city/state agencies. Growers current marketplace, present a host of oppor­ can enrich their marketing presence by being tunities for growers/retailers to use these active within their local community and other programs to enhance their “local” message. industry organizations. The promotional programs allow consumers to By building relationships through civic and easily identify state growers and understand networking endeavors, growers create oppor­ that, at a minimum, the products were devel­ tunities to augment their business reputation, oped within the state’s borders or a specific work ethic, standards, etc. These activities region. Research has detailed the added value create a win-win for growers to expand their consumers receive from consuming local customer base and promote products.

5 Chapter 2 Contracts and Contracting

Contracts are everywhere and are an important important point is that the offer can only be accepted legal consideration for specialty crop producers, as by the offeree. To return to the earlier example, assume they exist to help people buy and sell goods, obtain and that you offered to sell the bushel of corn to your give loans, lease property or agree to perform a service. neighbor, but your coworker overheard you talking. A contract is a legal document that represents an Your coworker cannot accept the offer because he/she agreement between two or more parties and involves is not the offeree. legally enforceable commitments or promises to do or not do something. It is important to understand that a An offer must be accepted exactly as it is made contract is more than just a promise – it is a legally without modifications. If the offer is changed, it is a enforceable promise. This means the court can step in counter-offer. Once a counter-offer is made, the origi­ and enforce an agreement reached between parties. In nal offer is gone and the counter-offer is in its place. general, contracts consist of four basic parts that are This means that if the counter-offer is rejected, the particularly relevant for specialty crop producers: the original offer cannot be accepted. Instead, the process offer, acceptance of the offer, consideration for the must begin again with a new offer. If your neighbor, in contract and performance of the contract. response to your offer to sell him produce, tells you that $15 is too high but he’ll buy it for $12, he has made a counter-offer. After he does that, you have the choice of Parts of a Contract accepting or rejecting his counter-offer, but he can no A contract begins with an offer. In legal terms, an longer accept your original offer to sell for $15. offer is a “communication by the offeror of an intent to enter a contract with the offeree with the stated terms.” Consideration is the third part of a contract and is In other words, it is not an invitation to bargain or defined as “the bargained exchange of something of negotiate – it expresses one party’s willingness (the value.” In other words, consideration is the “promise” offeror, the one making the offer) to be bound by the part of the contract – it is what one party promises to terms just set forth. An offer can be revoked before the do or exchange in return for the promised action from offeree (the one the offer is made to) has accepted, but the other party. Further, consideration can take many if the offeree accepts the offer before it is revoked, both forms – money, physical objects, services or promised parties are bound by the offer. actions. In our example, the consideration you offer to provide is the bushel of corn. If your neighbor accepts The next step in the life of a contract isacceptance . your offer, he promises to provide the consideration of Acceptance is the “communication of assent or agree­ $15 in cash. ment by the offeree to the terms of the offer to the offeror.” This acceptance of the offer must be made in The final part of a contract isperformance . Once the manner required by the offer. For example, if you the obligations contained in the contract are fulfilled by offer to sell a bushel of corn to your neighbor for $15 both parties, then full performance of the contract has as long as they call you this afternoon by 5 p.m., you occurred and the contract is complete. However, if full have offered to make the sale. If your neighbor then performance has not occurred, then the contract may shows up at your door at 4:30 p.m. to take you up on have been “breached.” A breach of contract occurs your offer, in general, you are not obligated to sell the when the contract terms were not met by at least one produce because the terms of your offer required party. At this point, courts can step in to provide that he call you in order to accept the offer. Another remedies for the breach.

6 Here are a few of the types of contracts that are Remedies required to be in writing by the statute of frauds. Money is usually the remedy used by the courts. The court may order one party to pay the other for • Contracts that cannot be performed within expectation damages, reliance damages or restitution, one year or the contract may specify stipulated damages that • Real estate sales are due. • Sale of goods over $500 • Agreeing to become a surety (becoming • Expectation damages are what the party responsible for another’s obligation or debt) expected to gain from the bargained exchange in the contract. Expectation damages are However, even if the statute of frauds does not “forward looking” and put the party in the require that a contract be in writing, it is always a good position they would have been if the contract business practice to have all contracts in writing. had been fulfilled. • Reliance damages compensate for the losses UCC: History and Scope incurred in reasonable reliance on the contract that was breached. Reliance damages are The Uniform Commercial Code, or UCC, is a set “backward looking.” They put the party in the of standardized state laws that have been adopted, in position they would have been in if the some form, in all 50 states. It is designed to make doing contract had never been entered into. business across state lines easier and more uniform by • Restitution is meant to prevent “unjust providing a common law to govern business transac­ enrichment” by one party. In restitution tions across the country. It was originally drafted by the damages, a court may require one party to National Conference of Commissioners on Uniform return an unfair benefit received as a result of State Laws in the 1940s, was adopted in the 1950s by the contract. This remedy is usually ordered most states and has gone through several revisions when there has been partial performance of since that time. the contractual obligations by one party which results in the other party’s benefit. The UCC is divided into 11 sections called articles. • Stipulated damages are usually a fixed sum of Each article addresses a different type of business money or a formula for calculating the sum of transaction. For example, Article 1 contains the general money due if one of the parties breaches the provisions of the code, including its scope, applicability contract in a certain way. Stipulated damages and general definitions, while Article 2 covers the sale are actual terms of the contract – the parties to of goods. Article 3 applies to negotiable instruments, the contract agreed to those specific damages which are a special type of contract for the payment of when they signed the contract. money – usually checks, promissory notes and other commercial paper. Article 2, addressing contracts for The court may also order specific performance of the sale of goods, will be the focus of the remainder of the contract. Specific performance occurs when the this discussion, although any or all of the sections of court requires one party to complete their contractual the UCC may apply to your business transactions. obligations. This remedy is available primarily in situa­ tions where money damages are considered to be an inadequate remedy. UCC Definitions Before setting out requirements for contracts, it is Statute of Frauds important to determine exactly what contracts are covered by this article of the UCC. Here are some The statute of frauds requires that certain important definitions that do just that. contracts must be in writing and signed by the parties. The idea behind it is that a contract is not enforceable • Goods: UCC Article 2 covers all contracts for unless there is evidence that a contract existed, and the the sale of goods. A good includes all things best evidence of that is a written contract containing that are moveable at the time of identification the terms both parties agreed to. Contracts covered by to a contract for sale. The definition includes the statute of frauds must also identify the parties and specially manufactured goods, the unborn the essential terms and obligations of the agreement. young of animals, growing crops and other Further, changes or additions to the contract should identified things attached to realty or land. also be in writing and signed as well.

7 • Merchant: A person who deals in goods of the UCC Article 2: Terms of Contract kind or holds himself/herself out by occupation as having knowledge or skill peculiar to the The terms of a contract may be established in a practices or goods involved in the transaction. number of ways. First of all, they can be included explicitly within the contract – these are express • Between Merchants: Any transaction where terms. However, often the terms of a contract are not both parties are charged with the knowledge or clear, so the court will use the performance during the skill of a merchant. life of the contract – this is called the course of •• Why does it matter if you are a performance of the parties. Another way the terms “merchant”? It matters because Article 2 may be determined is if the parties have contracted treats contracting between merchants often and for the same things. In this situation, the differently than contracts between parties may develop a customary relationship from non–merchants (usually a consumer) and which terms of the contract can be implied. These are a merchant. This section will address called course of dealing terms. Finally, within certain contracts between merchants. industries, there are customs and expectations that are traditionally in place. These implied terms are called UCC Article 2: Contract usage of trade terms. When a court is considering exactly what the parties meant when they signed the Requirements contract, it will look first at the express terms and then at the course of performance between the parties. If The basic requirements to form a contract under those don’t establish the meaning, the court will turn to Article 2 are the same as any contract. There must be the course of dealing between the parties and, as a last an offer, acceptance and consideration. When accept­ resort, to the usage of trade. ing an offer, an offeree can accept by either a return promise or by performance of the contract. For Additionally, the UCC outlines specific gap fillers example, when an order or other offer is made to buy for contracts it governs. A gap filler is a solution to goods, the offer can be accepted by either a promise to places in the contract in which the parties did not ship the goods or actual shipment of the goods. agree upon or include a specific express term. Typical Article 2 was written with transactions that take place gap fillers include: multiple times in mind, and it makes it easy to accept an offer either by fulfilling the terms of the offer or by • Price: When forming a contract, the parties communicating that you will fulfill the terms. may agree to set a price at a later time, to have a third party set the price or simply leave the The statute of frauds in the UCC also requires that price out of the contract. If this happens, as all contracts for the sale of goods over $500 must be in long as there was intent to enter into a writing and signed to be enforceable. They must also contract, the contract is still valid. The gap contain the quantity of goods to be sold. However, the filler a court will insert is that the price is a UCC outlines three exceptions to the statute of frauds. reasonable price at the time of delivery. Once One exception is for the sale of specially manufactured that happens, the parties will both be allowed goods. If the seller has already taken steps in the to present evidence as to the market value at production of goods that are not marketable in the the time the delivery is made, and the judge ordinary course of business, the court might excuse the will set the reasonable price. absence of a written contract. Another exception is an • Delivery: If there is no express agreement as to admission by the offending party that a contract exists. delivery, Article 2 provides for the manner, This may happen in a pleading or in court testimony. place and time of delivery. Unless agreed The third exception occurs when acceptance of otherwise, tender of the goods is required in a payment or of the goods is an objective indication that single delivery and payment is due only upon a contract existed. In this case, the absence of a written receipt of the goods. The place of the delivery, contract may be excused when one party accepts if none is provided in the agreement, is the payment or the goods and then denies that a contract seller’s place of business – meaning the buyer was in place. will pick up the goods from the seller. Finally, if no time is mentioned in the contract, delivery must be made in a reasonable time.

8 • Payment: Unless there are other terms in the • If the goods do not meet the terms of the contract between the parties that specify contract, the buyer can either accept or reject otherwise, payment is generally due at the the goods. point of receipt to allow the buyer an opportu­ nity to inspect the goods. Even when goods are The first two categories are pretty straightforward. considered “delivered” upon shipment by the However, in the last category, it can get a little tricky. seller, the buyer need not pay until the goods There are special rules for both the acceptance and are received. rejection of goods that do not meet the terms of the contract, and it’s important to remember that even if There is no gap filler for the quantity involved in the buyer accepts the goods, the seller has breached the the contract. While the other gap fillers can be deter­ contract and the buyer can seek remedies. mined based on the market or the typical relationship in similar transactions, there is no way to know what Goods that do not meet the terms of the contract the parties were thinking when it comes to the quantity are nonconforming goods. The ub yer has the right to of goods at issue. The quantity must be specified in reject nonconforming goods under the perfect tender the contract. rule, as long as the rejection is in good faith and in a timely manner. For example, if you contracted to sell On the other hand, sometimes there are too many 100 zucchini to the neighborhood grocery store but terms, or conflicting terms, included in a contract. only delivered 95 zucchini, they could be considered Typically, this happens when businesses have standard nonconforming goods because they did not meet the forms used for contracts, and those forms have differ­ terms of the contract. The grocery store would have the ent terms included than those included on the forms of right to reject the 95 zucchini, as long as they did so in a the other parties to the contract. These differing terms timely manner. This means the grocer probably could not are typically on the subject of warranties, remedies or keep the vegetables for a week before they were rejected. disclaimers. In this case, the court must determine which party’s terms make up the enforceable contract. However, sellers who deliver nonconforming The UCC has a specific provision that governs this goods have the right to fix the problem or cure the situation, which is called the battle of the forms. The breach, in some situations. First, the seller may cure provision states that when two merchants are contract­ the breach if the time for performance has not expired ing with each other, additional terms will become part and the seller can substitute conforming goods within of the contract unless 1) the offer forbids alteration; the contract time. To return to the example above, 2) the new terms in the acceptance materially alter the assume that you agreed to deliver the zucchini by agreement; or 3) one of the merchants objects to the June 12. On June 11, you delivered 95 zucchini to the terms added by the other merchant. It’s important to grocery store and the store refused them. If you then note, however, that most contracts are executed add 5 zucchini to the order and can deliver the without a problem, and these issues only arise when complete order to the store by June 12, then you have there has been a breach of the terms by one party. cured your breach. UCC Article 2: Performance and The other way in which a seller can cure the breach is when the time for performance has expired but the Breach of Contract seller had reasonable grounds to believe the goods would have been accepted. In this situation, the seller When you agree to a contract, you promise to has a reasonable amount of time to cure the breach. fulfill your specific part of the contract. Failure to do so Typically, in this case, the circumstances usually show is a breach of the contract, and the other parties to the that the seller was unaware of the nonconformity. contract can sue for legal remedies. Article 2 contract Again, assume that you delivered 95 zucchini to the breaches typically fall into one of three categories: store and that you did so on June 12, the date specified in the contract. When you delivered them, you thought • If the seller delivers the goods according to the you had 100 of them in the crates. Because you had terms and the buyer rejects them, the buyer has breached. reasonable grounds to believe the goods would have • If the goods do not meet the terms of the been accepted (because it was reasonable to mistake 95 contract and the buyer rejects them, the seller zucchini for 100), you have a reasonable amount of has breached. time to bring the other five zucchini that will cure the

9 breach. However, if you only brought 10 zucchini to notifies you that they will accept the produce and, if the store on the June 12, you probably wouldn’t be able not, filing suit in court for the breach of contract. to fix the breach, because it would be obvious to anyone that the goods were nonconforming. It’s also Warranties in the UCC important to note that the seller must notify the buyer of its intent to cure the situation in a timely manner. As A warranty is a legally enforceable promise by one a result, you would have to notify the grocery store that party to another that certain facts or conditions are you planned to bring the remaining product to them true or will happen. Once a warranty is made, the other and to cure the breach. party is permitted to rely on that promise and seek a legal remedy if it is not true or does not take place. The After the buyer accepts the goods, it is difficult to UCC recognizes two types of warranties – express return them. In fact, a buyer may only revoke accept­ warranties and implied warranties. An express ance, or return the product, if “the nonconformity of warranty arises from the seller’s affirmative actions. In the goods substantially impairs the value of the goods.” other words, an express warranty is based on some­ Further, the buyer has a couple of other requirements thing the seller did or said in order to get the buyer to that must be met. Either the original acceptance must commit. On the other hand, an implied warranty is have been based on a reasonable assumption that the based on protections that are offered through the law nonconformity would be cured or the buyer must not and are not based on anything the seller specifically did have known about the defects at the time of accept­ or said. ance. In other words, either the buyer accepted the goods thinking the seller would cure the problem or Express warranties generally concern characteristics the buyer did not know the goods were flawed. This is a of the item for sale such as its potential uses, its descrip­ rare situation. If you are the buyer, the goods should tion and the use of samples or models in negotiating always be inspected before acceptance to avoid the that create expectations of how the final product will complications of revoking the acceptance. look. However, it is important to distinguish warran­ ties, where a promise about the product is made, from puffery, where a general statement that exaggerates the UCC Article 2: Anticipatory attributes of the product is made. For example, the Repudiation statement that “this tomato is the best tasting one you’ll ever eat” would probably be considered puffery, while Very rarely, parties engage in anticipatory the statement that a specific packet of seeds has a repudiation of a contract. Anticipatory repudiation 94 percent germination rate would be a warranty. occurs when one party notifies the other before the time of performance or delivery that he does not Implied warranties relate to the condition of the intend to follow through with the contract. To continue goods. For most sellers of specialty crops, the three with our example from above, you contract with a implied warranties that will be most important are the grocery store to sell them 100 zucchini by June 12. On warranty of merchantability, the warranty of fitness for June 11, you notify the store that you will not be deliv­ a particular purpose and the warranty of title. ering the produce. Alternately, on June 11, the store The implied warranty of merchantability is notifies you that they do not need your zucchini and based on the unstated and reasonable expectations of they will not accept if you deliver. Either one of those the buyer about the quality of the goods. It guarantees situations would be an anticipatory repudiation of the that a good purchased from a merchant is a merchant­ contract. If you are involved in a contract in which the able good and meets a certain minimum level of other party engages in anticipatory repudiation, your quality. A merchantable good is one that falls within response should be to stop your own performance the quality range normally associated with the good by under the contract, limiting your damages. In the situ­ those in the trade. This warranty does not apply to ation above, once the store notified you that your goods sold by non-merchants, and it cannot be produce would not be accepted, you should stop your disclaimed unless expressly disclaimed by name. performance of the contract and not deliver the produce. The next step is to wait for performance for a The warranty of fitness for a particular purpose is “reasonable time,” and finally, to resort to remedies for implied when a buyer relies on the seller’s judgment or breach of contract. In the example, this would probably skill when buying goods for a particular purpose. It is involve waiting until June 12 to see if the grocery store based on the idea that if a seller has knowledge of the

10 buyer’s needs and knowledge that the buyer is relying • Liability insurance may be required if you are upon the seller to furnish suitable goods, that seller has selling at a farmers’ market. For more informa­ a responsibility to furnish suitable goods. For this tion, talk to your insurance agent. Additionally, warranty to apply, the seller does not have to be a don’t be afraid to talk to other insurance agents merchant. The buyer must prove that the seller knew of as well, and get several different quotes. Differ­ the use for which the goods were purchased and must ent companies have different options and differ­ also prove actual reliance on the seller’s assurances. ent prices. It’s important to know what options are available so you can make the best choice. The warranty of title is an implied promise that the seller has title to, or owns, the goods and has the Neil D. Hamilton, Ellis and Nelle Levitt right to sell them and that the title the seller is passing Distinguished Professor of Law, and Director of the to the buyer is a good title, free from security interests, Agricultural Law Center at Drake University Law liens and encumbrances (except for those the buyer is School, has written “10 Rules of Contracting” for made aware of). producers to consider. They are published in his book A Farmer’s Legal Guide to Production Contracts.3 As Common Sense Contracting stated in the text of that publication, the “10 Rules of Contracting” include the following: Before agreeing to a contract, it is important to consider who will be the parties to the contract. You 1. The parties who wrote the contract took care of should know who you are becoming legally obligated themselves first. with. Is it an individual or a business? Are they in good This means there is no reason to assume a financial standing? Do they have a good reputation in contract you are asked to sign is fair or balanced the industry? Your answer to these questions might or that it protects your interests. In fact, it is determine whether it is a good idea on your part to probably safer to assume the opposite. This does enter into the contract. not mean the party on the other side is evil, Additionally, some businesses will ask that you instead it just reflects the fact that most contracts meet certain requirements before they will contract are arm’s length business transactions in which with you. You should know what these requirements both sides try to maximize their advantage. are and ensure that you and your business will be able to meet them. They might include licensing, bonding 2. Read and understand (at least try to) any or insurance requirements. contract before signing. Signing a contract creates a binding legal • Business licenses may be required at the local obligation. It is in your best interest to under­ or state level depending on the type of business stand what you are agreeing to do and what you operate. In some cases, farmers are exempt the other party’s obligations are as well. Ask from the licensing requirements. However, questions until you understand and are even if you are a producer, you should check comfortable with the terms of the contract. with the proper offices to be sure you meet the business requirements. If you are a direct 3. Complying with the terms of a contract will be marketer, a license may still be required. required before you are considered to have • Bonding, or surety bonds, are agreements by satisfied the agreement. a third party promising to pay or have the work completed if a vendor does not fulfill his Contracts usually offer an economic incentive. or her obligations under a contract. A bond is But don’t expect to take advantage of it until not an insurance policy. It does not cover loss you have fulfilled your obligations under the due to personal injury or property damage; it contract – including quantity, quality and only provides assurance that the work delivery terms. For example, if a contract to contracted is satisfactorily complete. Banking provide a local store with vegetables requires institutions, surety bond companies and even you to meet the quality standards of the buyer, the Small Business Administration (SBA) offer you should not expect to be paid if what you bonding services. deliver does not meet those standards.

3Available on the National Agricultural Law Center’s website at http://www.nationalaglawcenter.org/assets/articles/hamilton _productioncontracts.pdf.

11 4. Never assume your failure to meet the terms of 8. Do not rely on oral communications to amend the agreement will be excused. the terms of an agreement. Every provision of a contract has some legal Just because you believe the written contract effect. Failure to meet any terms is considered was amended by your discussions doesn’t a breach of the contract. While the party on make it true. In fact, most written contracts the other side of an agreement may excuse include provisions that state only the written your failure to perform in one situation, such terms are binding. It is also important to keep as not delivering the quantity you promised, copies of any letters or other documents that this may not always be the case. In some situa­ might help show what was agreed. tions, like a crop failure due to weather, the law may provide you with an excuse; but in other 9. Keep good records of your performance under situations where the failure to perform was due the contract. to your actions, the other party might choose This includes any records or documentation to enforce the contract. If you believe you will concerning the quantity you delivered and any not be able to perform a contract as agreed, it payments made. It may also be helpful if you is a good idea to notify the other side and alert keep notes on any communications you have them to your situation. Then you can attempt with the other party. If a dispute should arise to negotiate a resolution. about your performance, your records may help provide the answers needed to sort out 5. If the contract calls for you to be paid by another the situation. party, know their financial situation. Take precautions to limit the risk that you will 10. Stay in touch with the other party to the contract. not be paid. This can be done by learning Communication between the parties can be more about their financial situation, by important in resolving uncertainties and in requesting financial guarantees and by selling preventing misunderstandings. Do not hesitate crops or livestock only to businesses covered to ask questions if you don’t understand what by the public laws designed to ensure that is happening, such as why your payment is farmers get paid. late. It may be that the other side is unaware of the situation. 6. Remember that proposed contracts are always negotiable. Contracts are an important legal consideration for Even though many contracts are on printed specialty crop producers who desire to sell their forms, it does not mean they cannot be produce. The information provided in this chapter is changed, if the parties agree to it. A good rule instructive but does not address all of the various to keep in mind is that you will never have considerations and possibilities that may arise for a more bargaining power in a contraction rela­ particular producer. tion than just before you sign. The reverse is also true – once you have signed a contract, it For more information on contracts, please visit will be difficult to alter it. the National Agricultural Law Center’s Reading Room on Commercial Transactions that is available at 7. Make sure any changes to a contract are http://www.nationalaglawcenter.org/readingrooms in writing. /commercial/. Also, please feel free to contact the Just as the statute of frauds dictates that certain National Agricultural Law Center should you have any contracts must be in writing, the amendments further questions regarding any aspect of contract law should also be in writing. Have the other party and principles. sign or initial the written changes. Be sure the person you are dealing with has the proper authority to make changes to the contract, especially if they represent a larger business.

12 Chapter 3 Perishable Agricultural Commodities Act

The Perishable Agricultural Commodities Act “all produce in fresh form generally considered as (PACA) was enacted in 1930 to regulate the marketing perishable fruits and vegetables, whether or not packed of perishable agricultural commodities in interstate in ice or held in common or cold storage,… [except] and foreign commerce. The primary purposes of the those perishable fruits and vegetables which have been PACA are to prevent unfair and fraudulent conduct in manufactured into articles of food of a different kind the marketing and selling of perishable agricultural or character.” commodities and to facilitate the orderly flow of perishable agricultural commodities in interstate and PACA also applies to “dealers,” “commission foreign commerce. In short, PACA is widely viewed as merchants” and “brokers.” In general, a dealer is “any a statute designed to promote fair trade in the fruit and person engaged in the business of buying or selling in vegetable industry. It also provides important protec­ wholesale or jobbing quantities…any perishable agri­ tions to sellers of “perishable agricultural commodities” cultural commodity” that has an invoice value in any that are relevant to many specialty crop producers. calendar year in excess of $230,000. There are some exceptions to this definition that could become appli­ The PACA is administered and regulated by the cable under certain situations, but the general defini­ Agricultural Marketing Service (AMS), an agency tion provided here is very instructive. A commission within the United States Department of Agriculture. merchant is “any person engaged in the business of Thus, AMS is the agency that develops the regulations receiving…any perishable agricultural commodity for that implement PACA, including enhanced definitions sale, on commission, or for or on behalf of another.” of terms such as “perishable agricultural commodity” Finally, a broker is a person engaged in the business of and certain other key aspects of PACA. In fact, AMS negotiating sales and purchases of perishable agricul­ provides information on PACA on its website, tural commodities either for or on behalf of the seller http://www.ams.usda.gov, and according to its website, or buyer. A person who is “an independent agent nego­ receives “hundreds of telephone calls each week” from tiating sales for or on behalf of the vendor” is not stakeholders in the fruit and vegetable industry. considered to be a broker, however, if “sales of such commodities negotiated by such person are sales of PACA is important for many specialty crop frozen fruits and vegetables having an invoice value not producers because it governs important aspects of in excess of $230,000 in any calendar year.” transactions between sellers and buyers of fresh and frozen fruits and vegetables. In particular, the unfair Under the PACA, the term person is broadly conduct and the statutory trust provisions are defined to include individuals, partnerships, particularly significant. corporations and associations. Key Definitions Unfair Conduct As noted, PACA applies to certain type of buyers As noted, PACA prohibits certain types of conduct and sellers of “perishable agricultural commodities.” on the part of buyers and sellers, though issues arising Under PACA, a perishable agricultural commodity is in this arena commonly focus on the alleged conduct any fresh fruit or vegetable, whether or not frozen or of commission merchants, dealers and brokers. For packed in ice, including cherries in brine, as defined by example, it is unlawful for a commission merchant, the USDA Secretary. The PACA regulations include dealer or broker “to engage in or use any unfair, unrea­ within the definition of fresh fruits and vegetables sonable, discriminatory, or deceptive practice in

13 connection with the weighing, counting, or in any way to engage in the fruit and vegetable industry. A person determining the quantity of any perishable agricultural who knowingly operates without a PACA license may commodity received, bought, sold, shipped or be fined up to $1,200 for each violation and up to $350 handled….” It is also unlawful for a commission for each day the violation continues. merchant, dealer or broker to do any of the following: It should be noted that the PACA license is the • “to make, for a fraudulent purpose, any false only license required under PACA. It is possible that a or misleading statement in connection with state or local government could require additional any transaction involving any perishable licenses. A grower should at a minimum check with agricultural commodity”; the appropriate state or local government entities in his • “to fail, without reasonable cause, to perform or her jurisdiction to determine whether an additional any specification or duty, express or implied, license is required. In addition, growers with any ques­ arising out of any undertaking in connection tions regarding PACA licenses can contact AMS toll with any such transaction”; and free at 800-495-7222. • “to fail or refuse truly and correctly to account and make full payment promptly” with respect Statutory Trust to any transaction. For specialty crop producers, the statutory trust is PACA provides that a commission merchant, a very important aspect of PACA since it is specifically dealer or broker that violates any of the unfair conduct designed to protect sellers of perishable agricultural provisions “shall be liable to the person or persons commodities in the event a buyer becomes insolvent or injured thereby for the full amount of damages… otherwise refuses to pay for produce. The statutory sustained in consequence of such violation.” The trust provision under PACA specifically provides the injured person or persons may enforce such liability by following (emphasis added): bringing an action in federal district court or by filing a reparations proceeding against the commission [p]erishable agricultural commodities received merchant, dealer or broker. Reparations proceedings by a commission merchant, dealer or broker in are discussed below. all transactions, and all inventories of food or other products derived from perishable agri­ cultural commodities, and any receivables or Licensing proceeds from the sale of such commodities or The PACA requires that all commission merchants, products, shall be held by such commission dealers and brokers obtain a valid and effective license merchant, dealer, or broker in trust for the from the USDA Secretary. PACA does not require benefit of all unpaid suppliers or sellers of growers who sell perishable agricultural commodities such commodities or agents involved in the they have grown to obtain a license, though sellers transaction, until full payment of the sums commonly choose to apply for a PACA license. From owing in connection with such transactions the grower’s perspective, the license demonstrates that has been received by such unpaid suppliers, the buyer is a legitimate business person or business sellers or agents. entity who can be trusted to honor contractual terms In other words, the buyer is required to maintain a and PACA requirements. statutory trust relative to fruits and vegetables received The requirement of a PACA license by a but not yet paid for. If a buyer becomes insolvent or commission merchant, dealer or broker is akin to the declares bankruptcy, the statutory trust provides prior­ requirement of a driver obtaining a driver’s license. A ity status to the unpaid seller against all other creditors commission merchant, dealer or broker that fails to in the world. obtain a valid and effective license shall be subject to Consequently, the PACA statutory trust is often monetary penalties, though some leniency may be referred to as a “floating trust.” Thus, a PACA trust provided if the failure to obtain the license was not beneficiary is not obligated to trace the assets to which willful. Importantly, if a commission merchant, dealer the beneficiary’s trust applies. When a controversy or broker has violated any of the unfair conduct provi­ arises as to which assets are part of the PACA trust, the sions, that person’s PACA license may be suspended or buyer has the burden of establishing which assets, if possibly revoked, which effectively negates their ability any, are not subject to the PACA trust. The PACA

14 beneficiary only has the burden of proving the • after expiration of such other time by which amount of its claim and that a floating pool of assets payment must be made, as the parties have exists into which the produce-related assets have expressly agreed to in writing before entering been commingled. into the transaction; or • after the time the supplier, seller or agent If a buyer files for bankruptcy, the trust assets do has received notice that the payment instru­ not become property of the estate because the buyer- ment promptly presented for payment has debtor does not have an equitable interest in the trust been dishonored. assets. Rather, the buyer holds those assets for the benefit of the seller. Thus, a beneficiary of the PACA If the payment terms extend beyond 30 days, the trust has priority over all other creditors with respect seller will lose his or her rights to the statutory trust. to the assets of the PACA trust. However, the seller must take certain steps in order PACA also provides that if the parties to the to protect his or her rights in the statutory trust. One tra nsaction “expressly agree to a payment time period method of preserving rights to the statutory trust is by different from that established by the Secretary, a copy simply including the following exact language on the of any such agreement shall be filed in the records of face of the invoice: each party to the transaction and the terms of payment must be disclosed” on the documents relating to the The perishable agricultural commodities listed transaction. But, as noted, if this agreement extends the on this invoice are sold subject to the statutory time for payment for more than 30 days, however, the trust authorized by section 5(c) of the Perish­ seller cannot qualify for coverage under the trust. able Agricultural Commodities Act, 1930 (7 U.S.C. § 499e(c)). The seller of these Reparations Proceedings commodities retains a trust claim over these commodities, all inventories of food or other Any person complaining that a commission products derived from these commodities, merchant, dealer or broker has violated any of PACA’s and any receivables or proceeds from the sale unfair conduct provisions may commence a repara­ of these commodities until full payment tions proceeding by filing an informal complaint with is received. the Secretary. Reparations proceedings provide a remedy in addition to remedies available under appli­ It should be noted that this method is available cable state laws or common law and are governed by only to those sellers who are licensed under PACA. the PACA Rules of Practice for Reparation Proceedings. Hence, many sellers will elect to be licensed so they can preserve their statutory trust rights in this manner. The informal complaint must provide a brief statement of the facts supporting the allegations Unlicensed sellers (or licensed sellers who do not against the commission merchant, dealer or broker and want to include the foregoing language on their must be filed within nine months from the date the invoices) may preserve their statutory trust rights violation occurred. After receiving all information and through a different method. This method requires that supporting evidence provided by the person filing the the seller provide written notice that specifies it is a informal complaint, the Secretary must conduct an notice of intent to preserve trust benefits. In addi­ investigation. If the informal complaint and the investi­ tion, the written notice must include the name(s) and gation seem to warrant such action, subject to certain address(es) of the seller, commission merchant or exceptions, the Secretary “shall give written notice to agent and the debtor as well as the date of the trans­ the person complained against of the facts or conduct action. The written notice must also identify the concerning which complaint is made, and shall afford commodity at issue, the invoice price, payment terms such person an opportunity, within a reasonable and the amount owed. time…, to demonstrate or achieve compliance with the This written notice must be given within applicable requirements of the Act and regulations 30 calendar days: promulgated thereunder.”

• after expiration of the time prescribed by If an amicable or informal settlement is not which payment must be made, as set forth in reached, the complaining party may file a formal the regulations issued by the Secretary; complaint. Theformal complaint must contain the

15 information required for filing an informal complaint other interested persons (other than an employee of an and a statement of the damages claimed. After the agency of the Department of Agriculture administering parties have properly responded to all claims and this Act) may file” an informal complaint with the counterclaims, if any, the matter is assigned a docket Secretary concerning any alleged violation of the number and scheduled for a hearing. PACA by any commission merchant, dealer or broker.

If a complaint claims less than $30,000 in damages, Thus, it is possible for a reparations proceeding to “a hearing need not be held and proof in support of the be brought by a private party, have a reparations order complaint and in support of the respondent’s answer issued against a commission merchant, dealer or may be supplied in the form of depositions or verified broker for a violation of any of the unfair conduct statements of facts.” If a complaint claims damages in provisions as a result of that reparations proceeding excess of $30,000, a hearing must be provided, unless and to then have a disciplinary action filed by “any waived by the parties. The Secretary must then deter­ officer or agency… and any other interested person” as mine whether the commission merchant, dealer or a result of the filing of a reparations proceeding. broker has violated any of the PACA’s unfair conduct provisions. If the Secretary determines that a violation Disciplinary proceedings are commenced, similar has occurred, it must determine the amount of to reparations proceedings, by the filing of an informal damages owed and enter an order stating the date by complaint. With respect to disciplinary proceedings, which the offender must pay those damages. however, the informal complaint may be brought any time within two years after the violation occurred, as Either party may appeal a reparation order to the long as the complaint does not allege “flagrant or district court in which the hearing was held within 30 repeated violations.” days from the date the order was entered. If, however, the matter was handled without a hearing because the For more information, please refer to the National claim for damages was less than $30,000 or because the Agricultural Law Center’s Reading Room on PACA parties agreed to waive the hearing, appeal must be that is available at http://www.nationalaglawcenter.org made to the district court in which the commission /readingrooms/perishablecommodities/. merchant, dealer or broker is located. Prompt Payment Disciplinary Proceedings PACA requires produce buyers to make full payment promptly, and the regulations implementing A disciplinary proceeding is any proceeding, other PACA expound on PACA. While there are additional than a reparations proceeding, arising out of any viola­ rules embedded in the regulations, the most common tion of the PACA. Disciplinary proceedings are payment requirement is that payment be made 10 days governed by the USDA’s Uniform Rules of Practice for from date of acceptance of the goods for purchase. Disciplinary Proceedings that apply not only to certain PACA violations, but violations under a multitude of For more information, please refer to the National other statutes as well. Disciplinary proceedings under Agricultural Law Center’s Reading Room on PACA the PACA differ from reparations proceedings in that available at http://www.nationalaglawcenter.org private parties do not bring disciplinary proceedings. /readingrooms/perishablecommodities/ or contact the Rather, “[a]ny officer or agency of any State or Terri­ National Agricultural Law Center. tory having jurisdiction over commission merchants, dealers or brokers in such State or Territory and any

16 Chapter 4 Business Organizations

Business organization options have existed for include liability issues, tax implications, payment years for various commercial enterprises, including limitation issues, corporate farming statutes and agriculture. For specialty crop producers, these business bankruptcy, among others. The benefits and conse­ organization options are very important to consider and quences are primarily determined by the type of busi­ understand because, among other factors, they have ness organization that is selected – usually a sole significant civil and tax liability implications. proprietorship, general partnership, limited liability partnership, limited liability company or a corporation From the simplest sole proprietorship to the most (whether “C” or “S”). complex multinational corporation, the various busi­ ness structures have evolved to meet people’s needs. Determining what business organization structure to Important Issues choose requires understanding the basics of the avail­ Liability Issues able options as well as the goals one may have for their operation. The many types of business structures offer One of the most fundamental reasons to create a the flexibility required to fit the different requirements business entity is to protect owners and investors from of agricultural operations today. Every farming opera­ the legal liability of actions performed on behalf of the tion that is operated for profit is recognized as being in business. As a result of this need, legislators organized one business structure or another, whether or not the business entity statutes to provide a “veil” of protec­ operator realizes it. tion, depending on the type of business structure and the actions of the parties and the organization. Business organizations provide stability and protection to investors and officers while establishing On the end of the spectrum with the least guidelines within the organization and under the protection, sole proprietorships and general partner­ state(s) laws where they do business. Within the U.S. ships provide no liability protection to the owners. over the past century, there have been numerous changes General partnerships will, in fact, often expose all part­ in state laws, creating new business structures and ners to joint and several liability as a result of the modifying old ones in an effort to induce businesses to actions of a single partner. In the middle of the spec­ locate within their borders. States such as Delaware trum lies the limited liability partnership, or “LLP,” have written their statutes in such a way as to create an which provides partial protection to the partners. Typi­ almost ideal environment for businesses in order to cally, these ventures have at least one general partner attract both old and new entities into the state. Compe­ who is personally liable for the actions and debts of the tition between the states has arisen to attract business partnership and one or more limited partners who are organizations, which in turn have resulted in rapid protected by the limited partnership so long as they changes in laws affecting businesses ranging from taxes remain passive in the running of the business. On the and liability to the composition of the business itself. most protective end of the spectrum are organizations such as limited liability companies – “LLCs”– and Laws surrounding business organizations concern corporations that provide the most protection to the almost every aspect of business, including those tied shareholders and officers of the businesses by shielding directly to agriculture. Because of this, it is important all parties from the actions and debts of the business so to know the benefits and consequences of creating any long as certain business boundaries are respected. business entity. These benefits and consequences can

17 Asset protection is a very important aspect for discount the value of the business. These types of many farming and agribusiness operations. Growers of considerations highlight the importance of obtaining specialty crops always face the risk of serious legal competent legal counsel as well as consultation with an consequences because of foodborne illnesses, Perish­ accountant or someone with a background in estate able Agricultural Commodities Act (PACA) violations, planning and taxation. negligence lawsuits and a host of other potential issues. As a result, arranging the ownership of assets Business Structures through business entities is a frequent method used to help limit exposure to events such as civil liability Sole Proprietorship from lawsuits and financial liability from unpaid or One of the simplest forms of business, the sole delinquent loans. proprietorship, is effective without any legal filing. Many businesses throughout the country function Tax Implications under this structure even if they are completely Changes in business organization statutes in all unaware that their operation does in fact have a busi­ 50 states have had direct consequences on income ness structure. Any individual who starts a business or taxes and indirect consequences on estate taxes. Earlier farming operation without further organization and in the 20th century, before the advent of many of the filing is generally considered to be a sole proprietor. limited liability organizations, businesses were taxed One of the most important characteristics of the sole according to what structure they operated under. Sole proprietorship is that the owner will be held personally proprietorships and general partnerships were not (and liable for the actions, taxes and debts of the business. still are not) taxed directly. Instead, the income is For example: imputed directly to the owner/partners with no men­ tion of a business entity, which is another reason why A tomato grower operates his farm as a sole farmers are considered to be in a business structure at proprietorship part time and also works in all times. town to supplement his income. The farm experiences a bad year and is unable to pay the Corporations are subject to the so-called double bank with the proceeds from the crops. In this taxation rule – the corporation is held liable for taxes case the bank can garnish the grower’s wages on its earned income and the dividends paid out to the from his job in town, foreclose on his farm if shareholders are also subject to taxation. For a time, they have a mortgage, or reach almost any the Internal Revenue Service (IRS) tried to determine other asset that the farmer owns. The farmer is whether new business entities being created across the responsible for the debts of the farm and this country should be classified as a form of corporation. responsibility even extends to non-farm assets. However, this approach has been abandoned since it was overly complex and states and new businesses were This virtually limitless potential exposure to purposefully creating convoluted business structures to liability often leads to the sole proprietor either shut­ avoid classification as a corporation. Instead, since ting down the business or shifting to another form of 1997 the IRS has used the “check the box” rule under business organization. It is also not the most stable which a business may elect for the “flow-through form of business because, like with its creation, the status” of a partnership even though the business may termination can occur without the sole proprietor ever more closely resemble a corporation. This has greatly being aware that it has happened. The death of the enhanced the popularity and flexibility of this newer owner, the selling of assets, bringing in of one or more generation of business entities, since limiting the taxes partners to help run the farm or creating a more formal paid by the business is no longer of great concern. business structure can all result in the termination of a sole proprietorship. The use of business structures added a very useful tool for the purposes of estate planning in the form of The sole proprietorship is essentially a fictitious discounts. A farmer who is concerned about paying entity. The profits, assets, debts, responsibilities and estate taxes may create one or more business entities to liabilities of the business rest solely on the individual hold his/her assets while gifting shares of those busi­ owner. Unlike other business structures, such as corpo­ ness entities to the heirs, which may allow them to rations or limited liability companies, there is no legal

18 entity that is created to bear the responsibility and risk individual. It is plausible that a court could of operating the farming operation. The ultimate determine that a general partnership exists responsibility rests entirely on the owner alone. There between the family members. If this plausible is nothing in place to shield the owner from the outcome occurred, it is possible that the financial and legal consequences of operating the farm farmer’s assets, including the farm, could be nor to protect the assets of the business if the individ­ reached by the victim of the car wreck because ual owner suffers from financial or legal problems. The of the general partnership that exists between survival of both the farm and the individual are so the farmer and his children. closely intertwined, in many instances, that a setback for one can be seriously detrimental to the livelihood Another critical problem of the general partnership of the other. is the ease at which it can be terminated. This business structure, unless there is a written agreement to the General Partnership contrary, is terminated by the creation of another busi­ ness structure or by the addition or loss of any partner. The general partnership is similar to the sole The inability to add or remove partners without termi­ proprietorship in that this form of business structure nating the business can create serious problems, espe­ does not require any legal documents to be filed in cially as the number of partners in the business order to create it. The basic definition of generala increase. A binding partnership agreement can partnership is that it occurs when two or more individ­ successfully modify most of the problems that occur uals come together with each person contributing when entering into a general partnership; however, money, labor, property or skill and each expecting to many partnerships are created and operated by verbal share in both the profits and losses of the business. agreements or even accidently through the actions of Evidence of two or more individuals involved in a the partners. The almost limitless potential liability common enterprise and sharing the profits is often coupled with the ease in which the business can be enough for courts to find that a partnership exists even dissolved make the general partnership a risky business without the agreement being formalized either verbally structure for a specialty crop farming operation to use or in writing. without some form of modification or formalization in place to mitigate these inherent weaknesses. The liability that a partner in a general partnership is exposed to is very similar to the personal liability Limited Partnership that a sole proprietor suffers (being held personally responsible for the actions and debts of the business); The limited partnership structure is created when however, it also includes an added element of risk. In a two or more people or businesses file the proper paper­ general partnership, the actions of one partner are work with the state where the partnership will be imputable to the other partners through joint and formed. Unlike the sole proprietorship and the general several liability. Each general partner is treated like an partnership, this business form cannot be formed acci­ agent of the rest of the partners. Essentially, this means dently or automatically. There must be at least one that the actions and mistakes of one of the partners general partner that is personally liable for the actions may become the responsibility of the rest of the part­ of the partnership and will typically run the farming ners. Depending upon the number and experience of operation. There will also be one or more limited part­ the partners involved in farming operation, the risk ners that are only liable up to the amount they have increases substantially with each additional partner. invested in the partnership. These members typically For example: have little or no control over the farming operation and remain as passive investors. Suppose that an older farmer wishes to bring his children in on the family orchard. The The two partnership statuses differentiate this children will help with labor, marketing and pa rtnership business structure from the general part­ management and intend to split the profits nership since personal liability rests almost solely on with the farmer at the end of the year (if there the general partner(s). It is important to note, however, are any). While taking fruit to the farmers’ that the more involved a limited partner becomes with market, one of the children is involved in a the business, the more likely it is that a court will find serious car accident that injures another them to be a general partner and subject them to

19 general liability. This ability to protect some, but not resident, and profits and losses must be allocated to all, of the partners is a unique trait of the limited shareholders proportionately to each one’s interest in partnership and is the primary reason why this form of the business. If these requirements are met, the corpo­ business structure is not as popular as the limited ration may file the proper paperwork with the IRS to liability company or corporation, both of which avoid the issue of double taxation entirely. potentially offer protection to all of their owners. The last hurdle many smaller business operations Regardless of the problems that face the partners of face with the corporate business structure is exercising a limited partnership, there are some benefits that the the required corporate formalities throughout the year structure provides, which is why this model remains to and keeping accurate records to show they are keeping this day. the corporate business separate from their personal business. Over a period of time, small corporations Corporations may not be as diligent in keeping their personal busi­ ness from intermingling with the corporate business, The corporate business structure is one of the which may result in the corporate business structure oldest options for organizing a business or farming being ignored and subjecting the owners to personal operation. It was established to provide liability protec­ liability, just as with a sole proprietorship or a general tion; however, along with that liability protection came partnership. For this reason, many new businesses are a disadvantageous tax situation known as double taxa­ using the limited liability company structure because it tion. In this situation, the income generated by the provides the protection of the corporation without the corporation is taxed first at the corporate level and hassle of maintaining rigid corporate formalities. then again when the profits are distributed to share­ holders in the form of a dividend. There are two types Limited Liability Company of corporations to consider: “C” corporations and “S” corporations. A newer business structure, and currently one of the most popular for farms and other businesses, is the The “C” corporation must have a board of directors, limited liability company (“LLC”). An LLC is a hybrid corporate bylaws and stock certificates for the initial structure that basically offers the limited liability of a owners of the corporation. It must also file formal corporation with the flow-through taxation of a part­ paperwork or articles of incorporation in the state nership. It is similar to the “S” corporation but without where it incorporates. Once incorporated, the “C” many of the corporate formality requirements. corporation must exercise nominal formalities, such as periodic meetings of the board of directors and record In an LLC, the owners are referred to as members retention in order to maintain the protection provided and LLCs can be either member-managed or manager- by the corporate status if legal trouble arises in the managed. A member-managed LLC may be governed future. Because of the complexity of the “C” corpora­ by a single class of members (similar to a partnership) tion, the interests of many smaller farming operations or by multiple classes of members (similar to a limited may be better served by organizing under a different partnership). The LLCs operating agreement sets out business structure. the management structure to be used in the business. The “S” corporation is very similar to the “C” corporation, but with some unique differences. The “S” To form an LLC, members must choose a business corporation provides the liability protection of a “C” name that conforms to their state’s LLC rules and file corporation, but it allows the corporation’s shareholders formal paperwork (usually called articles of organiza­ to elect against double taxation. Instead, the “S” corpo­ tion) with the state, along with the payment of a filing ration may choose to use flow-through taxation, where fee. Many states also require that the name must end the profits are only taxed at the individual level. with an LLC designator, such as “Limited Liability Company” or “Limited Company” or an abbreviation The “S” corporation has the same initial formation of one of these phrases (such as “LLC,” “L.L.C.” or requirements as a “C” corporation, but it requires some “Ltd. Liability Co.”). While the benefits – including additional steps. In order for a business to incorporate flow-through taxation, limited liability and relaxed as a “S” corporation, it must be a domestic corporation corporate formalities – that come with forming an with only one class of stock, it may not have more than LLC are significant, there are also some drawbacks to 100 shareholders, all of whom must be U.S. citizens or organizing in this way.

20 One problem with the LLC is caused by its relative organization options that may not be available in other newness. The first LLC act was passed in Wyoming in states. Each form of organization offers advantages and 1977, and all other states have since followed suit. As a disadvantages, which must be considered when deter­ result, the law in this area is not fully developed and mining what business entity to operate a farm business. can cause some uncertainty if litigation ensues. Another problem that occurs because of the evolving As agriculture has become more commercialized, nature of this new form is the inconsistency of the the importance of business organizations has risen as vocabulary that describes members’ duties. This can well. For specialty crop producers, issues such as tax lead to confusion and potential problems in determin­ liability, business planning, estate planning, marketing ing which individuals have authority to write checks, and civil liability are important factors in determining request credit or bind the LLC to contracts. State under what business organization option the agricultural statutes that govern LLCs also differ substantially; operation should operate. however, this problem is not quite as relevant in agri­ For more information on the topic, please refer to culture because so many operations are located solely the National Agricultural Law Center’s Reading within one state. Room on Business Organizations located at http:// Business organizations are creations of state www.nationalaglawcenter.org/readingrooms governments and can differ somewhat from one state /businessorganizations/. to another. Also, some states provide for business

21 Chapter 5 Agricultural Labor

Farming is a labor-intensive operation, particularly consideration. The only workers covered by MSPA are for those specialty crop producers who harvest their persons engaged in seasonal or temporary agricultural crops manually. Labor is the largest variable expense employment. The Act also distinguishes between for U.S. producers of specialty crops. As a result, workers who are away from home overnight and those another important area of law for specialty crop growers who live near the work site. concerns employment and labor law. There are many state and federal laws in place regulating many varied Farm labor contractors are required to register aspects of employment, including wages, working con­ with the United States Department of Labor before ditions, immigration and employment opportunities. performing any labor contracting activities. If the labor contractor provides transportation for the workers, Application of these laws to agricultural employees proof of vehicle safety and adequate insurance are also is often more complicated because special exemptions required. The contractor must also verify that the and exceptions are provided for their employers. As a workers’ housing meets safety and health standards for result of these complications, agricultural employers occupation. Employers who use the services of a farm must employ special vigilance to maintain compliance labor contractor must take reasonable steps to deter­ with the myriad of requirements. While some of the mine that the contractor has a valid certificate of regis­ most important ones will be discussed – the Migrant tration. This information may be verified by calling and Seasonal Agricultural Worker Protection Act, the the U.S. Department of Labor’s toll-free number at Fair Labor Standards Act, the Occupational Safety and 1-866-487-9243. Health Act, the Federal Insecticide, the Fungicide, and Workers must be provided with written information Rodenticide Act, the Immigration Reform and Control about wages, hours, workers’ compensation, working Act and the National Labor Relations Act – there are conditions and housing. This information must be also others that affect specialty crop employers and will supplied by the labor contractor or the employer at be discussed more generally. the time the workers are recruited. Payroll records must be kept by the contractor and agricultural Migrant and Seasonal employer, and a written earnings statement must be Agricultural Worker given to each employee. Protection Act The statute and regulations also allow the creation of joint employment. Joint employment makes The Migrant and Seasonal Agricultural Worker employers liable for violations of MSPA even when the Protection Act of 1983 (MSPA), 29 U.S.C. §§ 1801­ employees are hired through an independent farm 1872, was enacted to protect migrant and seasonal labor contractor. The creation of joint employment is workers and is one of the most important agricultural determined by a set of criteria that evaluate the rela­ labor statutes. The MSPA establishes, in part, wage and tionship between the employer and the workers for working condition requirements and requires the evidence of control. The more control that an employer registration of farm labor contractors. Farm labor exerts over the farm labor contractor’s workers, the contractors are defined by the statute as any person more likely it will be determined that a joint employ­ other than agricultural employers, their employees or ment situation has been created. Factors include such agricultural associations that recruit, solicit, hire, things as the power to hire or fire, wage determination, employ, furnish or transport any migrant or seasonal permanency of the work, the skill required to perform agricultural worker for money or other valuable work and the location of the work.

22 The MSPA is enforced by the Department of Labor • The hour and day on which the workweek and includes both criminal and civil sanctions. begins However, it also creates a private right of action. The • Total hours worked each workday and each private action allows an aggrieved party to file suit in workweek any federal district court with jurisdiction over the • Total daily or weekly straight-time earnings parties, regardless of the amount in controversy, citi­ • Regular hourly pay for any week when overtime zenship of the parties or whether the parties have is worked exhausted their administrative remedies. • Total overtime pay for the workweek • Deductions from or additions to wages Fair Labor Standards Act • Total wages paid each pay period The Fair Labor Standards Act of 1938 (FLSA), • Date of payment and pay period covered 29 U.S.C. §§ 201-219, is a sweeping federal statute that Agricultural employers are allowed to hire children sets minimum wages, requires overtime wages, for agricultural labor below the general legal minimum restricts child labor and mandates some record keeping by employers. The FLSA covers employees of age applicable to other industries. Outside of school employers engaged in interstate commerce directly or hours, children 14 and older may be hired, 12- and engaged in the production of goods and services for 13-year-old children may be hired with parental permis­ interstate commerce. sion and children under 12 may be hired on their parents’ farm or with parental permission on a farm that Agricultural employers are exempt from certain falls below the 500 man-day employment requirement. requirements of the FLSA. Under FLSA agriculture is defined as farming and all its branches, raising live­ The FLSA provides the minimum standards that stock or poultry, and any practices performed by a apply to employers. However, the statute requires farmer or on a farm as an incident to or in conjunction compliance with other laws that allow for enforcement with such farming operations. Regulations and case of state and local laws that may provide greater protec­ law further define agricultural employees as persons tions for agricultural workers than are contained in employed in farming, by a farmer, or on a farm. The the FLSA. exemptions for agricultural employers are different for each broad coverage area of the FLSA. Occupational Safety and Minimum wage requirements do not apply to Health Act employers that did not use more than 500 man-days of agricultural labor during any calendar quarter of the The Occupational Safety and Health Act of 1970 preceding calendar year. A man-day is any day during (OSHA), 29 U.S.C. §§ 651-678, assures safe and healthy which an employee performs at least one hour of agri­ working conditions through the enforcement of work­ cultural labor. Immediate family members of the agri­ place standards, provision of research and information cultural employer, certain hand harvesters paid on a in the field of occupational safety and health and aid to piece rate and employees primarily engaged in range state programs that assure safe and healthful working production of livestock are not covered by the conditions. Generally, employers must furnish employ­ minimum wage requirements. ees with employment and workplaces free from recog­ nized hazards that could cause death or serious injury Generally, all persons employees employed in agriculture are exempt from the overtime wage and follow legal standards of occupational safety and requirements. Packers and processors of produce who health, and employees must follow all rules and work with multiple farms’ crops are not covered by regulations that apply to that employee’s conduct. this exemption. Agriculture is covered under the OSHA in areas of For those employers who are subject to the temporary labor camps, tractor roll-over protection, minimum wage or overtime pay provisions, the guarding of farm field equipment, storage of anhydrous following information must be recorded: ammonia, field sanitation, hazard communication, cadmium usage and logging operations. Two exemp­ • Personal information, including employee’s tions are available for agricultural employers to remove name, home address, occupation, sex and the majority of employers from coverage under the birthday if under 19 years of age

23 Act. First, immediate family members of the farm and crop advisor businesses. The WPS includes the employer are not considered employees and thus are following worker requirements: not covered. Second, Congress has repeatedly included language in Department of Labor appropriations bills • Only appropriately trained and equipped to exclude agricultural workers in operations that have workers are allowed in the area during had ten or fewer non-family employees within the last pesticide application. 12 months unless a temporary labor camp was main­ • Workers may enter a treated area before the tained during the same time period. Thus, OSHA regu­ restricted entry interval has expired only if the lations apply to less than 10 percent of farm employers worker will have no contact with pesticide and about half of the hired farm workers. residue, will not be performing hand labor or is entering for a short term, emergency or Temporary labor camps, for example, must meet specifically exempted task. OSHA standards that have been developed for the site, • Workers must be provided with protective shelters, the water supply, toilet facilities, lighting, equipment in proper working order. insect and rodent control, refuse disposal, first aid and • Workers must be notified of pesticide applica­ the reporting of communicable disease violations, as tions, treated areas must be posted and/or oral well as for the construction and operation of kitchens, warnings must be given to workers as directed dining hall and feeding facilities. by labeling. • Workers must have received safety training OSHA is authorized to conduct workplace during the past five years before being allowed inspections to ensure compliance of covered work­ to enter a treated area during a restricted places. These inspections are given without advance entry interval. notice but must take place at a “reasonable time.” • Pesticide safety poster must be on display in a Penalties are proposed based on the severity of condi­ central location. tions, the good-faith effort of the employer to remedy • Decontamination site must be provided and problems, the employer’s size and the firm’s history of maintained if workers are required to enter OSHA violations. treated area during restricted entry area and following 30 days. Federal Insecticide, Fungicide, • Emergency assistance must be provided to any worker when there is reason to believe the and Rodenticide Act worker was poisoned or injured by pesticides. The Federal Insecticide, Fungicide, and Rodenticide Further, it contains several pesticide handler Act of 1947 (FIFRA), 7 U.S.C. §§ 136-136y, is a broad requirements as well. statute regulating the use of pesticides through a risk- benefit analysis. It mandates that pesticides be regis­ • Handler must provide information to handler tered and labeled before use. When used according to employer prior to applying any pesticide. its label instructions, the pesticide must perform its • Only appropriately trained and equipped intended function while not causing unreasonable handlers allowed in area being treated. risk to human health or the environment. The Environ­ • Handler employee must have knowledge of mental Protection Agency (EPA) regulates the label, safe use of equipment and posted registration and labeling of pesticides. information before starting handling activity. As part of its regulation, the EPA has issued a • Handler fumigating in a greenhouse must be Worker Protection Standard (WPS) and a Certification in continuous voice or visual contact with of Pesticide Applicators Standard (CAS) in order to another handler. protect the safety of workers potentially exposed to • Handlers must use protective equipment pesticides. The WPS has a broad application and covers specified no the label for use with the product. most agricultural employers, including owners or • Handlers must be provided with a managers of operations that produce agricultural deco ntamination site. plants, operators who hire workers for operations that • Emergency assistance must be provided to any produce agricultural plants, businesses that apply pesti­ worker when there is reason to believe the cides for operations that produce agricultural plants worker was poisoned or injured by pesticides.

24 Retaliation against workers who attempt to comply attempt to collectively bargain for the mutual aid and with the safety requirements is also prohibited. protection of workers. The impact of this statute on agricultural labor is through a broad exclusion – agri­ The CAS requires that workers must be certified cultural laborers are specifically excluded from the before they may apply or supervise the application of definition of covered employees. There is no federal restricted-use pesticides. Restricted-use pesticides are protection for agricultural laborers to form organiza­ identified by the EPA. The certification programs are tions in an effort to promote their interests; however, carried out by state agencies, but the programs must state laws may confer such a right to farm workers. meet EPA approval. The WPS covers all pesticide use unless a specific Other State and exception or exemption exists. These include excep­ tions for certain government pest control, application Federal Statutes on livestock or in livestock areas, application on Many other state and federal labor statutes apply noncommercial plants, and exemptions for farm generally to all employers, most of whom provide agri­ owners and their family of some entry restrictions, cultural employers no special exemptions and, there­ certain notice and information requirements, and fore, affect agricultural employers in a manner similar emergency assistance provisions. to other employers. States generally enforce the safety requirements and licensing programs if they have met EPA approval. Workers’ compensation laws are designed to State laws may also provide more stringent protections provide employees with immediate benefits in the case for workers. of an accident or work-related illness and to limit employer liability from negligence lawsuits. These laws are unique to each state, and each state’s coverage of Immigration Reform and agricultural workers may be voluntary or mandatory Control Act and may or may not have some exemptions for certain employers. The Immigration Reform and Control Act of 1986 (IRCA), Pub. L. No. 99-603, 100 Stat. 3359 (1986) The Personal Responsibility and Work Opportunity (amending various sections of 8 U.S.C.), limits unau­ Reconciliation Act of 1996 requires states to compile thorized immigration into the United States. The directories of new hires in order to facilitate the statute creates employer sanctions for the employment collection of delinquent child support. of unauthorized aliens. All employers are required to verify the employment eligibility status of employees. The Family and Medical Leave Act of 1993 allows Employers must examine approved documents to deter­ employees to take a certain amount of unpaid leave mine if the potential employee is properly identified from work for covered family or medical reasons. and authorized to work in the United States. Once veri­ Generally, employers must continue health insurance fied as eligible, employers may not discriminate against coverage during the leave, and upon return the employees based on citizenship or national origin. employee must be given the original or an equivalent job. The law only applies to employers with 50 or more The Immigration and Nationality Act as amended employees during 20 or more weeks in the current or by IRCA also creates the current H-2A program. This previous year. program allows agricultural employers that have a shortage of qualified domestic workers to import State and federal equal employment opportunity nonimmigrant aliens into the United States. These statutes both prohibit discrimination by employers workers are permitted to remain only temporarily for against employees for such things as gender, race, color, the purpose of seasonal agricultural work. religion, national origin, age or disability. The federal statutes generally apply only to larger employers.

National Labor Relations Act The major federal employment tax laws –Federal The National Labor Relations Act of 1935 (NLRA), Insurance Contributions Act, Federal Unemployment 29 U.S.C. §§ 151-169, protects the rights of workers to Tax Act and Federal Income Tax Codes – generally participate or not participate in organizations that apply to all employers. These tax laws require employers

25 to withhold wages from employees, match certain For more information on federal labor laws and funds withheld from employee wages and forward regulations, the Economic Research Service has these withheld and matching funds to the United States released a publication titled Summary of Federal Laws Treasury. Certain information collection and notifica­ and Regulations Affecting Agricultural Employers, 2000. tion are also required of employers. Agricultural It is available at http://www.ers.usda.gov/publications employers may have special rules regarding their duties /ah719/. Additionally, more information is available at under these laws based on the type of agricultural work the National Agricultural Law Center’s Reading Room performed, the amount of wages paid or the number on Labor Law at http://www.nationalaglawcenter.org of employees. /readingrooms/labor/.

26 Chapter 6 Food Safety and Specialty Crops

The Necessity of Food minimal processing. Further, it is often difficult to remove pathogens once they attach to surfaces, since Safety Regulation infiltration and internalization of pathogens is well documented for a variety of produce. Finally, the The United States is generally regarded as having highly perishable nature of many specialty crops make one of the safest food supplies in the world because the sources of outbreaks harder to investigate. As a safety improvements such as pasteurization, steriliza­ specialty crop producer, it is important to know the tion and proper canning have curtailed many problems laws that have the potential to affect your operation so inherent in the food supply of previous generations. the risks of consequences resulting from foodborne However, foodborne illness is still a serious public illnesses are minimized. health problem. Advances in technology allow us to detect different pathogens at much smaller levels than ever before, and when coupled with ever-evolving The Federal Agencies That diseases, the Centers for Disease Control and Preven­ Regulate Food Safety tion (CDC) estimates there are more than 250 differ­ ent foodborne diseases caused by a variety of bacteria, Food safety laws and regulations have traditionally viruses and parasites. These diseases translate into a been implemented in an unorganized manner, typically monetary cost to the United States, according to CDC in response to food-related emergencies. As a result, estimates, of over $23 billion a year and a human cost the federal food safety structure consists of numerous of 76 million illnesses, 300,000 hospitalizations and federal agencies with authority to enforce some, but approximately 5,000 deaths annually. not all, of the many different food regulations.

Foodborne illness outbreaks are becoming Although there are over 10 different federal increasingly much more difficult to track because of agencies that maintain regulatory control over different national and international food systems Americans aspects of food safety within the United States, two of enjoy. An outbreak of foodborne illness that occurred them clearly stand out as the most important. The years ago was typically confined to a small community Food and Drug Administration (FDA) and the Food because food was grown, stored, prepared and Safety and Inspection Service (FSIS) within the consumed within that area. Since fewer companies Department of Agriculture enforce the vast majority produce more food, the impact of a single contamina­ of food safety statutes and regulations between them. tion event can ripple across the country – or even the The general rule of thumb is that the FSIS regulates world – as food is shipped out. Another possible meat and poultry products, while the FDA handles the reason for the rise in foodborne illness is the medical remaining food groups. and technological advances that have been made within the last 25 years. These advances have made the However, there is a significant “gray area” where detection of foodborne illness much simpler, so illness multiple agencies are responsible for food safety at caused by contaminated food was often written off as a some point in the food production process or several stomachache and nothing more. agencies may have joint jurisdiction over the food. For example, consider a can of soup. The FDA has regula­ Specialty crops are uniquely susceptible to the tory control over the vegetables in the soup as well as presence of foodborne diseases for several reasons. the factory where it was canned. But if the soup Many specialty crops are eaten uncooked or with contains meat, FSIS is involved in the inspection of the

27 meat. Finally, if the animal that provided the meat was USDA), but the bills leave the specific regulations up to given antibiotics or growth hormones before it was the agencies. For example, Senate Bill 510 requires that slaughtered, the FDA has regulatory authority over the FDA set forth “practices as the Secretary deter­ those drugs and their usage. mines to be reasonably necessary to prevent the intro­ duction of known or reasonably foreseeable biological, While FDA and FSIS regulate most food safety chemical, and physical hazards, including hazards that issues, the means by which they do it differ signifi­ occur naturally, may be unintentionally introduced, or cantly. Meat products, which fall under FSIS jurisdic­ may be intentionally introduced, including by acts of tion, are inspected prior to the food being sold for terrorism, into fruits and vegetables that are raw agri­ consumption. USDA meat inspectors are sent to every cultural commodities and to provide reasonable assur­ meat packing plant where they are required to be on ances that the produce is not adulterated.” Many bills duty both before and after slaughter. FDA regulates a would also require the farmer to keep detailed records much wider array of food products under a smaller so that outbreaks of foodborne diseases could be traced federal appropriation. For example, the FDA currently back to the farm or facility where the contamination has oversight of more than 44,000 U.S. food manufac­ occurred. Concerns by small producers have been turers as well as over 100,000 additional registered food voiced citing that record keeping requirements and facilities, including warehouses and grain elevators. proposed food safety regulations may be overly Because of this, the FDA uses prior approval of foods burdensome on smaller producers; however, none of and additives as well as inspections of food preparation the bills currently before Congress address this issue. facilities to better leverage its resources. Current Liability Issues Facing Enforcing Food Safety Specialty Crop Growers Regulations on Specialty Crops While federal regulations may be passed in the For the purposes of specialty crops, the most near future that will affect the production of specialty relevant actors will often be the FDA and the state crops, there are legal liability issues that confront government organizations they work with. Under the growers now. Specialty crop growers are under the federal Food, Drug, and Cosmetic Act and the Public same general civil liabilities that everyone within the Health Service Act, the FDA is granted broad power to United States faces. People who consume the farmer’s “provide for such inspection, fumigation, disinfection, products and are made ill because of them may have sanitation, pest extermination, [and] destruction of the ability to recover damages from the farmer through animals or articles found to be so infected or contami­ a civil lawsuit. The three major theories that expose a nated as to be sources of dangerous infection to human farmer to civil liability are negligence, strict product beings[.]” What this means is that the FDA may have liability and warranty theory. the authority to regulate on-farm activities as well as the food processing plants where they have tradition­ Negligence liability is caused by the failure of a ally spent most of their time and resources. However, person to exercise reasonable care and, as a result of outbreaks of foodborne diseases, such as the salmo­ that failure, another individual was injured. The theory nella found in peppers that infected more than 1,300 is applied broadly, and many, if not most, civil suits people in 43 states, have caused Congress to look more across the country are brought under this theory. closely at food safety standards for farms. This, in turn, For example, a farmer fertilizes his vegetables may lead to more FDA inspections on the farm level. with animal manure that contains E. coli. A The FDA does releasegood agricultural practices, consumer becomes ill as a result of eating the which provide guidance but not binding regulation, to vegetables. Would a person exercising reason­ reduce certain risks before a crop is actually harvested. able care have applied animal manure to the Further, the 111th Congress has several bills before it vegetables? Would a reasonable person have that could create on-farm safety standards specifically taken steps to wash or sterilize the vegetables geared towards fruits and vegetables. The bills before before distributing them? Did the farmer Congress all delegate more regulatory authority to take reasonable steps to prevent the spread of various federal agencies (primarily the FDA and the foodborne diseases?

28 These questions and many more could be evaluated is selling are generally fit for human consumption. The by a court to determine whether the farmer was negli­ reason why this theory is mentioned last is that it gent. There are steps farmers can take to reduce the applies to merchants, and traditionally, courts have been likelihood of civil liability. Using good agricultural very reluctant to find that farmers are merchants. How­ practices and documenting the steps taken to ensure ever, it is worth mentioning because the traditional food sold is wholesome are relatively easy steps many views courts and the general public ascribe to farmers farmers can take. However, the issue of liability in negli­ have changed in recent years and will undoubtedly gence cases often hinges on what the court finds a person continue changing into the future. exercising reasonable care would do in a like situation. The rise in detected foodborne illnesses across the Another legal theory that specialty crop producers country has increased the pressure on federal and state may be subject to is strict liability. Typically, this cause governments to take actions to ensure the safety of our of action is used when an individual introduces an food supply. Many past outbreaks were attributed to unreasonably dangerous product into the stream of contaminated meats; however, nationwide outbreaks commerce. Under strict liability, there is no “reason­ traced back to spinach, tomatoes and peppers have able care” standard because the action or product is shown that specialty crops are also potential safety recognized as being hazardous or inherently danger­ risks. The producer’s ability to mitigate this risk ous. If an injury is caused while performing the inher­ through the exercise of proper food safety practices ently dangerous activity or selling a hazardous product, will be a necessary skill if the producer wants to main­ then civil penalties should be assessed. For example, tain or expand the business. The technology for identi­ the application of pesticide onto a field of vegetables fying and tracing foodborne pathogens has made rapid may be considered as an inherently dangerous activity, advancements in the not too distant past, and nothing especially if the applicator does not follow the instruc­ indicates that such progress will halt in the future. This tions for application. Although it is possible for strict means that, even in the absence of comprehensive liability to be used in some instances while growing or federal and state food safety regulation reform for selling specialty crops, it is not as likely to occur as an specialty crops, the ability of consumers to trace back action in negligence. foodborne pathogens to their source can enable them to bring civil suits against the grower. When the A third legal theory that may expose specialty crop increased traceability is combined with the strong like­ growers and sellers to civil liability is under warranty lihood of some form of state and federal food safety theory. There is animplied warranty of merchantabil­ regulation for specialty crops, the need for proper food ity most states include in their commercial code that handling processes and good record keeping becomes deals with the buying and selling of goods. This theory, critical for any grower to prosper. in its simplest interpretation, states that if a merchant (someone who is in the business of selling a particular For more information on the topic, please see the product) sells a good then they are guaranteeing it to National Agricultural Law Center’s Reading Room on be fit for the ordinary purpose for which it was sold. In Food Safety at http://www.nationalaglawcenter.org other words, a farmer who grows and sells specialty /readingrooms/foodsafety/. crops guarantees that the fruit and vegetables he or she

29 Chapter 7 Third-Party Audits of Specialty Crop Operations

Recent outbreaks of foodborne illnesses associated buying trend has opened new markets to small- and with fresh produce have led consumers to question the medium-sized farms that sell at these local outlets. To safety of the food products – fruits, vegetables, meats, maintain and protect these emerging markets, it is processed, etc. – they consume. We have recently more important than ever for growers and food busi­ witnessed the intense, around the clock television nesses to ensure they have appropriate processes in coverage of spinach with E. coli 0157:H7 (September – place to reduce the likelihood of food safety incidents. October 2006) and peanut products contaminated with These very markets could be ignored by consumers if salmonella (2008-2009), to name a few. We also heard there were only a few instances of foodborne illnesses the negative publicity all summer falsely implicating associated with “local” food products. Since consumers tomatoes with salmonella (Summer 2008), when in are feeling good about “buying local,” grocery stores, reality the contamination was from jalapeno peppers. restaurants and other retailers are increasing the level The level of coverage on these and other incidents of locally grown products. A few instances of food- along with the sometimes conflicting or erroneous borne illness would undoubtedly greatly impact not reporting have raised consumer concerns and awareness only the retail buyer’s level of interest but also the of the safety of their food. supplier requirements.

People involved in food safety on a daily basis know that a 100 percent totally safe food is economi­ Historical Perspective cally impossible, but we need to strive to reduce the Up into the 1980s, most people believed that probability to as low as realistically possible. One almost all foodborne illnesses were the result of eating avenue to alleviate consumer concerns and to protect meat and meat-related products. This was mainly growers and retailers from liability is third-party audits because most analyses methods were not as good as of production and processing facilities. A third-party they are today and pathogens or food poisoning audit is when a totally independent party to the busi­ microorganisms were looked for primarily in meat ness visits the farm/business production and/or products. Another issue that has changed over time is processing area and evaluates the field and/or facility in the relatively low level of consumer awareness and terms of its ability to produce safe, quality foods. These concern for foodborne illnesses and the reporting of audits assess business standard practices and proce­ such instances. Most foodborne illnesses are not dures. This chapter provides a brief introduction to reported since most people think they have the flu or food safety audits along with resources to assist busi­ some other type of illness. They are even more nesses in understanding the sometimes challenging convinced of the flu when the whole family suffers the landscape of food safety. contagious nature of the perceived flu when, in fact, the whole family got foodborne illness from eating the To a large degree, these large publicized food same contaminated food. recalls are in general erroneously believed to be the result of large corporate farming practices. As a result, Over the last decade, there has been a sharp an increasing number of consumers are buying locally increase in the number of food illness reports. This grown produce. They feel good about buying home­ increase is the result of several factors including changes grown produce at farmers’ markets, roadside stands to the dietary guidelines, consolidation of food indus­ and neighborhood markets, since this allows them to try and advances in technology and/or equipment. The buy directly from people they know and trust. This 2005 Dietary Guidelines for Americans recommended

30 eating at least 4½ cups (9 servings) of fruits and Good Agricultural Practices vegetables per day. This increased consumption of fruits and vegetables resulted in more foodborne (GAP) illnesses from fruits and vegetables than from meat and GAP is short for “Good Agricultural Practices.” meat-type products. Good Agricultural Practices are recommended proce­ Another more recent technological change in the dures producers should use to minimize the risk of food chain is the long distribution time. Several produce contamination. The procedures are a scientifi­ decades ago, it was very difficult to ship fruits and cally based protocol, developed by Food and Drug vegetables long distances without spoilage. In today’s Administration (FDA) in collaboration with U. S. world, food is often shipped across the country or even Department of Agriculture (USDA), to establish stan­ imported from foreign countries. This has resulted dard operating guidelines for businesses to follow. from the development of more resilient species of fruits These wide-ranging standards include testing for the and vegetables, better shipping conditions (i.e., gas presence of certain bacteria that are of serious health ripening, refrigeration) and faster distribution times. concern and other environmental hazards, such as However, with the increased distance traveled, there hazardous chemicals and physical hazards like stones are more times when things can go bad (refrigeration and glass fragments. The extended offshoot of GAP is problems, dock labor strikes, storms at sea) and GMPs or GHPs, which are “Good Manufacturing or increased time for bacterial growth and increased cost Handling Practices.” These are recommended proce­ of shipping. For these reasons, some people want to dures to follow after harvesting produce that reduce buy locally in addition to keeping the money local. the probability of produce becoming a potential hazard. In many cases, the term GAP applies to both Hazards in Foods GAP and GMPs/GHPs. Good Agricultural Practices started in 1997-1998 Growers and handlers of fresh produce must with the booklet entitled Guide to Minimize Microbial carefully control the factors that can affect the safety of Food Safety Hazards for Fresh Fruits and Vegetables, their produce. There are basically three types of which was more of a guidance document versus a regu­ hazards that can affect produce – biological, chemical lation or law. Several years later, Food Safety Begins on and physical. A biological hazard results from bacte­ the Farm: Good Agricultural Practices for Fresh Fruits ria, viruses and molds (fungi) that produce toxins or, and Vegetables; A Growers Guide was published as a when ingested, multiply and cause foodborne illness. followup to the previous booklet. Both of these book­ These microorganisms can contaminate produce or lets are in the references section and make excellent proliferate at any time – from when it is in the field up reading for businesses interested in understanding the to the time it is eaten. Chemical hazards are those that comprehensive nature of food safety. arise when food is contaminated with harmful chemi­ cals to include fertilizers, pesticides, herbicides and The goal of the GAP program was the fact that chemicals contained in runoff water. Physical hazards prevention of contamination is much more effective are those materials that are not supposed to be in the than corrective actions after contamination has already product – stones, sticks or other foreign material like occurred. Good Agricultural Practices are scientifically glass, metal objects, etc. based guidelines to reduce or eliminate microbial contamination of fresh produce in the field and in These hazards are present in both the production packing houses. and processing phase for most food products. Careful evaluation of the critical points in the food products development phases is vital to understanding the Potential Sources of potential for the presence of these hazards. By inserting On-Farm Contamination some simple reporting and tracking processes, growers can make huge strides in not only understanding the There are many possible ways for produce to potential presence of hazards but also implementing become contaminated by harmful microorganisms strategies to reduce and/or eliminate the hazard. during production, harvest and handling. While contamination can occur anywhere in the flow of food from farm to fork, our focus begins on the farm. Of

31 particular concern are manure management, water audits your organization or farm for the major food use and farm worker health and hygiene. Sources of company. Depending on the size of your operation and potential on-farm contamination include: the information needed by the food company, these audits can last one-half to three days. They are gener­ • Soil ally very thorough and quite complete. The audits are • Irrigation water designed to effectively determine if your operation is • Animal manure maintaining an adequate food safety program that • Inadequately composted manure provides evidence to minimize the probability of a • Wild and domestic animals recall or, worse yet, a foodborne outbreak. • Inadequate field worker hygiene • Harvesting equipment There are currently several auditing programs, • Transport containers (field to packing facility) most of which are private. The USDA currently has a • Wash and rinse water program known as the “Fresh Produce Audit Verifica­ • Unsanitary handling during sorting and tion Program.”The information on the program can be pac kaging, in packing facilities, in wholesale or found at http://www.ams.usda.gov/AMSv1.0 retail operations and at home /ams.fetchTemplateData.do?template=TemplateN • Equipment used to soak, pack or cut produce &page=GAPGHPAuditVerificationProgram. • Ice • Cooling units (hydrocoolers) The items audited include the following categories: • Transport vehicles • Improper storage conditions (temperature) • General Questions – Asks if operation has a • Improper packaging food safety program and about worker health • Cross-contamination in storage, display and and hygiene. preparation • Part 1. Farm Review – Reviews the farm operations per source of water, sewage treat­ These are the critical areas for growers/processors ment, animals and livestock, manure usage and to consider as they evaluate their food safety program. soil history. A few simple steps to monitor or evaluate each of the • Part 2. Field Harvest and Field Packing above areas can greatly reduce the likelihood of Activities – Reviews field sanitation and product contamination. hygiene and harvesting and transportation operations. Third-Party Audits • Part 3. House Packing Facility – Reviews receiving operations, washing and packing Almost every major food company requires that line, packing house worker hygiene, packing their suppliers be inspected or audited on a regular house general housekeeping. basis. The audits can be in different forms – survey or physical – and may vary in required re-certification, • Part 4. Storage and Transportation – although most audits are conducted on an annual Reviews product, containers and pallets, pest basis. A survey audit is used by a company to gain control, ice, storage and temperature control. some information from the supplying company • Part 5. Traceback – Reviews if a traceback without physically visiting the supplier. During physi­ program is established and specifics about cal audits,the purchasing company physically visits the such a program. premises of the supplier. Most audits are a blend of • Part 6. Wholesale Distribution both survey and physical audits. The auditing firm will Center/Terminal Warehouses – Reviews the probably want to see records and documents related to distribution center/warehouse relative to your pest control program, if required; a list of training operations such as receiving, sanitation and of your employees; a HACCP plan, if you have one; and temperature control, pest control, repacking or any type of record-keeping control program they think reconditioning, shipping/transportation. is important to the safety of your product. • Part 6A. Traceback for Wholesale Distribu­ tion Center/Terminal Warehouse – Reviews In more recent years, major food companies are the distribution center/warehouse traceback requiring third-party audits. These are survey and program. physical audits where an independent third party

32 • Part 7. Preventive Food Security your needs. If you are working with a specific retailer, it Procedures – Reviews the programs used to is a good idea to identify their pre-approved audit firms secure employees/visitors procedures, secure or check to see if their certification will be accepted. facility procedures.

Most of the above parts are self-explanatory except The Future the terms traceback and food security. Traceback refers Although the above may sound quite complex, it is to your methods of identifying your containers and just the basics and a start to developing newer retrieving them from the marketplace so they can be programs that focus on food product safety with effectively recalled if the need should arise. The term increased accountability and verification. There are food security procedures refers to your methods of numerous comprehensive programs already in exis­ preventing “intentional contamination” such as a tence to guide your efforts. For example, SQF (Safe bioterrorism attempt or the actions of a disgruntled Quality Foods) uses HACCP methodology to address employee finding a way of getting even. These proce­ both food safety and food quality issues. The FSSC dures include using a visitor log-in sheet, perimeter 22000 Food Safety Certification Standard is a program security such as a fence, limiting employee access, approved by the Global Food Safety Initiative (GFSI) deliveries and similar procedures. that is accepted globally as a food safety program and has numerous levels of food safety protocols. These Operations that have gone through the USDA programs, like the USDA procedure, help to ensure audit can be listed on the USDA’s website, and the food safety but go one step further to ensure the food checklist of what items the USDA audit will cover is quality as well. available at http://www.ams.usda.gov/AMSv1.0 /getfile?dDocName=STELPRDC5050869. Selected Readings For a list of GAP/GHP Certified Farms in Arkansas, see http://www.ams.usda.gov/AMSv1.0 1. Washington State Department of Agriculture. /getfile?dDocName=STELPRDC5080707. USDA Good Agricultural and Good Handling Practices: An Audit Verification Program for the If you live in Arkansas and are interested in Fresh Fruit and Vegetable Industry. scheduling a third-party audit, check with David Fort http://www.agr.wa.gov/Inspection/FVInspection at the Arkansas State Plant Board (501-837-8402; /docs/GHP_GAP_Presentation.pdf david.fort@[email protected]). 2. Guide to Minimize Microbial Food Safety There are also several private companies that Hazards for Fresh Fruits and Vegetables. conduct these audits. A popular private company http://www.fda.gov/Food within the Arkansas region that conducts many food /GuidanceComplianceRegulatoryInformation safety audits is Primus. The URL lists their products: /GuidanceDocuments/ProduceandPlanProducts http://www.aragriculture.org/marketing /ucm064574.htm /ag_handling_presentations/Primuslabs.pdf. 3. Food Safety Begins on the Farm. A Grower’s Most of the private companies offering audits will Guide. http://wcmorris.com/gap/files look at similar areas as the USDA audit examines, but /cornell_guide.pdf they may differ slightly. It is important to remember when researching potential audit firms that your busi­ 4. Brady, P.L., and J.R. Morris. 2005. Production ness is purchasing a service. Therefore, it is important and Handling Practices for Safe Produce. to note the company’s reputation, level of service and http://arkansasagnews.uark.edu/978.pdf ability to serve your needs. It is also important to note 5. Cornell University has an excellent website whether or not the audit firm’s results will be accept­ with numerous GAP materials able to the respective retailers. A number of retailers http://www.gaps.cornell.edu will only accept audits from certain firms, so make sure /indexhighspeed.html you are dealing with an approved firm that will meet

33 Chapter 8 Food Labeling

The requirements and restrictions on food labels Nutrition labeling, as a result of NLEA, has are an important part of the food safety and regulation become widely standardized and defined. For foods system in the United States. The topic of food labeling, that must be labeled (and those that choose to be), the however, is very broad, encompassing several specific label must feature a prominent product identity state­ areas of the law that may affect specialty crop produc­ ment, ensuring that consumers are able to identify the ers. These areas include nutritional labeling, country of product and obtain important information about the origin or “COOL” labeling, descriptive claims, organic type and form of food contained in the package. Other labeling and irradiation labeling. labeling requirements ensure that the net quantity of contents, or package amount, is listed on the package, In the United States, these areas are generally as well as a list of all ingredients listed in descending regulated by the USDA and the FDA. Regulation based order of predominance and in specifically defined on food labeling began in 1938, when the Food, Drug, wording. Other regulations require specific wording, and Cosmetic Act (FDCA) was passed. The FDCA type size and placement of the labeling information. focused on the issues of food misbranding and adulter­ ation and serves as the basic framework for food In order to ensure consistency, both FDA and regulation by the FDA and the USDA. It created food USDA regulations are very explicit about the layout of standards, authorized inspections of factories and the Nutrition Facts panel, detailing the type of infor­ provided for court injunctions as remedy for violations, mation that may be included as well as the format and in addition to the already existing seizure and prosecu­ order. Nutrition labels are required to provide informa­ tion remedies. The FDCA has been amended a number tion on 14 nutrients, which must appear in a specific of times since 1938, and related laws have been enacted. order on the label. However, in addition to information on the nutrient by measure of weight (gram or Nutrition Labeling milligram), the percent daily value must also be declared. This serves to standardize food labeling so In 1990, Congress passed the Nutrition Labeling people who are unfamiliar with the recommended and Education Act (NLEA), which required uniform daily value to measure and evaluate foods based on nutrition labeling. These standards focus on the rela­ their nutrient contents. tionship between food contents and healthy diets, and they are meant to provide adequate information to Finally, food labels must also outline the serving consumers regarding the content of food, including a size, which is the amount of food upon which the disclosure of the food’s nutritional properties and nutrient content is based. In order to ensure consistent added nutrients. As a result of these statutes, food serving sizes between similar products, NLEA defines labeling addresses nutritional information and is serving size as the amount of food customarily eaten at required for most prepared foods, such as breads, one time. While, the serving size included on the cereals, snacks, desserts and drinks. Food items, Nutrition Facts panel may vary slightly between similar including specialty crops that have been canned or products, it is based on the Reference Amounts frozen, are also required to contain nutrition informa­ Customarily Consumed Per Eating Occasion (RACC), tion. However, nutrition labeling for raw produce as established by the FDA. The serving size is the (fruits and vegetables) and fish remains voluntary. household measure (e.g., cups, tablespoon, piece, slice, fraction or container) closest to the RACC.

34 While raw fruits, vegetables and fish are not Because country of origin labeling is only required required to label their products with nutrition infor­ for larger retail facilities and because the responsibility mation, in order to encourage retail stores that sell to ensure compliance rests with the retailer rather than those products to participate in the voluntary labeling with the producer, COOL is something that should be program, the FDA has created downloadable posters considered, but it is not necessarily an integral part of for printing. The posters show nutrition information every specialty crop operation. for the 20 most frequently consumed raw fruits, vegetables and fish in the United States, and stores are For more information, please refer to the National encouraged to download the posters, print, display Agricultural Law Center’s Reading Room on COOL, and/or distribute them to consumers in close proxim­ available at http://www.nationalaglawcenter.org ity to the relevant foods in the stores. The posters are /readingrooms/cool/. available at http://www.fda.gov/Food/LabelingNutrition /FoodLabelingGuidanceRegulatoryInformation Descriptive Labeling /InformationforRestaurantsRetailEstablishments /ucm063367.htm. Another labeling issue that affects specialty crop producers occurs when engaging in descriptive label­ For more information, please refer to the ing of their product for the purpose of marketing their National Agricultural Law Center’s Reading Room crop. Commonly used words such as fresh or natural http:// on Food Labeling available at have specific meaning. www.nationalaglawcenter.org/readingrooms /foodlabeling/. The word “fresh” has a precise regulatory meaning, specifically that “the food is in its raw state and has not COOL Labeling been frozen or subjected to any form of thermal processing or any other form of preservation.” In the 2002 and 2008 Farm Bills, Congress However, the term “fresh frozen” or “frozen fresh” can included language to require Country of Origin Label­ be used as long as the food was quickly frozen while ing or COOL, which mandated that retailers notify their still fresh, and those terms can still be used if food is customers of the country of origin of muscle cuts and simply blanched before being frozen. Food that is ground beef (including veal), lamb, pork, chicken, goat; refrigerated, treated with approved waxes or coatings, wild and farm-raised fish and shellfish; perishable agri­ treated post-harvest with approved pesticides or cultural commodities; peanuts; pecans; ginseng; and cleaned with a mild chlorine wash or mild acid wash macadamia nuts. Specialty crop producers should be may also use the word “fresh” in labeling the product. aware of this labeling concern because the definition of The word “natural,” on the other hand, is not so perishable agricultural commodities includes “fresh clearly defined. Instead, both FDA and USDA have fruits and fresh vegetables of every kind and character.” policies regarding natural food labeling. They both However, it is important to note that retailers who sell provide that natural means that no artificial or less than $230,000 of fresh fruits and vegetables in synthetic ingredients have been added. USDA specifi­ any calendar year are not required to furnish COOL cally prohibits artificial flavor, coloring ingredients or labeling on their products chemical preservatives but allows minimal processing, specifying that such processing is limited to traditional It is the retailer, rather than the producer, who has processes used to make food safe for human consump­ the primary burden of providing labeling to consumers tion, ones that preserve it and those that do not alter under the COOL statute. COOL information must be the raw product. On the other hand, FDA allows a provided on a clear and visible sign on the commodity limited group of chemical reactions such as roasting, itself, the package, the display or the holding bin at the heating and enzymolysis that can be used to produce final point of sale to consumers. Retailers may also be natural flavors. required under the law to maintain records sufficient to enable an auditor to determine compliance with the For more information, please refer to the law, while suppliers to the final retailers are required to National Agricultural Law Center’s Reading provide necessary country of origin information to the Room on Food Labeling available at http: retailer to ensure compliance with the law. //www.nationalaglawcenter.org/readingrooms /foodlabeling/.

35 Organic Labeling producer or handler will use in its operation to ensure compliance with the record keeping requirements for When and if to label a product organic is another certified operations. potential concern for specialty crop producers. For foods to be labeled and sold as “organic,” they must be An organic system plan is submitted to a certifying produced and processed according to the National agent. After review and approval of the plan and an Organic Program standards. The farm where organic on-site investigation, the agent decides whether the food is grown, as well as the companies that handle or operation has met the requirements and can be certi­ process the organic food, must meet the USDA fied organic. The certification is then subject to periodic organic standards. review and reevaluation.

There are four approved organic labeling claims For more information, please refer to the National based on four distinctions of organic content. To label Agricultural Law Center’s Reading Room on the Organic a product 100 percent organic, the product must be Program at http://www.nationalaglawcenter.org composed of wholly organic ingredients and must not /readingrooms/organicprogram/. have any nonorganic ingredients or additives. To label a product organic, the product must contain at least Irradiation Labeling 95 percent of organically produced ingredients. To label a product made with organic ingredients, the In response to the 2006 E. coli outbreak, on product must contain 70 percent organic ingredients. August 22, 2008, the FDA published a final rule allow­ Other products with less than 70 percent organic ing the use of irradiation of fresh iceberg lettuce and ingredients can only specify the organic ingredient(s) fresh spinach in order to control harmful bacteria and in the ingredients statement. The USDA seal can be other microorganisms and keep longer without spoil­ placed only on foods that qualify as “100 percent ing. The products that may be irradiated include loose, organic” and “organic.” However, it is important to note fresh iceberg lettuce and fresh spinach as well as that operations with a gross annual income from sales bagged iceberg lettuce and spinach. However, the FDA of organic products totaling $5,000 or less are not requires that foods which have been irradiated bear the required to obtain NOP certification. radura logo along with the statement treated with radiation or treated by irradiation. Additionally, leafy For those operations that exceed the $5,000 greens that have been treated with irradiation are not t hreshold and must obtain NOP certification in order prohibited from using the word “fresh” as part of their to sell their products as “organic,” NOP outlines labeling and marketing scheme. production and handling standards, which set forth requirements for land management; soil fertility and Because of the extensive range of food labeling crop nutrient management practices; seeds and plant­ requirements, it encompasses several specific areas of ing stock use; crop rotation; crop pest, weed, and disease law. As a specialty crop producer, it is important to be management; and the harvesting of “wild crops.” familiar with all of those areas. The requirements and restrictions on food labels are an important part of the Potential organic producers must set forth an food safety and regulation system in the United States. organic system plan, which is “[a] plan of management The topic of food labeling, however, is very broad, of an organic production or handling operation that encompassing several specific areas of the law that may has been agreed to by the producer or handler and the affect specialty crop producers. These areas include certifying agent and that includes a written plan nutritional labeling, COOL labeling, descriptive claims, concerning all aspects of agricultural production or organic labeling and irradiation labeling. handling…” It must describe the practices and proce­ dures that the producer or handler will implement and For more information, please refer to the National maintain in its operation and explain how often these Agricultural Law Center’s Reading Room on Food Label­ practices and procedures will be performed. Further, it ing available at http://www.nationalaglawcenter.org must describe the record keeping system that a /readingrooms/foodlabeling/.

36 Grant funding for this book was made available through the USDA-AMS Specialty Crop Block Grant Program– Farm Bill (SCBGP-FB). Section 101 of the Specialty Crops Competitiveness Act of 2004 authorizes funding for the SCBGP. Section 10109 of the Food, Conservation, and Energy Act of 2008 (Farm Bill) amends the above Act and establishes the Specialty Crop Block Grant Program – Farm Bill (SCBGP-FB).

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