[Federal Register: November 8, 2006 (Volume 71, Number 216)]
[Proposed Rules]
[Page 65426-65430]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08no06-18]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
[[Page 65426]]
DEPARTMENT OF AGRICULTURE
Agricultural Marketing Service
7 CFR Part 46
[Docket Number FV05-373]
RIN 0581-AC53
Amendments to Regulations Under the Perishable Agricultural
Commodities Act (PACA) To Ensure Trust Protection for Produce Sellers
When Using Electronic Invoicing or Other Billing Statements
AGENCY: Agricultural Marketing Service, USDA.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Department of Agriculture (USDA) is proposing to amend the
regulations under the Perishable Agricultural Commodities Act (PACA) to
ensure that the status of sellers of perishable agricultural
commodities as trust creditors is protected when electronic data
interchange (EDI) or other forms of electronic commerce are used to
invoice buyers. Specifically, the proposed amendments would require a
buyer licensed under the PACA or his third party representative to
accept the PACA trust notice submitted to it by a seller on a paper,
electronic invoice, or other billing statement. In addition, the buyer
must allow sufficient data space for the required trust language
regardless of the billing medium. Finally, any failure, act or omission
inconsistent with this responsibility is unlawful and a violation of
the PACA. Comments are being sought from the public, but in particular,
from buyers and sellers of fruit and vegetables and vendors/software
developers of electronic billing systems.
DATES: Written or electronic comments received by January 8, 2007 will
be considered prior to issuance of a final rule.
ADDRESSES: You may submit written or electronic comments to:
(1) PACA Trust Comments, AMS, F&V Programs, PACA Branch, 1400
Independence Avenue, SW., Room 2095-S, Stop 0242, Washington, DC 20250-
0242
(2) Fax: 202-720-8868.
(3) E-mail comments to Dexter.Thomas@usda.gov.
(4) Internet: http://www.regulations.gov.
Instructions: All comments will become a matter of public record
and should be identified as ``PACA Trust Comments.'' Comments will be
available for public inspection at the Agricultural Marketing Service
at the above address or over the Agency's Web site at: http://www.ams.usda.gov/paca.
Web site questions can be addressed to the PACA Webmaster, Dexter.Thomas@usda.gov..
FOR FURTHER INFORMATION CONTACT: Karla Whalen, Section Head, Trade
Practices Section, or Phyllis Hall, Senior Marketing Specialist, Trade
Practices Section, 202-720-6873.
SUPPLEMENTARY INFORMATION:
Background of PACA and Trust Provisions
The Perishable Agricultural Commodities Act (PACA) establishes a
code of fair trading practices in 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 trade practices.
The law also provides a forum to adjudicate or mediate commercial
disputes. Licensees who violate the PACA may have their license
suspended or revoked, and principals of such a licensee are restricted
from employment or operating in the produce industry for a period of
time.
The PACA also imposes a statutory trust for the benefit of unpaid
suppliers or sellers on perishable agricultural commodities received
and accepted but not yet paid for, and may encumber products derived
from those commodities, and any receivables or proceeds due from the
sale of those commodities or products. USDA's Agricultural Marketing
Service (AMS) administers and enforces the PACA.
In the case of a business failure or bankruptcy of an entity
subject to PACA, the debtor's inventory and receivables (PACA trust
assets) are not property of the estate and are not available for
general distribution until the claims of PACA creditors who have
preserved their trust rights have been satisfied. Because of the
statutory trust provision, PACA trust creditors who have preserved
their trust rights with the appropriate written notices, including
sellers outside of the United States, have a far greater chance of
recovering the money owed to them should an entity subject to PACA go
out of business. The PACA trust provisions protect producers and the
majority of firms trading in fruits and vegetables as each buyer of
perishable agricultural commodities in the marketing chain becomes a
seller in its own turn.
In 1995, the PACA was amended to provide that licensed sellers of
fresh and frozen fruits and vegetables may provide notice to buyers of
their intention to preserve trust benefits by including specific
language on invoice and billing documentation. The required language
reads: ``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.'' (7 U.S.C.
499e(c)(4)).
Amendment of PACA Regulations To Allow for Electronic Invoicing
The PACA regulations (7 CFR 46.46(a)(5)) were amended in 1997 to
state that electronic transmissions are considered ``ordinary and usual
billing and invoicing statements'' within the meaning of Section
5(c)(4) of the PACA. Under current regulations, unpaid PACA licensed
sellers or suppliers of fresh and frozen fruits and vegetables may
provide notice to buyers of their intention to preserve their trust
rights by including the specified language contained in Section 5(c)(4)
of the PACA on their billing or invoice statements, whether paper
documentation or electronic transmissions. Alternatively, as provided
in the PACA and regulations, sellers (licensed or non-licensed) may
satisfy the notice requirement by
[[Page 65427]]
sending the buyer a separate detailed notice of their intent to
preserve trust benefits within thirty (30) days of payment default.
Whichever method of notice is used to preserve trust benefits, in order
to claim the benefit of the trust, payment terms may not exceed 30 days
from date of acceptance.
Since the amendment to the regulations, a number of produce sellers
have voiced concern that their PACA trust rights may not be preserved
if: (1) The buyer/buyer's agent either willfully or through oversight
does not receive the entire electronic transmission (i.e., electronic
invoice); (2) the buyer/buyer's agent does not download the trust
information; (3) the buyer/buyer's agent does not opt to receive the
information; (4) the buyer/buyer's agent does not buy the data field
that allows the inclusion of the trust language; or (5) the EDI service
provider does not translate the field that contains the trust language.
Additional concerns have been expressed that the alternate method of
trust notice (i.e., separate trust notice letter) is not being accepted
by some buyers who require electronic invoicing. Others in the industry
have expressed concern about being charged a fee by the buyer to accept
the notice to preserve their trust benefits with an electronic invoice,
a paper invoice, or separate trust notice.
Advanced Notice of Proposed Rulemaking
AMS published an Advanced Notice of Proposed Rulemaking in the
Federal Register on January 30, 2006, (71 FR 4831) seeking comments on
whether, and if so, how to amend the PACA regulations to address
industry concerns regarding electronic invoicing. The Advance Notice of
Proposed Rulemaking invited comments on: (1) The types of problems that
may need to be addressed by new regulatory language; (2) any
technological barriers and solutions; (3) any additional costs likely
to be associated with appropriate regulations, and opinions regarding
who should bear such costs; (4) whether the Agency should by regulation
define electronic invoicing methods that must be made available by
licensed buyers, (e.g., creating a separate field for trust notice
language in electronic invoices); (5) whether buyers should be required
to accept separate notices (i.e., electronic or paper PACA trust)
without restriction or charge; and (6) other related issues and
suggestions. The comment period ended on March 16, 2006.
Discussion of Comments
During the comment period, AMS received 65 comments. Sixty-two
comments favor amending the regulations to clarify electronic invoicing
practices so that sellers have the same protection when using
electronic invoicing as that afforded through traditional paper
invoices. Two comments suggest creating a blanket trust notice. One
comment did not believe that regulatory action was necessary. The major
subject areas of these comments are discussed below.
Modifying Regulations Necessary To Preserve Trust Protection
Of the sixty-two comments in favor of amending the regulations,
fifty-one comments were basically identical in form and substance.
These comments were submitted by growers/shippers of fresh fruits and
vegetables. They encourage AMS to amend the regulations to clarify that
shippers have the same statutory trust protections when invoicing
electronically as when invoicing using traditional paper invoices.
Comments also state that the regulations need to be changed to adapt to
evolving industry practices and provide protection to shippers when
invoicing electronically. These commentors did not give suggestions on
how to modify the regulations.
There has been uncertainty industry-wide about electronic billing
and the assurance of statutory trust protection. The 1997 amendment to
the PACA regulations serves to accommodate changes in the marketplace
as well as advances in technology. However, the industry has continued
to express concern about the potential danger that a notice seeking to
perfect trust rights may not be effective if the shipper/seller is
invoicing electronically. There is strong industry support for changing
the regulations to eliminate this perceived risk and to avoid a
potential challenge to trust protection in light of recent produce
company bankruptcies in the tens of millions of dollars. AMS agrees
with the commentors that the regulations should be modified to clarify
that shippers are provided the same statutory trust protection whether
they invoice electronically or use paper documentation and to ensure
that buyers/receivers do not hinder the sellers' claim of trust
protection.
Mandatory Acceptance of Trust Language
Another issue addressed by a number of commentors is whether the
buyer must be required to accept, or should be deemed to have accepted
the trust language in its electronic transactions. Comments from fifty-
one growers/shippers of fresh fruit and vegetables support modifying
the regulations so that it is mandatory and not discretionary for a
buyer to accept the trust notifications received from its sellers.
Specific comments are detailed below.
One trade association supports modifying the regulations to protect
sellers who invoice electronically and to allow coverage under the
trust on all electronic transmissions. This commentor further states
that it should be mandatory, not discretionary, for the buyer to accept
the notice to preserve trust benefits whether received on paper or
electronically.
One trade association believes that any new regulation should
ensure that the trust protection language included on an electronic
invoice be considered as accepted whether or not the customer or a
third party service provider elects to receive, relay or download such
language and that all of the seller's electronic invoices to its
customer shall be subject to trust protection. This commentor believes
a new regulation need only establish a mechanism for the seller to
notify the buyer of its intent to preserve its trust rights.
Another trade association explains that a seller cannot be sure the
trust notice transmits to the buyer when using electronic invoices
because some buyers have expressed a desire to avoid including the
required language in the electronic billing format. This commentor
states that the PACA requires growers' agents to preserve trust
benefits but that they are confronted with billing systems that fail to
provide assurance of the transmission of the trust notice.
One shipper maintains that its buyers require it to exclusively
invoice electronically and will not accept paper invoices. This
commentor believes the trust language is being dropped or excluded at
the buyer's discretion from the electronic invoice program.
One law firm explains that while current PACA regulations provide
that sellers can preserve their trust rights by including the trust
language on their electronic invoices, some purchasers are not allowing
a field for the trust language in their electronic format. This
commentor further explains that a few buyers are not allowing the
sellers to send any paper documentation related to the sales and are
charging the sellers a fee if paper documents are sent, thus inhibiting
the sellers from preserving their trust rights.
Finally, one trade association noted that the intent of Congress
when
[[Page 65428]]
creating the PACA trust was to protect the sellers of produce.
We agree that the PACA requires any buyer operating subject to the
Act to accept the trust notifications received from its seller/supplier
whether they be in paper or electronic format. However, the seller must
meet the statute's requirements for preserving its trust benefit,
including using the specific language required by the statute. If
invoicing electronically, the seller must be able to verify that the
electronic invoice was sent to the buyer and that it contained the PACA
trust notice.
The amended regulations provide assurance to the sellers that they
will have the same protection when invoicing electronically as through
traditional paper invoices whether or not the buyer accepts the trust
notice.
Failure To Accept Trust Notices Is an Unfair Practice
Another issue raised by a number of commentors is that the buyer's
failure to accept the trust language should be considered an unfair
trade practice. Some specific comments on this topic follow.
One trade association believes that since electronic billing serves
as an ordinary and usual billing method, action to defeat the trust by
blocking the transmission of the trust language would be a violation of
a buyer's duty.
One trade association asserts that a buyer's attempt to inhibit the
seller's effort to preserve PACA rights by creating a billing system
that does not accept the mandated language, would be an unfair trade
practice.
Another trade association believes that attempts at trust avoidance
should be considered failure to maintain the trust or failure to
perform other express or implied specifications or duties. Further,
this commentor states that actions which attempt to undermine
perfection of the trust should be considered a failure to maintain the
trust as much as dissolution of trust assets.
We agree that any attempt to preclude the seller from preserving
its trust rights is an unfair trade practice and a violation of Section
2(4) of the PACA. The requirements of the PACA trust cannot be lawfully
circumvented through the use of a technological change in how a
business invoices for the purchase and sale of fruits and vegetables.
As one commentor states:
``No technology should impair the trust or change the way buyers
and sellers use the trust.''
This commentor further states that:
``* * * technologies must enable sellers to notify buyers of trust
benefits preservation, and they must do so in such a way that sellers
can comply fully, including being able to show that they have filed a
notice (either electronically or documentary) to preserve trust rights
with the buyers.''
Trust Protection When Using a Third Party
An additional subject addressed in a few comments was the
effectiveness of enforcing the trust when either the buyer or the
seller uses a third party agent or service provider.
Since all of the information contained on the electronic invoice is
not flowing directly from the seller to the buyer when a seller is
using a third party vendor, one commentor expressed concern that the
buyer could argue that the seller did not preserve its trust rights
because the trust language was not sent directly to the buyer. This
commentor also asserts that some buyers or their third party vendors
may be stripping out the statutory trust language from electronic
invoices. Therefore, the commentor argues that when the sellers send
the trust preservation notice electronically to the third party vendor,
the buyer could potentially argue that the seller did not preserve its
trust rights because the buyer did not actually receive the trust
language.
When a buyer uses a third party vendor or agent on its behalf to
facilitate the electronic invoicing process, the third party vendor,
acting as the buyer's agent receives the trust notice on behalf of the
purchaser. Trust protection logically flows to and from the principals
directing the transactions. The law requires certain actions of the
seller to preserve its rights and obligates the buyer to hold all
inventories of food or other products derived from perishable
agricultural commodities, and any receivables or proceeds from the sale
of such commodities or products in trust for the benefit of all unpaid
suppliers or sellers of such commodities or agents involved in the
transaction, until full payment has been received. Although buyers may
generally hold these trust assets in a floating trust without specific
identification, sellers may seek the establishment of a trust account
to prevent dissipation of the trust upon a proper showing in a court
action brought on the trust. As both buyer and seller often use agents
in produce transactions, the proposed amendment to the regulation
permits the giving and receiving of the required notice through such
third party agents or electronic service providers. Thus, the proposed
amendment to the regulation assures that a purchaser utilizing a third
party agent or service provider does not negate the perfection of the
trust, because the purchaser itself does not receive the notice. If the
purchaser's agent, acting for and on behalf of the purchaser receives
the notice, then the purchaser has received the notice.
Trading Partner Agreements
A few comments suggest that to facilitate the preservation of trust
protection through electronic commerce, the regulation should allow for
a trading partner agreement to cover all transactions between the
parties under the trust.
For instance, one commentor suggests creating a blanket trust
notice in a Trading Partner Agreement (TPA). The commentor explains
that this type of agreement is signed before parties begin exchanging
information electronically and essentially takes care of the language
found on various documents (including invoices) and therefore would
reduce costs on electronic transactions since the charges are based on
the number of characters transmitted. This commentor wants USDA to
determine if a TPA can be considered binding under the PACA and
applicable to all electronic transactions.
Another commentor suggests that USDA create a TPA drafted
specifically to preserve the seller's trust rights. The commentor
explains that the content of the TPA should be developed by USDA with
no clause in it for renewal. The commentor suggests the regulation be
clear that the receiver does not have the right to refuse to enter into
a TPA.
This blanket trust notice or Trading Partner Agreement suggestion
may not be adopted, however, since the statutory language that creates
the PACA trust expressly sets forth the two permitted methods of
preserving trust interests by written notice. (See 7 U.S.C.
499e(c)(3)(4).) Either the required language must be on each sales
invoice or other billing statement issued by a PACA licensee, or there
must be a written notice filed after single or multiple transactions
that is timely [within 30 days of the date payment is due in
transactions without extended payment terms] to each transaction for
all transactions to be protected.
Financial Impact/Costs
Several commentors point out that protection under the trust is
critical to the financial well-being of sellers.
The issue of the cost of trust protection through electronic
commerce was addressed by a number of commentors.
One of the commentors believes it is critical that AMS become
actively
[[Page 65429]]
involved in proposing new regulatory language that provides a secure,
predictable and consistent manner by which sellers may preserve their
trust rights. This commentor states that it is critically important
that businesses have a clear-cut, low-cost method of preserving PACA
trust rights in electronic transactions and sees no technological
barriers and no increased costs to buyers or sellers since the
technology is already in place. This commentor believes that no
financial barriers should be placed upon sellers either through
regulation or from buyers in order to preserve their PACA trust rights.
Another commentor asserts that PACA must set forth clear and
unambiguous rules and regulations to protect the seller. This commentor
argues that this clarity will then lower costs. This and other
commentors believe that Congress intended the trust to favor sellers
over buyers, in effect, imposing costs on buyers to protect sellers.
AMS believes it is unwise for the amended regulation to define for
the industry how to manage the cost of their business dealings. Each
business and transacting party must make its own decision as to when to
enter into a transaction and how best to cover the costs of such a
deal.
Suggested Language for Amending the Regulations
Comments by three trade associations and two distributors offer
strong support for modifying and streamlining the regulations for
electronic invoicing practices. They advocate keeping the regulations
as simple as possible. They suggest almost identical language to amend
the regulations at Section 46.46(f)(3). The first is as follows:
``Licensees may choose an alternative 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, whether
documentary or electronic, contain the following statement at the time
of mailing or transmission to the buyer, irrespective of whether or not
the buyer downloads, receives, or accepts such statement.''
The other suggestion is as follows:
``Licensees may choose an alternative 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, whether
documentary or electronic, contain the following statement at the time
of mailing or transmission to the buyer, irrespective of whether or not
the buyer provides a field for including such statement or downloads,
receives, or accepts such statement.''
Another commentor suggests amending the regulations as follows:
``* * * the licensee's invoice or other billing statement, whether
documentary or electronic, contain the following statement at the time
of mailing or transmission to the buyer, regardless of whether or not
the buyer downloads, receives, or accepts such statement.''
While each of these suggested amendments to the regulatios has
merit, USDA is suggesting slightly different language as noted in the
proposed revisions to follow.
Executive Orders 12866 and 12988
This proposed rule has been determined to be not significant for
the purposes of Executive Order 12866, and therefore, has not been
reviewed by the Office of Management and Budget.
This proposed rule has been reviewed under Executive Order 12988,
Civil Justice Reform, and is not intended to have retroactive effect.
This proposed 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 that
must be exhausted prior to any judicial challenge to the provisions of
this proposed rule.
Effects on Small Businesses
Pursuant to requirements set forth in the Regulatory Flexibility
Act (RFA) (5 U.S.C. 601 et seq.), AMS 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 (SBA) (13 CFR 121.601) as
those whose annual receipts are less than $5,000,000. There are
approximately 15,000 firms licensed under the PACA, many of which could
be classified as small entities.
The proposed regulation clarifies how to preserve the trust benefit
when using electronic invoicing. The use of electronic invoicing would
provide companies an electronic alternative to paper documentation to
give notice of intent to preserve trust rights, thereby reducing the
time and expense associated with preserving trust rights under the
PACA.
Given the preceding discussion, AMS has made an initial
determination that the provisions of this proposed rule would not have
a significant economic impact on a substantial number of small
entities.
Paperwork Reduction Act
In accordance with OMB regulations (5 CFR part 1320) that implement
the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35), the
information collection and recordkeeping requirements that are covered
by this proposed rule were approved under OMB number 0581-0031 on
October 5, 2004, and expire on October 31, 2007.
E-Government Act Compliance
AMS is committed to complying with the E-Government Act, to promote
the use of the Internet and other information technologies to provide
increased opportunities for citizen access to Government information
and services, and for other purposes.
Proposed Changes
Under the Act it is the responsibility of the seller to preserve
its trust benefits, and we agree that the buyer must accept the trust
language if the seller attempts to preserve its trust rights. Based
upon full consideration of the comments received during the comment
period, the concerns of industry members and AMS about enforceability
of trust protection through electronic commerce, changes in the
technological nature of produce transactions, as well as the desire to
avoid enforcement problems if a produce firm using an electronic
billing system goes bankrupt, AMS is proposing to amend the PACA
regulations to require buyers or their intermediaries to accept the
PACA trust statement submitted by a seller on a paper or electronic
invoice or other billing statement. Further, any failure, act or
omission which is inconsistent with this responsibility is unlawful and
a violation of Section 2 of the PACA.
List of Subjects in 7 CFR Part 46
Agricultural commodities, Brokers, Investigations, Penalties,
Reporting and recordkeeping requirements.
For the reasons set forth in the preamble, AMS proposes to amend 7
CFR part 46 as follows:
PART 46--[AMENDED]
1. The authority citation for part 46 continues to read as follows:
[[Page 65430]]
Authority: Sec. 15, 46 Stat. 537; 7 U.S.C. 499o.
2. In Sec. 46.46, paragraph (f)(3) introductory text is revised
and new paragraphs (f)(4) and (5) are added to read as follows:
Sec. 46.46 Statutory trust.
* * * * *
(f) * * *
(3) Licensees may choose 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 as defined in paragraph (a)(5) of this section, whether in
documentary or electronic form, to preserve trust benefits.
Alternately, the licensee's invoice or other billing statement, given
to the buyer, must contain:
* * * * *
(4) If the invoice or other billing statement is in electronic
form, the licensee has met its requirement of giving the buyer notice
of intent to preserve trust benefits on the face of the invoice or
other billing statement if the electronic invoice or other billing
statement containing the statement set forth in paragraph (f)(3)(i) is
sent to the buyer and the electronic transmission can be verified. The
licensee will be deemed to have given notice to the buyer of its intent
to preserve trust benefits if the licensee can verify that the
electronic invoice or other billing statement was sent to a third party
electronic transaction vendor designated by the buyer. The licensee
will have met the requirement of giving the buyer written notice of
intent to preserve trust benefits using electronic means if it can
verify that the electronic data invoice or other billing statement was
transmitted to the buyer, or its designated electronic transaction
vendor, irrespective of whether or not the buyer or third party vendor
downloads or accepts the trust statement.
(5) If a buyer conducts its transactions in perishable agricultural
commodities using an electronic system, the buyer or its third party
electronic vendor must allow sufficient space for the seller to include
the required trust statement of intent to preserve trust benefits in
the buyer's electronic invoices or other billing statement forms. A
buyer or its designated third party electronic vendor must accept a
seller's notice of intent to preserve benefits under the trust using
the required trust statement, whether in documentary or electronic
form, as set forth in paragraphs (d) and (f) of this section. Any act
or omission which is inconsistent with this responsibility is unlawful
and in violation of Section 2 of the Act (7 U.S.C. 499b).
Dated: November 3, 2006.
Lloyd C. Day,
Administrator, Agricultural Marketing Service.
[FR Doc. E6-18826 Filed 11-7-06; 8:45 am]
BILLING CODE 3410-02-P