Amendments to the Perishable Agricultural Commodities Act (PACA)

SUMMARY: The Department of Agriculture (USDA) is revising the

regulations (other than Rules of Practice) under the Perishable

Agricultural Commodities Act (PACA) in order to implement legislative

changes signed into law by President Clinton. Specifically, the

legislative changes grant USDA the authority to adjust future license

fees through ``notice and comment'' rulemaking; eliminate the

requirement of filing notice of intent to preserve trust benefits with

USDA in the PACA trust; require USDA to receive a written complaint

before initiating an investigation; require additional USDA

investigation notification procedures; increase administrative

penalties; establish civil penalties as an alternative to revocation or

suspension of license; continue current filing fees for formal and

informal reparation complaints; explicitly address the status of

collateral fees and expenses; clarify misbranding prohibitions; and

amend the provisions of PACA regarding the determination of responsibly

connected individuals.

EFFECTIVE DATE: April 30, 1997.

FOR FURTHER INFORMATION CONTACT: James R. Frazier, Chief, PACA Branch,

Room 2095--So. Bldg., Fruit and Vegetable Division, AMS, USDA, 1400

Independence Avenue, SW., Washington, DC 20250, Phone (202) 720-2272.

SUPPLEMENTARY INFORMATION:

Background

The PACA establishes a code of fair trading practices covering the

marketing of fresh and frozen fruits and vegetables in interstate and

foreign commerce. The PACA protects growers, shippers, distributors,

and retailers dealing in those commodities by prohibiting unfair and

fraudulent practices. In this way, the law fosters an efficient

nationwide distribution system for fresh and frozen fruits and

vegetables, benefiting the whole marketing chain from farmer to

consumer. USDA's Agricultural Marketing Service (AMS) administers and

enforces the PACA.

The PACA was amended by the Perishable Agricultural Commodities Act

Amendments of 1995 (P.L. 104-48). The regulations implementing the PACA

(other than the Rules of Practice) are published in the Code of Federal

Regulations at Title 7, Part 46 (7 CFR Part 46). A proposed rule to

amend the regulations to implement Public Law 104-48 was published in

the Federal Register on September 10, 1996. Comments on the proposed

rule were to be submitted by November 12, 1996. Twelve comments were

received from four trade associations representing growers and

shippers, three trade groups representing retailers and grocery

wholesalers, three law firms, one association representing the frozen

food industry, and one fruit and vegetable broker.

Of the twelve comments received, three addressed the collection of

renewal fees paid by grocery wholesalers and retailers licensed by USDA

after enactment of Public Law 104-48. The three commentors write that

USDA is incorrectly proposing that first-time licensed retailers and

grocery wholesalers pay renewal fees. They refer to section 499(c)(3)

of the statute designated, ``ONE-TIME FEE FOR RETAILERS AND GROCERY

WHOLESALERS THAT ARE DEALERS'', which specifies the fees to be paid by

a retailer or a grocery wholesaler making an initial application during

the phase-out period and after such period ends. The commentors

emphasize the statutory language at the end of section 499(c)(3) which

states: ``* * * a retailer or grocery wholesaler paying a fee under

this paragraph shall not be required to pay any fee for renewal of the

license for subsequent years.'' Since the commentors' interpretation of

the legislative amendment is substantially different from USDA's view

but appears to be plausible, USDA is separating section 46.6 License

Fees from the rest of the proposed regulations, and is addressing the

issue independently from this final rule to allow other interested

parties to comment. In the meantime, USDA will continue to assess

license renewal fees as provided in 7 CFR Part 46.6. Should USDA, after

notice and comment, conclude that the law excludes certain categories

of licensees from the requirement to pay regular renewal fees during

the three-year phase-out period, all such fees paid by those firms or

individuals shall be refunded with interest.

Aside from removing section 46.6 from the final rule, other changes

have been made to the regulations. The definition of ``grocery

wholesaler'' has been edited to make it more concise; however, the

meaning of the term has not been substantively changed. In addition,

the regulatory language in section 46.45 as proposed goes beyond the

explicit language provided in section 2(5) of the PACA; section 46.45

has been corrected to comply with the statute. A change to the proposed

definition of ``good faith,'' and a few other minor editorial changes

have been incorporated into the final rule for clarity. The provisions

of the proposed rule are otherwise adopted for the reasons given in the

proposal and in this document.

Comments

One commentor objects to the five percent limit on wholesale sales

that a retailer may have in a year and still be considered a retailer

under the proposed definition of a ``retailer'' in section 46.2(j). The

commentor suggests that USDA increase the limit but offered no limit

alternative.

We disagree with the commentor's assertion that the five percent

limit be increased to allow for additional wholesale transactions. The

statute defines a retailer as a person who is a dealer engaged in the

business of selling any perishable agricultural commodity at retail. A

retailer is not subject to a license under PACA until the invoice

[[Page 15084]]

cost of its produce purchases exceeds $230,000 in a calendar year. A

question may obviously be raised regarding how much non-retail business

a firm may do and still be considered a retailer under the PACA. USDA

realizes that a retailer may occasionally engage in a wholesale

transaction by making a sale to another business, and USDA believes

that when such wholesale transactions comprise a very small portion of

a retailer's business, that business should continue to be classified,

for purposes of the PACA, as a retailer. When wholesale transactions

exceed five percent, however, they constitute a substantial business

activity, and it would no longer be appropriate to consider firms with

such levels of wholesale business as being retailers. For this reason,

we are not changing the final rule based on the above comment.

One comment received suggests that the definition of ``dealer'' in

the regulations does not accurately reflect the term as defined in the

statute. The commentor stated that the regulations, as proposed, would

define a ``retailer'' as a ``dealer,'' and a ``dealer'' would be

defined to include a ``retailer,'' resulting in total circularity. USDA

believes that this analysis is not correct. Both the statute and the

proposed regulations define ``retailer'' as a dealer engaged in the

business of selling any perishable agricultural commodity at retail.

That is to say, ``retailers'' are a subset of the broader category of

``dealers.'' This distinction is important because, unlike other types

of dealers, retailers must meet the $230,000 threshold before they are

subject to the PACA. This is the meaning of the term ``retailer'' as

provided in the proposed rule. In addition, the definition of

``dealer'' in the regulations was not addressed in the proposed rule.

For this reason, we are not changing the final rule based on the above

comment.

Two commentors express concern that the regulations should define

``collateral fees'' and outline the responsibilities governing their

use. One of the commentors, Food Distributors International (FDI), a

trade association formerly known as National-American Wholesale

Grocers' Association (NAWGA)--and its foodservice partner

organization--International Foodservice Distributors Association

(IFDA), includes a petition dated April 26, 1994, to USDA requesting

that a notice and comment proceeding be undertaken in order to

formulate a statement of general policy regarding the disclosure to

customers of promotional allowances, rebates, and collateral fees. FDI

expressed concern that USDA left its petition unanswered.

At the time FDI submitted its petition, a USDA investigation was

underway involving an association member which allegedly failed to

disclose promotional allowances and rebates, which it termed collateral

fees in its cost-plus contracts. During this same period, efforts were

also underway to amend or repeal the statute. USDA concluded at the

time that any policy statement would be inappropriate.

Since then, a definition of the term ``collateral fees and

expenses'' has been added to the statute. USDA therefore believes that

no further definition of the term is warranted. Moreover, the amendment

to section 2(4) of the PACA, which states that ``* * * the good faith

offer, solicitation, payment, or receipt of collateral fees and

expenses, in and of itself, shall not be considered unlawful'' under

the PACA, codifies USDA's longstanding position on the lawfulness of

such fees under the PACA. It is the failure to disclose collateral fees

and expenses that constitutes a violation of section 2(4) of the PACA.

The ``policy statement'' or additional clarification sought by FDI

appears in this final rule at section 46.2(hh), the definition of

``good faith,'' that requires the disclosure of such fees when they

affect a material term of the agreement. Since the issues raised by the

two commentors have been addressed, both in the statutory amendment and

in this notice and comment rulemaking process, we are making no change

to the final rule.

Two other commentors expressed their concern that the proposed

regulations do not specify the method of disclosing collateral fees and

expenses between the parties to a transaction. We agree that the

regulations should specify the method for disclosing collateral fees

and expenses. Therefore, we are changing section 46.2(hh) to reflect

that a party to a transaction disclose in writing the existence of any

collateral fees and expenses to all other parties to the transaction

where the collateral fees and expenses affect a material term of the

agreement.

Five commentors raised objections to USDA's definition of ``good

faith'' in the proposed regulations. One of the commentors stated that

the definition goes far beyond the statutory language by including as

an element of ``good faith,'' the requirement that a party to a

transaction disclose the existence of collateral fees to all other

parties where the collateral fees and expenses affect a material term

of the agreement. The other four commentors stated that USDA not only

was exceeding its authority under the PACA, but also was going beyond

the definition of ``good faith'' as provided in Uniform Commercial Code

(UCC) section 2-103(b), by adding that the principal of good faith

requires affirmative disclosure.

USDA disagrees with the commentors' objections. The PACA amendments

provide that the good faith offer, solicitation, payment, or receipt of

collateral fees and expenses, is not, in itself, unlawful. The term

``good faith'' is new to the PACA and is not defined in the statute. It

was left, then, to USDA to provide the interpretation of the term as it

is used in the PACA. Although USDA is not bound by the use of the term

``good faith'' as it appears in other broad, general contexts, the

definition of ``good faith'' found in the UCC provides the foundation

for the definition in the proposed regulations. USDA, with its

definition of ``good faith'' in the regulations, clarifies what that

term means in the PACA as it relates to the offer, solicitation,

payment, or receipt of collateral fees and expenses. The definition

puts all regulated entities on notice of what action needs to be taken

so that the receipt of payments or credits of collateral fees and

expenses complies with the prohibition against false and misleading

statements in section 2(4) of the PACA. The proposed definition does

not impose any additional obligation on regulated entities that is not

already imposed under section 2(4). For these reasons, no change to the

final rule is being made based on the five comments.

One commentor suggested that a new term, ``purchaser's agent,'' and

an associated definition be added to the regulations to draw

distinctions among various types of broker operations. USDA believes

that this term and definition would be redundant. The existing

regulations distinguish between two types of broker operations. In the

first type of operation, outlined in section 46.27(a), the broker acts

as a neutral third party, conveying offers, counter offers, and

acceptances between the parties. Once the contract is formed, and a

confirmation is issued by the broker to the parties in the transaction,

the broker's duties are usually fulfilled. The second type of broker

operation, commonly referred to as a ``buying'' broker, is outlined in

section 46.27(b) of the existing regulations. A buying broker

negotiates purchases at shipping point, terminal markets, or

intermediate points, on behalf of the buyer on the buyer's instructions

and authorization. Generally, a purchase is made in the buyer's name

and the seller directly invoices the buyer. Given authorization from

the buyer, the broker may purchase the product in his or her own name,

make the loading and shipping

[[Page 15085]]

arrangements, and directly bill the buyer for the cost of the product

plus a brokerage fee and any other agreed upon service charges. Since

the regulations already include ``buying brokers,'' we believe that

adding an additional term and definition of a ``purchaser's agent'' as

described by the commentor would be confusing since such a definition

would also apply to a buying broker operation.

In addition, USDA believes that the commentor's concerns are

addressed in the proposed revision to section 46.28 which requires that

a broker identify on the confirmation or memorandum of sale the party

who engaged the broker in the transaction. As we stated in the preamble

to the proposed rule, this change is intended to recognize that a

broker may not be a neutral party when he or she is engaged by, and

thus, may have a closer relationship with, one of the parties to the

contract. Under the above circumstances, we are making no change to the

final rule based on this comment.

A commentor opposed as unfair the proposed revision to section

46.27 which states that the broker is not the proper party to whom

notice of a breach or of a rejection should be directed. In response,

we note that the proposed language does not specify that the broker to

a transaction is not to be notified of a breach or of a rejection. We

merely point out that the broker is not to be the primary party to whom

such notice should be given. Under usual circumstances, a broker

negotiates a contract as a third party and once a contract is formed

has no authority to modify that contract. Since time is critical when

dealing in perishable agricultural commodities, the parties to the

contract, that is, the seller and the purchaser, should be in direct

communication regarding any breach or rejection. If, however, a party

does notify the broker of a breach or rejection, the broker must notify

the other party to the contract. We are making no change to the final

rule based on this comment.

The same commentor also opposed the proposed revision to section

46.28 which establishes the presumption that a broker is acting on

behalf of the buyer if the confirmation or memorandum of sale fails to

disclose the party who engaged the broker in the transaction. The

commentor stated that the presumption is not logical, and furthermore,

there is no basis for this change in the 1995 PACA amendments or in the

PACA Industry Advisory Committee Reports. The commentor further argues

that if any presumption is to be made, it should be presumed that the

broker acts on behalf of the seller since any payment to the broker by

necessity reduces the net return to the seller, thus, the seller pays

the brokerage.

The House of Representatives Agriculture Committee suggested that

USDA revise the regulations which cover the duties and responsibilities

of fruit and vegetable brokers to accurately reflect the increased role

of brokers as agents of purchasers. The proposed revision to the

regulation reflects the reality that increasingly the broker is engaged

by the buyer to locate product or products and facilitate their

purchase. As we stated in the preamble to the proposed rule, this

change is intended to recognize that a broker may not be a neutral

party when he or she is engaged by, and thus, may have a closer

relationship with, one of the parties to the contract. The presumption,

of course, would no longer apply in those instances when the broker

identifies in the confirmation or memorandum of sale or other document

the party on whose behalf it is negotiating. Even when there is no such

declaration, the presumption that the broker was acting on behalf of

the buyer, may be rebutted by proof that the broker was engaged by the

shipper or other entity. For this reason, we are making no change to

the final rule based on this comment.

We received two comments addressing the proposed revision to the

paragraph of section 46.45 regarding the misrepresentation and/or

misbranding of produce. The commentors stated that in some instances

the first licensed handler may not be in a position to determine that

the produce at issue was misbranded or misrepresented. They requested

that the rule be modified to allow the first licensed handler of

misbranded or misrepresented produce the opportunity to provide

evidence of lack of knowledge of a misbranding violation to prevent any

instances where the first licensed handler could be put in a

competitive disadvantage in the marketplace.

The statute states that it is unlawful for any person to

misrepresent product that is received, shipped, sold, or offered to be

sold in interstate or foreign commerce. The statute and the proposed

regulation state that a person other than the first licensee handling

misbranded perishable agricultural commodities shall not be held liable

for a violation of the PACA by reason of the conduct of another party

if the person did not know of the violation or lacked the ability to

correct the violation. The law assigns misbranding liability to the

first licensed entity in the transaction to ensure that some licensed

entity will be accountable. Hence, the first licensee handling the

product is responsible for identifying any misbranding problem with the

product in question, and for ensuring that the produce is brought into

compliance before being shipped, sold, or offered for sale to another

party.

A comment was received suggesting that the definition of

``reasonable time'' in the regulations be revised so that acceptance

occurs when the seller transfers custody and control to the buyer. The

commentor stated that receivers are currently at no risk and may have

an incentive to delay calls for inspections on products that were

within grade at arrival but deteriorate between arrival time and the

time of inspection, outside of the custody and control of the seller.

Although this issue was not addressed in the proposed rule or the

amended statute, USDA disagrees with the commentor's reasoning that a

receiver has an incentive to delay a call for an inspection given the

current definition of ``reasonable time'' in the regulations. In order

to reject product shipped by truck, the regulations at section 46.2(cc)

now require the receiver to call for an inspection within eight hours

after being notified of the product's arrival and availability for

inspection. If the receiver delays calling for the inspection, and the

inspection that is finally performed reflects deterioration of the

produce that exceeds normal deterioration, the receiver may be held

liable for the full contract price of the product as the receiver has

no proof of the condition of the product when it was first delivered.

Given that the shipper of product in an FOB sale is responsible for

loading or shipping product in suitable shipping condition, USDA

believes that the eight hour window a receiver has to apply for an

inspection is reasonable. Furthermore, this comment raises an issue

which was not addressed in the proposed rule, and, therefore goes

beyond the scope of this rulemaking.

One commentor suggested that the regulations be expanded to include

provisions to allow USDA to implement procedures to prevent the

dissipation of assets. This comment raises an issue which was not

addressed in the proposed rule, and, therefore goes beyond the scope of

this rulemaking.

One commentor suggested that USDA use its rulemaking authority to

eliminate license fees for food service distributors. Since USDA has no

authority to exempt by regulation any segment of the industry from

paying license fees, we are making no changes to the final rule based

on this comment.

[[Page 15086]]

Another commentor recommended that USDA use its rulemaking

authority and initiate multi-year licensing. The amended statute

directs the Secretary to take into account savings to the program when

determining an appropriate interval for the renewal of licenses. USDA

is currently studying the administrative implications of such changes

and is not yet prepared to initiate a multi-year licensing program. We

are therefore making no changes to this final rule based on the above

comment.

In preparing to finalize the proposed rule, USDA determined that

changes to the regulatory language in section 46.2(ii) and section

46.45 are needed.

USDA determined that the definition of ``grocery wholesaler'' in

section 46.2(ii) of the proposed rule could be more succinctly stated

without altering the meaning. USDA concluded that numbered paragraphs

and some of the wording were unnecessary to state the criteria that a

dealer must meet in order to be considered a ``grocery wholesaler.''

USDA believes that the definition in the final rule is clearer and more

straightforward, while it does not change the substance of the

definition.

USDA noticed that the regulatory language in section 46.45 of the

proposed rule goes beyond the explicit language of the amended statute.

In part, the proposed rule states the following: ``* * * a person other

than the first licensee handling misbranded perishable agricultural

commodities shall not be held liable for a violation of the Act by

reason of another if the person did not have knowledge of the violation

or lacked the ability to correct the violation.'' However, the

amendment to Section 2(5) of the PACA provides that ``* * * a person

other than the first licensee handling misbranded perishable

agricultural commodities shall not be held liable for a violation of

this paragraph by reason of the conduct of another if the person did

not have knowledge of the violation or lacked the ability to correct

the violation.'' The proposed regulation inadvertently broadened the

scope of the statutory language. Therefore, a change in the final rule

was required to conform the regulatory language with the statutory

language. Section 46.45 has been amended to read as follows: ``* * * a

person other than the first licensee handling misbranded perishable

agricultural commodities shall not be held liable for a violation of

section 2(5) of the Act by reason of the conduct of another if the

person did not have knowledge of the violation or lacked the ability to

correct the violation.''

In the final rule, USDA has deleted the superfluous phrase ``the

term'' which appeared at the beginning of each definition in section

46.2 in the proposed rule.

Executive Orders 12866 and 12988

This final rule is issued under the Perishable Agricultural

Commodities Act (7 U.S.C. 499 et seq.), as amended. USDA is issuing

this final rule in conformance with Executive Order 12866.

This final rule has been reviewed under Executive Order 12988,

Civil Justice Reform. It is not intended to have retroactive effect.

The final rule will not preempt any State or local laws, regulations,

or policies, unless they present an irreconcilable conflict with this

rule. There are no administrative procedures which must be exhausted

prior to any judicial challenge to the provisions of this rule.

Regulatory Flexibility Act

Pursuant to requirements set forth in the Regulatory Flexibility

Act (RFA) (5 U.S.C. 601 et seq.), USDA has considered the economic

impact of this proposed rule on small entities. The purpose of the RFA

is to fit regulatory actions to the scale of businesses subject to such

actions in order that small businesses will not be unduly or

disproportionately burdened. Small agricultural service firms have been

defined by the Small Business Administration (13 CFR 121.601) as those

whose annual receipts are less than $5,000,000. The PACA requires that

wholesalers, processors, food service companies, grocery wholesalers,

and truckers be considered dealers and subject to a license when they

buy or sell more than 2,000 pounds of fresh and/or frozen fruits and

vegetables in any given day. A retailer is considered to be a dealer

and subject to license when the invoice cost of its perishable

agricultural commodities exceeds $230,000 in a calendar year. Brokers

negotiating the sale of frozen fruits and vegetables on behalf of the

seller are also exempt from licensing when the invoice value of the

transactions is below $230,000 in any calendar year.

There are approximately 15,700 PACA licensees. Separating licensees

by the nature of business, there are approximately 6,000 wholesalers,

4,750 retailers, 2,100 brokers, 1,200 processors, 550 commission

merchants, 450 food service businesses, 150 grocery wholesalers, and 50

truckers licensed under PACA. The license is effective for 1 year

unless suspended or revoked by USDA for valid reasons [46.9 (a)-(h)],

and must be renewed annually by the licensee. Many of the licensees may

be classified as small entities.

A compliance guide which highlights the 1995 PACA legislation, and

a general compliance guide entitled ``PACA Fact Finder'' which explains

the rights and responsibilities of firms operating subject to the

provisions of the PACA, are available to all licensees, including small

businesses. Beginning in April 1997, USDA will send information

regarding the PACA to all licensees when processing annual license

renewals.

Accordingly, based on the information and the above discussion, it

is determined that the provisions of this rule would not have a

significant economic impact on a substantial number of small entities.

Paperwork Reduction Act

In compliance with Office of Management and Budget (OMB)

regulations (5 CFR part 1320) which implement the Paperwork Reduction

Act of 1995 (Pub. L. 104-13), the information collection and

recordkeeping requirements covered by this proposed rule were approved

by OMB on October 31, 1996, and expire on October 31, 1999.

List of Subjects in 7 CFR Part 46

Agricultural commodities, Brokers, Penalties, Reporting and

recordkeeping requirements.

For the reasons set forth in the preamble, 7 CFR part 46 is amended

as follows:

PART 46--[AMENDED]

1. The authority citation for part 46 continues to read as follows:

Authority: Sec. 15, 46 Stat. 537; 7 U.S.C. 499o.

2. In Sec. 46.2, paragraph (j) is revised and two new paragraphs

(hh) and (ii) are added to read as follows:

Sec. 46.2 Definitions.

* * * * *

(j) Retailer is a dealer engaged in the business of selling any

perishable agricultural commodity at retail; Provided, That occasional

sales at wholesale shall not be deemed to remove a dealer from the

category of retailer if less than 5 percent of annual gross sales is

derived from wholesale transactions.

* * * * *

(hh) Good faith means honesty in fact and the observance of

reasonable commercial standards of fair dealing in the trade. The

principle of good faith requires that a party to a transaction disclose

in writing the existence of any

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collateral fees and expenses to all other parties to the transaction

where the collateral fees and expenses affect a material term of the

agreement.

(ii) Grocery wholesaler is a dealer primarily engaged in the full-

line wholesale distribution and resale of grocery and related nonfood

items (such as perishable agricultural commodities, dry groceries,

general merchandise, meat, poultry, and seafood, and health and beauty

care items) to retailers. This term does not include persons primarily

engaged in the wholesale distribution and resale of perishable

agricultural commodities rather than other grocery and related nonfood

items. Specifically, for an entity to be considered a grocery

wholesaler, 50 percent or more of its annual gross sales must be from

the full-line distribution and resale of grocery and related nonfood

items, and it cannot have more than 50 percent of its sales in

perishable agricultural commodities. ``Full line'' means that an entity

must be supplying the retailer with a wide range of products such as

the grocery and related nonfood items specified.

3. In Sec. 46.9, paragraph (i) is revised to read as follows:

Sec. 46.9 Termination, suspension, revocation, cancellation of

licenses; notices; renewal.

* * * * *

(i) Under section 4(a) of the Act, at least 30 days prior to the

anniversary date of a valid and effective license, the Director shall

mail a notice to the licensee at the last known address advising that

the license will automatically terminate on its anniversary date unless

an application for renewal is filed supplying all information requested

on a form to be supplied by the Division, and unless the renewal fee

(if any is applicable) is paid on or before such date. If the renewal

application is not filed and/or the renewal fee (if required) is not

paid by the anniversary date, the licensee may obtain a renewal of that

license at any time within 30 days by submitting the required renewal

application and/or paying the renewal fee (if required), plus $50.

Within 60 days after the termination date of a valid and effective

license, the former licensee shall be notified of such termination,

unless a new license has been obtained in the meantime.

4. Section 46.10 is revised to read as follows:

Sec. 46.10 Nonlicensed person; liability; penalty.

Any commission merchant, dealer, or broker who violates the Act by

engaging in business subject to the Act without a license may settle

its liability, if such violation is found by the Director not to have

been willful but due to inadvertence, by submitting the required

application and paying the amount of fees that it would have paid had

it obtained and maintained a license during the period that it engaged

in business subject to the Act, plus an additional sum not in excess of

two hundred and fifty dollars ($250) as may be determined by the

Director.

5. Sec. 46.17 is revised to read as follows:

Sec. 46.17 Inspection of records.

(a) Each licensee shall, during ordinary business hours, promptly

upon request, permit any duly authorized representative of USDA to

enter its place of business and inspect such accounts, records, and

memoranda as may be material:

(1) In the investigation of complaints under the Act, including any

petition, written notification, or complaint under section 6 of the

Act,

(2) To the determination of ownership, control, packer, or State,

country, or region of origin in connection with commodity inspections,

(3) To ascertain whether there is compliance with section 9 of the

Act,

(4) In administering the licensing and bonding provisions of the

Act,

(5) If the licensee has been determined in a formal disciplinary

proceeding to have violated the prompt payment provision of section

2(4) of the Act, to determine whether, at the time of the inspection,

there is compliance with that section.

(b) Any necessary facilities for such inspection shall be extended

to such representative by the licensee, its agents, and employees.

6. In Sec. 46.27, paragraph (a) is revised to read as follows:

Sec. 46.27 Types of broker operations.

(a) Brokers carry on their business operations in several different

ways and are generally classified by their method of operation. The

following are some of the broad groupings by method of operation. The

usual operation of brokers consists of the negotiation of the purchase

and sale of produce either of one commodity or of several commodities.

A broker is usually engaged by only one of the parties, but in

negotiating a contract the broker acts as a special agent of first one

and then the other party in conveying offers, counter offers, and

acceptances between the parties. Once the contract is formed, and the

confirmation issued, the broker's duties are usually ended, and the

broker is not the proper party to whom notice of breach or of rejection

should be directed. However, a broker receiving notice has a duty to

promptly convey the notice to the proper party. Frequently, brokers

never see the produce they are quoting for sale or negotiating for

purchase by the buyer, and they carry out their duties by conveying

information received from the parties between the buyer and seller

until a contract is effected. Generally, the seller of the produce

invoices the buyer, however, when there is a specific agreement between

the broker and its principal, the seller invoices the broker who, in

turn, invoices the buyer, collects, and remits to the seller. Under

other types of agreements, the seller ships the produce to pool buyers,

and the broker as an accommodation to the seller invoices the buyers,

collects, and remits to the seller. Also, there are times when the

broker is authorized by the seller to act much like a commission

merchant, being given blanket authority to dispose of the produce for

the seller's account either by negotiation of sales to buyers not known

to the seller or by placing the produce for sale on consignment with

receivers in the terminal markets.

* * * * *

7. In section 46.28, paragraph (a) is revised to read as follows:

Sec. 46.28 Duties of brokers.

(a) General. The function of a broker is to facilitate good faith

negotiations between parties which lead to valid and binding contracts.

A broker who fails to perform any specification or duty, express or

implied, in connection with any transaction is in violation of the Act,

is subject to the penalties specified in the Act, and may be held

liable for damages which accrue as a result of the violation. It shall

be the duty of the broker to fully inform the parties concerning all

proposed terms and conditions of the proposed contract. After all

parties agree on the terms and the contract is effected, the broker

shall prepare in writing and deliver promptly to all parties a properly

executed confirmation or memorandum of sale setting forth truly and

correctly all of the essential details of the agreement between the

parties, including any express agreement as to the time when payment is

due. The confirmation or memorandum of sale shall also identify the

party who engaged the broker to act in the negotiations. If the

confirmation or memorandum of sale does not contain such information,

the broker shall be presumed to have been engaged by the buyer. Brokers

do not normally act as general agents of either party, and will not be

presumed to have so acted.

[[Page 15088]]

Unless otherwise agreed and confirmed, the broker will be entitled to

payment of brokerage fees from the party by whom it was engaged to act

as broker. The broker shall retain a copy of such confirmations or

memoranda as part of its accounts and records. The broker who does not

prepare these documents and retain copies in its files is failing to

prepare and maintain complete and correct records as required by the

Act. The broker who does not deliver copies of these documents to all

parties involved in the transaction is failing to perform its duties as

a broker. A broker who issues a confirmation or memorandum of sale

containing false or misleading statements shall be deemed to have

committed a violation of section 2 of the Act. If the broker's records

do not support its contentions that a binding contract was made with

proper notice to the parties, the broker may be held liable for any

loss or damage resulting from such negligence, or for other penalties

provided by the Act for failing to perform its express or implied

duties. The broker shall take into consideration the time of delivery

of the shipment involved in the contract, and all other circumstances

of the transaction, in selecting the proper method for transmitting the

written confirmation or memorandum of sale to the parties. A buying

broker is required to truly and correctly account to its principal in

accordance with Sec. 46.2(y)(3). The broker should advise the

appropriate party promptly when any notice of rejection or breach is

received, or of any other unforeseen development of which it is

informed.

* * * * *

8. In Sec. 46.45, the introductory text is revised to read as

follows:

Sec. 46.45 Procedures in administering section 2(5) of the Act.

It is a violation of section 2(5) for a commission merchant,

dealer, or broker to misrepresent by word, act, mark, stencil, label,

statement, or deed, the character, kind, grade, quality, quantity,

size, pack, weight, condition, degree, or maturity, or State, country,

region of origin of any perishable agricultural commodity received,

shipped, sold, or offered to be sold in interstate or foreign commerce.

However, a person other than the first licensee handling misbranded

perishable agricultural commodities shall not be held liable for a

violation of section 2(5) of the Act by reason of the conduct of

another if the person did not have knowledge of the violation or lacked

the ability to correct the violation.

* * * * *

9. In Sec. 46.46, paragraph (a) is removed, paragraphs (b) through

(g) are redesignated as paragraphs (a) through (f), and newly

designated paragraphs (c), (e)(2), and (f) are revised to read as

follows:

Sec. 46.46 Statutory trust.

* * * * *

(c) Trust benefits. (1) When a seller, supplier or agent who has

met the eligibility requirements of paragraphs (e) (1) and (2) of this

section, transfers ownership, possession, or control of goods to a

commission merchant, dealer, or broker, it automatically becomes

eligible to participate in the trust. Participants who preserve their

rights to benefits in accordance with paragraph (f) of this section

remain beneficiaries until they are paid in full.

(2) Any licensee, or person subject to license, who has a fiduciary

duty to collect funds resulting from the sale or consignment of

produce, and remit such funds to its principal, also has the duty to

preserve its principal's rights to trust benefits in accordance with

paragraph (f) of this section. The responsibility for filing the notice

to preserve the principal's rights is obligatory and cannot be avoided

by the agent by means of a contract provision. Persons acting as agents

also have the responsibility to negotiate contracts which entitle their

principals to the protection of the trust provisions: Provided, That a

principal may elect to waive its right to trust protection. To be

effective, the waiver must be in writing and separate and distinct from

any agency contract, must be signed by the principal prior to the time

affected transactions occur, must clearly state the principal's intent

to waive its right to become a trust beneficiary on a given

transaction, or a series of transactions, and must include the date the

agent's authority to act on the principal's behalf expires. In the

event an agent having a fiduciary duty to collect funds resulting from

the sale or consignment of produce and remit such funds to its

principal fails to perform the duty of preserving its principal's

rights to trust benefits, it may be held liable to the principal for

damages. A principal employing a collect and remit agent must preserve

its rights to trust benefits against such agent by filing appropriate

notices with the agent.

(e) Prompt payment and eligibility for trust benefits.

* * * * *

(2) The maximum time for payment for a shipment to which a seller,

supplier, or agent can agree and still qualify for coverage under the

trust is 30 days after receipt and acceptance of the commodities as

defined in Sec. 46.2(dd) and paragraph (a)(1) of this section.

* * * * *

(f) Filing notice of intent to preserve trust benefits. (1) Notice

of intent to preserve benefits under the trust must be in writing, must

include the statement that it is a notice of intent to preserve trust

benefits and must include information which establishes for each

shipment:

(i) The names and addresses of the trust beneficiary, seller-

supplier, commission merchant, or agent and the debtor, as applicable,

(ii) The date of the transaction, commodity, invoice price, and

terms of payment (if appropriate),

(iii) The date of receipt of notice that a payment instrument has

been dishonored (if appropriate), and

(iv) The amount past due and unpaid.

(2) Timely filing of a notice of intent to preserve benefits under

the trust will be considered to have been made if written notice is

given to the debtor within 30 calendar days:

(i) After expiration of the time prescribed by which payment must

be made pursuant to regulation,

(ii) After expiration of such other time by which payment must be

made as the parties have expressly agreed to in writing before entering

into the transaction, but not longer than the time prescribed in

paragraph (e)(2) of this section, or

(iii) After the time the supplier, seller or agent has received

notice that a payment instrument promptly presented for payment has

been dishonored. Failures to pay within the time periods set forth in

paragraphs (f)(2)(i) and (ii) of this section constitute defaults.

(3) Licensees may chose an alternate method of preserving trust

benefits from the requirements described in paragraphs (f) (1) and (2)

of this section. Licensees may use their invoice or other billing

statement to preserve trust benefits. The alternative method requires

that the licensee's invoice or other billing statement, given to the

debtor, contain:

(i) The statement: ``The perishable agricultural commodities listed

on this invoice are sold subject to the statutory trust authorized by

section 5(c) of the Perishable Agricultural Commodities Act, 1930 (7

U.S.C. 499e(c)). The seller of these commodities retains a trust claim

over these commodities, all inventories of food or other products

derived from these commodities, and any receivables or proceeds from

the sale of these commodities until full payment is received.''; and

[[Page 15089]]

(ii) The terms of payment if they differ from prompt payment set

out in section 46.2(z) and (aa) of this part, and the parties have

expressly agreed to such terms in writing before the affected

transactions occur.

10. A new Sec. 46.49 is added to read as follows:

Sec. 46.49 Written notifications and complaints.

(a) Written notification, as used in section 6(b) of the Act,

means:

(1) Any written statement reporting or complaining of a PACA

violation(s) filed by any officer or agency of any State or Territory

having jurisdiction over licensees or persons subject to license, or

any other interested person who has knowledge of or information

regarding a possible violation, other than an employee of an agency of

USDA administering this Act or a person filing a complaint under

Section 6(c);

(2) Any written notice of intent to preserve the benefits of the

trust established under section 5 of this Act; or

(3) Any official certificate(s) of the United States Government or

States or Territories of the United States.

(b) Any written notification may be filed by delivering it to any

office of USDA or any official thereof responsible for administering

the Act. A written notification which is so filed, or any expansion of

an investigation resulting from any indication of additional further

violations of the Act found as a consequence of an investigation based

on written notification or complaint, shall also be deemed to

constitute a complaint under section 13(a) of this Act.

(c) Upon becoming aware of a complaint under Section 6(a) or 6(b)

of this Act, the Secretary will determine if reasonable grounds exist

for an investigation of such complaint for disciplinary action. If the

investigation substantiates the existence of violations, a formal

disciplinary complaint may be filed by the Secretary as described under

Section 6(c)(2) of the Act.

(d) Whenever an investigation, initiated as a result of a written

notification or complaint under Section 6(b) of the Act, is commenced,

or expanded to include new violations, notice shall be given by the

Secretary to the subject of the investigation within thirty (30) days

of the commencement or expansion of the investigation. Within one

hundred and eighty (180) days after giving initial notice, the

Secretary shall provide the subject of the investigation with notice of

the status of the investigation, including whether the Secretary

intends to issue a complaint under Section 6(c)(2) of this Act,

terminate the investigation, or continue or expand the investigation.

Thereafter, the subject of the investigation may request in writing, no

more frequently than every ninety (90) days, a status report from the

Chief of the PACA Branch who shall respond thereto within fourteen (14)

days of receiving the request. When an investigation is terminated, the

Secretary shall, within fourteen (14) days, notify the subject of the

investigation of the termination. In every case in which notice or

response is required under this subsection such notice or response

shall be accomplished by personal service or by posting the notice or

response by certified mail to the last known address of the subject of

the investigation.

Dated: March 21, 1997.

Eric M. Forman,

Acting Director, Fruit and Vegetable Division.

[FR Doc. 97-7807 Filed 3-28-97; 8:45 am]

BILLING CODE 3410-02-P