I believe that pallet recyclers are the unsung heroes of the U.S. supply chain when it comes to dealing with things that others just don’t want to do. If recyclers didn’t exist you would see pallets everywhere. And if it wasn’t for pallet recyclers, national service providers, especially rental companies, would face much higher costs. In reality, CHEP, PECO Pallet and iGPS need pallet recyclers a whole lot more than the recyclers need the rental companies.
But that fact doesn’t seem to matter sometimes. At moments in the struggle between recyclers and proprietary pallet owners, these large pool operators have treated recyclers as a necessary evil and even worse as criminal for wanting to be paid fairly for helping to locate, secure, sort, store, transport assets at the end of the supply chain.
Regardless of whether or not a pallet is stray (meaning outside of a rental network or proprietary pallet system), there are costs involved in doing all of these functions. And it seems downright criminal to me to expect third parties not to mention your competitors to do this for free at cost or below cost in some cases.
In various federal cases, the courts have ruled that CHEP owns its stray pallets and this has been applied by virtually everybody to many other companies, including other rental operations and private pools. What has also become clear is that expecting these return services for free or paying less than market rate constitutes unjust enrichment, which is a basis that pallet recyclers can use to sue for compensation. From rental companies to others that claim large national fleets, such as the U.S. Postal Service or Coca Cola, recyclers are due compensation for locating, transporting, sorting, storing and safeguarding divergent assets.
Everybody knows that a major cost of any pallet pool is transporting pallets from the end of the supply chain to the beginning. And that is quite simply something that retailers, distributors and some pallet companies have done far too long at a cost that may not be worth the effort. Some retailers are starting to evaluate whether or not they want to be a participating distributor in these rental networks.
And a handful of recyclers are in negotiation battles with PECO Pallet over the asset recovery fees paid for some pallets. PECO claims the pallets in question are in network and thereby should be returned for free. The rental company known for its distinctive red pallets has offered 20 cents for the return of these pallets while it claims truly stray pallets remain at the existing Asset Recovery Program (ARP) rate.
The major recycler involved in this dispute is Northwest Pallet Supply Co., which operates national programs for a number of retailers including The Home Depot, Target, Walgreen’s, etc.
Northwest Pallet contends that its primary sources are retailers/distributors who have not signed on as participating distributor in the PECO network. Both sides have filed lawsuits against each other after negotiations led to an impasse.
This is a very strong stance that PECO is taking, and it seems like a test balloon to see how a handful of recyclers react. If recyclers cave to legal pressure from PECO, this could cause a domino effect. The problem is that how does a recycler know if he is going to be paid the going ARP rate or not. It really is up to the whim of the pallet rental company. And if $1.25 to $2.25 per pallet is not fair, what about 20 cents? If recyclers aren’t sure that they will get paid a fair price, will they be less inclined to transport, load and return PECO or other rental pallets?
The good news for recyclers is that Northwest Pallet isn’t caving into legal pressure from PECO that has threatened a protracted legal battle.
Jim Riff of Northwest Pallet said that his company is committed to standing up for its rights and will not back down from the legal challenge. He added that they believe they must stand up or else the negative consequences for the entire industry could be severe. He further called on other recyclers to stand with them and to refuse to settle for less than established asset recovery rates.
PECO in its letter to some pallet recyclers claims that it is not required to pay any compensation for asset return of the pallets in question, and that pallet companies have a responsibility to do so under bailment law. PECO essentially argues that pallet recyclers are not entitled to any compensation for the return of PECO pallets going forward based on a “mutual benefit bailment” theory. This means that when personal property is delivered by an owner to another party and both parties benefit in the exchange, no further compensation, other than the “mutual benefit,” is warranted and the bailee must return the property in undamaged condition when the purpose of the bailment is fulfilled.
PECO goes on to argue that its benefit from the bailment is the rental fee it charges to its customers and the retailer (not the recycler) benefits from receiving the products. PECO then asserts that the fact that the retailer subcontracts its obligation to a recycler to return the pallets is irrelevant even though the recycler receives no benefit. As an alternative argument, PECO contends that the recycler benefits from having access to white-wood pallets as part of its dock sweeping. Either way, PECO contends that the recycler is not entitled to compensation for these services but indicates that it is willing to pay a mere 20 cents per pallet returned.
PECO claims that it has no legal responsibility to pay recovery and transportation fees connected with returning PECO-marked pallets. But two federal court cases suggest the exact opposite (CHEP USA vs. Mock Pallet and Buckeye Diamond Logistics vs. CHEP USA).
What the courts leave up to local interpretation is what those fees should be. Ricky Mock in Georgia received $5 per pallet, and he still gets that amount today. Others have negotiated far less. And the industry standard set by CHEP’s ARP has been $2.25 delivered per pallet for those under 200 miles, and $1.25 per pallet loaded onto a CHEP provided truck at the recycler’s location.
Unjust enrichment has become a fairly established precedent in the pallet industry cases involved with recycler rights. The issue of bailment is not a strategy that CHEP or the pallet recyclers ever addressed. And it will be interesting to see what happens. Bailment law does have one negative for proprietary pallet owners. According to the Uniform Commercial Code (UCC), a bailment relationship implies the right to a lien for the bailee (pallet recycler) until it has been paid for services rendered to the bailor (proprietary pallet company). A detailed explanation of bailment law can be found in the ABCs of the UCC (Revised) Article 7: Documents of Title from the American Bar Association.
CHEP has always wanted to avoid anything that gives the pallet recycler a right to a lien on its pallets because this would allow the recycler to legally hold onto the pallets until the issue could be resolved. As the situation now stands, except in some localities that have different laws, pallet companies must allow the proprietary pallet company to obtain its stray assets or the pallet recycler could be found guilty of conversion.
The entities in the equation who really are irresponsible when it comes to PECO pallets are retailers and distributors not the pallet recyclers. They are the ones who get free use of the pallet and should be on the hook for returning them. Unless you can show a contract where the recycler agrees to process the pallets for free or at a low-cost, it appears that this really comes down to an issue of unjust enrichment and debt collection.
It is unclear if the courts will allow bailment to apply in this case. And as far as I am aware this is the first time that the issue of bailment law has been used to rule on proprietary pallets. If PECO is successful in using the courts to mandate loading or return services, that would be a huge game changer that could impact both retailers and recyclers. The issue of transportation and loading is a major concern for rental companies because they tend to use common carriers that don’t have the capabilities to load and unload trailers. If the courts mandated loading in this case, it would put pressure on recyclers to cave and make price concessions. This would drive down costs for rental companies making them stronger by pushing costs onto recyclers.
Beyond simply getting back its pallets, Northwest contends the real aim of PECO’s new payment policy is to undermine the recycler’s relationships with retail partners. Northwest argued, “The true intent behind PECO’s abrupt ‘about face’ is based on PECO’s attempts to interfere with Northwest Pallet’s contracts and relationships with its national retailer customers in order to take over the Total Pallet Solution business that Northwest Pallet provides to those retailers and utilize its prominence as one of the largest pallet manufacturers as leverage to force Northwest Pallet out of the market.”
It is certainly true that a significant reduction in what PECO pays for return of pallets would undermine the ability of recyclers, such as Northwest, to offer total pallet services to retailers and still cover costs not to mention make any money.
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Warning: Nothing in this article should be considered legal advice. Please contact your attorney before following any particular action in regards to proprietary pallets.
