Top Ten Agricultural Law and Tax Developments from 2019 (Numbers 10 and 9)

Overview

2019 contained many legal and tax developments that were of importance to agricultural producers, rural landowners, agribusinesses and others tied to the business of agriculture.  The legal and tax systems impact agriculture in many ways.  From environmental and water issues to income tax and estate/business planning issues, to bankruptcy and contract issues, to financing and liability issues as well as others, there are many ways that legal and tax issues impact agriculture.    

On Monday’s post, I highlighted what I viewed as significant developments but not significant enough to make my “Top 10” list for 2019.  In today’s post, I start the journey through the ten biggest legal and tax developments of 2019 in terms of their impact (or potential impact) on the agricultural sector.

The “Top Ten” of 2019 – developments 10 and nine.  It’s the topic of today’s post.

10. The Relevance of Roundup Jury Verdicts

2019 saw more juries render verdicts in cases involving alleged damages by Roundup.  The jury verdicts have been in the multi-millions of dollars.  Presently, over 11,000 cases involving Roundup have been filed and are awaiting trial and adjudication.  The basic claim in each case is that the use of Roundup caused some sort of physical injury to the plaintiff.  In many of the cases, the claim is that physical injury occurred after usage (usually over a long period of time) of Roundup.  While the temptation may be great to dismiss the recent verdicts as the result of raw emotion and passion by juries that don’t have much, if any, relation to agriculture, that temptation should be resisted.  It is true that juries tend to react based on emotion to a greater degree than do judges (indeed, the judge in the 2018 case significantly reduced the jury verdict), but that doesn’t mean that there aren’t some “take-home” implications for farming and ranching operations at this early stage of the litigation.

Farming and ranching operations should at least begin to think about the possible implications of the Roundup litigation. 

• What about lease agreements? Farmers and ranchers that lease out farmland and pasture may want to reexamine the lease terms. Consideration should be given as to whether the lease should incorporate language that specifies that the tenant assumes the risk of claims arising from the use of Roundup or products containing glyphosate.  Relatedly, perhaps language should be included that either involves the tenant waiving potential legal claims against the landlord or provides for the landlord to be indemnified by the tenant for any and all glyphosate-related claims.  Should language be included specifying that the tenant has the sole discretion to select chemicals to be used on the farm and that any such chemicals shall be used in accordance with label directions and any applicable regulatory guidance?  How should the economics of the lease be adjusted to reflect this type of lease language?  The tenant is giving up some rights and will want compensation for the loss of those rights.  If the lease isn’t in writing, perhaps this is a good time to reduce it to writing. 
• Is the comprehensive liability policy for the farm/ranch sufficient to cover glyphosate-related claims? Many farm comprehensive general liability policies contain “pollution exclusion” clauses.  Do those clauses exclude coverage for glyphosate-related claims?  How is “pollution” defined under the policy?  Does it include pesticides and herbicides and associated claims?  Does it cover loss to livestock that consume corn and/or soybeans that were grown with the usage of chemicals containing glyphosate?  Can a rider be obtained to provide coverage, if necessary?  These are all important questions to ask the insurance agent and an ag lawyer trained in reading farm comprehensive liability policies. 
• If the farm employs workers, should that arrangement be modified from employer/employee to independent contractor status? If employee status remains and an employee sues the employer for alleged glyphosate-related damages, what can be done?  Will enrolling the farm in the state workers’ compensation program provide sufficient liability protection for the farming/ranching operation?      

What About Food Products?

To date, the cases have all involved the use of Roundup directly over a long period of time.  At some point will there be cases where consumers of food products claim they were harmed by the presence of glyphosate in the food they ate?  If those cases arise, given the use of production contracts in agriculture and the possibility of tracing back to the farm from which the grain in the allegedly contaminated food product was grown, does the farmer have liability?  If you think this is far-fetched, remember that there is presently a member of the U.S. House that is proposing the regulation (if not elimination) of cows with flatulence.  Relatedly, there are certain segments of the population that are opposed to the manner in which modern, conventional agriculture is conducted.  These persons/groups would not hesitate in trying to pin liability all the way back down the chain to the farmer. 

The Roundup litigation shouldn’t be ignored.  It may be time to start thinking through possible implications and modifying certain aspects of the way the typical farm or ranch does business in order to provide the greatest liability protection possible. 

9. Ag Antitrust – The Ability of a Farmer To Sue For Anticompetitive Conduct

The markets for the major ag products in the U.S. are highly concentrated.  This raises economic and legal questions as to whether the conduct that such concentration makes possible improperly denies farmers a proper share of the retail food dollar and simultaneously increase prices to consumers.  In other words, does the conduct associated with market concentration at these various levels negatively impact commodity prices, and result in producers receiving less of the retail food dollar while consumers simultaneously pay more for food?  If so, what can a farmer or rancher do about it?  Does antitrust law provide a remedy? Does it matter that a farmer/rancher is not a directly injured party?  In 2019, the U.S. Supreme Court decided a case involving the Apple Co. and IPhone users that involves some of these concepts.  The Court’s decision has implications for agriculture. 

In 1977, the U.S. Supreme Court held in Illinois Brick Co. v. Illinois, 431 U.S. 720 (1977), that a plaintiff cannot claim damages when the plaintiff is not the party that was directly injured.  In other words, even if an antitrust violation can be established that results, for example, in ag product prices being lower than a competitive market would produce, Illinois Brick bars the farmer/rancher from suing for damages due to lack of standing because they haven’t been directly injured – there is a processor in-between.

Note:   Since 1977, most states have enacted laws or have judicial opinions that reject the Illinois Brick decision (which are not preempted by federal law – see California v. ARC America, 490 U.S. 93 (1989)).  In these states, indirect purchasers can seek recovery under state antitrust laws. 

In Apple Inc. v. Pepper, et al., 139 S. Ct. 1514 (2019), IPhone users sued Apple Inc. over its operations of the App Store.  The trial court held that the consumers in the case were indirect purchasers that lacked standing due to Illinois Brick.  The Ninth Circuit reversed (Pepper v. Apple Inc., 846 F.3d 313 (9th Cir. 2017)) and the U.S. Supreme Court agreed to hear the case (Apple Inc. v. Pepper, 138 S. Ct. 2647 (2018).  On May 13, the Supreme Court affirmed the Ninth Circuit decision by a 5 to 4 vote.  Thus, the plaintiffs could pursue their claims against Apple for allegedly monopolizing access to apps for Apple’s iPhones and imposing monopoly prices.  Apple had constructed its arrangement with the app developers so that formally the developers set the prices charged to buyers and Apple took a 30 percent commission from that price before remitting the remainder to the developer.  Thus, as a formal contract matter, Apple was only the agent of the developer although the customers could only deal with Apple to get apps.  The majority took the view that Apple was a retailer of apps with an alleged monopoly over the supply.  In this view the formal contract relationship between the developer and Apple was irrelevant to the question of whether the buyers were the first victim to Apple’s alleged monopoly. 

Thus, the court was unanimous that the Illinois Brick rule should remain.  However, the decision appears to reject the use of formal contracts to determine who is the first buyer.  This is consistent with historic practice in antitrust where courts have looked to the substance and not the form of the conduct.  However, to determine who is the first seller, the majority focused on transactional characteristics that seem very formal. But it repeatedly characterized Apple as a classic retailer that selected the goods it would sell, and generally controlled the marketing of the goods.  In contrast, there are real “agents” who function as independent contractors to deliver goods for others and remit the payments.  The decision does not make this distinction explicitly but its repeated characterization of Apple as a retailer suggests that the majority was taking a realistic, functional view of the relationship. A more nuanced analysis of this point would have been very helpful.

Peter Carstensen, antitrust expert and Professor Emeritus of the Wisconsin School of Law commented to me that because the decision leaves the Illinois Brick rule in place, it fails to give farmers any direct expansion of their right to damages under federal law.  Of greater significance for agriculture where the concern is exploitation of monopsony or oligopsony power, Prof. Carstensen noted that the majority opinion is clear that both downstream customers and upstream suppliers (e.g., farmers) can sue the buyer/seller engaged in anticompetitive conduct causing harm.  This is helpful with respect to poultry and (potentially) hog cases brought on behalf of farmers providing growing services. It confirms their independent right to claim damages.  This declaration is also relevant to the continuing disputes over the interpretation of the Packers and Stockyards Act (PSA) condemnation of unfair and discriminatory conduct. 7 U.S.C. §§182 et seq. The courts have imposed an interpretation that holds that the PSA is an antitrust statute which requires competitive injury before there can be a violation.  In addition, the decisions have required that there be an adverse effect on consumers and not just producers.  Prof. Carstensen noted that the Pepper decision re-emphasizes the well-established antitrust principle that both upstream and downstream harms are independent antitrust injuries.  In future PSA cases proof of harm to producers should establish “harm to competition.” 

Another implicit but important underlying assumption of the case is that Illinois Brick applies to exploitive conduct (i.e., either excessive prices imposed on buyers, or under payment to sellers).  The implication is that this rule has no bearing on cases involving exclusion or predation where the illegal conduct harms the victims but does not create a direct gain to the wrongdoer.  Unlike the exploitation cases, the predatory wrongdoer is not sitting on a “pot of money” resulting from its illegal deeds; rather it has expended resources to exclude rivals or entrench its market position in some way.  In such cases the measure of harm is the loss to the victim and not the gain to the wrongdoer.  This is important because usually the harm results from some market manipulation or exclusionary practice in which the wrongdoer causes the harms without directly dealing with the victim. Where farmers are victims of such exclusionary practices even if the harm is inflicted indirectly, they would still have standing to seek damages as well as injunctions in federal court.

On the whole, Prof. Carstensen concluded that the Supreme Court reaffirmed the Illinois Brick rule.  However, it employs a functional analysis to identify the first buyer (seller).  This may improve slightly the chances of farmers getting damages in federal court when buyers engaged in unlawful exploitation have used agents or other specious means to avoid direct dealings.  But the rule remains a major barrier to getting damages for farmers harmed indirectly by exploitive practices by downstream buyers.  Where the farmers’ harm stems from exclusionary or predatory conduct, the decision reinforces the position that the rule does not apply to such damages.  But, it also provides a further correction to the misinterpretations of competitive harm invoked in PSA cases.  The Court’s opinion is a helpful one for agriculture.

Conclusion

In Friday’s post, I will continue the trek through the Top Ten of 2019.