The Food Security Act of 1995 is part of a matryoshka of statutes. In the center is the general rule of 9-320(a) of the UCC, that a buyer in the ordinary course of business takes free of a security interest created by its seller. The next doll is the Farm Products Exception, which I wrote about here: except, most notably, in California, the buyer in the ordinary course rule does not apply to a buyer of farm products. The next doll is the Food Security Act itself: if you fail to comply with its terms, then the Farm Products Exception does not apply. Finally, if you do comply, then the Farm Products Exception does apply.
If that's not entirely clear, don't blame the messenger.
An interesting case out of the U.S. Bankruptcy Court for the Central District of Illinois asked this question: does the Food Security Act apply to proceeds? Here are the basic facts of CNH Capital America LLC v. Trainor Grain & Supply Co.: Both CNH and Trainor had financed crops for farmers named Printz, who are now in bankruptcy. CNH had the earlier filed financing statement. Trainor was also the grain elevator which bought the crops. CNH did not comply with the notice provisions of the Food Security Act. Trainor had therefore, there was no dispute, purchased the crops free and clear of CNH's lien. But what about the proceeds? Trainor simply offset them against its debt and paid nothing to the Printzes. Would it be able to walk away without paying, despite CNH's earlier filed financing statement?
Your ordinary buyer, when it pays for the crops, is concerned about double payment, which is why it will check the Food Security Act filings or notices of its seller. In essence, Trainor wasn't making any payment at all; no cash was changing hands. If it was wrong, it still had its debt. That probably isn't worth much without collateral and with the farmers in bankruptcy, but also, as a secured party, it was clearly in second position behind another creditor.
And that, in essence, is what the court held. The Food Security Act protects a buyer. If a secured creditor does not comply with its notice provisions (which, in some states like Idaho and Oregon, are essentially the same as for filing a financing statement, while in others, like Washington and, presumably, Illinois, involve actually sending notice to known prospective buyers of the farm products), then the buyer gets full title to the goods. But what it does not get is priority in proceeds as well.
Think of it this way: if there were no Farm Products Exception--the rule that applies to purchasers of every kind of goods except farm products--would a buyer who also had a second security interest be able to take the goods by setting off its debt against the interests of a first priority secured creditor? I think not, and that is what the court ruled here.
What if Trainor had paid the farmers and the farmers had turned around and paid Trainor in cash? Under 9-332 of the UCC, unless Trainor and the farmers had been in collusion, Trainor would, outside of bankruptcy, have taken good title to the funds. Of course, in bankruptcy, this was likely to be a preference and thus recoverable just as the setoff in the actual case was.
At the back of most contracts are provisions that lawyers and parties often refer to as "boilerplate". The Free Dictionary defines it as "inconsequential, formulaic or stereotypical language." A recent decision of the Wisconsin Supreme Court supports the interpretation I've given my colleagues for years: there is no such thing as inconsequential language in a contract. Yesterday's boilerplate is today's most critical wording.
The case involved the standard guaranty required by federal law. At the end of the guaranty form, the supplier had added, "This Guaranty shall not render Seller liable for any incidental or consequential damages of whatsoever nature nor shall it extend to the benefit of persons or corporations other than" buyer. The goods that were shipped under this guaranty were found contaminated with E. coli and the buyer sued for, among other things, its consequential damages. The Wisconsin Supreme Court affirmed the intermediate appellate court's decision that this language was ineffective to disclaim consequential damages. After the jump, we'll discuss why.
The supplier's problem is that this was the only disclaimer in any of its documents. As an Article 2 merchant (see my previous entry), the supplier was subject to another warranty, the implied warranty of merchantability. That warranty is given unless disclaimed, Here, it was not disclaimed, and thus was given. Damages for breach of warranty may also be limited or excluded if not unconscionable. So the question became whether the exclusion of consequential damages in the Guaranty applied to damages for breach of the implied warranty of merchantability.
The court answered that question in the negative, and it relied on the express words used in the disclaimer in the Guaranty. "The words, 'This Guaranty,' focus the limitation of damages on those damages that may flow from a breach of the express warranties set out in 'This Guaranty' . . . . They say nothing about damages that may arise from the breach of an implied warranty . . . ."
Exactly. The standard "boilerplate" provision reads more like this: "Under no circumstances may either party be liable to the other for any special, incidental, consequential or punitive damges in any action arising out of this contract, whether considered in contract, in tort of otherwise." The words attached to the Guaranty were far more limited, and the words were given meaning by the Wisconsin Supreme Court.
There are many factors to consider in deciding whether to disclaim implied warranties and whether to limit damages. In contracts related to food, implied warranties are disclaimed far less frequently than in other sales of goods. Parties often exclude incidental damages without understanding what they are giving up. But the lesson from the Wisconsin Supreme Court is always good: the words you choose matter. There is no "inconsequential" boiilerplate.
A recent case from the Court of Appeals in Tennessee highlighted an important issue in connection with how contracts to purchase farm products will be handled under Article 2 of the Uniform Commercial Code. In Brooks Cotton Co. v. Williams, the court was faced with essentially a single question: may a farmer be a "merchant" within the meaning of Article 2? The court answered the question in the affirmative for the farmer at issue, but it is important to understand both why the question may be critical and that the court's decision does not answer the question for all farmers.
First, what is a "merchant" under Article 2? Section 2-104(1) of the UCC contains the definition.
"Merchant" means a person that deals in goods of the kind or otherwise holds itself out by occupation as having knowledge or skill peculiar to the practices or goods involved in the transaction or to which the knowledge or skill may be attributed by the person's employment of an agent or broker or other intermediary that holds itself out by occupation as having the knowledge or skill.
After the jump, we'll explore why it's important to be or not be a merchant, how the Tennessee court applied it to farmers and what it means for the farmers from which you may buy farm products.
Being a merchant: The particular provision of Article 2 that was relevant here is called the "merchant exception to the statute of frauds." Under Article 2, any contract for the sale of goods of a value over $500 must be in writing unless an exception applies. The exemption involved here provides:
Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) against such party unless written notice of objection to its contents is given within ten days after it is received.
That is a handy way to avoid needing to getting a signature on a document; it also follows the general sense of the law merchant, on which Article 2 is based, that between merchants formalities are regularly not followed in the interest of speeding up commerce.
The Tennessee Decision. The Tennessee court did not plough new ground, but provided a good summary of the state of the law on whether a farmer can be a merchant. In essence, the court held that whether a farmer is a merchant under Article 2 is to be decided on the facts related to the particular farmer. A farmer who is aware of the practice of selling forward contracts on an oral basis and who is familiar with the markets involved in such sales may be a merchant, while one who merely grows a crop for a sale to a single buyer may not be.
A key point is that the focus is on the farmer, not necessarily the transaction itself. In other words, it is the sophistication of the party, not the complexity of the transaction, that will determine whether the farmer is a merchant for Article 2 purposes.
What it Means. As in any test that is based on facts and circumstances, you will not be able to know in advance with perfect certainty if you are buying from a merchant or not. If you're buying a small quantity of organic vegetables from someone who is selling you their entire crop, it's probably a good guess they are not a merchant. If you are buying large quantities from someone who sells to large agribusiness companies as well as you, and who quotes you both a current spot price and an historical price without needing to look on a monitor, they are probably a merchant. There will be cases in between where you can't know for certain, and simply relying on the merchant exception can give your seller a defense if they don't want to sell.
The merchant exception, though, is not the only exception to the statute of frauds; on the other hand, the status of the other party as a merchant does not satisfy the exception without complying with the rest of 2-201(2). If it matters enough, get it in writing.
It is probably an article of faith out there among the lay populace that if you discover that the object causing your previously unexplained cough of two years’ duration is a two-inch long fragment of a plastic eating utensil that has somehow entered your lung, and if you find the logo of a well-known restaurant chain on the utensil, you expect that someone will show up delivering you a large sum of money. A recent decision of the United States District Court for the Eastern District of North Carolina reminds us, not so fast.
In a well-reasoned decision following North Carolina law, the judge found the plaintiff’s claim that the defendants had sold him a food item that contained the utensil and he had unwittingly digested it impossible to swallow. This was because the plaintiff had to stack “inference upon inference” in his attempt to prove that the restaurant had anything to do with this injury.
First, there was no proof that the object had been in any food (under the Uniform Commercial Code, food is "goods") the restaurant had sold him, a necessary factor in his theory of breach of the warranty of merchantability. The plaintiff relied only on circumstantial evidence—he claimed he had eaten at that restaurant, no other restaurant in its chain and no similar restaurant (though in other restaurants) in the relevant time period. But that was not enough. His doctors merely testified that the object caused his symptoms; they didn’t have anything to say about how it got there. Defendants’ experts, on the other hand, showed what you might expect: objects like that don’t get into your lungs when you simply eat them. Instead, there must be some “severe mental depression” that suppresses the coughing instinct. What can cause that? Drug or alcohol abuse. And there was substantial evidence the plaintiff was using both around the time he took ill.
Moreover, when foreign objects get into the lungs, unlike the stomach, they don’t degrade or degenerate. So the absence of any food-related objects in his lungs along with the plastic negated the likelihood that the plastic entered his lungs while he was eating the restaurant’s food.
The utensils were available free to anyone who came to the restaurant, or any other one in the chain, which again did not support any inference that the only way one could have entered his lung was through ingestion of the restaurant’s food. And there was no evidence that anything like this had ever happened before, or that among the tiny number of complaints of foreign objects in the restaurant’s food was there a fact pattern even remotely similar. So the complaint was dismissed on summary judgment.
This case demonstrates more than that there are successful defenses to claims for violation of the warranty of merchantability even in a case where a defendant’s logo is found in an unusual place. Causation is not something that can be assumed, or proven by piling “inference upon inference,” and is a defense that should always be examined.
Following the playbook it has followed in the past with sodium and other issues, the Center for Science in the Public Interest (CSPI) has filed yet another complaint of very questionable legal merit to promote a policy agenda. This time CSPI seeks to compel all retailers to use loyalty cards as a recall alert system.
Some retailers use their loyalty card systems to alert customers of product recalls. Other retailers do not. Retailers who don't use loyalty cards as a recall alert system may have a variety of legitimate reasons why they don't or can't create the technology that CSPI wants a court to order retailers to implement. For example, some may lack the technological ability, have privacy agreements with customers that do not allow loyalty cards to be used as a recall alert system, or have other legitimate privacy concerns.
Like CSPI's sodium litigation, this complaint has serious flaws. It seeks broad certification of a "nationwide class" of customers who bought recalled products and whom the retailer "did not advise that they had bought Recalled Products." Even supposing that the claims had some legal merit, few "common issues of fact and law" are apparent. State law varies on the type of consumer fraud claims asserted. Some putative class members surely did get notice of the recall (through means other than loyalty cards).
On the merits, the claims are problematic because we suspect that many (and perhaps most) jurisdictions do not recognize a retailer’s affirmative duty to create some technology to alert customers of manufacturers’ recalls. The complaint utterly fails to acknowledge that retailers employ mechanisms other than loyalty cards to assure customers are aware of recalls.
On its face, a claim for breach of the warranty of merchantability is completely incongruent with a request that the court order retailers to employ new technologies. And, a loyalty card is not a good subject to the warranty of merchantability.
What might be most shameful about CSPI's complaint is its conflict with the Food Safety Modernization Act (FSMA), which CSPI purports to support. Section 211 of the FSMA modifies the Reportable Food Registry to enhance consumer notification of Class I recalls by grocery stores. FDA is tasked to, "[n]ot more than 1 year after the date of enactment of the [FSMA,] . . . develop and publish a list of acceptable conspicuous locations and manners" for grocery stores to notify customers of Class I recalls. CSPI (as well as anyone else) will have the opportunity to submit comments to FDA as part of the rule-making process.
Even if CSPI were somehow successful in its litigation, the outcome of the litigation may be supplanted or even in direct conflict with the FDA's rulemaking and the FSMA. Litigation is rarely a productive, efficient or useful way to create industry regulation. Litigation in the wake of legislation creating the actual policy that CSPI seeks to promote seems utterly wasteful and counterproductive.
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The Agricultural Marketing Service (AMS) of the U.S. Department of Agriculture is finally revising its standards for olive oil, promulgated way back in 1948, to bring them in line with the International Olive Council (IOC), an organization established under United Nations auspices that represents 98% of the world’s olive oil production, nearly all in the Mediterranean basin (the U.S. is not a member). It is doing so at the behest of the California Olive Oil Council (COOC), which is the trade association of U.S. olive oil producers, essentially all of whom are in California.
The new regulations, which are effective on October 25, can be found here, and here is a release the AMS put out describing them. Pretty clearly, terms like "U.S. Fancy" are quaint and obsolete with respect to how olive oil is marketed, and standards for what the terms "Extra Virgin" and "Virgin" olive oil mean are important for olive oil producers, distributors, retailers and consumers.
COOC was also a funder of a study, which has received much press attention, about the accuracy of olive oils labeled as “extra virgin” in advance of the effectiveness of the new AMS regulations. The study has resulted in headlines like, “Olive Oil Study Questions ‘Extra Virgin’ Claims” and the even more provocative, “Olive Oil Study Questions Claims of Virginity.”
The study showed, among olive oils purchased by the researchers in three parts of California (the Bay Area, Sacramento and Los Angeles County) a difference in the accuracy of “extra virgin” labeling between domestic and imported olive oils. Using tests that are used by IOC and in the AMS regulations, as well as other tests used by the German Fat and Oil Society and Australian Olive Association (neither Germany nor Australia being IOC members), there was a distinct difference in the quality of the oils tested, with the domestic olive oil coming off better.
The study makes no claim to any statistical significance for its findings, which is not surprising considering they only examined 14 imported and five domestic brands, buying one of each imported brand in three different places in California and one of each domestic brand in two. Equally unsurprisingly, the North American Olive Oil Association (NAOOA), which represents olive oil importers, has questioned the study's conclusions, which they say are not in line with the results of their own periodic tests of their members' products. Both groups appear to be supportive, however, of the AMS regulatory action.
One thing in the NAOOA press release about the new regulations struck me, however.
But the practice of labeling lower-quality olive oil as top-end — and charging a premium for it — is technically legal in the U.S.
The reason is simple: There are no federal rules that define what is — or is not — "virgin" or "extra virgin" olive oil, said Vito S. Polito, professor of plant sciences at UC Davis and co-chairman of the school's Olive Center, a research group.
I suppose we can all have our own definition of "technically legal." Something could be thought of as technically legal if doing it does not result in criminal sanctions, or result in the product being forcibly recalled from store shelves. In those senses, I suppose selling something as "extra virgin" olive oil would be, until the AMS regulations come into effect in October, "technically legal." But if one took it to mean there are no adverse legal consequences, may I beg to differ? Readers of this blog will remember the implied warranty of merchantability contained in Section 2-314 of the Uniform Commercial Code. One key provision of that warranty is that the goods "conform to the promise or affirmations of fact made on the container or label if any." It doesn't require federal standards to say what extra virgin olive oil is; any form of evidence of a standard, such as, say, the IOC standards, would presumably be admissible into evidence to show what the common understanding of the term is. If the goods sold do not conform to the standard found by the court or jury, then damages under Article 2 will be available.
For consumers, it should be even easier. If you buy something labeled extra virgin olive oil and the bottle, when opened, smells rancid, take it back to your retailer. If it smells delicious, enjoy one of nature's true wonders.
In a case that does not involve food at all, but is sure to get a lot of publicity, the Ninth Circuit yesterday ruled that the common iPod does not breach the warranty of merchantability even if it can be used to damage your ear while wearing ear buds. The decision in Birdsong v. Apple, Inc. will be very helpful in defending future claims of breach of the warranty in many areas, including in relation to food.
The plaintiffs in Birdsong did not allege any injury to themselves. Rather, they alleged that the iPod earbuds were capable of producing 115 decibels of sound, that consumers may listen at unsafe levels and that iPod batteries last 12 to 14 hours and may be recharged, meaning that a consumer may listen for a long time. The plaintiffs requested relief in the form of iPods being modified to have noise-reduction features, better warnings and a decibel meter. The court was having none of it.
The plaintiffs do not allege the iPods failed to do anything they were designed to do nor do they allege that they, or any others, have suffered or are substantially certain to suffer inevitable hearing loss or other injury from iPod use. Accordingly, the district court correctly determined that the plaintiffs failed to allege sufficiently the breach of an implied warranty of merchantability.
The court's analysis may apply equally well to many of the recent food liability cases we've examined where the plaintiffs allege no specific injury to themselves or any inevitable injury to someone consuming the food they have targetted. The warranty of merchantability does not work to protect a consumer from misuse of an item, or use of the item in an absurd, unnatural or harmful way. No one should play heavy metal music on an iPod for 14 hours straight at full volume, and should not claim a breach of the warranty of merchantability if they do. And no one who has been diagnosed with any particular health condition should expect to be able to order anything off the menu at a national chain restaurant, in any quantity, and assume it will not exacerbate that condition.
The noted New York restaurateur and curmudgeon Kenny Shopsin takes this attitude toward people who expect his restaurant to cater to their health needs:
Some people tell me they're deathly allergic to something and that I have to make sure it's not in their food. I kick them out. I don't want to be responsible for anyone's life-or-death situation. I tell them they should eat in a hospital.
Most restaurateurs, big and small, are more accommodating than Kenny (whose autobiography/cookbook has the title Eat Me for a reason). But ultimately, they are providers of food, not doctors, dieticians, the FDA or the Health Department.
Happy (and healthy) New Year, everyone.
Along, I am sure, with many of you, I was intrigued at Ken's recent post on the case of DeBenedetto v. Denny's Corporation, filed recently in Middlesex County, New Jersey by the Center for Science in the Public Interest. Most interesting to me, of course, was the claim that Denny's food violated the warranty of merchantability contained in contracts for the sale of goods under Article 2 of the Uniform Commercial Code. I have blogged on the warranty of merchantability in connection with food recalls.
Paragraph 59 of the complaint states as follows:
59. Denny's meals purchased by Plaintiff and New Jersey Consumers are not adequately described on the menu to advise Plaintff and New Jersey Consumers that they are consuming high amounts of sodium in one meal that are in excess of the advised daily limit.
In Paragraph 60, the complaint claims that this violates the warranty of merchantability because of, among other claims, the alleged inadequate description.
A recent decision of the Ninth Circuit Court of Appeals, Millenkamp v. Davisco Foods International, Inc., seriously calls into question the validity of the plaintiff's claims in the case against Denny's. That case involved the implied warranty of fitness for a particular purpose, not the implied warranty of merchantability, but the reasoning is sufficiently applicable that it can be inferred that Denny's should prevail on this claim.
In Millenkamp, the plaintiffs had purchased milk permeate as cattle feed. The cows fed the milk permeate subsequently died and the plaintiffs sued the supplier as well as a feed company that had advised them about how to use the milk permeate (they later settled against the feed company). One of the claims was that the failure to label the milk permeate as required by Idaho law resulted in a breach of the warranty of fitness for a particular purpose. After prevailing in the trial court, judgment for the plaintiffs was reversed by the Ninth Circuit, which held,
compliance with Idaho's Milk Permeate Labeling Requirement does not address whether Davisco breached a warranty of fitness for a particular purpose.
In order to breach the warranty, a mislabeling must breach "a part of the bargain between the parties." In Millenkamp, the contract between the parties did not include an express requirement that the milk permeate comply with all laws, or comply with all labeling laws.
Is there a difference with the warranty of merchantability?
The Ninth Circuit, in footnote 3 of its opinion, implies that there might be. That footnote is dictum, however, and with all due respect to the Ninth Circuit, misses an important part of the labeling language of Article 2.
Section 2-314(2)(e) of the Uniform Commercial Code contains as a requirement of the warranty of merchantability that the goods "are adequately contained, packaged, and labeled as the agreement may require." Comment 9 to Section 2-314 states, "Paragraph (e) applies only where the nature of the goods and of the transaction require a certain type of package or label." In other words, the result under the warranty of merchantability should be exactly the same as under the warranty of fitness for a particular purpose: if it's not in the contract, then it's not possible to violate it through the implied warranty. Plaintiffs have expressly disclaimed that there is any kind of special contract involved in buying food at Denny's (they need to, in order to avoid any contract that would have disclaimed these implied warranties). Thus, the claim for breach of the implied warranty of merchantability by means of inadequate labeling should fail.
Article 2 of the Uniform Commercial Code contains powerful tools for buyers and sellers of food and other goods. A recent case out of the Georgia Supreme Court emphasizes the critical gatekeeper function of the scope section of Article 2, Section 2-102. This section provides:
Unless the context otherwise requires, this Article applies to transactions in goods; it does not apply to any transaction which although in the form of an unconditional contract to sell or present sale is intended to operate only as a security transaction nor does this Article impair or repeal any statute regulating sales to consumers, farmers or other specified classes of buyers.
Prior case law has generally distinguished between contracts whose primary purpose is the sale of goods or services. For instance, when you deal with a roofing contractor, are you buying the shingles or the installation services?
In Olé Mexican Foods, Inc. v. Hanson Staple Co. (Ga. April 28, 2009), the parties disputed whether certain packaging had met contract specifications. Without lawyers present, they negoiated a handwritten settlement agreement. The agreement included a provision whereby the buyer
would “purchase a minimum of $130,000 worth of current inventory from” [seller] and would “test the remainder of inventory and ... purchase additional inventory if it meets quality expectations.”
On a motion to enforce the settlement agreement, buyer got the court to agree that "that such purchases would “be governed by the Georgia Uniform Commercial Code [UCC], and [buyer] shall retain the right to reject [seller's product pursuant to the Georgia [UCC].”
The Georgia Court of Appeals reversed and the Georgia Supreme Court upheld the intermediate appellate court's decision. The reasoning was that the purpose of the settlement agreement was not the sale of goods, but the settlement of a dispute over the sale of goods.
The fact that the document at issue is labeled “agreement reached in settlement” “is a good barometer of the parties’ intentions. Though the label that contracting parties affix to an agreement is not necessarily determinative of the agreement’s predominant purpose, it can constitute potent evidence of that purpose.”
Citing a number of cases, the court held that where the purpose was settlement, it would be wrong to treat the case instead as a sale of goods, bringing in the implied warranties that the language of the parties' settlement indicated should not apply to the mandatory purchase of goods pursuant to the settlement.
one reason why the court’s holding is so clearly correct is that a contrary holding would essentially eviscerate the purpose of this particular settlement: since one of the central disputes in the underlying litigation was whether Hanson’s goods were merchantable within the meaning of the Uniform Commercial Code, and since the case was settled rather than having this issue decided by the court, applying the implied warranty of merchantability to the settlement agreement would almost certainly require the parties to relitigate the question of merchantability.
When settling a case involving goods that are alleged not to conform to the contract, then, it is often the case that the terms of the settlement might involve future shipments. It is therefore critical to recognize that the question of whether implied warranties and other Article 2 default terms should be addressed by the parties directly in the contract, and not left for later interpretation by a court. In this case, the parties settled without the benefit of counsel, and it is not inconceivable that each had a different take on whether the default warranties would apply. It is also conceivable that neither gave the question a moment's thought until their respective lawyers looked over their handiwork
Which is another reason to have the advice of counsel when settling a case.
I just got the latest issue of Business Law Today, published by the Business Law Section of the American Bar Association. The cover has an intriguing title: "Food and the Law." The lead article has a title even closer to my heart: "Le Menu: the UCC and Food", written by Steven O. Weise of Proskauer Rose LLP. Steve is, in the interest of full disclosure, a friend, but in the interest of a full introduction, one of the most prolific writers and speakers on commercial law topics on the planet, someone who has been a mentor to many (myself included) and is engaging, witty and unbelievably smart.
Only he left out an item on his menu.
In his discussion of Article 9 of the Uniform Commercial Code, he left out section 9-320(a), which is called the "Farm Products Exception."
I think I know why he left it out: he practices in Los Angeles and California has never had the Farm Products Exception.
After the jump, more on the Farm Products Exception.
For the rest of us, how the Farm Products Exception works is this:
The general rule is that when you buy something in the ordinary course of business, you own it free and clear, even if your seller had granted someone a security interest in what you bought. If you walk into a hardware store and buy a wrench, you don't have to worry who Home Depot's lender is.
The rule is turned around (twice, as we'll see in future entries) for farm products. 9-320(a) provides:
a buyer in ordinary course of business, other than a person buying farm products from a person engaged in farming operations, takes free of a security interest created by the buyer's seller, even if the security interest is perfected and the buyer knows of its existence.
Thus, the general rule doesn't apply to a person buying farm products from a farmer. And, as you read it more closely, you see that if it doesn't apply to a person buying farm products from a farmer, it never applies to those farm products at all.
The easiest example is the farm stand. If you buy strawberries at a farm stand, directly from the farmer, and the farmer has a secured lender, you are buying in violation of the rights of that lender. This is just another reason to eat those farm-fresh products before you get back in your car. They taste best that way, too, of course.
But the critical language, when applied to the Farm Products Exception is "created by the buyer's seller." In the wrench example, you can usually assume that everyone in the chain of purchase, from supplier of raw materials to manufacturer to distributor to retailer, has purchased in the ordinary course of business. So when farm products are not involved, you can also assume that you took free from the lenders to each of those persons.
With farm products, your assumption is turned on its head.
Farmers have secured lenders. Essentially all of them. There may be a stray farmer out there who can support operations without borrowing, but I've never encountered one. There may be a lot of lenders who don't take the right steps to perfect their security interests (more on that in subsequent entries) but anyone dealing with farmers knows that you should assume that the farmer has a secured, perfected lender.
Returning then to the critical language, say you are a grocery store. Unless you buy from farmers directly, you are not buying farm products, you are buying inventory from a processor or wholesaler (the definition of farm products makes it clear that only farmers sell them and the moment they leave the farmer's hands, they're not farm products anymore). Since the safe harbor in 9-320(a) only applies to your direct seller ("created by the buyer's seller"), it doesn't cut off the claims of someone for whom the Farm Products Exception would have applied.
The example that is often given is the steak sizzling on your plate. The steak was cut from a cow, and the cow was farm products in the hands of the rancher, a person engaged in farming operations. The rancher sold it to someone, who sold it to a slaughterhouse, who sold it to a meat wholesaler who sold it to your local grocery store, who sold it to you. But the rancher had a secured, perfected lender, and that lender didn't get paid. As a technical matter, the rancher's lender could snatch that steak right off your plate just before you stick your knife and fork into it.
The Farm Products Exception gets tied into the Federal Food Security Act., which is often said to preempt it, but actually only constitutes additional hurdles to its application. There are also practical ways--mainly the issuance of joint checks to farmers and their lenders--by which grain elevators, processors and other buyers of farm products typically avoid complications of the Farm Products Exception. Those will be dealt with at length in subsequent entries. The Farm Products Exception has led to a lot of litigation, and in times of farm bankruptcies it becomes more and more critical for everyone to understand how it affects their rights.
Except in California. Bon appetit, Mr. Weise. As he says in the last line of his piece, "So where would we be without the UCC? Hungry!"
Article 2 of The Uniform Commercial Code. The Uniform Commercial Code ("UCC") is my Bible. So, when I read about the pain caused to businesses and charities by the peanut butter recall, I look first to the UCC to see what might be available to help.
Article 2 of the UCC covers transactions in goods. It expressly does not repeal laws on sales to consumers, nor does it change tort law. But my focus here is not on torts, it is on contract law. When a wholesaler buys tainted peanut butter paste from a factory, when a manufacturer buys that same paste from a wholesaler, when a grocer buys the products of that manufacturer directly or from another wholesaler, and when a consumer buys those products from a grocer, there is a simple contract for the sale of goods involved, and that contract is governed by Article 2. When someone is made sick from the tainted product, there is a lot of law you can refer to; Ken has blogged on it a lot and will again. But what happens in the case of a recall to parties who are, fortunately, unharmed by the tainted goods except in an economic way?
To begin with, to apply Article 2, there needs to be a sale. Sale is defined in Article 1 of the UCC (the definition is applicable to Article 2 and the whole UCC) and requires the passing of title for a price. Thus, a food bank that receives donated goods will not have any direct rights under Article 2.
A contract for sales over $500 generally requires a writing. This can be as simple as a purchase order or sales order or as elaborate as a 100-page contract for the sale of an airplane. Even an exchange of e-mails can be sufficient.
Generally, the more elaborate the contract, the more likely it is to protect sellers, not buyers. This is because Article 2 protects sellers by default. Article 2 contains what are called "gap filler" terms, which govern in the absence of express agreement otherwise. Some of the most critical of these protect buyers from exactly the kind of issues that a food recall might generate.
Express and Implied Warranties. Among the gap filler provisions are implied warranties. The UCC implied warranties include:
- A warranty of title
- A warranty against infringement (which is only given by merchants)
- A warranty of merchantability (also only given by merchants)
- A warranty of fitness for a particular purpose
In addition, sellers can give (or be deemed to have given) express warranties.
What are these warranties like and how do they work in the context of food recalls?
The warranty of title is just what you think it is, a warranty that the person selling the goods has the power to sell them to you. This is not exactly the same thing as saying the seller has full title to the goods; under certain circumstances, a buyer in the ordinary course of business can obtain better title than the seller itself has.
The warranty against infringement relates to claims about intellectual property. Food itself can be patented in some circumstances. Infringement may be a topic for another day, though, no one is likely to be claiming intellectual property rights in tainted food.
It is the last three warranties that can be critical to the question of a food recall.
As we'll see in a bit, if these warranties are made, the buyer has some powerful tools in the case of a recall. If these warranties aren't made, then the seller faces a far more favorable legal landscape.
The Warranty of Merchantability. First, the warranty of merchantability requires that goods do all of the following:
- pass without objection in the trade under the contract description; and
- in the case of fungible goods, are of fair average quality within the description; and
- are fit for the ordinary purposes for which such goods are used; and
- run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
- are adequately contained, packaged, and labeled as the agreement may require; and
- conform to the promise or affirmations of fact made on the container or label if any.
If you're a buyer of food, you immediately want all these warranties, don't you? If you buy apples, they should be apples as described by the seller, be of fair average quality, be fit for the ordinary purpose for which apples are used (cooking, eating), be of even kind, quality and quantity, be adequately packaged and labeled and conform to promises on the label (e.g., "Washington Extra Fancy").
If you're a seller of food, you're thinking, "now, wait a minute."
Apples are perishable, they can rot when they're not stored properly, they get worms in them, they get bruised, they get pushed around or dropped in transit, a certain percentage of them aren't perfect. The seller is thinking, I took all those things into consideration in setting the price of these apples, and what I don't want is the buyer to be able to come back to me and say, three apples are bad, pay up. Or worse, three apples are bad, I'm rejecting the whole batch.
So the seller says he doesn't want to make the warranty of merchantability.
The Warranty of Fitness for a Particular Purpose. What about the warranty of fitness for a particular purpose?
What it says is this:
Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.
We go through the same dance again. Imagine that you're looking to add some peanuts to a cookie dough. You call in a bunch of peanut sellers and tell them your requirements: quality, color, fat content, moisture content, etc. The peanut seller says, have I got the peanuts for you! And again the buyer is thinking, "I sure like this implied warranty of fitness for a particular purpose," while the seller is saying "I don't want to be liable if the peanuts don't make great cookies, I'm not a cookie baker."
Express Warranties. Finally, express warranties.
Here's how they come into being:
- Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
- Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
- Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
You won't be surprised to see that sellers and buyers make the same arguments about these warranties as well.
Disclaiming Warranties. Sellers argue for, and often obtain, provisions in contracts like this:
SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
The language is specific because the UCC requires that the word "merchantability" appear (unless some other phrases approved in the UCC such as "with all faults" is used), and it is in all caps and bold because the UCC requires the disclaimers to be conspicuous.
The Battle of the Forms. Section 2-207 of the UCC, the so-called "Battle of the Forms" section, is the single most litigated section of the UCC. Its revision was a central part of the abortive attempt to revise Article 2, which was not adopted in any state and was the subject of major controversy. The current version has its own problems.
What the battle of the forms covers, or tries to cover, is the situation that arises so often in commercial transactions when two parties act like they have a contract, but there is no one definitive expression of that contract. The buyer sends out a purchase order with a lot of fine print on the back; the seller sends out a sales confirmation with a lot of fine print, too. No one signs anything but the seller ships goods and the buyer pays for them and then a problem arises. What are the terms of the parties' contract?
2-207(b) is where the real difficulties with this section of Article 2 lie. It provides that "between merchants", terms in an acceptance that materially alter an offer become part of the contract unless one of three things has occurred:
- the offer expressly limits acceptance to the terms of the offer;
- they materially alter it; or
- notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
The critical issue that is covered in 2-207(c) is that a contract has in fact been formed even though the parties do not agree on all its terms.
Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.
This is, essentially, why the buyers often win in a battle of the forms. If one form says "you are making me a warranty" and the other form says "I'm not making any warranty", then the warranty clause is not a clause on which the parties agree. Since the implied warranties of Article 2 are "supplementary terms", however, the seller will be subject to them unless it can disclaim them effectvely.
Who Wins? There are three times when a buyer can complain to a seller, with a cascading series of rights and obstacles depending on where you are in the timeline.
The easiest situation is upon delivery. At the point of delivery, you have the "perfect tender" rule, which provides that if goods "fail in any respect to conform to the contract", they may be rejected. Not only that, but you may reject all of them, accept all of them, or reject any commercial unit and accept the rest. Thus, if you get a box of rotten apples in a carload, you can choose to reject them all, accept them all or reject the rotten box and keep the rest. Indeed, you can technically reject them if a single apple is rotten.
Applied to a food recall, this is again the simplest case. If the food has been recalled, it will not conform to the contract and may be rejected. Even if all warranties have been disclaimed, the delivered food would not conform to the contract because it will not, in any meaningful sense, be food.
What if delivery has occurred, but the food is recalled before it is processed, consumed or sold?
This is where the rules for revocation of acceptance may apply. In order to revoke your acceptance of goods, the following must be true:
- the non-conformity must substantially impair the value of the goods to the buyer
- it was accepted because its non-conformity was difficult to discover
- the revocation of acceptance occurs within a reasonable time of discovery of the non-conformtiy
- the revocation occurs before any substantial change in the goods
- the buyer notifies the seller
In the case of recalled food, the first requirement should be easy to satisfy, and the second would appear to be easy as well--the recalled status of food is usually not the buyer's responsibility vis-a-vis the seller. The third and fifth requirements will depend on the buyer's diligence, but ordinarily in the case of a food recall, at least a merchant buyer will tend to be relatively diligent.
The real action is in the question of whether substantial change has occurred to the goods.
Interestingly, one of the leading cases in this area involves peanuts. It held that peanuts that had been blanched were not substantially changed, and thus were eligible to have their acceptance revoked, while those that had been processed were substantially changed.
If revocation of acceptance is not available, then the action will be for breach of warranty. If the seller has made a warranty that the goods will be fit for human consumption, then it will not be difficult to make a claim for breach of warranty with respect to recalled goods. If the warranty was disclaimed, then of course the situation would be reversed.
The reality is that in the case of recalls that involve deaths, the really culpable party will, like PCA, most likely end up in bankruptcy. Everyone else in the distribution chain, from distributors of raw materials to processors to distributors of processed foods to retailers to consumers, will be essentially an innocent party seeking to find some way out of its loss. In general, whoever supplied the contract may end up with the best chance of prevailing.