VOLUME 21, NUMBER 3, WHOLE NUMBER 244 FEBRUARY 2004

Judgments for willful seed patent infringement deemed non-dischargeable In an important case for growers and holders of agricultural patents, an appellate bankruptcy panel recently concluded that a damage award against a grower for deliberately infringing on a seed technology patent is not dischargeable in bankruptcy. In re Trantham (Monsanto Co. v. William Farris Trantham), 2004 FED App. 0001P (6th Cir. BAP 2004). Reversing a prior ruling of a bankruptcy court, In re Trantham (Monsanto Co. v. William Farris Trantham), 286 B.R. 650 (Bankr. W.D. Tenn. 2002). the Bankruptcy NSI DE Appellate Panel for the Sixth Circuit, which hears bankruptcy appeals in Kentucky, I Michigan, Ohio, and Tennessee, ruled that a soybean and cotton grower could not escape liability to Monsanto Company for a nearly $600,000 willful patent infringement judgment simply by filing bankruptcy. • Ch. 12 sunsets The case stems from Monsanto’s Roundup Ready®, Bollgard®, and Bollgard with Roundup Ready® seeds for cotton and soybean production. The seeds contain Monsanto’s • Arbitration agreement patented gene technology, which makes them resistant to certain insecticides and lacks mutuality of herbicides, and therefore enormously beneficial and popular. In order to legally use these seeds, a grower must be properly licensed. Under the obligation standard licensing agreement, a grower is allowed to use the technology in only one growing season, and is prohibited from saving for later planting any of the seed produced • Insurance coverage from plants grown using the purchased seed. for agricultural In 1999 and 2000, despite never obtaining a license and being well aware of the environmental claims prohibitions against the unauthorized use of Monsanto seed, William Farris Trantham obtained and planted cottonseed and soybean seed with Roundup Ready® and Bollgard® gene technology. Although he attempted to conceal his unauthorized use, Monsanto learned of the patent violation and filed a federal lawsuit against him in the United States District Court for the Western District of Tennessee. Monsanto subsequently obtained a Solicitation of articles: All AALA court order to enter Mr. Trantham’s land to collect and test samples of the cotton and members are invited to submit ar- soybean crops, which confirmed the crops were indeed planted with seeds containing ticles to the Update. Please include Monsanto’s patented gene technology. See Monsanto Company v. Trantham, 156 F. Supp. copies of decisions and legislation with 2d 855 (W.D. Tenn. 2001). the article. To avoid duplication of In September 2001, a federal jury unanimously found that Mr. Trantham had willfully infringed upon Monsanto’s patents, a violation of 35 U.S.C. § 271. After the trial, the effort, please notify the Editor of your Cont. on p. 2 proposed article.

Country of origin labeling: update and overview The inclusions of Country of Origin Labeling (COOL) in the 2002 Farm Security and Rural Investment Act, the proposed USDA rule, and the bitter disputes over both have come to a pause with the recently passed moratorium on COOL. The Senate passed the N UTURE omnibus appropriations bill, which contained the two-year moratorium, by a 65-28 vote. I F COOL supporters led by Senate Minority Leader Tom Daschle seek to introduce a bill to repeal the motion. On the House side, H.R. 3732 has been introduced by Representatives SSUES Rehberg and Peterson to repeal the moratorium. COOL opponents vow to promote a I voluntary program that works for industry and consumers. The moratorium does not extend to wild-caught salmon and other seafood. The intent of COOL is to provide consumers with additional information on which to base their purchasing decisions. It is not a food safety or animal health measure.1 • Drafting conservation Supporters, such as the non-profit group Americans for Labeling, believe that consumers easements for desire the information to feel secure in their food choices. According to a 2002 produce agriculture survey, 86% of surveyed consumers support COOL on meat products.2 However, opponents of COOL contend that it acts as a hidden tax that places the implementation cost burden on packers and retailers. In his Agriculture Marketing Service (AMS) listening testimony American Meat Institute Senior Vice President Mark Dopp stated, “the fallacy of the food safety argument is demonstrated when one considers that the labeling of meat from three animals–each born in Mexico, Canada, and Cont. on p. 2

FEBRUARY 2004 AGRICULTURAL LAW UPDATE 1 SEED PATENT INFRINGEMENT/CONTINUED FROM PAGE 1 federal court ruled that Monsanto had sus- Farris Trantham), 286 B.R. at 664. It con- patent for the sole purpose of avoiding tained $106,000 in compensatory damages. cluded that although Mr. Trantham’s ac- payment of the license fee, and then com- Because the infringement was deemed will- tions constituted “reckless, careless, negli- pounded matters by attempting to conceal ful, however, the court increased the award gent, and even aggravated disregard for his actions. Those findings, according to to nearly $600,000, including treble dam- Monsanto and its patent rights,” his behav- the panel, were tantamount to a “willful ages, attorneys’ fees, and costs. See 35 ior failed to constitute the type of malicious and malicious” determination under sec- U.S.C. §§ 284 – 85. conduct required by section 523(a)(6). It tion 523(a)(6). Thus, the willful patent in- Shortly after the judgment was rendered, stressed that Mr. Trantham never intended fringement judgment was deemed non-dis- Mr. Trantham filed for bankruptcy protec- to injure Monsanto, and that his intentions chargeable. tion under Chapter 7 of the Bankruptcy were merely to produce an efficient and Mr. Trantham has asked the panel to Code. Unwilling to allow Mr. Trantham to profitable crop. reconsider its decision, and he may appeal escape liability, Monsanto sought to have On appeal, the Bankruptcy Appellate the decision to the United States Court of its willful infringement judgment deemed Panel for the Sixth Circuit reversed the Appeal for the Sixth Circuit. Assuming the non-dischargeable. Monsanto argued that decision, and found that Monsanto’s entire ruling is maintained and adopted by other the judgment was non-dischargeable un- judgment for willful patent infringement circuits, however, the decision imposes der section 523(a)(6) of the Bankruptcy Code was non-dischargeable. In re Trantham serious consequences on growers who because it was based on a “willful and (Monsanto Co. v. William Farris Trantham), choose to infringe on seed technology pat- malicious injury.” See 11 U.S.C. § 523(a)(6). 2004 FED App. 0001P at 13. In its reasons, ents. As evidenced by the example of Mr. Pursuant to the doctrine of collateral estop- the panel analyzed and ultimately rejected Trantham, growers who knowingly use pel, Monsanto urged the bankruptcy court the bankruptcy court’s narrow interpreta- protected seed without a proper license can to adopt the judgment of the district court tion of section 523(a)(6)’s malice require- be held liable for compensatory damages, without a separate trial. ment. treble damages, attorneys’ fees, and costs. The bankruptcy court agreed that a sepa- Specifically, the panel found the bank- And because willful patent infringement rate trial was unnecessary, but found that ruptcy court had overemphasized the fact has been deemed to cause “willful and Mr. Trantham’s infringement had not sat- that Mr. Trantham was not specifically malicious injury,” these judgments are not isfied the maliciousness prong of the sec- motivated to harm Monsanto. Noting that dischargeable in bankruptcy. In conclu- tion 523(a)(6) test for non-dischargeability. even bank robbers usually have no ill will sion, growers should think twice before In re Trantham (Monsanto Co. v. William toward the banks they are robbing—they engaging in acts of seed piracy, as the are generally motivated only by a desire to safety net of bankruptcy is potentially no enrich themselves—the panel concluded longer available. that the key question is not the debtor’s —Michael H. Pinkerton, Frilot, Partridge, opinion of his victim, but whether the debtor Kohnke & Clements, L.C. acted “in conscious disregard of one’s du- New Orleans, LA ties or without just cause or excuse.” Editor’s note: Michael Pinkerton is an attor- Upon a review of the district court’s ney with the firm that represented and contin- VOL. 21, NO. 3, WHOLE NO. 244 FEBRUARY 2004 findings, it was evident that Mr. Trantham ues to represent Monsanto Company in the AALA Editor...... Linda Grim McCormick had “deliberately” infringed on Monsanto’s Trantham litigation.

2816 C.R. 163, Alvin, TX 77511 Phone: (281) 388-0155 E-mail: [email protected] Country of origin labeling/Cont. from page 1 Contributing Editors: Michael H. Pinkerton, New Orleans, the U.S.–will have to be different–even “engaged in the business of selling any LA; Susan A. Schneider, University of Arkansas, Fayetteville, AR; Todd J. Janzen, Indianapolis, IN: Phyllis though all three animals were slaughtered perishable agricultural commodity solely J. Marquitz, Penn State University, Carlisle, PA; Harrison at the same U.S. plant, under the supervi- at retail when the invoice cost of all pur- M. Pittman, , National AgLaw Center, Fayetteville, AR; sion of the same USDA inspector and using chases or products exceeds $230,000 dur- 3 For AALA membership information, contact Donna French the same food safety criteria.” ing a calendar year.” This definition ex- Dunn, Executive Director, 4115 South Duff Avenue, Suite COOL requires the labeling of covered cludes butcher shops, fish markets, and C, Ames, IA 50010-6600. Phone: (515) 956-4255. commodities to identify the country or coun- small grocery stores. However, the law Agricultural Law Update is published by the American tries where the food was grown and/or does state that any persons in the business Agricultural Law Association, Publication office: Maynard Printing, Inc., 219 New York Ave., Des Moines, IA 50313. processed. The law defines “covered com- of supplying the covered commodities may All rights reserved. First class postage paid at Des Moines, modity” as muscle cuts of beef (including be required by the Secretary of Agriculture IA 50313. veal), pork, lamb; ground beef, ground lamb, to keep records or an audit trail. This publication is designed to provide accurate and and ground pork; farm-raised fish and shell- The law states that the country of origin authoritative information in regard to the subject matter fish; wild fish and shellfish; perishable ag- declaration may be provided to consumers covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other ricultural commodities (fresh and frozen by means of a label, stamp, mark, placard, professional service. If legal advice or other expert fruits and vegetables); and peanuts. Poul- or other clear and visible sign on the cov- assistance is required, the services of a competent professional should be sought. try is excluded from this definition. Pro- ered commodity or on the package, dis- cessed versions of these products are also play, holding unit, or bin containing the Views expressed herein are those of the individual authors and should not be interpreted as statements of excluded as “processed food items” al- commodity at the final point of sale to policy by the American Agricultural Law Association. though there is no definition given specifi- consumers. Under the proposed rule, ab- cally in the country of origin labeling law breviations would be allowed for naming Letters and editorial contributions are welcome and should be directed to Linda Grim McCormick, Editor, 2816 for what constitutes “processed.” As it the country because of the packaging con- C.R. 163, Alvin, TX 77511. stands, the rule for processed foods would cerns expressed to the AMS. Copyright 2003 by American Agricultural Law include foods that have some of these “cov- AMS recognized that several states have Association. No part of this newsletter may be reproduced ered commodities” included in their ingre- implemented mandatory programs for or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any dients but are processed according to proper country of origin labeling and that some of information storage or retrieval system, without FDA regulations. the guidelines used in those various states permission in writing from the publisher. The Perishable Agriculture Commodi- have been suggested to the agency. How- ties Act defines “retailer” as one who is Continued on page 6

2 AGRICULTURAL LAW UPDATE FEBRUARY 2004 Chapter 12 sunsets, caught in political battle With a long history of short-term exten- When the House recently considered S. James Sensenbrenner (R-Wis) substituted sions and promises of eventual permanency, 1920, House Republicans orchestrated ef- the entire text of The Bankruptcy Abuse Chapter 12 again expired on January 1, forts to switch the legislative focus back to and Consumer Protection Act of 2003 (H.R. 2004. Its most recent six-month extension the overall bankruptcy reform bill, The Bank- 975) for the Chapter 12 extension language provided temporary authorization only ruptcy Abuse and Consumer Protection in S. 1920. This bill, with the substituted through December 31, 2003. Pub. L. No. Act. This legislation has been debated in language, passed the House on a roll call 108-73, 117 Stat. 891 (2003). Congress for a number of years and has vote of 265-99. House leadership announced Just prior to the expiration, both Houses passed both Houses, in slightly different that the bill was now ready for conference of Congress considered Chapter 12 exten- versions. It came close to becoming law in with the Senate, and House conferees were sions. The Senate passed a six-month ex- November, 2002, but was derailed over appointed. See, Thomas: Legislative Infor- tension by unanimous consent on Novem- language agreed to by the Conference Com- mation on the Internet, available at http:// th ber 25, 2003. S. 1920, 108 Cong. (2003). On mittee that disallowed the discharge of thomas.loc.gov/cgi-bin/bdquery/ December 8, 2003, the Senate bill was re- certain abortion protest damages. Bank- z?d108:SN01920:@@@S ferred to the House Committee on the Judi- ruptcy Abuse Prevention and Consumer Pro- As of this writing, it is not clear whether ciary, and then on to the Subcommittee on tection Act of 2001, H.R. 333, 148 Cong. Rec. the House procedural tactic will in fact Commercial and Administrative Law. See, D-1154-55 (November 14, 2002). Although force the Senate into conference on the re- Thomas: Legislative Information on the Internet the bankruptcy reform bill as a whole has form bill. However, Chapter 12 is once http://thomas.loc.gov/cgi-bin/bdquery/ been controversial, all major versions of the again caught up in the debate over reform z?d108:SN01920:@@@S. Although two dif- bill have included provisions that would and remains unavailable to family farmers. ferent bills were proposed in the House, make Chapter 12 a permanent chapter of —Susan A. Schneider, Associate Professor neither passed before the end of the year. the bankruptcy code, and these provisions and Director Graduate Program in Agricul- th H.R. 3540, 108 Cong. (2003)(providing for have been largely unopposed. tural Law, University of Arkansas School of th a one-year extension); H.R. 3542, 108 Cong. On January 28, 2004, in an unusual proce- Law, Fayetteville, AR (2003)(providing a six-month extension). dural move, House Judiciary Chairman

Arbitration agreement lacks mutuality of obligation In Tyson Foods, Inc. v. Archer, No. 03-649, rejected Tyson’s motions, ruling that the farmers agreed “to forgo their rights to 2004 WL 308127 (Ark. Feb. 19, 2004), the arbitration agreement was not enforceable pursue judicial actions, while…[Tyson] re- Arkansas Supreme Court held that an arbi- because it lacked mutuality of obligation. tained their ability to pursue an action tration agreement contained in contracts See id. Tyson appealed the circuit court’s through the judicial process.” Id. It added entered into by Tyson Foods, Inc. (Tyson) decision to the Arkansas Supreme Court. that: and several hog farmers was unenforceable See id. it is clear from our cases discussing mu- because it lacked mutuality of obligation. Tyson’s principle argument was that the tuality that one party cannot limit an- Tyson contracted with several farmers to arbitration agreement is mutual because it other party to the exclusive remedy of raise live hogs for Tyson. See Tyson Foods, requires both parties to submit disputes to arbitration, while retaining the ability to 2004 WL 308127. Paragraph eleven of the arbitration. See id. The farmers argued that pursue other judicial remedies for them- contracts provided that “[a]ny dispute or there was a lack of mutuality since their selves. We have repeatedly stated that controversy between the parties hereto aris- only option under the contract was to sub- there is no mutuality where one party ing out of or relating to this Contract…shall mit a dispute to arbitration, while Tyson uses an arbitration agreement to shield be submitted to arbitration….” Id. Para- retained the right to “‘pursue any other itself from litigation, while at the same graph sixteen of the contracts provided the remedies at law or equity’” in the event a time reserving its own ability to pursue following: farmer defaulted on his contract obliga- relief through the court system. In sum, Upon default of breach of any of the tions. See id. Arkansas precedent on mutuality re- Producer’s obligations under this Con- The court explained that arbitration “is quires that the terms of the agreement tract the Company may immediately can- simply a matter of contract between the must fix a real liability upon both parties. cel this Contract by giving notice in writ- parties” and that a valid contract under Id. (citations omitted). ing, and the Company may, without fur- Arkansas law requires competent parties, ther notice, delay or legal process, take subject matter, legal consideration, mutual The concurring opinion explained that possession of swine, feed or other prop- agreement, and mutual obligations. Id. (ci- ambiguities in the provisions of a contract erty owned by the Company. The Com- tations omitted). Recognizing that the only are to be “construed strictly against the pany shall have the right to utilize, the element at issue was whether the parties drafter of the contract” and that an ambigu- Producer’s swine facilities until the swine had mutual obligations under the contract, ity exists when a contract provision has reaches marketable weight. The Com- the court explained that “mutuality of con- more than one reasonable interpretation. pany may also pursue any other rem- tract means that an obligation must rest on Id. It concluded that: edies at law or equity. each party to do or permit to be done [b]ecause the language is susceptible to Id. something in consideration of the act or more than one interpretation, it is neces- promise of the other; thus, neither party is sarily ambiguous; because it is ambigu- In August of 2002 Tyson informed the bound unless both are bound.” Id. (citation ous, it must be construed strictly against farmers that it intended to cancel their omitted). It further explained that a con- Tyson, the drafter of the contract…. [I]t contracts. See id. Shortly thereafter the farm- tract “that leaves it entirely optional with is…apparent that the agreement lacks ers brought an action in circuit court alleg- one of the parties as to whether or not he mutuality, because the…[farmers] are ing fraud, deceit, and promissory estoppel, will perform his promise would not be bound to arbitration, while Tyson may and seeking compensatory and punitive binding on the other.” Id. (citations omit- seek redress through a court of law. Such damages. See id. Tyson filed a motion to ted). a lack of mutuality renders the arbitra- stay the proceedings and a motion to com- The court held that there was a lack of Cont. on p.6 pel arbitration. See id. The circuit court mutuality because under the contracts the

FEBRUARY 2004 AGRICULTURAL LAW UPDATE 3 Insurance coverage for agricultural environmental claims By Todd J. Janzen

A recent agricultural case highlighted the that hay crop would be a third party loss. provides greater coverage for more perils. importance of agricultural counsel having Insurance companies often sell insurance Other policies include worker’s compensa- a working knowledge of insurance cover- packages that cover both first and third tion, inland marine, which may be useful if age law. After apparently receiving a com- party losses. the loss involves property in transit, live- plaint from a neighbor, a dairy farm was Most traditional liability policies are “oc- stock protection, income protection, or crop, served with a temporary restraining order currence” based. They cover liability for to name a few. In the case in this example, prohibiting its operation from applying ma- property damage or bodily injury that oc- the dairy farm had purchased a specialized nure. The potential impact on the dairy’s curs within the policy period, even if the “pollution liability” policy to protect him- day-to-day operations was disastrous. Even third party makes the claim years later. self from liability in the event his operation worse, a long, drawn-out legal battle while Although this concept seems simple caused some form of “pollution.” the case was pending would be financially enough, the results of pursuing such cover- Regardless of the type of policy and the crippling, regardless of the ultimate out- age can be quite spectacular. Imagine a extent of coverage, one of the most impor- come. The dairy farm turned to his insur- fertilizer spill that, ten years after it occurs, tant insurance coverage rules is to advise ance carrier to defend its interests. Instead, is discovered to have migrated into a local your client to locate and save all of his insur- the dairy’s insurance agent responded that water supply. Users of this water supply ance policies. Understandably, policies are there was no coverage because the claim then bring a claim against the person that the best evidence of the policy terms. Con- arose out of “pollution.” The dairy’s insur- caused the spill, who in turn, tenders a trary to common thought, insurers do not ance policy, like many others, contained a claim to his insurance company. The in- save a copy of your client’s policies. If you “pollution exclusion.” If the dairy had ac- sured can look not only to his current policy, do not have them, countless hours can be cepted its agent’s interpretation, this is but each policy dating back to the date of spent arguing, proving, and in the worst where the story would have ended. the spill, because property damage “oc- case, litigating, what you believe the poli- Fortunately, the dairy was willing to chal- curred” during each of these ten years. The cies covered. If policies are lost or gone, lenge its insurer’s determination. Through end result is that he has not one year of locate and save secondary evidence, such a series of exchanges between its attorneys coverage to respond to the loss, but ten. His as declaration pages, premium notices, can- and the insurance carrier, the dairy farm’s policy limits have, in effect, multiplied ten- celled checks, invoices, renewal notices, law firm was able to persuade the insurer fold. Even more spectacular, many insur- etc. that the “pollution exclusion” did not ap- ance policies promise to pay for “all sums” ply. The result: the insurance carrier re- for which the policyholder becomes liable Making a claim versed its initial denial of coverage and as a result of an “occurrence.” A number of By the time he or she comes to you, your agreed to pay for the dairy’s defense. The state courts have interpreted this “all sums” client may have already notified their in- dairy now can afford to challenge the tem- language to mean that the policyholder can surance agent or broker of a potential claim. porary restraining order. choose which year of all those triggered Never accept the agent’s or broker’s determi- This story teaches a very important les- should respond to the occurrence. See e.g., nation that there is no coverage for your client’s son: if you are not willing to stand your Allstate Ins. Co. v. Dana Corp., 759 N.E.2d loss. The agent or broker is typically not an ground with insurers, many of your client’s 1049, 1057-58 (Ind. 2001). For instance, in attorney, not familiar with how courts in- claims will go unpaid. This article provides the ten-year example set out above, the terpret policy terms, and may not be anx- insurance coverage advice to attorneys who policyholder could select the policy in ef- ious to dispute matters with an insurer. consider pursuing insurance coverage. fect during year three to respond to the After all, an agent or broker derives its spill. This is extremely valuable when in- income from selling policies, not securing Insurance policy basics surers become insolvent, potentially leav- coverage once the loss occurs. When an agricultural client, whether a ing a policyholder with a reduced or no The first step to procuring insurance cov- farmer, rancher, livestock producer, or dif- remedy. erage is to provide prompt “notice” to the ferent agri-business, comes to you with an Depending on the size of your agricul- insurer. Specific notice provisions may vary environmental problem, a first step should tural client, you may find that he or she from policy to policy, so check your policy be to take inventory of his insurance poli- comes to you with a number of different to determine what “notice” is required. At cies. Insurance professionals generally policies. One typical policy is homeowner’s a minimum, notice should contain the speak of policies as responding to two insurance, providing first and third party policyholder’s name, a statement that you types of losses: first party and third party. coverage. Although a homeowner’s policy represent the policyholder, a general de- A first party loss results when the policy- usually will seek to exclude coverage for scription of the loss, and a request for holder suffers property damage, for in- the business pursuits of the policyholder, a defense and indemnity. Besides informing stance, when a fire destroys a policyholder’s farmer’s homeowner’s policy may be dif- the insurer of the claim, notice enables the barn. In contrast, a third party loss results ferent, or contain endorsements that ex- insurer to make an investigation into the when people other than the policyholder tend coverage into farming-related activi- claim. If the loss spans multiple policy make a claim that the policyholder is liable. ties. On the other hand, a larger corporate periods or types of policies, all insurers For example, if the policyholder’s barn burns farmer will likely have business policies, potentially on the claim should be notified. while it is storing a neighbor’s hay crop, including those that go above and beyond Err on the side of over-inclusiveness. There first and third party primary policies. In- is no penalty for incorrectly notifying an surance that covers risks “above” the pri- insurer of a claim provided you have a Todd J. Janzen is an associate at the law firm of mary policies are described as “excess” reasonable belief that there may be cover- Plews Shadley Racher & Braun in Indianapo- coverage. These policies take effect after age, but there is a potential defense to lis, Indiana. His regular practice areas include the primary policy limits are exhausted. coverage if you do not. environmental, insurance coverage, and agri- Policies that go “beyond” primary first and When providing notice to the insurer, cultural law. Mr. Janzen represented success- third party coverage come in a variety of promptness is important. A policy will fully the dairy farm client discussed in this forms. One common form is “umbrella” usually provide that notice of claim be ten- article. coverage, which, as the name indicates, dered within a certain time. Such provi-

4 AGRICULTURAL LAW UPDATE FEBRUARY 2004 sions may be specific, for example sixty nish information in a timely manner, but law. See, e.g., Bosecker v. Westfield Ins. Co., days, but more likely will require that no- keep a record of what you do. This may be 724 N.E.2d 241, 244 (Ind. 2000). Courts in tice be given “immediately,” “as soon as important later. Failure to cooperate can different states, however, use different practicable,” “promptly,” “within a rea- lead to a denial of coverage. methods for resolving these ambiguities. sonable time,” or other subjective time Some states allow parties to submit extrin- frame. Construing the policy terms sic evidence as proof of the parties’ intent. If the policyholder delays in providing Insurance coverage is a specialized field See, e.g., Beale v. American Nat. Laywers Ins. notice, an insurer may assert “late notice” of law. The manner in which courts inter- Reciprocal, 2004 WL 306092 (Md. 2004). as a defense to coverage. When asserting pret policies varies greatly from state to Such extrinsic evidence may be custom or late notice, an insurer will claim that it state—some are very policyholder-friendly, usage as understood by the insurance in- would have handled and settled the matter others are insurance industry-friendly. In- dustry. differently, but it lost this chance when the surance coverage law itself is dynamic. Other states take a more policyholder- policyholder failed to timely notify it of the Insurers draft the policies. Policyholders friendly approach. In these states, if there claim. States’ courts vary in the weight they argue the policy language should be read are two reasonable interpretations, the in- give to the late notice defense. Policyholder- broadly. When enough policyholders con- terpretation that favors coverage prevails. friendly states are reluctant to relieve an vince courts that the broad interpretation is See, e.g., American States Ins. Co. v. Kiger, insurer of its policy obligations simply be- correct, the insurance industry sometimes 622 N.E.2d 945, 947 (Ind. 1996). Stated cause the policyholder did not provide redrafts certain policy language, and the simply, ambiguous terms in policies should prompt notice. For example, the Alaska cycle begins again. This cycle will never be construed in favor of coverage. This rule Supreme Court recently held that “absent end, because a policy can never anticipate builds upon the common law contract doc- prejudice, regardless of the reasons for the every conceivable type of loss. If it could, trine of contra proferentem, which means delayed notice, there is no justification for there would be no need for insurance. In- “against the offeror.” It follows the theory excusing the insurer from its obligations surance coverage law is a constantly evolv- that contracts should be construed against under the policy.” Tush v. Pharr, 68 P.3d ing landscape. It pays to have competent the party that drafted them because it had 1239, 1250 (Alaska 2003). The court held insurance coverage counsel. Nevertheless, the upper hand when negotiating. In no that when asserting late notice, the even if it is not your area of expertise, there situation is this more true than in insurance insurer must prove that it was actually preju- are certain universal coverage rules to re- policies. This contra proferentem treatment diced. Other states allow a lack of prejudice member when representing your agricul- is applied with particular force to policy to overcome late notice, but require the tural client’s interest to the insurer. exclusions. In these states, if the insurer policyholder to prove it. See, e.g., PSI Energy Begin by construing policy terms with their wants to exclude coverage, it must do so v. Home Ins. Co., 801 N.E.2d 705, 716 (Ind. plain and ordinary meaning. Read the poli- explicitly. See, e.g,. Kiger, 622 N.E.2d at 949 Ct. App. 2004). At the other end, some state cies. Do not assume that the insurer, agent, (holding that “gasoline” was not an ex- courts have found the presence or absence or broker’s interpretation of policy lan- cluded “pollutant” under a filling station of prejudice to be immaterial. Late notice guage is correct. Courts often begin their policy). alone may be a bar to coverage. See Marez interpretation of insurance policies with a This issue arose in a dairy farm case. The v. Dairyland Ins. Co., 638 P.2d 286 (Colo. recitation of “general rules of contract con- client was sued by the state environmental 1981). But in all states, prompt notice is struction.” Valmont Steel, Inc. v. Commer- agency for alleged manure run-off into state important. It allows you to avoid this issue cial Union Ins. Co., 2004 WL 238344 (5th Cir. waters. The claim was tendered to his in- altogether. 2004). Thus, a court will attempt to effectu- surer under his first and third party liabil- After receiving notice of the claim, the ate the intent of the parties. It will consider ity policy. His insurer initially denied cov- insurer will issue a response. Most likely the policy as a whole, and will try to give erage pursuant to a policy provision that this response will come in the form of a each provision effect and meaning. Finally, excluded coverage for losses “arising out of “reservation of rights” letter. A reservation it will give those unambiguous policy terms the actual, alleged or threatened discharge, of rights letter sets out all of the coverage their plain, ordinary, and popular mean- seepage, migration, dispersal, release or defenses the insurer may potentially assert ing. escape of ‘pollutants’” (a so-called “pollu- and states that it is investigating the claim. However, this law school contract inter- tion exclusion”). “Pollutants” was a policy- Pay close attention to this letter; defenses pretation approach is limited in its useful- defined term: “any solid, liquid, gaseous or to coverage that are not asserted may be ness. Insurance policies are often not the thermal irritant or contaminant, including waived if the insurer tries to assert them product of an arms-length transaction. Poli- smoke, vapor, soot, fumes, acids, alkalis, later. After investigation, the insurer will cies are form documents that are modified chemicals and waste. Waste includes ma- either deny the claim, pay the claim, or with various endorsements and exclusions, terials to be recycled, reconditioned, or continue to defend under a reservation of but the overriding language is the same for reclaimed.” In short, the claim was denied rights. This last course is common for a policyholder A, B, or C. As one court ex- because “manure” was considered a “pol- good reason. The duty to defend is broader plained, “the insurer drafts the policy and lutant,” and the policy excluded coverage than the duty to indemnify. See, e.g., Seymour foists its terms upon the customer. The for pollution causing losses. Lawyers for Mfg. Co., Inc. v. Commercial Union Ins. Co., insurance companies write the policies; we the dairy farm argued that whether “pol- 655 N.E.2d 891, 892 (Ind. 1996). Thus, there buy their forms or we do not buy insur- lutants” included “manure” was ambigu- may not be enough facts known at the time ance.” American Econ. Ins. Co. v. Liggett, 426 ous. It was not obvious from the plain and of the claim to determine indemnity obliga- N.E.2d 136, 142 (Ind. Ct. App. 1981). ordinary meaning, as “manure” was not a tions, but there probably are enough to When the plain meaning is not clear, ambi- listed pollutant. Although one could argue determine whether defense obligations have guities exist in the policy terms. “Ambiguity” that manure is a “gaseous irritant,” or been triggered. is a term of art used in insurance policy “waste,” or that its constituents are “chemi- It is important to work with the insurer construction. Generally, if a term in a policy cals,” one could equally argue that manure during its investigation of the claim. Most is subject to more than one reasonable inter- is not waste, but a natural beneficial sub- policies have a “duty to cooperate.” Fur- pretation, it is “ambiguous” as a matter of Cont. on page 6

FEBRUARY 2004 AGRICULTURAL LAW UPDATE 5 Insurance/Cont. from page 5 stance, a fertilizer. Indeed, many agricul- argued that environmental claims arising out an exhaustive and expensive discovery tural crop producers likely view manure in from the accidental leakage of gasoline were period. this positive way. The policy also con- not covered under a gas station’s “garage tained a separate exclusion for the losses policy.” The Indiana Supreme stated: “That Conclusion arising from the application “liquid fertil- an insurance company would sell a ‘garage Finding insurance coverage for a client izer,” if done for hire. This exclusion would policy’ to a gas station when that policy can make or break the farm. This is espe- be surplusage if the general “pollution ex- specifically excluded the major source of cially true for agricultural businesses, where clusion” already applied to manure. Thus, potential liability is, to say the least, high cost inputs are used to generate prof- whether “pollutants” included “manure” strange.... We are particularly troubled by its on very tight margins. At a settlement was subject to more than one reasonable the interpretation advanced by [the insurer], meeting between the dairy farmer and state interpretation. In Indiana, under which this as it makes it appear that the [policyholder] officials, one of the state’s attorneys com- policy’s terms were construed, the con- was sold a policy that provided no cover- mented to counsel for the dairy farmer after struction that favors coverage governs. age for a large segment of the gas station’s the meeting: “We know your client needs to Moreover, because the definition of “pol- business operations.” Kiger, 622 N.E.2d at resolve this matter because we understand lutants” is so broad, encompassing nearly 948-49. This type of “illusory coverage” can that the tight margins involved in farming any substance, it is overbroad and unen- be a persuasive argument in favor of cover- make it hard for your farmer to continue to forceable, since applied literally it would age. litigate.” He was right. A typical farmer provide no coverage at all Kiger, 622 N.E.2d Finally, be prepared to litigate. Your efforts probably can not afford to fairly litigate at 948. to persuade your client’s insurer may ulti- against a state agency. But he was also If there is no state court opinion inter- mately be unsuccessful. Learn the law, and wrong. He was forgetting, or perhaps over- preting the policy provisions at issue, use if it is on your side, be ready to file a looking, that one protection the client pur- other jurisdictions for guidance. Insurance is declaratory judgment action. Issues of cov- chased to protect his interests—insurance. generally a state law matter, but your state erage are typically matters of policy con- Your job is to help you client utilize his court will likely not have interpreted every struction, and thus purely legal issues. They coverage to its utmost. policy term you encounter. Insurance poli- can be settled on summary judgment with- cies are similar across state boundaries because of standardization. Many policies follow the Insurance Service Office’s (ISO) standard form policies. Thus, a commercial Country of origin labeling/Cont. from page 2 Arbitration/continued from page 3 general liability policy from Alpha Insur- ever, AMS has determined that, in general, tion agreement unenforceable. ance Company of Arkansas may be identi- the programs do not provide a suitable Id. (citation omitted). cal to one from Kappa Insurance Company model on which to base federal regulation.4 of Kansas. If there is a split in authority in Agriculture Secretary Ann Veneman The dissent reached the conclusion that other jurisdictions, that can be evidence backs the delay in order to give additional the language contained in paragraph eleven that that term is ambiguous. After all, courts time and information for addressing the does not violate the requirement of mutual- are generally thought of as reasonable per- concerns of Congress with the legislation. ity of obligation. See id. Noting that the sons. See Hartford Accident & Indemnity Trade associations that fought COOL will majority misunderstood the nature of the Co., et al. v. Dana Corporation, 690 N.E.2d promote a voluntary program that they contract at issue, the dissent explained that 285, 295 (Ind. App. 1997). believe will benefit consumers, producers, “Tyson is not only worried about whether Hold insurers to their duty of good faith. and processors who desire to participate. the producer will carry out his or her duties Most states have recognized, whether judi- Groups supporting COOL such as the Na- as agreed under the contract, which might cially or by statute, that insurers owe their tional Farmer’s Union continue their fight well give rise to a disagreement submitted policyholders a duty of good faith. See Erie to show Congress that consumers want this to arbitration, but Tyson is also rightly Ins. Co. v. Hickman, 622 N.E.2d 525, 519 information and that U.S. farmers will ben- concerned about its investment in the hogs (Ind. 1993). In these states, a breach of this efit from the consumers’ preference for while claims subject to arbitration are re- duty gives rise to an independent cause of U.S. labeled foods. solved.” Id. The dissent stated that the action, referred to as “bad faith.” Such a With all that has happened in the U.S. language of paragraph eleven is designed breach may occur if the insurer makes an food industry over the past few months, the to permit Tyson “to protect its property by unfounded refusal to pay policy proceeds, debate over COOL has been overshadowed injunction or such other court action as may causes an unfounded delay in making pay- by concerns about BSE, avian flu, and fund- be necessary, and which would be outside ment, deceives the policyholder, or exer- ing for the prevention of bioterrorism and the realm of an arbitrator’s power.” Id. cises an unfair advantage to pressure the detection of disease. The decision to delay —Harrison M. Pittman, Staff Attorney, insured into a settlement. In short, your indicates that opponents have effectively National AgLaw Center client’s interests are entitled to consider- convinced Congress that the cost burdens ation. that come with COOL are not welcome in a This material is based on work supported by the Do not forget public policy arguments. currently suffering industry without a more U.S. Department of Agriculture under Agree- Judges are human, in many cases elected, in-depth look at the effectiveness and effi- ment No. 59-8201-9-115. Any opinions, find- and they purchase insurance too. Check to ciency of this law. ings, conclusions, or recommendations ex- see how much your client spent on premi- pressed in this article are those of the author ums. The fact that your client paid $10,000 1 7 C.F.R. 61945 (2003). and do not necessarily reflect the view of the in annual policy premiums and has never 2 Produce Survey: 2002 Fresh Trends, U.S. Department of Agriculture. had a claim in ten years makes a compelling Vance Publishing Meats Survey (1999) argument. Was it reasonable for your client Worthlin Worldwide. The National AgLaw Center is a federally to expect that his loss would be covered? In 3 7 U.S.C §499. funded research institution located at the Uni- the case of the dairy farmer, surprisingly 4 7 C.F.R. 61950 (2003). versity of Arkansas School of Law, Fayetteville. his “Pollution Liability” policy did not cover alleged claims arising from manure. If not — Phyllis J. Marquitz, Dickinson School manure, what other “pollution” would a of Law of the Pennsylvania dairy farmer be concerned with? In the State University, Kiger case illustrated above, the insurer Carlisle, PA

6 AGRICULTURAL LAW UPDATE FEBRUARY 2004 Jury verdict in favor of cattle ranchers On February 17, 2004, a federal jury in Critics, however, question its overall im- that an appeals court will reverse the ver- Alabama reached its decision in the case of pact on pricing and argue that it disadvan- dict if that effort fails. Tyson Press Release, Picket v. Tyson Fresh Meats, No. 96-A-1103- tages smaller-scale independent produc- available at http:// N (D. Ala. Jury verdict filed Feb. 17, 2004) ers. In the Picket case, the plaintiffs suc- www.tysonfoodsinc.com/corporate/news/ finding that Tyson’s cattle procurement cessfully argued that the extensive use of viewNews.asp?article=1389 methods manipulated cash prices down- such a contracting system depresses the Meanwhile, the second half of the Picket ward between February 1, 1994 and Octo- open market and gives meat packers an case to determine limits on packer behavior ber 31, 2002. The jury calculated that the unfair advantage in setting prices. in purchasing cattle will be argued later plaintiffs should receive $1.28 billion in In reaching its verdict, the jury unani- this year. Two other class action suits filed damages. At issue in this class action mously found that the plaintiffs established in Alabama by ranchers against two of the lawsuit was whether the use of captive each of the following statements by a pre- other large meat packers, Excel and Swift supply cattle contracts illegally depressed ponderance of the evidence: are pending. cattle prices in violation of the Packers and 1) That there is a nationwide market for Additional information about the Picket Stockyard Act, 7 U.S.C. §§ 181-229. The fed cattle; case can be found on the official court lawsuit was originally filed in 1996 against 2) That the defendant’s use of captive website at http:// IBP, Inc., then the country’s largest supply had an anticompetitve effect on endcaptivesupply.lawoffice.com/ meatpacker. Tyson acquired IBP in 2001. the cash market for fed cattle; courtpapers.html In the past, ranchers primarily sold their 3) That the defendant lacked a legitimate Information about the Packers and Stock- cattle on the open market, and slaughter- business reason or competitive justifica- yards Act can be found in the Packers and houses bought them as needed. In recent tion for using captive supply; Stockyards Act “Reading Room” on the years, however, the increasingly concen- 4) That the defendant’s use of captive website of the National Center for Agricul- trated meat packing industry has turned to supply proximately caused the cash mar- tural Law Research and Information, at the use of contracts with large-scale ranch- ket price to be lower than it otherwise http://nationalaglawcenter.org/ ers and major feedlots in order to gain would have been; and, readingrooms/packersandstockyards/ control of the supply of cattle that it will 5) That the defendant’s use of captive need for future slaughter. From the meat supply injured each and every member —Susan A. Schneider, Associate Professor packers perspective, these “captive supply of plaintiff’s class. and Director Graduate Program in contracts” guarantee a steady supply of Picket v. Tyson Fresh Meats, No. 96-A-1103- Agricultural Law, cattle that are consistent in quality. Some N (D. Ala. Jury verdict filed Feb. 17, 2004). University of Arkansas School of Law producers have favored this contracting arrangement as a way to assure a market Tyson has asked the trial judge to over- for their cattle at a more or less fixed price. turn the decision and expressed confidence

Association News and Announcements Accepting Applications for Membership Recruitment directory by last name, state of resi- Admissions / Fellowships dency, state where a member has a Special thanks to our AALA Member- license, and specialties identified by The Graduate Program in Agricul- ship Committee. They have launched an each member. Contact information, in- tural Law at the University of Arkan- impressive membership recruitment cluding an e-mail address, is available sas School of Law is now accepting drive and hope to have a new AALA for most members. applications for admission and fel- membership brochure available later this lowship opportunities. This program Spring. We are all grateful for their hard The “Members Only” section can be offers the nation’s only advanced work, enthusiasm, and excellent recruit- accessed by clicking on the “members LL.M. degree in agricultural law ing ideas. Maureen Kelly Moseman only” button at the top of the home through a nine month course of study. serves as Chair of this Committee. Mem- page. You will be asked to identify your For more information about the bers are Peggy Hall, Jeff Feirick, Mark user name and password. Your user Graduate Program in Agricultural Thornburg, Charley Sullivan, Michael name is your last name. Your password Law, visit the website at http:// Roberts, and Jon Lauck. Larry Gearhardt is the identification number assigned to law.uark.edu/llm/, e-mail us for in- serves as Board Liaison, and Anne your membership. This number should formation at [email protected] or call 479- Hazlett provides helpful consultation. be found on the letter you received from 575-3706. Membership is the heart of the AALA, the AALA acknowledging your 2005 and this committee reflects the true dedi- membership payment. If you renewed cation of our members. at the conference, before the new sys- Thanks. tem was set up, you may not have re- ceived this information. Please contact our administrative office to find out New member benefit your membership identification num- ber. Call 515-956-4255 or email Recently the “Members Only” section [email protected]. was activated on the AALA Web site (http://www.aglaw-assn.org/). Mem- —Susan A. Schneider, Associate bers visiting this section can access past Professor and Director, Graduate issues of the Agricultural Law Update Program in Agricultural Law, and can search the new membership [email protected]

FEBRUARY 2004 AGRICULTURAL LAW UPDATE 7 AALA Conference Reminder The 2004 AALA Annual Educational Symposium will be held at the Hotel Fort Des Moines, in Des Moines, Iowa, October 1-2, 2004. President-elect Bill Bridgforth is putting together an excellent program that will highlight the critical information needed by attorneys who practice agricultural law. Please reserve these dates and help us to spread the word about this excellent continuing legal education opportunity.

8 AGRICULTURAL LAW UPDATE FEBRUARY 2004