[Federal Register Volume 75, Number 119 (Tuesday, June 22, 2010)]
[Proposed Rules]
[Pages 35338-35354]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14875]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 75, No. 119 / Tuesday, June 22, 2010 /
Proposed Rules
[[Page 35338]]
DEPARTMENT OF AGRICULTURE
Grain Inspection, Packers and Stockyards Administration
9 CFR Part 201
RIN 0580-AB07
Implementation of Regulations Required Under Title XI of the
Food, Conservation and Energy Act of 2008; Conduct in Violation of the
Act
AGENCY: Grain Inspection, Packers and Stockyards Administration, USDA.
ACTION: Proposed rule.
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SUMMARY: The Department of Agriculture (USDA), Grain Inspection,
Packers and Stockyards Administration (GIPSA) is proposing to add
several new sections to the regulations under the Packers and
Stockyards Act, 1921, as amended and supplemented (P&S Act).
The new regulations that GIPSA is proposing would describe and
clarify conduct that violates the P&S Act and allow for more effective
and efficient enforcement by GIPSA. The proposed regulations would
clarify conditions for industry compliance with the P&S Act and provide
for a fairer market place.
DATES: We will consider comments we receive by August 23, 2010.
ADDRESSES: We invite you to submit comments on this proposed rule. You
may submit comments by any of the following methods:
E-mail: [email protected].
Mail: Tess Butler, GIPSA, USDA, 1400 Independence Avenue,
SW., Room 1643-S, Washington, DC 20250-3604.
Fax: (202) 690-2173.
Hand Delivery or Courier: Tess Butler, GIPSA, USDA, 1400
Independence Avenue, SW., Room 1643-S, Washington, DC 20250-3604.
Federal e-Rulemaking Portal: http://www.regulation.gov.
Follow the on-line instructions for submitting comments.
Instructions: All comments will become a matter of public record
and should be identified as ``Farm Bill Comments,'' making reference to
the date and page number of this issue of the Federal Register.
Comments will be available for public inspection at http://www.regulations.gov and in the above office during regular business
hours (7 CFR 1.27(b)). Please call GIPSA Management Support Services
staff at (202) 720-7486 to arrange a public inspection of comments.
FOR FURTHER INFORMATION CONTACT: S. Brett Offutt, Director, Policy and
Litigation Division, P&SP, GIPSA, 1400 Independence Ave., SW.,
Washington, DC 20250, (202) 720-7363, [email protected].
SUPPLEMENTARY INFORMATION:
Background
The P&S Act sets forth broad prohibitions on the conduct of
entities operating subject to its jurisdiction. These broad provisions
make enforcement difficult and create uncertainty among industry
participants regarding compliance. In enacting Title XI of the Food,
Conservation and Energy Act of 2008 (Farm Bill) (Pub. L. 110-246),
Congress recognized the nature of problems encountered in the livestock
and poultry industries and amended the P&S Act. These amendments
established new requirements for participants in the livestock and
poultry industries and required the Secretary of Agriculture
(Secretary) to establish criteria to consider when determining whether
the P&S Act has been violated.
In accordance with the Farm Bill, GIPSA is proposing regulations
under the P&S Act that would clarify when certain conduct in the
livestock and poultry industries represents the making or giving of an
undue or unreasonable preference or advantage or subjects a person or
locality to an undue or unreasonable prejudice or disadvantage. These
proposed regulations also establish criteria that GIPSA would consider
in determining whether a live poultry dealer has provided reasonable
notice to poultry growers of a suspension of the delivery of birds
under a poultry growing arrangement; when a requirement of additional
capital investments over the life of a poultry growing arrangement or
swine production contract constitutes a violation of the P&S Act; and
whether a packer, swine contractor or live poultry dealer has provided
a reasonable period of time for a grower or a swine producer to remedy
a breach of contract that could lead to termination of the growing
arrangement or production contract.
The Farm Bill also instructed the Secretary to promulgate
regulations to ensure that poultry growers, swine production contract
growers and livestock producers are afforded the opportunity to fully
participate in the arbitration process, if they so choose. We are
proposing a required format for providing poultry growers, swine
production contract growers and livestock producers the opportunity to
decline the use of arbitration in those contracts that have an
arbitration provision. We are also proposing criteria that we would
consider in finding that poultry growers, swine production contract
growers and livestock producers have a meaningful opportunity to
participate fully in the arbitration process if they voluntarily agree
to do so. We would use these criteria to assess the overall fairness of
the arbitration process.
In addition to proposing regulations in accordance with the Farm
Bill, GIPSA is proposing regulations that would prohibit certain
conduct because it is unfair, unjustly discriminatory or deceptive, in
violation of the P&S Act. These additional proposed regulations are
promulgated under the authority of section 407 of the P&S Act, and
complement those required by the Farm Bill to help ensure fair trade
and competition in the livestock and poultry industries.
In recent years, there has been an increased use of contracting in
the marketing and production of livestock and poultry by entities under
the jurisdiction of the P&S Act. This increased contracting coupled
with the market concentration has significantly changed the industry
and the rural economy as a whole, making proposed regulations
necessary, especially in those situations in which packers, live
poultry dealers or swine contractors use their market power to harm
producers or impair private property rights of growers and producers.
Transparency, competition and financial integrity of the marketplace
have also diminished.
Section 407 of the P&S Act (7 U.S.C. 228) provides that the
Secretary ``may make such rules, regulations, and orders as may be
necessary to carry out the provisions of this Act.'' Pursuant to this
[[Page 35339]]
authority, the Secretary has issued regulations, published as Part 201
of Title 9 of the Code of Federal Regulations (CFR). Sections 11005 and
11006 of the Farm Bill became effective June 18, 2008, and instruct the
Secretary to promulgate additional regulations as described in this
notice of proposed rulemaking. These regulations, if finalized, are
also proposed to be published in Part 201 of Title 9 of the CFR.
Section 202 of the P&S Act (7 U.S.C. 192) prohibits packers, swine
contractors and live poultry dealers from engaging in unfair and
deceptive practices, giving undue preferences to persons or localities,
apportioning supply among packers, swine contractors and live poultry
dealers in restraint of commerce, manipulating prices, creating a
monopoly, or conspiring to aid in unlawful acts. The Farm Bill requires
promulgation of regulations under the P&S Act dealing with various
industry behaviors. In addition, GIPSA has identified 11 terms
requiring definition and three areas of concern in which regulations
will be developed to address each of these behaviors. Definitions of
the terms, tournament system, principal part of performance, capital
investment, additional capital investment, suspension of delivery of
birds, forward contract, marketing agreement, production contract,
competitive injury, and likelihood of competitive injury would be added
to Sec. 201.2 of the regulations. The proposed regulations are grouped
under the general headings of (1) undue or unreasonable preference or
advantage, (2) unfair, unjustly discriminatory and deceptive practices,
and (3) arbitration.
In preparing to issue these proposed regulations, GIPSA held three
public meetings in October 2008, in Arkansas, Iowa, and Georgia to
gather comments, information, and recommendations from interested
parties. Attendees at these meetings were asked to give input on the
Farm Bill requirements for production contracts, arbitration, and the
four following topics included in Farm Bill section 11006: (1) Undue or
unreasonable preferences or advantages, (2) adequate notice to poultry
growers of suspension of delivery of birds, (3) criteria for
determining when requiring additional capital investment over the life
of a contract constitutes a violation, and (4) criteria for determining
when packers, swine contractors and live poultry dealers have provided
a reasonable period of time to remedy a breach of contract that could
lead to contract termination. Attendees provided comments on these
topics as well as other issues of concern under the P&S Act, including
packer livestock procurement practices believed to unjustly
discriminate against producers based on the volume of livestock they
sell.
GIPSA also gathered data concerning market participants. There are
roughly 30,000 swine producers and poultry growers operating under
production contracts. More than 85 percent of these producers and
growers will be contracted to one of the five largest slaughtering
firms. The average gross sales revenue of the three largest of these
slaughtering firms is 23,000 times that of a small grower or producer.
The proposed regulations are based on comments, information, and
recommendations received in those meetings along with GIPSA's
expertise, experience, and interactions in the livestock and poultry
industries.
The P&S Act
The P&S Act was enacted in 1921 ``to comprehensively regulate
packers, stockyards, marketing agents and dealers.'' \1\ The P&S Act
``was framed in language designed to permit the fullest control of
packers and stockyards which the Constitution permits, and its coverage
was to encompass the complete chain of commerce and give the Secretary
of Agriculture complete regulatory power over packers and all
activities connected therewith.'' \2\ It was hailed as a ``far-reaching
measure and extend[ing] further than any previous law into the
regulation of private business.'' \3\
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\1\ Hays Livestock Comm'n Co. v. Maly Livestock Comm'n Co., 498
F.2d 925, 927 (10th Cir. 1974).
\2\ Bruhn's Freezer Meats of Chicago, Inc. v. USDA, 438 F.2d
1332, 1339 (8th Cir. 1971) (citing H.R. Rep. No. 67-324 (1921); H.R.
Rep. No. 67-77 (1921)).
\3\ 61 Cong. Rec. 1801 (1921) (statement of Rep. Haugen); see
also Wilson & Co. v. Benson, 286 F.2d 891, 895 (7th Cir. 1961)
(``The legislative history shows Congress understood the sections of
the [P&S Act] under consideration were broader in scope than the
antecedent legislation.'') (citing 61 Cong. Rec. 1805 (1921)).
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The scope of the P&S Act is broad. Section 202 of the P&S Act
provides that ``[i]t shall be unlawful for any packer or swine
contractor with respect to livestock, meats, meat food products, or
livestock products in unmanufactured form, or for any live poultry
dealer with respect to live poultry, to:
Engage in or use any unfair, unjustly discriminatory, or
deceptive practice or device; or
Make or give any undue or unreasonable preference or
advantage to any particular person or locality in any respect, or
subject any particular person or locality to any undue or unreasonable
prejudice or disadvantage in any respect; or
Sell or otherwise transfer to or for any other packer,
swine contractor, or any live poultry dealer, or buy or otherwise
receive from or for any other packer, swine contractor, or any live
poultry dealer, any article for the purpose or with the effect of
apportioning the supply between any such persons, if such apportionment
has the tendency or effect of restraining commerce or of creating a
monopoly; or
Sell or otherwise transfer to or for any other person, or
buy or otherwise receive from or for any other person, any article for
the purpose or with the effect of manipulating or controlling prices,
or of creating a monopoly in the acquisition of, buying, selling, or
dealing in, any article, or of restraining commerce; or
Engage in any course of business or do any act for the
purpose or with the effect of manipulating or controlling prices, or of
creating a monopoly in the acquisition of, buying, selling, or dealing
in, any article, or of restraining commerce; or
Conspire, combine, agree, or arrange with any other person
(1) to apportion territory for carrying on business, or (2) to
apportion purchases or sales of any article, or (3) to manipulate or
control prices; or
Conspire, combine, agree, or arrange with any other person
to do, or aid or abet the doing of, any act made unlawful by
subdivisions (a), (b), (c), (d), or (e) of this section.'' \4\
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\4\ See also sections 2, 201 (defining the statutory terms).
Section 202 originally applied only to the livestock and meat
packing industries. Live poultry dealers were added in 1935, see
Pub. L. No. 74-272, 49 Stat. 648 (1935), and swine contractors were
added in 2002, Pub. L. 107-171, Sec. 10502(b)(1), 116 Stat. 134,
509 (2002).
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The P&S Act sets forth similar prohibitions on stockyard owners,
market agencies, and dealers. Section 312 provides that ``[i]t shall be
unlawful for any stockyard owner, market agency, or dealer to engage in
or use any unfair, unjustly discriminatory, or deceptive practice or
device in connection with determining whether persons should be
authorized to operate at the stockyards, or with the receiving,
marketing, buying, or selling on a commission basis or otherwise,
feeding, watering, holding, delivery, shipment, weighing, or handling
of livestock.'' \5\
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\5\ See also section 301, 302 (providing additional
definitions); section 304 (providing that ``[a]ll stockyard services
furnished pursuant to reasonable request made to a stockyard owner
or market agency at such stockyard shall be reasonable and
nondiscriminatory and stockyard services which are furnished shall
not be refused on any basis that is unreasonable or unjustly
discriminatory''); section 305 (providing that ``[a]ll rates or
charges made for any stockyard services furnished at a stockyard by
a stockyard owner or market agency shall be just, reasonable, and
nondiscriminatory, and any unjust, unreasonable, or discriminatory
rate or charge is prohibited and declared to be unlawful''); section
307 (``It shall be the duty of every stockyard owner and market
agency to establish, observe, and enforce just, reasonable, and
nondiscriminatory regulations and practices in respect to the
furnishing of stockyard services, and every unjust, unreasonable, or
discriminatory regulation or practice is prohibited and declared to
be unlawful.'').
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[[Page 35340]]
In addition, the P&S Act imposes a variety of more specific
limitations and requirements. In particular, it specifies procedures
for a poultry grower or swine production contract grower seeking to
cancel a poultry growing arrangement or swine production contract; \6\
requires disclosure of additional capital investments in production
contracts; \7\ establish procedures for the use of arbitration; \8\
imposes record-retention requirements; \9\ and requires that certain
contracts and rates to be available to the Secretary and the public
(without confidential information).\10\ The P&S Act further declares
that ``[a]ny delay or attempt to delay by a market agency, dealer, or
packer purchasing livestock, the collection of funds as herein
provided, or otherwise for the purpose of or resulting in extending the
normal period of payment for such livestock'' or ``[a]ny delay or
attempt to delay, by a live poultry dealer which is a party to any such
transaction, the collection of funds as herein provided, or otherwise
for the purpose of or resulting in extending the normal period of
payment for poultry obtained by poultry growing arrangement or
purchased in a cash sale,'' is ``an `unfair practice' in violation of
this chapter.'' \11\
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\6\ Id. section 208.
\7\ Id. section 208.
\8\ Id. section 210.
\9\ Id. section 401.
\10\ Id. sections 222, 306.
\11\ Id. sections 409, 410.
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The P&S Act provides that ``[t]he Secretary may make such rules,
regulations, and orders as may be necessary to carry out the provisions
of this chapter.'' \12\ The P&S Act also sets forth procedures for
enforcement actions before the Secretary \13\ and private
litigation.\14\
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\12\ Id. section 408.
\13\ Id. section 408. The [S]ecretary cannot proceed against
section 202 violations by live poultry dealers by adjudications
under this section. Payment and trust violations that would
constitute unfair practices under section 202 may be
administratively adjudicated under section 411 only as violations of
sections 410 and 207. Id. sections 410, 411.
\14\ Id. sections 308, 404.
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The Supreme Court upheld the constitutionality of the P&S Act
shortly after its enactment in Stafford v. Wallace. \15\ The Court
concluded that the P&S Act reflected a permissible exercise of
Congress' powers under the Commerce Clause because of the interstate
nature of the livestock industry.\16\ The Supreme Court emphasized that
the P&S Act was ``remedial legislation,'' whose ``object [was] the free
and unburdened flow of live stock from the ranges and farms of the West
and the Southwest through the great stockyards and slaughtering centers
on the borders of that region, and thence in the form of meat products
to the consuming cities of the country in the Middle West and East, or,
still, as live stock, to the feeding places and fattening farms in the
Middle West or East for further preparation for the market.'' \17\ The
Court explained that there were multiple ``evils'' that the P&S Act
sought to remedy:
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\15\ 258 U.S. 495 (1922).
\16\ Id. at 516.
\17\ Id. at 513, 514, 521.
The chief evil feared is the monopoly of the packers, enabling
them unduly and arbitrarily to lower prices to the shipper, who
sells, and unduly and arbitrarily to increase the price to the
consumer, who buys. Congress thought that the power to maintain this
monopoly was aided by control of the stockyards. Another evil, which
it sought to provide against by the act, was exorbitant charges,
duplication of commissions, deceptive practices in respect of
prices, in the passage of the live stock through the stockyards, all
made possible by collusion between the stockyards management and the
commission men, on the one hand, and the packers and dealers, on the
other.\18\
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\18\ Id. at 514-15.
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Sections 202(a) and (b) of the P&S Act
Section 202(a) of the P&S Act prohibits ``any unfair, unjustly
discriminatory, or deceptive practice.'' Section 202(b) prohibits ``any
undue or unreasonable preference or advantage [or] prejudice or
disadvantage.'' USDA has consistently taken the position that, in some
cases, a violation of section 202(a) or (b) can be proven without proof
of predatory intent, competitive injury, or likelihood of injury.\19\
At the same time, USDA has always understood that an act or practice's
effect on competition can be relevant \20\ and, in certain
circumstances, even dispositive \21\ with respect to whether that act
or practice violates section 202(a) and/or (b).
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\19\ In re Ozark county Cattle Co., 49 Agric. Dec. 336, 365
(1990); 1 John H. Davidson et al., Agricultural Law section 3.47, at
244 (1981).
\20\ See In re Sterling Colo. Beef Co., 39 Agric. Dec. 184, 235
(1980) (considering and rejecting respondent packer's business
justification for challenged conduct).
\21\ See Armour & Co. v. United States, 402 F.2d 712, 717 (7th
Cir. 1968) (a coupon promotion plan (here coupons for fifty cents
off specified packages of bacon) is not per se unfair and violates
section 202(a) if it is implemented with some predatory intent or
carries some likelihood of competitive injury); In re IBP, Inc., 57
Agric. Dec. 1353, 1356 (1998) (contractual right of first refusal at
issue violated section 202 ``because it has the effect or potential
of reducing competition'').
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The longstanding agency position that, in some cases, a violation
of section 202(a) or (b) can be proven without proof of likelihood of
competitive injury is consistent with the language and structure of the
P&S Act, as well as its legislative history and purposes. Neither
section 202(a) nor section 202(b) contains any language limiting its
application to acts or practices that have an adverse effect on
competition, such as acts ``restraining commerce.'' Instead, these
provisions use terms including ``deceptive,'' ``unfair,'' ``unjust,''
``undue,'' and ``unreasonable''--which are commonly understood to
encompass more than anticompetitive conduct.\22\ This is in direct
contrast to sections (c)-(e), which expressly prohibit only those acts
that have the effect of ``restraining commerce,'' ``creating a
monopoly,'' or producing another type of antitrust injury. The fact
that Congress expressly included these limitations in sections (c)-(e)
but not in sections (a) and (b) is a strong indication that Congress
did not intend sections (a) and (b) to be limited to harm to
competition. And Congress confirmed the agency's position by amending
the P&S Act to specify specific instances of conduct prohibited as
unfair that do not involve any inherent likelihood of competitive
injury.\23\
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\22\ When the P&S Act was enacted, Webster's New International
Dictionary defined ``deceptive'' as ``[t]ending to deceive; having
power to mislead, or impress with false opinions''; ``unfair'' as
``[n]ot fair in act or character; disingenuous; using or involving
trick or artifice; dishonest; unjust; inequitable'' (2d.
definition); ``unjust'' as ``[c]haracterized by injustice; contrary
to justice and right; wrongful''; ``undue'' as ``[n]ot right; not
lawful or legal; violating legal or equitable rights; improper''
(2d. definition); and ``unreasonable'' as ``[n]ot conformable to
reason; irrational'' or ``immoderate; exorbitant.'' Webster's New
International Dictionary 578, 2237, 2238, 2245, 2248 (1st ed. 1917).
This is the same understanding of the terms today.
\23\ See sections 409, 410.
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USDA's interpretation of sections 202(a) and (b) is also consistent
with the interpretation of other sections of the P&S Act using similar
language--sections 307 and 312. Courts have recognized that the proper
analysis under these provisions depends on ``the
[[Page 35341]]
facts of each case,'' \24\ and that these sections may apply in the
absence of harm to competition or competitors.\25\
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\24\ Capitol Packing Company v. United States, 350 F.2d 67, 76
(10th Cir. 1965); see also Spencer Livestock Comm'n Co. v USDA, 841
F.2d 1451, 1454 (9th Cir. 1988).
\25\ See, e.g., Spencer, 841 F.2d at 1455 (Section 312 covers
``a deceptive practice, whether or not it harmed consumers or
competitors.'').
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Although proof of harm to competition is not necessary to satisfy
the statutory language, it is sufficient to do so. Any act that harms
competition is necessarily also ``unfair'' and therefore violates
section 202(a).
The legislative history and purposes of the P&S Act also support
USDA's position. The Act ``is a most comprehensive measure and extends
farther than any previous law in the regulation of private business, in
time of peace, except possibly the interstate commerce act.'' \26\
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\26\ H.R. Rep. 67-77, at 2 (1921); see also Swift & Co. v.
United States, 308 F.2d 849, 853 (7th Cir. 1962) (``The legislative
history showed Congress understood the sections of the [P&S Act]
under consideration were broader in scope than antecedent
legislation such as the Sherman Antitrust Act, sec. 2 of the Clayton
Act, 15 U.S.C. 13, sec. 5 of the Federal Trade Commission Act, 15
U.S.C. 45 and sec. 3 of the Interstate Commerce Act, 49 U.S.C.
3.'').
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In amending the P&S Act, Congress made clear that its goals for the
statute extended beyond the protection of competition. In 1935, for
instance, when Congress first subjected live poultry dealers to
sections 202(a) and (b), Congress explained in the statute itself that
``[t]he handling of the great volume of live poultry * * * is attendant
with various unfair, deceptive, and fraudulent practices and devices,
resulting in the producers sustaining sundry losses and receiving
prices far below the reasonable value of their live poultry. * * * ''
\27\ Similarly, the House Committee Report regarding 1958 amendments
stated that ``[t]he primary purpose of [the P&S Act] is to assure fair
competition and fair trade practices'' and ``to safeguard farmers * * *
against receiving less than the true market value of their livestock.''
\28\ The Report further observed that protection extends to ``unfair,
deceptive, unjustly discriminatory'' practices by ``small'' companies
in addition to ``monopolistic practices.'' \29\ In accordance with this
legislative history, courts and commentators have, over a span
exceeding 70 years, recognized that the purposes of the P&S Act are not
limited to protecting competition.\30\
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\27\ Pub. L. 74-272, 49 Stat. 648, 648 (1935).
\28\ H.R. Rep. No. 85-1048 (1957), reprinted in 1958
U.S.C.C.A.N. 5212, 5213 (emphasis added).
\29\ Id. at 5213.
\30\ See, e.g., Stafford, 258 U.S. at 513-14; Spencer Livestock
Comm'n Co. v. USDA, 841 F.2d 1451, 1455 (9th Cir. 1988); United
States v. Perdue Farms, Inc., 680 F.2d 277, 280 (2d Cir. 1982);
Bruhn's Freezer Meats, 438 F.2d at 1336-37; Bowman v. USDA, 363 F.2d
81, 85 (5th Cir. 1966); United States v. Donahue Bros., 59 F.2d
1019, 1023 (8th Cir. 1932).
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Recently, three courts of appeals have disagreed with the USDA's
interpretation of the P&S Act and have concluded (in cases to which the
United States was not a party) that plaintiffs could not prove their
claims under section 202(a) and/or (b) without proving harm to
competition or likely harm to competition.\31\ After carefully
considering the analysis in these opinions, USDA continues to believe
that its longstanding interpretation of the P&S Act is correct. These
court of appeals opinions (two of which were issued over vigorous
dissents) \32\ are inconsistent with the plain language of the statute;
they incorrectly assume that harm to competition was the only evil
Congress sought to prevent by enacting the P&S Act; and they fail to
defer to the Secretary of Agriculture's longstanding and consistent
interpretation of a statute administered by the Secretary. To the
extent that these courts failed to defer to the USDA's interpretation
of the statute because that interpretation had not previously been
enshrined in a regulation,\33\ the new regulations constitute a
material change in circumstances that warrants judicial reexamination
of the issue.\34\
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\31\ Wheeler, ------ F.3d ------, 2009 WL 4823002, No. 07-40651
(5th Cir. 2009) (en banc) (no violation of section 202(a) or (b)
without a likely effect on competition); Been v. O.K. Indus., Inc.,
495 F.3d 1217 (10th Cir. 2007) (``unfair practice'' is one that
injures or is likely to injure competition); London v. Fieldale
Farms Corp., 410 F.3d 1295 (11th Cir. 2005) (P&S Act prohibits only
those unfair, discriminatory, or deceptive practices that adversely
affect or are likely to adversely affect competition). The issue is
currently pending before one other court of appeals. Terry v. Tyson
Farms, Inc., No. 08-5577 (6th Cir., argued March 3, 2009).
\32\ Wheeler, 2009 WL 4823002, at 14-28 (Garza, J., dissenting);
Been, 495 F.3d at 1238-43 (Hartz, J., concurring in part and
dissenting in part).
\33\ See London, 410 F.3d at 1226-27.
\34\ See National Cable & Telecomm. Ass'n v. Brand X Internet
Servs., 545 U.S. 967, 982-84 (2005).
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Competitive Injury
Although it is not necessary in every case to demonstrate
competitive injury in order to show a violation of section 202(a) and/
or (b), any act that harms competition or is likely to harm competition
necessarily violates the statute. Accordingly, proposed new Sec.
201.2(t) defines competitive injury and proposed new Sec. 201.2(u)
defines likelihood of competitive injury. Competitive injury occurs
when an act or practice distorts competition in the market channel or
marketplace. How a competitive injury manifests itself depends
critically on whether the target of the act or practice is a competitor
(e.g., a packer harms other packers), or operates at a different level
of the livestock or poultry production process (e.g., a packer harms a
producer). The likelihood of competitive injury occurs when an act or
practice raises rivals' costs, improperly forecloses competition in a
large share of the market through exclusive dealing, restrains
competition among packers, live poultry dealers or swine contractors or
otherwise represents a misuse of market power to distort
competition.\35\ The likelihood of competitive injury also occurs when
a packer, swine contractor, or live poultry dealer wrongfully depresses
prices paid to a producer or grower below market value or impairs the
producer or grower's ability to compete with other producers or growers
or to impair a producer's or grower's ability to receive the reasonable
expected full economic value from a transaction in the market channel
or marketplace.
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\35\ See, e.g., Thomas G. Krattenmaker & Steven C. Salop,
Anticompetitive Exclusion: Raising Rivals' Costs to Achieve Power
over Price, 96 Yale L.J. 209 (1986); 11 Philip E. Areeda & Herbert
Hovenkamp, Antitrust Law 1821 (2d ed. 2005).
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To establish an actual or likely competitive injury, it is not
necessary to show that a challenged act or practice had a likely effect
on resale price levels. Even the antitrust laws do not require such a
showing. Because the P&S Act is broader than the antitrust laws, such a
requirement of showing effect on resale price levels is not necessary
to establish competitive injury under section 202 of the P&S Act either
(though such a showing would suffice).
Unfair, Unjustly Discriminatory and Deceptive Practices
GIPSA is proposing to add to the regulations a new Sec. 201.210(c)
that reiterates the Secretary's position that the appropriate analysis
under section 202(a) depends on the nature and circumstances of the
challenged conduct. A finding of harm or likely harm to competition is
always sufficient, but not always necessary, to establish a violation
of sections 202(a) and/or (b) of the P&S Act.
In the Farm Bill, Congress required criteria to be established to
determine: (1) Whether a live poultry dealer has provided reasonable
notice to poultry growers of any suspension of the delivery of birds
under a poultry growing arrangement; (2) when a requirement of
additional capital investments over the life of a poultry growing
arrangement or swine production contract constitutes a
[[Page 35342]]
violation of the P&S Act; and (3) if a packer, swine contractor, or
live poultry dealer has provided a reasonable period of time for a
poultry grower or swine production contract grower to remedy a breach
of contract that could lead to termination of the growing arrangement
or production contract. Regulation in these areas (and other areas in
which GIPSA is proposing regulation) is important to preserve the
rights of poultry growers, swine production contract growers and
livestock producers and maintain trust and integrity in the
marketplace. GIPSA has been informed by growers and producers,
particularly where contracts for the production or sale of livestock or
poultry are involved, that poultry growers, swine production contract
growers and livestock producers are sometimes at a distinct
disadvantage in negotiating the terms of an agreement. These reports
indicate that packers, swine contractors and live poultry dealers have
exhibited a tendency to exert their disproportionate positions of power
by misleading or retaliating against poultry growers, swine production
contract growers or livestock producers, and that some growers or
producers may have no choice but to acquiesce to the packer's, swine
contractor's, or live poultry dealer's terms for entering into a
contract or growing arrangement, or acquiesce to unfair conduct in
order to continue in business.
Proposed new Sec. 201.210(a) would first provide a statement of
the broad coverage of section 202(a). It would then provide the
following eight specific examples of conduct deemed unfair:
An unjustified material breach of a contractual duty,
express or implied, or an action or omission that a reasonable person
would consider unscrupulous, deceitful or in bad faith in connection
with any transaction in or contract involving the production,
maintenance, marketing or sale of livestock or poultry.
A retaliatory action or omission by a packer, swine
contractor, or live poultry dealer in response to the lawful
expression, spoken or written, association, or action of a poultry
grower, livestock producer or swine production contract grower; a
retaliatory action includes but is not limited to coercion,
intimidation, or disadvantage to any producer or grower in an
execution, termination, extension or renewal of a contract involving
livestock or poultry;
A refusal to provide to a contract poultry grower or swine
production contract grower, upon request, the statistical information
and data used to determine compensation paid to the contract grower or
producer under a production contract, including, but not limited to,
feed conversion rates, feed analysis, origination and breeder history;
An action or attempt to limit by contract a poultry grower's, swine
production contract grower's, or livestock producer's legal rights and
remedies afforded by law, including, but not limited to the following:
i. The right of a trial by jury (except when arbitration has been
voluntarily agreed to);
ii. The right to all damages available under the law;
iii. Rights available under bankruptcy law;
iv. The authority of the judge or jury to award attorney fees to
the appropriate party; or
v. A requirement that a trial or arbitration be held in a location
other than the location where the principal part of the performance of
the arrangement or contract occurs;
Paying a premium or applying a discount on the swine
production contract grower's payment or the purchase price received by
the livestock producer from the sale of livestock without documenting
the reason(s) and substantiating the revenue and cost justification
associated with the premium or discount;
Termination of a poultry growing arrangement or swine
production contract with no basis other than the allegation by the
packer, swine contractor, live poultry dealer or other person that the
poultry grower or swine production contract grower failed to comply
with an applicable law, rule or regulation. If the live poultry dealer
or swine contractor believes that a poultry grower or swine producer is
in violation, the live poultry dealer or swine contractor must
immediately report the alleged violation to the relevant law
enforcement authorities if they wish to use this alleged violation as
grounds for termination.
A representation, omission, or practice that is fraudulent
or likely to mislead a reasonable poultry grower, swine production
contract grower, swine contract producer or livestock producer
regarding a material condition or a term in a contract or business
transaction. Any act that causes competitive injury or creates a
likelihood of competitive injury.
Proposed new Sec. 201.212 would not be part of the definition of
``unfair,'' but rather a separate and distinct regulation. It proposes
to address various situations where a packer (or group of packers) is
able to manipulate prices paid for livestock, such as where a packer-
to-packer sale signals the price that packers will pay producers or
where a packer purchases cattle through exclusive arrangements with
dealers and is able to depress the price paid to producers through that
conduct.\36\ Proposed new Sec. 201.212(c) would prohibit bonded
packers from purchasing livestock from other packers or other packer-
affiliated companies, but allows waivers in emergency situations such
as a catastrophe or natural disaster that may severely impact
operations at a particular packing company or plant. The proposed
regulation is intended to limit the ability of packers to manipulate
prices.
---------------------------------------------------------------------------
\36\ Chapter 6 ``Dynamic Price Competition and Tacit Collusion''
in Jean Tirole's The Theory of Industrial Organization (1988)
provides a general discussion of price signaling and competition.
---------------------------------------------------------------------------
Congress recognized, and GIPSA has been informed by poultry growers
and industry organizations, that the disproportionate negotiating power
of a live poultry dealer may sometimes infringe on poultry grower's
rights. Under a poultry growing arrangement, a live poultry dealer has
discretion on whether it will perform under the agreement; i.e.,
whether it will place poultry on a poultry grower's farm. The poultry
grower does not have the same discretion and must raise and care for
poultry placed on his or her farm by the live poultry dealer. There
have been instances in which a live poultry dealer has failed to place
poultry on a poultry grower's farm for an extended period of time
without notifying the poultry grower of the reasons for or the
anticipated length of delay in placing additional poultry. Without
sufficient information, a poultry grower is unable to protect his or
her financial interests and make informed business decisions. GIPSA is
proposing to add a new Sec. 201.215 that would require a live poultry
dealer to give adequate notice of any suspension of delivery of
poultry. In proposed new Sec. 201.215, live poultry dealers would be
required to provide notice of any suspension of delivery of birds at
least 90 days prior to the suspension taking effect. This 90-day period
would allow the poultry grower time to consider options for utilizing
his or her poultry houses and for keeping up with any loan payments,
some of which are government guaranteed loans. Live poultry dealers may
request a waiver from the GIPSA Administrator of the 90-day notice
requirement in emergency situations such as a catastrophic or natural
disaster where the dealer could not have foreseen the reduction in
delivery of poultry.
[[Page 35343]]
Capital investments required by a packer, swine contractor, or live
poultry dealer during the life of a growing arrangement or production
contract may violate the P&S Act. Congress required the Secretary to
develop criteria to consider when determining if such a requirement is
a violation of the P&S Act. Proposed new Sec. Sec. 201.216 and 201.217
would provide several requirements designed to preserve trust between
the parties and limit the risk incurred by poultry growers or swine
production contract growers. Some contracts are multiyear and provide
long-term security while others are short term and could terminate at
the end of a single growing period. Among the proposed requirements is
that a contract be of sufficient length to allow the poultry growers or
swine production contract growers to recoup 80 percent of investment
costs related to the capital investment. For example, in situations
where a poultry grower or swine production contract grower is required
to make capital investments as a condition to enter into or continue a
contract, that requirement may be considered unfair if the packer,
swine contractor, or live poultry dealer did not offer a contract
duration that would allow the poultry grower or swine production
contract grower to recover 80 percent of its investment cost, at a
repayment rate based on a percentage of the grower's yearly
compensation. The term ``investment cost'' includes any balance due on
the initial capital investment and any additional capital investments,
plus accrued loan interest, if any, at the legal rate of interest where
the principal part of the performance takes place under the contract.
We are proposing that 80 percent of the investment costs represent the
portion of the overall value of the poultry grower's or swine
production contract grower's property that the growing or raising
facilities represent with a poultry growing arrangement or swine
production contract in place.
Proposed new Sec. 201.216 that would establish criteria the
Secretary may consider when determining whether a requirement that a
poultry grower or swine production contract grower make additional
capital investments over the life of a swine production contract or
poultry growing arrangement constitutes an unfair practice in violation
of the P&S Act. Establishing these criteria is expected to deter or
reduce unfair conduct and help preserve the value of the poultry
grower's or swine production contract grower's property rights and
protect against financial loss by the grower. Allowing for grower
discretion to accept or reject proposed capital investments made by the
live poultry dealer provides for increased flexibility to accommodate
mutually advantageous investment opportunities.
Congress recognized the need for poultry growers or swine
production contract growers to have reasonable time to remedy a breach
of contract that could lead to termination of that contract. GIPSA's
proposed new Sec. 201.218 would include criteria that the Secretary
will consider when determining whether a poultry grower or swine
production contract grower has been given sufficient time to remedy a
breach of contract. Proposed new Sec. 201.218 would set forth
procedures that a packer, swine contractor, or live poultry dealer must
follow before it can terminate a contract or poultry growing
arrangement based on a breach by the poultry grower or swine production
contract grower.
Undue or Unreasonable Preference or Advantage
In enacting the 2008 Farm Bill, Congress required the Secretary to
establish criteria to be considered in determining whether conduct
constitutes an undue or unreasonable preference or advantage in
violation of the P&S Act. Through telephone calls received from
producers and poultry growers, complaints received by its field agents,
and comments made at meetings, conferences and conventions, GIPSA has
learned that packers, swine contractors and live poultry dealers
sometimes treat similarly situated poultry growers and livestock
producers differently. Disparate treatment of similarly situated
growers and producers can be a violation of the P&S Act when that
disparate treatment is undue or unreasonable. According to producer
comments made at public meetings, as well as comments and complaints
from individual producers, a packer may offer better price terms to
producers that can provide larger volumes of livestock than the packer
offers to a group of producers that collectively can provide the same
volume of livestock of equal quality, without a legitimate
justification for the disparity. In one case, a Midwestern packer was
offering a higher price to an individual producer who could deliver
full truck loads of cattle. A group of producers approached the same
packer and offered collectively to provide a full truck load of like
cattle, but the packer refused to offer the same price terms to the
group of producers. GIPSA is therefore proposing a new Sec. 201.211 to
address undue or unreasonably preferential treatment of poultry
growers, swine production contract growers or livestock producers.
New proposed Sec. 201.211 establishes criteria that the Secretary
may consider in determining if differential treatment constitutes an
undue or unreasonable preference or advantage, or an undue or
unreasonable prejudice or disadvantage, under the P&S Act. The criteria
include whether contract terms are offered to all producers that can
provide the required volume, kind and quality of livestock, either
individually or collectively. Other considerations include whether any
price premium based on a producer's or a group of producers' ability to
deliver livestock meeting specified conditions is offered to other
producers or groups of producers that can meet that condition. (For
example, producers have reported to GIPSA that some packers will offer
price premiums for early delivery to one producer that it does not
offer to other producers or groups of producers that are willing and
able to meet the same early morning delivery conditions at equal
convenience to the packer). Finally, the Secretary may consider whether
differences in price paid for livestock, based on the cost of acquiring
or handling the livestock, are disclosed equally to all producers.
GIPSA would consider the particular circumstances of any pricing
disparity in determining whether to initiate an enforcement action
alleging a violation of the P&S Act, including whether there is a
legitimate justification for the disparity. This provision would not
require packers to purchase livestock if their needs are already
satisfied or impose a public utility duty to deal with all sellers.
In the course of its enforcement of the P&S Act, GIPSA has reviewed
the records of many live poultry dealers and numerous poultry growing
settlement documents. GIPSA has also received complaints from poultry
growers regarding how settlements occur. These complaints indicate that
some live poultry dealers have established pay schedules under which
poultry growers that raise and care for the same type and kind of
poultry receive different rates of pay; improperly grouped together
those poultry growers who raise and care for live poultry in different
types of poultry housing for settlement purposes; and, under a
tournament system, paid some poultry growers less than the base pay
amount in the poultry growing arrangement. These complaints also
indicate that some poultry growers are not given the production
information that is used in the compensation formula to determine their
ranking in the tournament system. These practices, if not corrected,
create a reasonable
[[Page 35344]]
likelihood of competitive injury. GIPSA is proposing a new Sec.
201.214 that would require live poultry dealers that pay poultry
growers on a tournament system to pay all poultry growers raising and
caring for the same type of poultry the same base pay, and that would
prohibit paying poultry growers less than the base pay amount. New
proposed Sec. 201.214 would also require that poultry growers be
ranked in settlement groups with other poultry growers that raise and
care for poultry in the same type of houses.
If a packer, swine contractor, or live poultry dealer believes it
can justify disparate treatment of poultry growers, swine production
contract growers or livestock producers, it must have a legitimate
business reason for that differential treatment. GIPSA is proposing to
add a new paragraph (b) to Sec. 201.94 that would require packers,
swine contractors or live poultry dealers to maintain records that
justify their treatment of poultry growers, swine production contract
growers, or livestock producers. This justification need not be
extensive but should be enough to identify the benefit-cost basis of
any pricing differentials received or paid, and may include increased
or lower trucking costs; market price for meat; volume; labor, energy,
or maintenance costs, etc. For example, a packer's participation in a
branded program for a particular type of beef that returns a premium to
the packer could be used to justify a higher price paid to producers
that sell the type of cattle that meets the specifications of the
branded program. In general, the data needed to justify a different
treatment would identify those pecuniary costs and benefits associated
with the treatment that demonstrate its decreased costs or increased
revenues from a standard business practice. Therefore, GIPSA would
consider the particular circumstances of any pricing disparity in
determining whether a violation of the P&S Act occurred, including
whether there is a legitimate justification for the disparity.
One of the common complaints that GIPSA has received regarding
undue and unreasonable preferences or advantages is that packers, swine
contractors and live poultry dealers offer considerably better contract
terms to select sellers/growers, which impedes other sellers/growers'
ability to compete. GIPSA is proposing to add a new Sec. 201.212(a)
that would prohibit dealers operating as packer buyers from purchasing
livestock for any packer other than the packer identifying that dealer
as its packer buyer. A dealer is defined in the P&S Act as ``any
person, not a market agency, engaged in the business of buying or
selling in commerce livestock, either on his own account or as the
employee or agent of the vendor or purchaser.'' \37\ This section is
proposed under the authority of section 303 of the P&S Act, requiring
market agencies and dealers to register in such manner as the Secretary
may prescribe. A packer buyer is any person regularly employed on
salary, or other comparable method of compensation, by a packer to buy
livestock for such packer. Proposed new Sec. 201.212(b) would also
prohibit packers from entering into exclusive purchase agreements with
any dealer except those dealers the packer has identified as its packer
buyers. This provision does not eliminate exclusive arrangements, but
provides transparency by identifying the dealer as a packer buyer for a
specific packer. Proposed new Sec. 201.212(a) and (b) would work in
conjunction to prevent apportioning territory by independent dealers
and packers. This would open the market to other buyers, increasing
participation in the cow and bull slaughter market and prevent
collusion between multiple packers using one dealer as an exclusive
agent to manipulate prices.
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\37\ Section 301(d).
---------------------------------------------------------------------------
GIPSA has also been informed through discussion with livestock
producers that most livestock sellers lack sufficient information on
available contract terms. To increase the amount of information
available that would allow sellers to make informed business decisions,
GIPSA is proposing to add a new Sec. 201.213, which would require
packers, swine contractors, and live poultry dealers to submit copies
of sample types of contracts to GIPSA and GIPSA to make those samples
available for public viewing on its Web site.
Arbitration
With the Farm Bill, Congress amended the P&S Act to add section
210, which addresses arbitration. The Farm Bill requires that livestock
contracts and poultry growing arrangements contain an option for
poultry growers and livestock producers to accept or reject arbitration
to settle disputes. Many of these contracts unilaterally drafted by
packers, swine contractors, or live poultry dealers contain provisions
limiting the legal rights and remedies afforded by law to poultry
growers, swine production contract growers, or livestock producers.
Section 210 of the P&S Act requires that poultry growers, swine
production contract growers, or livestock producers have the
opportunity, prior to entering a contract or poultry growing
arrangement, to decline to use arbitration to resolve disputes arising
out of the contract or growing arrangement. In accordance with section
210 of the P&S Act, under the proposed regulation, the poultry grower,
swine production contract grower, or livestock producer may decide
later, after a dispute arises, to resolve the dispute using arbitration
only if both parties voluntarily agree to the use of arbitration at
that later time. Congress directed the Secretary to promulgate
regulations to carry out section 210 of the P&S Act, and to establish
criteria to consider when determining if the arbitration process
provided in a contract provides a meaningful opportunity for the
poultry growers, swine production contract growers, or livestock
producers to participate fully in the arbitration process.
GIPSA has been informed by poultry growers, swine production
contract growers, and livestock producers that often the cost of the
arbitration process is prohibitive to resolving disputes between a
packer, swine contractor, or live poultry dealer and a producer or
grower. For example, fees for arbitration may need to be paid up front
and can be substantial. A poultry grower, swine production contract
grower, or livestock producer may not have sufficient resources
available to pay the fees for arbitration. Prior to enactment of the
Farm Bill, producers and growers with contracts that required mandatory
and binding arbitration were often left with no means available to
resolve disputes if they lacked sufficient resources to pay arbitration
fees. In proposing this new rule, GIPSA relied on established fee
structures in employment arbitration rules to determine appropriate
fees to be assessed to a producer or grower.
GIPSA also examined numerous contracts offered, modified, amended,
renewed or extended after the effective date of the Farm Bill to see
how the requirements of new section 210 of the P&S Act were being
implemented by packers, swine contractors, or live poultry dealers.
GIPSA found little consistency among the contracts. Some contracts were
very clear and allowed the poultry growers, swine production contract
growers, or livestock producers to easily recognize the choice
regarding arbitration. Other contracts created a burdensome procedure
for poultry growers, swine production contract growers, or livestock
producers to make the choice.
GIPSA is proposing to add a new Sec. 201.219(b) to the regulations
under the P&S Act that would establish a uniform means by which poultry
growers, swine
[[Page 35345]]
production contract growers, or livestock producers are offered the
option to decline use of arbitration to resolve disputes arising out of
a contract. Proposed new Sec. 201.219(a) would ensure that the poultry
grower, swine production contract grower, or livestock producer has a
meaningful opportunity to participate in the arbitration process.
Proposed new Sec. 201.219(a) would also provide criteria the Secretary
may consider in evaluating the fairness of the arbitration process.
Among these criteria are: Overall fairness in the procedures, limits on
costs to poultry growers, swine production contract growers, or
livestock producers, reasonable time limits for completion of the
process, reasonable access to discovery of information by the growers
or producers, and a requirement that a reasoned written opinion be
issued by the arbitrator.
Options Considered
The Farm Bill explicitly directs the Secretary to promulgate
certain regulations. GIPSA also has exercised its discretion and
proposed other regulations to further clarify the types of conduct that
violate the P&S Act. With regard to both the mandatory and
discretionary regulatory provisions, GIPSA considered alternative
options.
Some of the alternatives considered may have been less restrictive
on the regulated entity. For example, we considered not requiring that
regulated entities maintain records that support differential pricing
or any deviation from standard price or contract terms for actions
taken by packers, swine contractors or live poultry dealers involving
poultry growers, swine production contract growers, or livestock
producers. We also considered requiring shorter notice periods for live
poultry dealers that suspend the delivery of birds to poultry growers.
We determined, however, that these alternatives would not improve
fairness and transparency in the marketplace, nor would they foster
trust and integrity among buyers and sellers in the livestock and
poultry markets.
We considered proposing more restrictive options. For instance, we
considered proposing prohibiting the use of arbitration to resolve
disputes. That option, however, goes against a popular method of
dispute resolution in other industries and is not in line with the
spirit of the Farm Bill.
GIPSA believes that these proposed regulations best implement the
purposes of the P&S Act and the Farm Bill, and will help protect
producers and consumers. GIPSA welcomes and will consider comments with
regard to all aspects of this proposed rulemaking.
Executive Order 12866 and Regulatory Flexibility Act
This proposed rule has been determined to be significant for the
purposes of Executive Order 12866 and, therefore, has been reviewed by
the Office of Management and Budget. As required by the Farm Bill,
GIPSA is proposing these regulations under the P&S Act. Also, we have
prepared an economic analysis for this proposed rule. The cost-benefit
analysis of the proposed regulations is initially conducted on a
section-by-section analysis. Section 201.212, ``Livestock Purchasing
Practices,'' is subdivided into two sub-section analyses. After the
section-by-section analyses and the review of the Regulatory
Flexibility Act (RFA), a summary cost-benefit analysis is presented.
Within the analysis, costs are aggregated into three major types:
(1) Administrative costs, which include items such as office work,
postage, filing, and copying; (2) costs of analysis, such as a business
conducting a financial review; and (3) adjustment costs, such as costs
related to changing business behavior to achieve compliance with the
proposed regulation. Where applicable, GIPSA also considered whether
the regulations would prohibit or deter efficient conduct or
significantly raise the costs of production for packers, swine
contractors, live poultry dealers, producers, or growers. Potential
benefits include gains from having market prices for commodities or
grower services more accurately reflect supply-demand conditions; from
making decisions based on more accurate price signals; and from
remedying anticompetitive conduct and minimizing associated dead weight
losses and other inefficiencies.
Proposed new Sec. 201.2(l) through (t), ``Terms Defined,'' would
contain definitions for eight terms used in the proposed regulations.
These definitions are of commonly used terms in the industry and enter
into the cost-benefit analysis through the proposed regulations.
Proposed new Sec. 201.3(a) through (c), ``Applicability of
regulations in this part,'' would indicate that the proposed
regulations serve the intent of Congress and similar to the previous
section enter into the cost-benefit analysis through the proposed
actionable regulations.
Proposed new Sec. 201.94(b), would require a regulated entity to
maintain records that support differential pricing or any deviation
from standard price or contract terms by an entity subject to section
202 of the P&S Act and reflects the routine record requirements of
section 401 of the P&S Act. The proposed specifications amount to prior
indication of those circumstances in which a regulated entity may
expect to maintain and make available specific documentation. Document
maintenance and inspection would be required for GIPSA's regulatory and
investigative responsibilities and protected as confidential documents
under the P&S Act. These business documents would not be available to
the public, consistent with other current document maintenance
requirements of section 401 of the P&S Act. Increased industry costs
depend in part on the existing level of record keeping a firm currently
maintains and the manner in which those documents are maintained. Most
additional documents required under the proposed regulation would be
related to the data used to complete standardized financial statements,
such as income statements or balance sheet statements, which are used
for yearly assessments of firm financial or managerial performance.
Generally, the costs are of an administrative or of a financial review
nature. For example, records supporting differential pricing or any
deviation from standard price or contract terms may include projecting
anticipated incomes or losses, and maintaining the documents presenting
those results. GIPSA believes that potential benefits include ensuring
that decisions and actions are made based on prices determined by
supply-demand conditions. An additional benefit is that increased
information transparency reduces decision-making costs of such
transactions in the marketplace and identifies who would best conduct
these transactions. GIPSA invites specific comments on additional
categories of cost and benefit items as well as their magnitudes.
Proposed new Sec. 201.210(a) through (c), ``Unfair, unjustly
discriminatory and deceptive practices or devices,'' would list
specific conduct, acts, or practices that the agency believes to be
unfair, or constitutes an unjustly discriminatory, or deceptive
practice. The list is consistent with GIPSA's past interpretations of
section 202(a) of the P&S Act.
To the extent that firms are engaged in activity that GIPSA's
proposed regulations would identify as a violation of the P&S Act,
firms will have adjustment costs in ceasing the activity. GIPSA,
however, believes that these types of instances are not widespread and
related costs are not anticipated as large. Because these regulations
merely
[[Page 35346]]
clarify existing requirements, any such costs must be incurred
regardless of whether the regulations are issued, and are therefore not
costs associated with the regulations themselves.
Benefits from the regulation include justifying and making known
premium and discount payments to ensure transparent information to
support efficient allocation of resources by better decision making.
Two additional benefits to the market place in general are (1)
establishing greater information parity to facilitate contract
evaluation and negotiating power between the packer, swine contractor,
or live poultry dealer and poultry growers, swine production contract
growers, or livestock producers and (2) the definition of entitlement
claims producers or growers have under contract terms. GIPSA invites
specific comments on additional types of categories of cost and benefit
items as well as their magnitudes.
Proposed new Sec. 201.211, ``Undue or unreasonable preferences or
advantages; undue or unreasonable prejudice or disadvantages,'' would
provide general criteria that GIPSA would use to determine if an act or
practice constitutes an undue or unreasonable preference or advantage
and undue or unreasonable prejudice or disadvantage. The proposed new
regulation provides general criteria for interpretation of existing
section 202(b) of the P&S Act. These criteria are not designed to
prohibit instances where the circumstances justify a price differential
to a poultry grower, swine production contract grower, or livestock
producer.
To the extent that firms were engaged in activity that GIPSA may
determine to be a violation of the P&S Act based on the criteria, firms
will have an adjustment cost in ceasing or desisting in the activity.
GIPSA, however, believes that these types of instances are not
widespread and related costs are not anticipated as large because these
regulations merely clarify existing requirements, any such costs must
be incurred regardless of whether the regulations are issued and are
therefore not costs associated with the regulations themselves.
Benefits to the industry and the market will arise from
establishing parity of negotiating power between the packer, swine
contractor, or live poultry dealer and poultry growers, swine
production contract growers or livestock producers by reducing the use
of monopsonistic power and the accompanying dead weight losses.\38\
GIPSA believes that potential benefits are expected to exceed costs.
GIPSA invites specific comments on additional categories of cost and
benefit items as well as their magnitudes.
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\38\ Nigel Key and Jim M. MacDonald discuss evidence for the
effect of concentration on grower compensation in ``Local Monopsony
Power in the Market for Broilers? Evidence from a Farm Survey''
selected paper American Agri. Economics Assn. meeting Orlando, FL,
July 27-29, 2008.
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Proposed new Sec. 201.212, ``Livestock Purchasing Practices,''
would identify specific instances of industry conduct or behavior that
would constitute violations under the proposed Sec. Sec. 201.210,
``Unfair, unjustly discriminatory and deceptive practices or devices''
and 201.211, ``Undue or unreasonable preferences or advantages; undue
or unreasonable prejudice or disadvantages.'' The cost-benefits of
these sections follow.\39\
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\39\ Marvin Hayenga, Ted Schroeder, and John Lawrence provide an
overview of the type of concerns GIPSA has about the purchasing
practices of large packers in: ``Churning out the Links: Vertical
Integration in the Beef and Pork Industries'' http://www.choicesmagazine.org/2002-4/2002-4-03.pdf, accessed 7/1/2009. A
similar article by Ted Schroeder, James Mintert, and Eric Berg is
``Valuing Market Hogs: Information and Pricing Issues'' http://www.oznet.ksu.edu/library/agec2/samplers/mf2644.asp, accessed 7/1/
2009. An additional reference is the Interim Livestock Meat
Marketing Study Report prepared for GIPSA by RTI, International at:
http://www.gipsa.usda.gov/GIPSA/webapp?area=home&subject=lmp&topic=ir-mms.
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Proposed new Sec. 201.212(a) and (b) would prohibit packers from
limiting sellers' choices by excluding sellers who meet the packers
input needs, forming unjustifiable exclusive agreements with select
sellers, and limiting packer-buyer ties to a single packer. In general,
the prohibited behaviors are used to apportion territory or restrain
commerce as a mechanism to exert market power to effect lower seller
prices. There are about a dozen packers in the United States that
slaughter more than 100,000 head of cows and bulls and that potentially
could be affected by the regulation. In a recent procurement practice
review, GIPSA identified 180 livestock auctions where one buyer bought
cull cattle for more than one packer. Most of the packers reviewed
would not accept cattle from more than one buyer at any one sale,
regardless of whether the buyer was a dealer, commission agent, or
employee.
To the extent that firms are engaged in activities that these
regulations would specify as violations of the P&S Act, the adjustment
cost in ceasing the activity will correspond to the inability (or
reduced ability) to exercise monopsony power. GIPSA notes that many of
these activities are currently considered violations of the P&S Act and
as such, will not require additional cost to comply. To GIPSA's
knowledge, this activity is restricted to cull cattle procurement, and
GIPSA does not believe that the costs associated with ceasing to
exclude other sellers will result in a large cost to the industry. In
markets that will support additional buyers, those new buyers will now
be able to purchase and sell cattle to packers in situations where
exclusive agreements previously prevented them from competing. Any cost
of compliance to packers and existing buyers would thus be primarily
due to increased prices they might have to pay due to more competitive
markets. Benefits are the prevention of monopsonistic conduct and
greater market access for producers.
Proposed new Sec. 201.212(c) would prohibit packers from
purchasing, acquiring, or receiving swine or livestock from another
packer or packer-affiliated companies. Packer-to-packer acquisitions
have historically been restricted to purchases from other packers of
``off'' animals that did not fit with the other packers' specifications
but were procured in a larger lot of animals. The practice was
primarily restricted to hog packers. Since 2006, GIPSA has observed
that the practice has been expanded considerably and GIPSA believes it
to be contributing to significant price distortions. In one instance,
the price distortion was almost 3 percent of the reported base price
for hogs. These price distortions in the swine negotiated cash market
have larger price effects than just the cash market as many contracts
including formula pricing often refer to the reported base price. The
cost of compliance with the proposed regulation would be localized to
packing companies and their affiliates, which would be less able to
exercise their market power and pay lower, non-competitive prices to
producers. The benefits of a more fair and competitive market resulting
from this rule are expected to exceed the compliance costs of the
regulated entities. In Sec. 201.212(c)(i), we are proposing that
packers be afforded the opportunity to apply to the Administrator for a
waiver from the requirements of Sec. 201.212(c) in the event of
catastrophic or natural disaster or an emergency. The recognition of
exigent conditions (such as fire damaging a plant resulting in a packer
needing to liquidate committed procurement) and waivers based on those
conditions would minimize costs related to packer-to-packer sales based
on efficiency reasons.
Proposed new Sec. 201.213(a) through (d), ``Livestock and poultry
contracts,'' would act to increase transparency in the marketplace
regarding the value (fair
[[Page 35347]]
compensation rate) of contracts. Total administrative costs are
estimated at $25,000 per year for the affected parties to submit
contracts based on 0.25 hours to prepare contracts; a per hour rate of
$25; and 995 poultry contract types, 2,751 swine contract types and 100
types of cattle contracts. GIPSA believes the benefits to increased
transparency are expected to exceed its costs.\40\
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\40\ Rachael E. Goodhue, Gordon C. Rausser, and Leo K. Simon
discuss poultry contracts and grower compensation issues in:
``Understanding Production Contracts: Testing an Agency Theory
Model'' selected paper American Agric. Economics meetings Salt Lake
City, UT, May 15, 1998.
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Proposed new Sec. 201.214, ``Tournament system'' would stipulate
that the lowest ranked poultry grower for a live poultry dealer would
receive the base contract pay and all others would receive premium(s)
to allow for better assessment of contract values at the time of
contract negotiation.\41\ As this primarily involves actuarial analysis
and an adjustment in the formula used to compute compensation rates to
poultry growers, it is not anticipated to have costs beyond
administrative costs for changes to contracts. GIPSA believes the
benefits would likely outweigh costs by providing poultry growers with
a more consistent benchmark to compare different contracts and the
evaluation of compensation terms for acceptability in a particular
contract. GIPSA invites comments related to the cost of conducting the
actuarial analysis and the benefits in allowing better evaluation by
poultry growers and/or lenders of the expected income streams from
entering a poultry growing contract.
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\41\ Armando Levy and Tomislav Vukina observe the benefit of a
fixed standard for comparing grower performance within tournament
systems in: ``The League Composition Effect in Tournaments with
Heterogeneous Players: An Empirical Analysis of Broiler Contracts''
in J. of Labor Economics, 2004, pp. 353-377.
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Proposed new Sec. 202.215(a) and (b), ``Suspension of delivery of
birds,'' would indicate a time requirement for notifying a poultry
grower prior to suspension of delivery of birds, including notification
of the length of suspension and date delivery will resume. Proposed new
Sec. 201.215(c) would allow a live poultry dealer to apply for a
waiver of the requirements in Sec. 201.215(a) and (b) in emergency or
other extraordinary circumstances. For example, if a fire or other
catastrophic event occurs an immediate suspension may be necessary.
These provisions delineate the private property rights structure of a
poultry grower by allowing a poultry grower to have adequate notice and
make informed decisions on the future use of resources, which may
include contract termination.\42\ Costs related to the regulation are
related to potential prior planning on the part of live poultry dealers
and actual notification. During the normal course of the broiler
production cycle, GIPSA believes that a live poultry dealer should know
90 days ahead of time that they are going to suspend delivery, meaning
that the regulations would not impose additional costs by constraining
a dealer's operational flexibility. The benefits are related to
allowing poultry growers to make early decisions that may include
contract termination in the event of suspension of bird delivery prior
to having to absorb costs related to being idle. This benefit is tied
to ensuring that the live poultry dealer and poultry growers have
parity in their contractual commitments. In general economic terms,
providing parity of powers acts to reduce dead weight losses from
asymmetric market positions. GIPSA invites comments on how pervasive
the practice is in the industry and on the related magnitudes of
expected costs and benefits.
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\42\ Paul Milgrom and John Roberts discuss property rights
structures in ``Economics, Organization, and Management'', 1992,
Chap. 9, Ownership and Property Rights. Note, for perfectly
efficient property rights structures resources must be privately
held and entitlements completely specified. All benefits and costs
of ownership accrue to the owner. All property rights are
transferable from one owner to another in voluntary exchange. And
all rights from ownership are enforceable and secure from
involuntary seizure.
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Proposed new Sec. 201.216(a) through (g), ``Capital investments
criteria,'' would provide a partial list of criteria that the Secretary
would use when determining whether requiring capital investment in a
poultry grower's operation is a violation of the P&S Act. These
provisions delineate the private property rights structure of a grower
or producer by allowing a poultry grower or swine production contract
grower to obtain adequate notice and make informed decisions on the
future use of resources, which may include contract termination. Costs
related to the regulation are related to potential prior planning on
the part of packers, live poultry dealers or swine contractors and
actual notification. Additional costs would be related to potential
added administrative costs of recordkeeping; however, sound business
practice dictates that many of these incidents are currently being
documented. A significant benefit is that the proposed rule would
reduce the occurrence of ``hold-up'' costs, i.e., the costs a grower or
producer is forced to absorb after having made an initial fixed cost
investment.\43\ GIPSA believes benefits are expected to be larger than
costs, but recognizes that, in general, this may require a period of
adjusting to a new contractual relationship between packers, swine
contractors, and live poultry dealers and poultry growers or swine
production contract growers. The regulations allow for investments that
improve the cost of production or improve health or safety. To the
extent the regulations prohibit investments that do not improve
production performance; health or safety, there is an increase in
overall benefits. GIPSA invites comments on the type and magnitude of
the costs and benefits of this proposal.
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\43\ The empirical evidence for hold-up costs is discussed by T.
Vukina and P. Leegomonchai in ``Oligopsony Power, Assett
Specificity, and Hold-up: Evidence from the Broiler Industry'',
Amer. J. of Agri. Economics, pp. 589-605, Aug., 2006. A general
discussion of the hold-up problem by Paul Milgrom and John Roberts
is found in ``Economics, Organization, and Management'' pg. 136,
1992.
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Proposed new Sec. 201.217(a), ``Capital investments requirements
and prohibitions,'' would stipulate that required capital investments
must be related to the effective life of the contract via the amount of
investment recovered, designated at 80 percent of the investment. The
proposed regulation protects poultry growers or swine production
contract growers from opportunistic behavior by packers, swine
contractors, and live poultry dealers by ensuring that the length of
the contract is sufficiently long to allow the grower to recoup any
capital investments that were made as a condition of entering into or
continuing a poultry growing arrangement or swine production contract.
GIPSA believes that the benefit is that better decisions on resource
allocations that reduce waste would be made after an initial adjustment
period by contractors. Overall, benefits are expected to exceed costs.
Proposed new regulation in Sec. 201.217(b) would stipulate that a
packer, swine contractor, or live poultry dealer cannot require
additional capital investment from a poultry grower or swine production
contract grower that has given to the packer, swine contractor, or live
poultry dealer written notice of intent to sell the grower's or
producer's farm, unless the requirement was provided 90 days prior to
the notice of intent to sell the farm. The costs and benefits of this
are similar to Sec. 201.217(a). The proposed new regulations in Sec.
201.217(c), (d) and (e) stipulate that a packer, swine contractor, or
live poultry dealer cannot require equipment upgrades to properly
[[Page 35348]]
working equipment without compensation incentives, that the density of
poultry or swine cannot be changed in response to requirements to
change equipment that is in good working order, and that capital
investments cannot be obtained through threat or intimidation. The
costs and benefits of this proposed regulation are similar to the
benefits in Sec. 201.217(a). GIPSA invites comments related to the
cost-benefit categories identified above and the magnitudes of the
costs and benefits.
Proposed new Sec. 201.218(a) through (h), ``Reasonable period of
time to remedy a breach of contract,'' would delineate rules for
contract termination to better delineate property rights by allowing a
grower to have adequate notice for time to remedy and to make informed
decisions on the future use of resources, which may include contract
termination. Costs related to the regulation are related to potential
prior planning on the part of a packer, live poultry dealer or swine
contractor and actual notification. Additional costs would be related
to potential added administrative costs of record keeping; however,
sound business practice dictates many of these incidents are documented
currently. GIPSA believes that benefits are expected to be larger than
costs, but recognizes that, in general, this may require a period of
adjusting to a new contractual relationship between packers, swine
contractors, or live poultry dealers and poultry growers or swine
production contract growers. GIPSA invites comments on how pervasive
potential violations in the industry may be under the proposed
regulation and the related magnitudes of expected costs and benefits
and if all types of cost-benefit categories have been considered.
Proposed new Sec. 201.219, ``Arbitration,'' is expected to enhance
property rights by establishing minimal standards for the arbitration
process. These standards would provide a meaningful opportunity for
poultry growers, swine production contract growers, or livestock
producers to fully participate in arbitration; if that is the dispute
resolution mechanism they have chosen in the agreement or contract.
Industry participants have indicated that a benefit of GIPSA defining a
bright line position on the boundary between appropriate and unfair as
well as reasonable and unreasonable conduct is to help with the
avoidance of costly litigation that may be required to discover that
boundary on its own. Additional costs would be related to potential
added administrative costs of changes in contracts that would need to
be made to reflect the proposed regulation. GIPSA invites comments on
potential unforeseen consequences of the proposed regulations, the
related magnitudes of expected costs and benefits, and if all types of
cost-benefit categories have been considered.
The Small Business Administration (SBA) defines small businesses by
their North American Industry Classification System Codes.\44\ The
affected entities and corresponding size thresholds under the proposed
rule that would be defined as a small business are as follows: NAICS
12111, cattle producers; NAICS 112210, hog producers and swine
contractors; and NAICS 112320 and 112330, broiler and turkey producers
if sales are less than $750,000 per year. Live poultry dealers, NAICS
31165, and hog and cattle slaughterers are considered small businesses
if they have fewer than 500 employees.
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\44\ See: http://www.sba.gov/idc/groups/public/documents/sba_homepage/serv_sstd_tablepdf.pdf
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The Census of Agriculture (Census) indicates there are 727 swine
contractors. The Census provides the number of head sold by size
classes for these entities, but not value of sales. In order to
estimate the size by the SBA classification, the average value per head
for sales of all swine operations is multiplied by production values
for firms in the Census size classes for swine contractors. The
estimates reveal that about 300 entities had sales of less than
$750,000 in 2007 and would have been classified as small businesses.
Additionally, there were 8,995 hog producers with swine contracts,
almost all of these producers would have been classified as small
businesses.
GIPSA maintains data on cattle, hogs, and sheep (collectively
referred to as `livestock') slaughterers and live poultry dealers from
the annual reports these firms file with GIPSA. Currently, there are
418 livestock slaughter firms and 140 live poultry dealers (all but 16
are also poultry slaughterers and would be considered poultry
integrators) that would be subject to the proposed regulation.
According to U.S. Census data on County Business Patterns, there were
42 livestock (other than poultry) slaughter firms, and 64 poultry
slaughter firms, that had more than 500 employees in 2006. The
difference yields approximately 375 livestock slaughter firms and 75
poultry slaughters/integrators that have fewer than 500 employees and
would be considered as small businesses that would be subject to the
proposed regulation.
Another factor, however, that is important in determining the
economic effect of the regulations is the number of contracts held by a
firm. GIPSA records for 2007 indicated there were 20,637 poultry
production contracts in effect, of which 13,216 or 64 percent were held
by the largest 6 poultry integrators, and 95 percent (19,605) were held
by the largest 21 firms. These 21 firms are all in the large business
SBA category, whereas the 19,605 poultry growers holding the other end
of the contract are all small businesses by SBA's definitions. A
similar situation exists in hog production where the large majority of
hog producers hold contracts with the very largest of the swine
contractors, which similar to poultry tend to also be slaughterers. For
example, the 2007 Census indicates the 437 largest swine contractors
(annual sales greater than 5,000 head at an average value of $5.9
million) accounted for 99 percent of all sales by swine contractors.
The situation in general for the nation's 29,632 combined swine
producers and poultry growers operating under contract is that they are
almost all small businesses with a contract held by one of the top five
very large swine or poultry slaughters. The SBA considers a grower or
producer to be a large business if their gross income is $750,000 per
year. To illustrate the magnitude in size differences between a large
grower/producer and a swine contractor/poultry dealer the gross sales
revenue difference is 1:23,000. To the extent the proposed regulations
impose costs; these costs are expected to be borne primarily by swine
contractors, live poultry dealers, and slaughterers. The cost has two
parts, a financial review component and an administrative cost. The
costs of conducting a financial review such as projecting income or
loss (to justify volume discounts on procurement for example) or an
actuarial analysis (e.g., for tournament systems) are related to the
type of contracts. These costs would increase with the number of
contracts a firm has, and in the majority of cases, these are large
business entities. For those small business entities, the proposed
regulation is not expected to be a significant expense. This will be
discussed in more detail below.
Five of the proposed regulations (Sec. 201.214 on tournament
compensation, Sec. 201.215 on suspension of delivery of birds, Sec.
201.216 and Sec. 201.217 dealing with capital investments, and Sec.
201.218 on the time to remedy contract breaches) are specific to
production contracts; and four of the proposed regulations (Sec.
201.219 arbitration, Sec. 201.210 on unfairness, Sec. 201.211 on
undue
[[Page 35349]]
preferences, and Sec. 201.213 on contract presentation) deal with both
marketing and production contracts.
Summarizing the costs that the proposed regulations related to
production contracts entail, these costs are substantively borne by
packers, swine contractors, and live poultry dealers. Those entities
that are small businesses in this group tend to have few (1-3)
production contracts, and costs of submitting contracts to GIPSA is
estimated to be roughly $6.25 per contract type, hence the costs to
smaller businesses would be minimal. In cases involving records
retention, the larger costs tend to relate to the analysis in instances
where the firm will seek to engage in an activity that requires
additional records retention. The instances include where price
differentials or deviations from standard price or contract terms are
offered by packers, live poultry dealers or swine contractors. An
average fee for this type of analysis was estimated at $2,190. GIPSA
believes there will be an estimated 70 analyses conducted per year. The
other administrative costs are related to producer or grower
notification or potential contract revisions and are also not expected
to be large for the small live poultry dealers or swine contractor, or
for the larger firms with multiple contract types.
Although the marketing contracts are not nearly as concentrated
with producers as production contracts, the proposed regulations that
relate to both production and marketing contracts are expected to have
similar cost distributions between producers/growers and contractors/
live poultry dealers. That is, there are a larger number of overall
marketing contracts in place as opposed to production contracts for the
affected entities. In part, this is because marketing contracts are
widely used within the cattle and swine markets, whereas production
contracts are used to a lesser degree. Summarizing the costs that these
regulations would entail to the industry, the entities affected would
primarily be live poultry dealers and cattle and hog slaughterers. The
costs related from compliance with the records retention (when needed),
notification costs, and contract revisions, also if applicable, are
similar to the sections related to the production contracts for similar
reasons and also are not expected to be large to the entities that are
small businesses subject to these sections of the proposed regulations.
Proposed new Sec. 201.212(a) through (c) on livestock purchasing
patterns entail costs borne by packers that are not related to
production or marketing contracts. Proposed new Sec. 201.212(a)
through (c) would likely apply only to cow-bull slaughterers; to the
extent they are engaged in practices that would require costs for them
to alter purchasing behavior. The costs from changing behavior, if
required, would likely be the difference between any lower price from
reduced competition in the input market purchases price and the
competitive market valued price. The firms likely to be affected by the
increased costs are in the category of larger packers and are
considered to be large businesses. For example, bonds that these firms
carry to cover a 2-day period of livestock purchases are in excess of
$1 million. Proposed new Sec. 201.212(c) would relate to packer-to-
packer purchases with costs primarily borne by hog packers. Sales of
hogs either in substantive numbers or for occasional ``off-hogs,''
which are hogs purchased that may not fit a packer's specifications,
are activities only the larger packers are engaged in. The effect of
the proposed regulations on all small businesses described in the
analysis is expected not to have a significant economic impact on a
substantial number of small business entities as defined in the
Regulatory Flexibility Act (5 U.S.C. 601 et seq.).
Executive Order 12988
This proposed rule has been reviewed under Executive Order 12988,
Civil Justice Reform. These actions are not intended to have
retroactive effect, although in some instances they merely reiterate
GIPSA's previous interpretation of the P&S Act. This rule would not
pre-empt state or local laws, regulations, or policies unless they
present an irreconcilable conflict with this rule. There are no
administrative procedures that must be exhausted prior to any judicial
challenge to the provisions of this rule. Nothing in this proposed rule
is intended to interfere with a person's right to enforce liability
against any person subject to the P&S Act under authority granted in
section 308 of the P&S Act.
Paperwork Reduction Act
In accordance with section 3507(d) of the Paperwork Reduction Act
of 1995 (44 U.S.C. 3501 et seq.), this rule announces that GIPSA is
seeking approval for a new information collection. Upon OMB approval
this package will be merged with 0580-0015.
Title: Implementation of Regulation Required Under Title XI of the
Food, Conservation and Energy Act of 2008; Undue and Unreasonable
Preferences; Unfair, Unjustly Discriminatory and Deceptive Practices;
Dispute Resolution under the Packers and Stockyards Act, 1921.
OMB Number: 0580-NEW.
Type of Request: New.
Methodology Used for Calculating Time and Cost Estimates
Personnel costs were obtained from the U.S. Bureau of Labor
Statistics, Table B-4 ``Average Hourly Earnings'' (August 7, 2009).
Burden hour estimates are based on previous GIPSA experience with time
required to maintain records, complete forms, submit required
information, management review, and a legal review for possible changes
in contracts or business practices. Estimates are based on average data
situations of similar type and complexity required during the course of
investigations conducted by GIPSA. The estimates also reflect GIPSA's
experience in assembling large amounts of data.
Time Burden and Cost Estimate for Records Retention (Sec. 201.94(b))
There is not expected to be a cost and time burden on swine
contractors as their contracts are set based on a production facility
square footage basis. Livestock packers have the largest number of
differentiating agreements and these are almost exclusively with the
larger packers. Using the top 10 packers as the group affected, they
have an estimated average of 10 alternative agreements, yielding a
required 100 analyses for the packers. A per firm cost of $2,190 per
analysis is estimated based on 30 hours preparation time at $25 per
hour administrative wages plus 40 hours at $36 per hour analyst wage.
This yields a total packer cost of $219,000. The live poultry dealers
affected are estimated to number 14 (10 percent of non processing live
poultry dealers) with an average number of differentiating agreements
of five per firm to yield 70 poultry industry analyses. This provides a
cost of $153,300 for the poultry industry or a combined industry costs
of $372,300 per year.
Contract Submission Time Burden and Cost Estimate (Sec. 201.213
Livestock and Poultry Contracts)
The live poultry dealer business costs are based on an estimated
199 live poultry dealers. The estimated number of poultry production
agreements is 20,637 and the estimated number of types of contracts is
995 (an average of 5 per entity). The total burden is 249 hours (995 x
0.25 hours committed). This yields a total cost to the poultry industry
of $6,219 (249 hours x $25 per
[[Page 35350]]
hour wage). The swine industry costs are based on an estimate of 727
swine contractors and 35 swine packers with 55 plants. The estimated
number of swine contractor production agreements is 2,181 (3 per
contractor). The estimated number of types of marketing agreements is
570 (an average of 10.3 per packing plant). Together this is 2,751
swine reportable contracts. This yields a total burden of 666 hours
(2,751 x 0.25 committed hours). Yielding a total swine industry cost of
$17,194 (688 hours x $25 per hour wage). The cattle industry costs are
based on 4,157 markets and dealers, 259 packers, but an estimate of
only 100 written marketing agreements types across all the entities.
This yields an hourly industry burden of 25 hours (100 x 0.25 committed
hours). For a total cattle industry cost of $626 (25 hours committed x
$25 hour wage rate). The combined poultry, swine, and cattle industry
costs for contract submission are estimated at $24,038 per year.
Time Burden and Cost Estimate for Suspension of Delivery of Birds
(Sec. 201.215)
The number of grower contracts is approximately 20,000. Taking 10
percent of the contracts as the annual rate of delivered notices yields
2,000 notices delivered per year. Multiplying the 2,000 notices by an
average time burden of 0.25 hours to provide notice at a wage rate of
$25 per hour yields a cost of $12,500 per year to meet this
requirement.
Time Burden and Cost Estimate for Reasonable Period of Time To Remedy a
Contract Breach (Sec. 201.218)
The number of poultry grower and swine contracts affected is
approximately 24,000. Using one percent of the contracts as the annual
rate of contract breaches needing notification yields 240 notices per
year. Applying an average time burden of 1 hour to provide notice at a
wage rate of $25 per hour yields a cost of $6,000 per year to meet this
requirement.
As required by the Paperwork Reduction Act (44 U.S.C. 350(c)(2)(A))
and it's implementing regulations (5 CFR 1320.8(d)(1)(i)), we
specifically request comments on the following:
1. Whether the proposed collection of information is necessary for
the proper performance of the functions of the agency, including
whether the information will have practical utility;
2. The accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used;
3. Ways to enhance the quality, utility, and clarity of the
information to be collected;
4. Ways to minimize the burden on the collection of information on
those who are to respond, including through the use of appropriate
automated electronic, mechanical, or other technological collection
techniques or other forms of information technology; and
5. The cost to small businesses for records retention (i.e. number
of price differentials offered) and submitting different types of
contracts.
All responses to this rule will be summarized and included in the
request for the Office of Management and Budget approval. All comments
will also become a matter of public record.
E-Government Act Compliance
GIPSA is committed to complying with the E-Government Act, to
promote the use of the internet and other information technologies to
provide increased opportunities for citizen access to Government
information and services, and for other purposes.
List of Subjects in 9 CFR Part 201
Confidential business information, Reporting and recordkeeping
requirements, Stockyards, Surety bonds, Trade practices.
For the reasons set forth in the preamble, we propose to amend 9
CFR part 201 as follows:
PART 201--REGULATIONS UNDER THE PACKERS AND STOCKYARDS ACT
1. The authority citation for part 201 is revised to read as
follows:
Authority: 7 U.S.C. 181-229, 229c.
2. Section 201.2 is amended by adding new paragraphs (l) through
(u) to read as follows:
Sec. 201.2 Terms defined.
* * * * *
(l) Tournament system means any method used by a live poultry
dealer to calculate some portion of the payment made to poultry growers
based on a comparison of one poultry grower's performance with that of
one or more other poultry grower's performance.
(m) Principal part of performance means the raising of, and caring
for livestock or poultry, when used in connection with a livestock or
poultry contract.
(n) Capital investment means any initial capital investment of
$25,000 or more paid by a grower for growing and raising facilities.
Such term includes the total cost of equipment, goods, professional
services and labor utilized, plus any interest incurred and any
increased labor and operating costs that are directly attributable to
the capital investment.
(o) Additional capital investment means a combined amount of
$25,000 or more paid by a poultry grower or swine production contract
grower beyond the initial investment for growing and raising facilities
by the grower to make a capital improvement to the raising or growing
facility. Such term includes the total cost of equipment, goods,
professional services and labor utilized, plus any interest incurred
and any increased labor and operating costs that are directly
attributable to the capital investment. The term does not include costs
of maintenance or repair.
(p) Suspension of delivery of birds means the failure of a live
poultry dealer to deliver a new poultry flock before the date payment
is due for a poultry grower's previous flock under section 410 of the
Act.
(q) Forward contract means fixed price or basis contract, oral or
written, for the purchase of a specified quantity, or a lot or lots of
livestock, where delivery will occur more than 14 days after the
agreement is entered. Price may be determined when an agreement is
entered (fixed price), or provisions may be made for the price to be
determined at a later date, for example, based on prices on the futures
market (basis contract) or a publicly reported price.
(r) Marketing agreement means an agreement to purchase livestock at
a future date with the price to be determined at or after the time of
slaughter, where delivery will occur more than 14 days after the
agreement is entered. A marketing agreement (also known as a marketing
contract) is an ongoing (open-ended or for a fixed period of time) oral
or written agreement in which a seller agrees to sell all or part of
its slaughter livestock to a packer when the livestock are ready for
slaughter, and the packer agrees to purchase the livestock, with price
determined by an agreed formula. Terms of sale are not negotiated for
individual lots of livestock within the agreement when livestock are
purchased through a marketing agreement. A marketing agreement may
include a commitment for the seller to deliver a specified number of
livestock each week, month, etc., or may allow the seller considerable
discretion in the number of livestock delivered under the agreement.
(s) Production contract means a contract that details specific
poultry grower or swine production contract grower and packer, swine
contractor or
[[Page 35351]]
live poultry dealer responsibilities for production inputs and
practices, as well as a mechanism for determining payment.
(t) A competitive injury occurs when conduct distorts competition
in the market channel or marketplace.
(u) Likelihood of competitive injury means there is a reasonable
basis to believe that a competitive injury is likely to occur in the
market channel or marketplace. It includes but is not limited to
situations in which a packer, swine contractor, or live poultry dealer
raises rivals' costs; improperly forecloses competition in a large
share of the market through exclusive dealing; restrains competition
among packers, swine contractors, or live poultry dealers; or
represents a misuse of market power to distort competition among other
packers, swine contractors, or live poultry dealers. It also includes
situations in which a packer, swine contractor, or live poultry dealer
wrongfully depresses prices paid to a producer or grower below market
value, or impairs a producer's or grower's ability to compete with
other producers or growers or to impair a producer's or grower's
ability to receive the reasonable expected full economic value from a
transaction in the market channel or marketplace.
Sec. Sec. 201.3 and 201.4 [Redesignated as Sec. Sec. 201.4 and
201.5]
3. Sections 201.3 and 201.4 are redesignated as Sec. Sec. 201.4
and 201.5 respectively.
4. A new Sec. 201.3 is added to read as follows:
Sec. 201.3 Applicability of regulations in this part.
(a) Applicability to live poultry dealers. The regulations in this
part when applicable to live poultry dealers shall apply to all stages
of a live poultry dealer's poultry production, including pullets,
laying hens, breeders and broilers, excluding hens that only produce
table eggs.
(b) Applicability to contracts. The regulations in this part, when
referencing contracts or agreements generally, apply to all swine
production contracts, poultry growing arrangements and livestock
production and marketing contracts, including but not limited to,
formula and forward contracts.
(c) Scope of Sections 202(a) and (b) of the Act. The appropriate
application of section 202(a) and (b) of the Act depends on the nature
and circumstances of the challenged conduct. A finding that the
challenged act or practice adversely affects or is likely to adversely
affect competition is not necessary in all cases. Conduct can be found
to violate section 202(a) and/or (b) of the Act without a finding of
harm or likely harm to competition.
(d) Effective dates. The regulations in this part, when governing
or affecting contracts, shall apply to any poultry growing arrangement,
swine production contract or livestock marketing or production contract
entered into, amended, altered, modified, renewed or extended after
[EFFECTIVE DATE OF FINAL RULE].
5. Section 201.94 is amended by redesignating the existing
undesignated text as paragraph (a) and by adding a new paragraph (b) to
read as follows::
Sec. 201.94 Information as to business; furnishing of by packers,
swine contractors, live poultry dealers, stockyard owners, market
agencies, and dealers; records retention.
* * * * *
(b) A packer, swine contractor or live poultry dealer must maintain
written records that provide justification for differential pricing or
any deviation from standard price or contract terms offered to poultry
growers, swine production contract growers, or livestock producers.
6. New Sec. Sec. 201.210 through 201.219 are added to read as
follows:
* * * * *
Sec.
201.210 Unfair, unjustly discriminatory and deceptive practices or
devices.
201.211 Undue or unreasonable preferences or advantages; undue or
unreasonable prejudice or disadvantages.
201.212 Livestock purchasing practices.
201.213 Livestock and poultry contracts.
201.214 Tournament systems.
201.215 Suspension of delivery of birds.
201.216 Capital investments criteria.
201.217 Capital investments requirements and prohibitions.
201.218 Reasonable period of time to remedy a breach of contract.
201.219 Arbitration.
* * * * *
Sec. 201.210 Unfair, unjustly discriminatory and deceptive practices
or devices.
(a) The term ``unfair, unjustly discriminatory and deceptive
practice or device'' as it is used in Sec. 202 of the Act, includes,
but is not limited to:
(1) An unjustified material breach of a contractual duty, express
or implied, or an action or omission that a reasonable person would
consider unscrupulous, deceitful or in bad faith in connection with any
transaction in or contract involving the production, maintenance,
marketing or sale of livestock or poultry.
(2) A retaliatory action or omission by a packer, swine contractor,
or live poultry dealer in response to the lawful expression, spoken or
written, association, or action of a poultry grower, livestock producer
or swine production contract grower; a retaliatory action includes but
is not limited to coercion, intimidation, or disadvantage to any
producer or grower in an execution, termination, extension or renewal
of a contract involving livestock or poultry;
(3) A refusal to provide to a contract poultry grower or swine
production contract grower, upon request, the statistical information
and data used to determine compensation paid to the contract grower or
producer under a production contract, including, but not limited to,
feed conversion rates, feed analysis, origination and breeder history;
(4) An action or attempt to limit by contract a poultry grower's,
swine production contract grower's, or livestock producer's legal
rights and remedies afforded by law, including, but not limited to the
following:
(i) The right of a trial by jury (except when arbitration has been
voluntarily agreed to);
(ii) The right to all damages available under the law;
(iii) Rights available under bankruptcy law;
(iv) The authority of the judge or jury to award attorney fees to
the appropriate party; or
(v) A requirement that a trial or arbitration be held in a location
other than the location where the principal part of the performance of
the arrangement or contract occurs;
(5) Paying a premium or applying a discount on the swine production
contract grower's payment or the purchase price received by the
livestock producer from the sale of livestock without documenting the
reason(s) and substantiating the revenue and cost justification
associated with the premium or discount;
(6) Termination of a poultry growing arrangement or swine
production contract with no basis other than the allegation by the
packer, swine contractor, live poultry dealer or other person that the
poultry grower or swine production contract grower failed to comply
with an applicable law, rule or regulation. If the live poultry dealer
or swine contractor believes that a poultry grower or swine producer is
in violation, the live poultry dealer or swine contractor must
immediately report the alleged violation to the relevant law
enforcement authorities if they wish to use this alleged violation as
grounds for termination.
(7) A representation, omission, or practice that is fraudulent or
likely to
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mislead a reasonable poultry grower, swine production contract grower,
or livestock producer, swine contract producer or livestock producer
regarding a material condition or a term in a contract or business
transaction.
(8) Any act that causes competitive injury or creates a likelihood
of competitive injury.
Sec. 201.211 Undue or unreasonable preferences or advantages; undue
or unreasonable prejudice or disadvantages.
The Secretary may consider the following criteria, among others, in
determining if an undue or unreasonable preference or advantage, or an
undue or unreasonable prejudice or disadvantage, has occurred in
violation of the Act:
(a) Whether contract terms based on number, volume or other
condition, or contracts with price determined in whole or in part by
the volume of livestock sold are made available to all poultry growers,
livestock producers or swine production contract growers who
individually or collectively meet the conditions set by the contract.
(b) Whether price premiums based on standards for product quality,
time of delivery and production methods are offered in a manner that
does not discriminate against a producer or group of producers that can
meet the same standards.
(c) Whether information regarding acquiring, handling, processing,
and quality of livestock is disclosed to all producers when it is
disclosed to one or more producers.
Sec. 201.212 Livestock purchasing practices.
(a) Dealers who operate as packer buyers must purchase livestock
only for the packer that identifies that dealer as its packer buyer.
(b) A packer may not enter into an exclusive arrangement with a
dealer except those dealers the packer has identified as its packer
buyers and reported to the Secretary on approved forms.
(c) A packer shall not purchase, acquire, or receive livestock from
another packer or another packer's affiliated companies, including but
not limited to, the other packer's parent company and wholly owned
subsidiaries of the packer or its parent company.
(d) A packer may apply to the Administrator for a waiver of Sec.
201.212(c) in case of a catastrophic or natural disaster, or other
emergency.
Sec. 201.213 Livestock and poultry contracts.
(a) Packers and swine contractors purchasing livestock under a
marketing arrangement including, but not limited to, forward contracts,
formula contracts, production contracts or other marketing agreements,
and live poultry dealers obtaining poultry by purchase or under a
poultry growing arrangement must submit a sample copy of each unique
type of contract or agreement to GIPSA.
(b) Sample copies of marketing arrangements and poultry growing
arrangements must be submitted within 10 business days of entering into
the agreement.
(c) Packers, swine contractors and live poultry dealers must notify
GIPSA within 10 business days when a sample contract submitted to GIPSA
is no longer in use.
(d) Because it is in the public interest that sample copies of each
unique contract be made public, except for provisions containing trade
secrets, confidential business information and personally identifiable
information, GIPSA may post on its Web site a copy of each unique
contract it receives. Provisions containing trade secrets, confidential
business information and personally identifiable information will not
be made public.
(e) Packers, swine contractors and live poultry dealers must
identify confidential business information when submitting contracts to
GIPSA.
Sec. 201.214 Tournament systems.
(a) If a live poultry dealer is paying growers on a tournament
system, all growers raising the same type and kind of poultry must
receive the same base pay. No live poultry dealer shall offer a poultry
growing arrangement containing provisions that decrease or reduce
grower compensation below the base pay amount.
(b) Live poultry dealers must rank growers in settlement groups
with other growers with like house types.
Sec. 201.215 Suspension of delivery of birds.
The criteria the Secretary may consider when determining whether or
not reasonable notice has been given for suspension of delivery of
birds include, but are not limited to:
(a) Whether a live poultry dealer has provided to a poultry grower
written notice of its intent to suspend the delivery of birds under a
poultry growing arrangement at least 90 days prior to the date it
intends to suspend delivery of birds;
(b) Whether written notice under paragraph (a) in this section has
stated the reason for the suspension of delivery, the length of the
suspension of delivery, and the date the delivery of birds will resume.
(c) A live poultry dealer may apply to the Administrator for a
waiver of Sec. 201.215(a) in case of a catastrophic or natural
disaster, or other emergency.
Sec. 201.216 Capital investments criteria.
The criteria the Secretary may consider when determining whether a
requirement that a poultry grower or swine production contract grower
make additional capital investments over the life of a production
contract or growing arrangement constitutes an unfair practice in
violation of the Act include, but are not limited to:
(a) Whether a poultry grower or swine production contract grower is
provided discretion to decide against the capital investment
requirement;
(b) Whether the investment is the result of coercion, retaliation
or threats of coercion or retaliation by the packer, swine contractor
or live poultry dealer;
(c) Whether the packer, swine contractor or live poultry dealer
intends to substantially reduce or end operations at the slaughter
plant or processing facility that processes the poultry grower's or
swine production contract grower's poultry or swine, or if the packer,
swine contractor or live poultry dealer in fact substantially reduces
or ends operations at the slaughter plant or processing facility within
12 months of requiring the additional capital investment;
(d) A live poultry dealer may apply to the Administrator for a
waiver of Sec. 201.216(c) in case of a catastrophic or natural
disaster, or other emergency;
(e) Whether the packer, swine contractor, or live poultry dealer
required some poultry growers or swine production contract growers to
make additional capital investments, but did not require other
similarly situated poultry growers or swine production contract growers
to make the same additional capital investments;
(f) The age of, and recent upgrades to or capital investments in,
the poultry grower's or swine production contract grower's operations;
(g) Whether the cost of the required capital investments can
reasonably be expected to be recouped by the poultry grower or swine
production contract grower; and
(h) Whether the poultry grower or swine production contract grower
was given a reasonable time period to implement the required capital
investments.
Sec. 201.217 Capital investments requirements and prohibitions.
(a) Any requirement that a poultry grower or swine production
contract grower make initial or additional capital
[[Page 35353]]
investments as a condition to enter into or continue a growing
arrangement or production contract must be accompanied by a contract
duration of a sufficient period of time for the poultry grower or swine
production contract grower to recoup 80 percent of the cost of the
required capital investment. These contracts would still be subject to
the contractual rights dealing with growers and producer misconduct.
(b) No packer, swine contractor, or live poultry dealer may require
an additional capital investment from a poultry grower or swine
production contract grower who has given to the packer, swine
contractor, or live poultry dealer written notice of intent to sell the
grower's or producer's farm and facilities, unless notice of such
additional capital investment was given at least 90 days prior to the
producer's or grower's notice of intent to sell.
(c) No packer, swine contractor, or live poultry dealer shall
require equipment changes on equipment previously approved and accepted
by the packer, swine contractor, or live poultry dealer if existing
equipment is in good working order unless the packer, swine contractor,
or live poultry dealer provides adequate compensation incentives to the
poultry grower or swine production contract grower.
(d) No packer, swine contractor, or live poultry dealer shall
reduce the number of birds/swine placed with a poultry grower or swine
production contract grower or terminate a growing arrangement or
production contract based solely on the failure of a grower or producer
to make equipment changes so long as existing equipment is in good
working order.
(e) A packer, swine contractor, or live poultry dealer shall not
engage in conduct or use a device with the intent or having the effect
of limiting the ability of the poultry grower or swine production
contract grower to voluntarily choose to enter into a growing
arrangement, production contract or an agreement to make additional
capital investments. Such conduct or device includes, but is not
limited to, use of intimidation, threats, false or misleading
information, statements or data, or the concealment of any material
information, statements or data.
Sec. 201.218 Reasonable period of time to remedy a breach of
contract.
The criteria the Secretary may consider when determining whether a
packer, swine contractor or live poultry dealer has provided a poultry
grower or swine production contract grower a reasonable period of time
to remedy a breach of contract that could lead to contract termination
include, but are not limited to:
(a) Whether the packer, swine contractor or live poultry dealer
that intends to take an adverse action against a poultry grower or
swine production contract grower based on a breach of contract by the
grower or producer, including termination of a contract, has provided
written notice of the breach of contract to the producer or grower upon
initial discovery of a breach of contract.
(b) And whether the notice includes the following:
(1) A description of the act or omission believed to constitute a
breach of contract, including identification of the section of the
contract believed to be breached;
(2) When the breach occurred;
(3) The means by which the poultry grower or swine production
contract grower can satisfactorily remedy the breach, if possible,
based on the nature of the breach; and
(4) A date that provides a reasonable time, based on the nature of
the breach, by which the breach must be remedied.
(c) Whether, when establishing the date by which a breach should be
remedied, the packer, swine contractor or live poultry dealer
considered the poultry grower's or swine production contract grower's
ongoing responsibilities related to poultry or swine under their care
and reasonable time periods related to raising and caring for the
poultry or swine.
(d) Whether the written notice affords the poultry grower or swine
production contract grower an opportunity to rebut in writing an
allegation that there has been a breach of contract, and whether
sufficient time from the date of the notice of the alleged breach is
provided for submitting the rebuttal. Generally, this will be about 14
days.
(e) Whether attempts are made to assert that the poultry grower or
swine production contract grower waived their claims by failing to meet
unreasonable time restrictions.
(f) Whether the packer, swine contractor or live poultry dealer
attempts to terminate a growing arrangement or production contract if
the poultry grower's or swine production contract grower's breach is
remedied within the time provided in the notice, or by another mutually
agreed upon date.
(g) Whether the packer, swine contractor or live poultry dealer
gives notice of such breach or failure to act within 90 days of finding
the breach or failure. Such failure will generally be considered to be
a waiver of any objections by the packer, swine contractor or live
poultry dealer to the breach and to its legal claims based on that
breach.
(h) Whether the packer, swine contractor or live poultry dealer
terminates a swine production contract or poultry growing arrangement
because of a dispute or breach that is submitted for arbitration, in
which the poultry grower or swine production contract grower prevails
in the arbitration proceeding.
Sec. 201.219 Arbitration.
(a) The criteria the Secretary may consider when determining
whether the arbitration process provided in a contract provides a
meaningful opportunity for the poultry grower, livestock producer, or
swine production contract grower to participate fully in the
arbitration process include, but are not limited to:
(1) Whether the contract discloses sufficient information in bold,
conspicuous print describing all the cost of arbitration to be paid by
the poultry grower, swine production contract grower, or livestock
producer, the arbitration process and any limitations on legal rights
and remedies in such a manner as to allow the grower or producer to
make an informed decision on whether to elect arbitration for dispute
resolution.
(2) Whether impartial and unbiased qualified neutrals shall be used
as arbitrators;
(3) Whether the cost of arbitration to the poultry grower,
livestock producer or swine production contract grower is reasonable
compared to the costs found in a typical employer/employee arbitration
process. Cost of arbitration includes, but is not limited to,
administrative fees, filing fees, and arbitrator deposits and fees;
(4) Whether there are reasonable time limits in the entire
arbitration process and any process or procedure resulting from the
outcome of the arbitration;
(5) Whether there are fair procedures that comply with the terms of
the Federal Arbitration Act;
(6) Whether the poultry grower, livestock producer, or swine
production contract grower is provided access to and opportunity to
engage in reasonable discovery of information held by the packer, swine
contractor or live poultry dealer;
(7) Whether the arbitration is used only to resolve disputes
relevant to the contractual obligations of the parties; and
(8) Whether a reasoned, written opinion based on applicable law,
legal
[[Page 35354]]
principles and precedent for the award is required to be provided to
the parties;
(b) The language described in paragraph (a)(1) of this section
shall immediately precede the following language, which must appear as
follows on the signature page of the contract in bold conspicuous
print:
Right to Decline Arbitration. A poultry grower, livestock producer
or swine production contract grower has the right to decline to be
bound by the arbitration provision set forth in this agreement. A
poultry grower, livestock producer or swine production contract grower
shall indicate whether or not it desires to be bound by the arbitration
provision by signing one of the following statements:
I decline to be bound by the arbitration provisions set forth in
this Agreement --------------------------------------------------------
------------------------
I accept the arbitration provisions as set forth in this Agreement
----------------------------------------------------------------------
----------
Failure to choose an option by signing one of the above renders the
contract void.
J. Dudley Butler,
Administrator, Grain Inspection, Packers and Stockyards Administration.
[FR Doc. 2010-14875 Filed 6-18-10; 11:15 am]
BILLING CODE 3410-KD-P