So, what are recycling services worth to pallet poolers? That is the question that a jury had to consider recently in a federal court case between PECO Pallet and Northwest Pallet (NWP). The good news for recyclers is that the jury sided with NWP on all counts and awarded the pallet recycler $6.27 million in damages and fees associated with almost three million PECO pallets.
The bad news is that most recyclers won’t win the war of attrition against larger pallet rental companies, such as CHEP and PECO. Recyclers could win and likely would win in court if they are willing to stand and fight. But too few small, independent companies are willing to fight for Asset Recovery Program (ARP) fees when a rental company claims, “Hey, those pallets are in-network and aren’t strays.”
The ARP developed by CHEP more than a decade ago has worked well for years even though it has only seen minimal raises when fuel prices skyrocketed. Other rental providers followed CHEP’s lead and adopted a similar ARP. But that has all started to change over the last few years. Increasingly, more pallet users are opting out of being a participating distributor or refusing to manage, sort and return rental pallets for free. These retailers and food service companies have discovered that free use of rental pallets comes with lots of hidden costs. These companies are pushing back and in some cases are wanting their pallet flows to be considered out-of-network.
Pallet recyclers that provide Total Pallet Management services for these retailers and food service companies are caught in the middle. The rental companies are lowering what they pay or in some cases suggesting that certain pallet flows do not qualify for ARP rates.
This is the backdrop behind the PECO/NWP lawsuit. Recently a similar lawsuit emerged between Rehrig Pacific Inc. and CHEP International. Rehrig Pacific has challenged CHEP for unilaterally changing ARP terms for pallets flowing through Gordon Food Service. Unless the parties reach an agreement, it could take years for this lawsuit to see its day in court.
So, let’s delve into the details of the NWP victory. The legal dispute involved fees for acquiring, sorting, safeguarding, storing and loading PECO-marked pallets obtained from a variety of sources. In 2015, PECO unilaterally altered what it offered Northwest Pallet and other companies claiming that it will no longer pay full asset recovery rates for “non-stray pallets.” In some cases, PECO offered as little as 10 cents per pallet, which is far less than the standard $1.25 asset recovery program (ARP) fee traditionally paid by rental companies.
As the dispute developed, Northwest Pallet stated it would allow PECO to obtain its pallets, but the recycler refused to load or transport those pallets. Instead of coming and getting those pallets, PECO let them sit at recycler facilities trying to force the recycler to load pallets. PECO finally began picking up those pallets a few months before the trial.
Elated with the jury decision, Jim Riff of Northwest Pallet commented, “After a two-week trial, the jury found in favor of Northwest Pallet and against PECO on all counts. We were elated to see that the jury found value in all that a pallet recycler does in returning a pallet to PECO and that a pooler cannot just unilaterally dictate the price.”
According to PECO, the jury awarded $2.2 million for pallet recovery services, or approximately $0.73 per pallet, and $4.1 million for non-recurring pallet storage fees accumulated over the course of the three-year litigation period. But the jury clearly sided with the pallet recycler although it did not award Northwest Pallet the most extreme cost projections it presented in court.
PECO Pallet responded to the jury award by questioning the outcome. A spokesperson said, “While the jury rejected a substantial portion of Northwest Pallet’s claimed damages, we believe certain aspects of the decision are neither supported by the law nor the evidence presented at trial. PECO will pursue legal remedies to address these issues.”
PECO asserts that it values its recycler relationships and commented, “Pallet recyclers are an important part of the ecosystem of our business. We pride ourselves on the strong relationships we have built and maintained with the recycler community.”
But some recyclers suggest that rental providers unilaterally changing long-standing compensation practices looks a lot like cost shifting.
The jury award certainly indicates that pallet recyclers have a strong case for current ARP fees or more depending on what services are offered. The current ARP is based on a system developed by CHEP years ago. And a lot has changed since then. Both CHEP and PECO are similar and yet different in their management approaches. The line between in-network and out-of-network pallets has been blurred in some cases. Some of these retail partners now expect part of the ARP for compensation. Also, labor and transport costs have skyrocketed since the original ARP prices were adopted by rental companies.
The reality is that rental providers have developed systems that rely upon and almost force pallet recyclers to interact with their pallets. These services have real costs and distract from the primary business where recyclers make most of their profit. Although rental providers may own the pallets in question, that also means they are responsible for their management and the costs their systems inflict on others in the supply chain.
The outcome of the Northwest Pallet cases only applies to the pallets covered by the lawsuit. Future transactions between those two parties are up to negotiations although the jury decision certainly puts the recycler on a stronger bargaining position. PECO has yet to indicate if it will appeal the decision.
So, what does the decision in the NWP case mean for other recyclers? Truthfully, it all depends on the industry. Will recyclers push for greater compensation? Will more recyclers refuse to load or return proprietary pallets and force the rental companies to come pick them up? What will happen with new TPM contracts and retailer expectations? How will CHEP and iGPS respond?
The outcome very limited legal impact for pallet companies outside of the jurisdiction of this court, but recyclers can use the specifics of the case as they push for greater levels of compensation. This is not something the rental companies will merely hand over due to the cost ramifications. They will scrap for every penny. Will pallet recyclers stand up for their rights? Unfortunately, if experience predicts the future, most recyclers will not fight. But those that do, like Mock Pallet or NWP, will be the ones that get paid what they are worth.
