[Federal Register Volume 62, Number 61 (Monday, March 31, 1997)]
[Rules and Regulations]
[Pages 15083-15089]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7807]



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  Federal Register / Vol. 62, No. 61 / Monday, March 31, 1997 / Rules 
and Regulations  

[[Page 15083]]



DEPARTMENT OF AGRICULTURE

Agricultural Marketing Service

7 CFR Part 46

[Docket Number FV96-351]
RIN 0581-AB41


Amendments to the Perishable Agricultural Commodities Act (PACA)

AGENCY: Agricultural Marketing Service, USDA.

ACTION: Final rule.

-----------------------------------------------------------------------

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

[[Page 15087]]

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