To Upgrade or Not: How USDA’s Regulations May Impact a Demand for a Poultry Grower to Make Additional Capital Investments

Written by: Joel McKie, Esq.

For owners of broiler grow-out houses, the decision to make upgrades to their facilities at the demand of a poultry integrator can be very difficult.  On one hand, the value of a grower’s farm and in many cases, the grower’s livelihood is inextricably connected to the continued operations of the broiler grow-out houses.  However, further investment (and in some cases debt) into broiler grow-out houses without a certain way to recoup the grower’s investment may seem just as unreasonable.

Ten years ago, Congress modified the Packer and Stockyards Act (the “Act”) to give poultry growers additional (albeit modest) rights in their relationship with poultry integrators.  In the 2008 Farm Bill, Congress instructed, among other things, USDA to write regulations related to when a requirement of additional capital investments over the life of a poultry growing arrangement contract constitutes a violation of the Act.  While the issue of whether USDA fulfilled its obligation to write all the standards that it was instructed to create under the 2008 Farm Bill remains subject to a lawsuit in the Eighth Circuit Court of Appeals, USDA did in fact issue the following regulation (9 C.F.R. § 201.216), presented here in summary form:

The Secretary of Agriculture may consider various criteria in determining whether a requirement that a poultry grower make additional capital investments over the life of a growing arrangement constitutes a violation of the Act. These criteria include:

(a) Whether a live poultry dealer failed to give a poultry grower discretion to decide against the additional capital investment requirement;

(b) Whether the additional capital investment is the result of coercion, retaliation or threats of coercion or retaliation by the live poultry dealer;

(c) Whether the live poultry dealer intends or does substantially reduce or end operations at the processing facility or intends or does substantially reduce or end production operations within 12 months of requiring the additional capital investment, absent the occurrence of a catastrophic or natural disaster, or other emergency, such as unforeseen bankruptcy;

(d) Whether the live poultry dealer required some poultry growers to make additional capital investments, but did not require other similarly situated poultry growers to make the same additional capital investments;

(e) The age and number of recent upgrades to, or capital investments in, the poultry grower’s operations;

(f) Whether the cost of the required additional capital investments can reasonably be expected to be recouped by the poultry grower;

(g) Whether a reasonable time period to implement the required additional capital investments is provided to the poultry grower; and

(h) Whether equipment changes are required with respect to equipment previously approved and accepted by the live poultry dealer, if existing equipment is functioning as it was intended to function unless the live poultry dealer provides adequate compensation incentives to the poultry grower.

Therefore, USDA, through its Fair-Trade Practices Program, Packer and Stockyard Division (formerly known as GIPSA), can investigate and issue notices of violations to poultry integrators for violation of this regulation.  However, prior to the 2008 Farm Bill, the Act had been consistently construed by the Courts to require almost all enforcement actions (except related to trust and similar provisions) involving poultry integrators to be filed in civil court (as opposed to through USDA’s administrative procedures).  It appears USDA, working in conjunction with the Department of Justice, remains reluctant (and generally slow, as it could take years) to bring civil suit to enforce these new provisions in cases where an integrator does not voluntarily comply with USDA’s initial notice of violation.

Prior to the 2008 Farm Bill, the federal courts of appeals had also consistently ruled that for an integrator to be found to have violated the Act, the grower had to show an injury to competition generally.  Historically, this burden was almost insurmountable where the unfair practice is aimed at a single or relatively few growers. While the Act allows a grower to sue the integrator directly (instead of relying on USDA), courts have yet to conclusively apply this competitive injury requirement for violations of USDA’s 2011 amendments.

In addition to a potential private right of action for violation of USDA’s regulations and the Act, a grower who is reluctant to make upgrades may also consider what rights may exist under his or her contract. USDA regulations require an integrator to “furnish the grower with a true written copy of the poultry growing arrangement, which shall clearly specify . . . [t]he duration of the contract and conditions for the termination of the contract by each of the parties.”  9 C.F.R. § 201.100(c).  This USDA regulation strongly suggests that the historical “flock-to-flock” term provisions in poultry grower agreements are illegal.  In some cases, integrators have modified their contracts to say they cannot be terminated except under designated circumstances.  Therefore, anytime an integrator gives a demand to make an upgrade to a grower’s broiler grow-out houses “or else”, one should evaluate whether the contract allows for termination on this basis alone.

Since fear of retaliation from some (though not necessarily all) poultry integrators is a legitimate concern, “pushing back” against demands for upgrades is not the right decision for all growers.  However, in addition to the assistance of USDA (which is recommended), retaining counsel that understands the poultry industry and the USDA regulations may be right for some growers who are willing to take a more aggressive route with, and the risk associated with it, integrators to protect their livelihood and their property value.