AMS releases inclusive competition proposed rule under the Packers and Stockyards Act

The United States Department of Agriculture (USDA) has released a proposed rule that would expand the Agricultural Marketing Service’s (AMS’s) requirements for packers and live poultry dealers under the Packers and Stockyards Act (PSA).  Called Inclusive Competition and Market Integrity Under the Packers and Stockyards Act, the proposed rule would define certain practices that AMS considers to be undue prejudices or disadvantages, unjust discriminatory practices, or deceptive practices under Sections 202(a) and 202(b) of the PSA.  The proposed rule would prohibit various actions in dealings between live poultry dealers, packers, and swine contractors and their growers, ranchers, and producers.  The proposed rule has been released in pre-publication form.¹ Comments are due 60 days from the date the proposed rule is published in the Federal Register, which is currently scheduled for October 3, 2022.

The proposed rule is the latest installment in a three-part rulemaking announced last year and that USDA has positioned variously as promoting competition in the meat and poultry industries, addressing inflationary and supply chain pressures, and protecting livestock and poultry farmers.  Earlier this year, AMS released the first of the three promised proposed rules, which focused on increasing transparency in the poultry grower contracting process, as well as a companion advanced notice of proposed rulemaking soliciting input for further potential changes to poultry production contracting.  The just-released proposed rule addresses contracting for the raising of poultry, cattle, and hogs, with a focus on preventing perceived issues related to discrimination, retaliation, contract termination, and contract negotiation.  The proposed rule would also impose a broad recordkeeping requirement on dealers, packers, and swine contractors.  A third proposed rule remains forthcoming and is anticipated to address the need (or lack thereof) to show injury or likely injury to competition when establishing a violation of Section 202 of the PSA. 

Collectively, these actions reflect a revival of a long-running and controversial rulemaking process that originated from the 2008 Farm Bill and that has seen repeated rulemaking attempts, Congressional involvement, and litigation.  

Overview of the Proposed Rule

The proposal would establish several general prohibited practices.  The proposed rule is divided into two main components: (1) regulations addressing undue prejudices or disadvantages and unjust discriminatory practices, and (2) regulations addressing deceptive practices.  We address each in turn further below.

To simplify terminology, the proposed rule introduces two collective terms to describe the parties involved in the supply chain, which will also be used in this memo:

• Live poultry dealers, swine contractors, and packers would collectively be called “regulated entities.”
• Poultry growers, livestock producers, and swine contract growers would collectively be called “covered producers.”   

Although the proposed regulatory text does not expressly address whether there must be a showing of injury to competition to establish a violation of Sections 202(a) or 202(b) of the PSA, in the preamble discussion accompanying the proposed rule AMS in several instances expresses its view that it is not always necessary to demonstrate injury or likely injury to competition.  These statements may be a preview of AMS’s thinking behind the third (and still forthcoming) proposed rule. 

Undue Prejudices or Disadvantages and Unjust Discriminatory Practices

The proposal would add a new regulation at 9 C.F.R. § 201.304 entitled Undue Prejudices or Disadvantages and Unjust Discriminatory Practices.  This section would define prohibited bases for discrimination, identify prohibited retaliatory practices, and create recordkeeping obligations.

Prejudices, Disadvantages, and Adverse Market Actions

First, the proposed rule would prohibit a regulated entity from prejudicing, disadvantaging, inhibiting market access, or otherwise taking adverse action against a covered producer “with respect to any matter related to livestock, meats, meat food products, livestock products in unmanufactured form, or live poultry” based on the covered producer’s status as either a “market vulnerable individual” or as a cooperative. 

A “market vulnerable individual” in turn is defined as a person who is a member of or is perceived by the regulated entity as a member of “a group whose members have been subjected to, or are at heightened risk of, adverse treatment because of their identity as a member or perceived member of the group without regard to their individual qualities.”  This definition includes legal entities whose principal owners or executives would qualify as a market vulnerable individual. 

The proposal provides a non-exclusive list of conduct that would be considered a prejudice or disadvantage under this provision:

• Offering less favorable contract terms than those generally or ordinarily offered;
• Refusing to deal;
• Differing performance or enforcement of contract terms; and
• Terminating or not renewing a contract.

In the preamble discussing the proposed rule, AMS indicates that it intends the protections for “market vulnerable individuals” to “help break down barriers that may serve to exclude or disadvantage certain covered producers, while leaving room for differential treatment based on legitimate business purposes.”  AMS implies it would interpret the term broadly, identifies race, national origin, and sexual orientation (among others) as examples of factors that could make someone a market vulnerable individual, and seeks comments on whether AMS should identify specific groups or classes that would be considered market vulnerable individuals. 

AMS likewise takes a broad view toward cooperatives in the preamble discussion, indicating cooperatives can be formal or informal and would generally constitute “an association or group made up of one or more producers collectively processing, preparing for market, handling, and marketing livestock or poultry.”  AMS discusses cooperatives primarily in the context of livestock production, although the concept would also encompass poultry cooperatives.  AMS also notes that the proposal would not prohibit actions or decisions that are unrelated to whether a producer operates as a cooperative: “regulated entities may decline contracting with cooperatives for other justified economic reasons—i.e., for reasons other than the prospective business partners’ status as a cooperative.”  AMS cites as an example a situation in which the contract would not be cost effective regardless of whether the producer is operating as a cooperative.  AMS does not discuss how it would view issues such as marketing agreements, poultry grower contracts, and general supply chain logistics in the context of cooperatives, nor does AMS address how its proposal would apply to covered producers already under contract who wish to form cooperatives. 

Retaliation

Second, the proposed rule would prohibit a regulated entity from retaliating or taking an adverse action against a covered producer because of the covered producer’s participation in a list of protected activities.  Those protected activities are:

• Communicating with a government agency regarding any matter generally covered by the PSA or seeking redress before a court, legislature, or government agency;
• Asserting any PSA or contractual rights;
• Joining or forming a producer or grower association or cooperative;
• Communicating or cooperating with a person for the purposes of improving production or marketing of livestock or poultry;
• Communicating or negotiating with a regulated entity to explore business relationships (e.g., talking to a competing dealer or packer); and
• Supporting or serving as a witness in a legal proceeding involving the PSA or an alleged legal violation by a regulated entity.

The proposed rule would define retaliation non-exhaustively as

• Terminating or not renewing a contract;
• Adverse performance or enforcement of a contract that differs from others;
• Refusing to deal with the covered producer; and
• Interfering in farm real estate transactions or contracts with third parties.

In the preamble to the proposed rule, AMS expresses concerns that covered producers in some instances operate in highly concentrated local markets with little or no alternative packers or dealers available, limiting their options in the event of a dispute with a packer or dealer and exposing them to the potential for retaliatory action.  According to AMS, “a covered producer’s ability to freely participate in these [protected] activities without fear of retaliation is essential to promoting fair and competitive markets in the livestock and poultry industries.”  AMS further explains the agency chose these specific retaliatory actions “because they represent retaliatory practices that have been the most common causes for complaints or because AMS has otherwise determined them to be recurring problems in the livestock and poultry industries.” 

Recordkeeping

Third, the proposed rule would establish a broad recordkeeping requirement.  It would require that regulated entities maintain “all records relevant to its compliance with” these requirements for at least 5 years.  The proposal identifies potentially relevant records to include (without limitation) “policies and procedures, staff training materials, materials informing covered producers regarding reporting mechanisms and protections, compliance testing, board of directors’ oversight materials, and the number and nature of complaints received relevant to this section.”  The proposal does not expressly require that regulated entities create any particular records, but the emphasis on maintaining records relevant to compliance and the broad list of examples suggests AMS would view the recordkeeping requirement, and thus its records access, expansively.

AMS’s discussion of the proposal reveals a specific focus on senior executives:  “AMS believes that its recordkeeping approach will enable it to monitor and facilitate a regulated entity’s approach to compliance at the highest levels, including the tone at the top: chief executive officers and boards of directors.  The tone and compliance practices set by senior executives can be expected to play a vital role in establishing a corporate culture of compliance, which is a critical defense against legal and regulatory violations and a first step towards more inclusive market practices.”  AMS indicates that the 5-year recordkeeping timeframe is necessary to allow AMS to monitor practices over time “and to ensure that records are available for what may be complex evidentiary cases.”

Deceptive Practices

The proposed rule would add a new regulation at 9 C.F.R. § 201.306, entitled Deceptive Practices.  This section would identify several “deceptive practices” and prohibit regulated entities from engaging in those practices “with respect to any matter related to livestock, meats, meat food products, livestock products in unmanufactured form, or live poultry.”

Under the proposal, the following would be prohibited as deceptive practices:

• Using a “pretext,” false or misleading statement, or omission of material fact necessary to make a statement not false or misleading as part of:²
  • Making or modifying a contract;
  • Performing or enforcing a contract; or
  • Terminating a contract or taking other adverse action against a covered producer.³
• Providing false or misleading information to a covered producer or association of covered producers concerning a refusal to contract. 

AMS does not further define what constitutes a “pretext” or how it would determine whether an explanation in fact was a pretext.  In discussing its approach to pretexts in the preamble to the proposed rule, AMS references complaints by cattle ranchers that they have been told their cattle are not sufficient size or quality when trying to negotiate open-market purchases and complaints by growers that their contracts were terminated due to animal welfare violations.  AMS does not discuss how a regulated entity would establish that an explanation for an adverse action was not a pretext. 

In discussing false or misleading statements, AMS references practices such as “bait and switch” pricing, failing to disclose a packer lacks a required surety bond, publishing inaccurate prices, short-weighing, inaccurate grading, kickbacks, short payments, and statements by dealers that certain provisions of a grower contract would not be enforced, although AMS does not present this as an exhaustive list.    

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Comments are due 60 days from the date the proposed rule is published in the Federal Register.  Publication is currently scheduled for October 3, 2022.  

We will continue to monitor this and other Packers and Stockyards Act developments.  Please do not hesitate to contact us if you would like additional information.