Protecting Foreign Growers Who Consign Produce or other Fresh Food to the U.S.
To say that the perishable produce market is competitive is an understatement. Like other markets for goods that are sold and consumed by individuals across the world, the fresh produce market is fast-paced, and the supply chain is transnational.
There are other unique factors making the produce market a tough one. For one, the product is perishable. If it is not kept in the right environment and distributed quickly, it loses its value. Another characteristic that sets perishable produce aside from other industries its high number of competitors. In the U.S. alone, perishable fruits and vegetables come from hundreds of growers (both domestic and foreign) and wholesale distributors.
Yet another difficultly involving produce is that growers often consign their entire crops (i.e., they give it to an agent to sell on their behalf, without being guaranteed a price in return). A consignment, of course, is not a sale.
The U.S. market can be particularly challenging for growers in Latin America and elsewhere outside the U.S. who consign produce or other fresh food to marketing agents. While legal protections exist in the U.S., foreign growers seldom take advantage of them.
This article focuses on the “grower-agent” marketing model in which growers consign wholesale volumes of fresh food to marketing agents in the U.S. Further, this article discusses the fiduciary duties that can arise under the “grower-agent” model and how growers whose rights may have been violated by a marketing agent can seek recourse.
Note: This article does not discuss the PACA Trust. It discusses manners of recourse that may be available even without PACA Trust for protection.
The Grower-Agent Marketing Model:
U.S. produce distributors frequently set up agreements with foreign growers as agency agreements in which the U.S. distributor acts as a “marketing agent” for the grower. Under this arrangement, the grower often entrusts its entire crop for a given season to a single distributor. Usually, the grower and the U.S. distributor/marketing agent agree on a specific variety of the crop to market (e.g., red globe grapes from Peru, or Hass avocados from Mexico). The marketing agent often gives advances on the anticipated sales prices for the crop so that the grower can pay its workings, harvest the crop, and prepare it for shipment to the U.S. After the produce arrives to the U.S., the distributor/marketing agent sells the produce, makes deductions for necessary expenses and its agreed-upon commission, and then pays the grower the net proceeds – that is, all amounts over and above prior advances, sales commission, and expenses.
This sounds efficient. But when bad seasons occur, they can present extreme difficulties. Instead of getting a check (or a wire transfer), a grower may instead get a bill or “notice of deficit” for hundreds of thousands of dollars supposedly owed back to the distributor/marketing agent. The same grower may reasonably have expected, based on the USDA market prices for similar crops during the season, to receive profits of over several times the supposed “deficit” amount.
It is common for both sides to declare that the other side is at fault after a bad season. The grower may blame the agent for overstocking or giving preference to other growers or customers. At the same time, the marketing agent may assert that the grower’s produce was of a substandard quality or condition.
Common law agency / fiduciary duties:
The problem for growers who consign produce – particularly growers outside the US –is that they entrust distributors/marketing agents with millions of dollars’ worth of product without being able to monitor what the agents are doing with it. Fortunately, the U.S. Department of Agriculture (“USDA”), which is the government agency in charge of regulating trade in perishable agricultural commodities, has recognized that the grower-agent model can give rise to heightened legal responsibilities.
The USDA has long held that when a marketing agent handles produce on a grower’s behalf for a sales commission, a fiduciary relationship exists. This means that a marketing agent has certain legal obligations to the grower as a matter of law. These obligations – which include the duty not to act adversely to the grower’s interest, the duty to account with accurate figures, and the duty to follow the grower’s directions – are called “fiduciary duties.”
Breaches of fiduciary duties can and do occur in practice. A marketing agent can violate a fiduciary duty owed to a foreign grower in various ways. Examples of breaches of fiduciary duties could include: (1) negligently fumigating produce that was already fumigated, costing the grower unnecessary fees and time; (2) failing to account accurately and/or truthfully for the returns on the fruit; (3) overstocking on produce from multiple suppliers, and then giving preference consistently to other growers who seem more likely to enforce their legal rights than a foreign grower selling its crops on free consignment; (4) giving a powerful buyer discounts on the foreign grower’s crops without obtaining a USDA inspection to justify the reduced price given based on substandard quality or condition; (5) deducting fees that were not agreed upon or necessary in the circumstances; or (6) failing to communicate material facts to the grower in a timely manner. This list is not exhaustive and whether a breach of fiduciary duty occurred is a fact-specific inquiry.
Recourse for Growers:
There are two ways a grower from another country can protect its rights against a distributor that acted as its fiduciary. First, it can file an administrative complaint to the USDA. Second, it can file a lawsuit in a competent court in the United States.
The first option is often impracticable due to an onerous administrative barrier (the “double bond” requirement) imposed on non-licensees in the USDA tribunals. This requirement requires growers without a PACA license – a category that necessarily includes foreign growers due to the USDA’s licensing limitations – to pay a bond of double the amount of the grower’s claim before proceeding with a “formal complaint” over which the USDA will make a binding determination. However, foreign growers often use the USDA’s “informal complaint” process in attempt to negotiate disputes with marketing agents / distributors. The “informal complaint” process is low cost but it does not involve a binding determination by the USDA; it is more of an administrative mediation.
The second option which is suing in a court with jurisdiction over the marketing agent ./ distributor in the U.S., may be the more viable option for a foreign grower needing to protect its rights. Like the USDA tribunals, the courts can also draw upon common law principles regarding breaches of fiduciary duties in analyzing the merits of the case.
Our California Office is Prepared to Serve You
Our office has handled breach of fiduciary duty cases and commercial law and a variety of contexts in state and federal courts. We have attorneys who speak Spanish, Hindi, and Punjabi fluently. We are mindful the fresh food industry is particularly strong in the State of California. The port cities of Long Beach, Los Angeles, and San Francisco bring in fresh produce from all over the world. The businesses abroad that send these imports face stiff competition in California. They should be prepared to assert their legal rights when necessary. Please contact our office if you wish to learn more.
William R. Schubert | Associate Attorney | Thakur Law Firm, APC
