Ever since rental and proprietary pallets became more and more common in the U.S. supply chain, pallet recyclers have struggled to understand their legal rights and responsibilities. The courts have ruled on some of these issues, but the legal precedents are not always clear. And in many cases your rights are only as good as your willingness to protect them and insist on fair play.
The major pallet rental companies have a lot more financial resources than most pallet recyclers, and they have opted to compensate recyclers for costs involved with locating, collecting, sorting, safeguarding and returning pallet assets. CHEP USA has developed an extensive Asset Recovery Program (ARP) that has become the industry standard for most transactions.
But last year, PECO Pallets indicated that it would not pay ARP fees for some accounts suggesting they are not stray and are part of its network. Known for its distinct red pallets, PECO contends the recyclers in question source most of their PECO pallets from companies that are part of its network. As a result those pallets are not strays and should be considered in a separate class from those pallets that come in off the street.
But a number of recyclers contend these core sources are procured from retailers and distributors that do not have signed contracts with PECO. Last year, the Recycle Record reported on PECO Pallet sending notices to a number of recyclers, notably Northwest Pallet, demanding a drastic cut in fees associated with the return of PECO’s pallets. It appears the most recent notifications are a second round of expanding this effort. It is interesting that PECO has targeted some of the largest pallet recyclers in the country, and what these companies do could reverberate to other companies or even impact how other rental providers respond to asset recovery fees.
Specifically, PECO has engaged in a legal showdown with Northwest Pallet that has resulted in both sides filing lawsuits about the proper recovery fees. The separate cases have been consolidated into one case that will be heard in a Chicago court in 2016.
This article covers some basics of proprietary pallets and recycler rights and responsibilities. The information contained herein should not be considered legal precedent nor a substitute for seeking legal counsel. You are encouraged to seek assistance from an attorney to figure out how this information applies to your specific circumstances.
Q: What can a proprietary pallet pool owner demand in terms of return of its property?
A: Recyclers don’t have to return proprietary pallets unless required by a written contract. In jurisdictions where the courts have ruled on proprietary pool ownership in favor of a rental provider, all recyclers have to do is make proprietary pallets available for pick up. Otherwise, keeping proprietary pallets could put the recycler in jeopardy of being sued for conversion, which is the civil law form of theft. The jurisdictions covered by the Eleventh Circuit Court of Appeals and the Ohio Central District Court have ruled that CHEP owns its pallets including strays. This covers Alabama, Georgia, Florida and part of Ohio. But those rulings don’t necessarily translate to PECO or other proprietary pallet companies because the facts of those cases and how those pools are managed may be different. And in fact, few if any other proprietary pallet companies go to the effort that CHEP does to track and retrieve its property, so those other owners may not receive the same level of protection in court.
Q: Are all proprietary pallet situations created equal?
A: Most of the lawsuits or legal cases involving proprietary pallets have involved rental pallets, especially CHEP USA. And as the largest rental provider in the United States, CHEP goes to great lengths to monitor, retrieve, track and control its assets. From legal contracts to asset protection staff on the ground to advertising and promotion, it does a lot more than just stencil its name and phone number on a pallet. Thus, some other pallet owners may not have gone to the steps to safeguard their assets or even done things that jeopardize their ownership claim. Those actions could result in a court deciding the owner had abandoned its property. As a result, not all legal scenarios are the same. But without litigating each scenario, the prevailing law suggests that proprietary pallet owners do own their pallet pools even those assets that have strayed outside of their control.
Q: What are recycler rights when it comes to proprietary pallets?
A: Recyclers are not required to cover the logistics, transportation, handling, sorting, storage, safeguarding or collection costs associated with securing the return of proprietary pallets. Since this is a significant benefit to pool owners, it amounts to cost shifting and unjust enrichment. Recyclers are free and within their legal rights to negotiate a fair recovery fee and don’t have to just take what the pallet owner gives.
However, if the recycler does not allow the pallet owner to retrieve its property, it could be sued for conversion and/or costs associated with lost rental fees.
Recyclers can request mutually agreed upon pickup schedules to reduce operational burdens. Also, recyclers can charge interest and other collection fees if necessary. It is important that recyclers know they are the ones who have to stand up for their rights.
Q: What is the basis of PECO’s lawsuit against Northwest Pallet?
A: Contrary to previous legal cases involving proprietary pooled pallets, PECO is suing based on bailment law. PECO contends 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.
In previous cases, CHEP did not use the bailment law for its legal challenges.
Q: Is PECO right about bailment law?
A: For starters, that is the core of the lawsuit that will be disputed in court. So, the law is not clear until there is a ruling in federal court. PECO obviously believes it can make a compelling case about this point.
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). Federal courts found that a proprietary pallet company (CHEP — and may be assumed PECO as well) do own stray pallets in their pool. But they cannot expect other companies, including competitors, to obtain those assets, transport, store and manage their return for free. This amounts to unjust enrichment and a burden on pallet recyclers.
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. CHEP also offers a fuel surcharge for delivered pallets, which varies depending on the cost of fuel.
Unjust enrichment has become a fairly established precedent in the pallet industry cases involved with recycler rights. And the basis for judging damages in the Mock case was the value to CHEP not the cost of the services.
Q: Why didn’t CHEP use the bailment law angle in its previous legal cases involving the return of pallets?
A: CHEP declined to answer that question when asked. But there may be a number of reasons. First, to create a bailment relationship, there has to be an explicit or implied contract. And it is the burden of PECO to demonstrate that in court. If you have pallets obtained from a retailer that has not signed a contract to be part of a retrieval network, it would be difficult to establish a bailee relationship. To have a sub-bailee, you must have a primary bailee. Also, the ability to obtain white wood cores, which is common even without the existence of rental pallets, may not be enough to establish a benefit for the pallet recycler.
A reason why CHEP may not have gone the bailee route is that such a strategy could establish a number of negative precedents. Primarily, 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 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. But that doesn’t mean you have to subsidize your competitor or do lots of work for them either.
A reason why PECO may have used bailment law is that it is a new legal angle that recyclers may not be familiar with. And it raises questions about recycler compensation requirements.
Q: Are pallet recyclers really benefitted by the current rental system and recovery process?
A: Other than fees paid by the rental provider, the only real answer seems to be the ability to obtain white-wood cores from distribution centers. PECO has contended that pallet recyclers are unduly benefited by applying the ARP to pallets that are not strays. But the reality seems to be that many of the costs that recyclers have in regards to returning proprietary pallets (trucking, storage, sortation, bookkeeping, etc.) exist regardless of the source.
PECO has countered in its court case against Northwest Pallet that the recycler receives a benefit by getting white-wood cores from these companies. But the presence of proprietary pallets doesn’t really help the recycler obtain those cores. In fact, each rental pallet takes up the space of a white-wood pallet that a recycler could otherwise sell.
Q: What should a recycler do if it gets a letter from a proprietary pallet owner suggesting it will no longer pay established asset recovery rates?
A: First of all, is the letter from PECO or its attorney? While both should be taken seriously, one means that you are likely in the cross hairs for a lawsuit and the other means you are still in the negotiation phase. Secondly, what are your costs involved in procuring, safeguarding, processing and returning proprietary pallets? If your costs are X, and PECO is only offering Y, you have to decide if the difference is something you can negotiate. Also, why should you work at below cost to help out a competitor?
Turn what is a negative into a positive. See this as an opportunity to negotiate more terms that haven’t been part of the traditional ARP. This could include everything from when payments are due (some are wanting cash on delivery) to when and how pickups are scheduled to indemnification clauses or insurance riders to protect you from lawsuits involving PECO, its personnel or subcontractors. You can also use this as an opportunity to spell out policies for PECO or its personnel coming onto your property as well as storage, debt collection or other fees if PECO does not honor your procedural requests. Of course, PECO will turn this all around and make its own requests, but that is all part of the negotiations. The main thing is to know that you do have rights. However, you will have to stand up for them or else you will always be at the mercy of your competitor. This is an issue that you may want to consult your attorney on before making any statements or responding.
Smart recyclers will not accept less than what is a fair price for these services. While you may allow the rental provider or proprietary pool owner to take possession of its pallets, you can sue for the difference between what it is offering and what you deem is actually fair.
Warning: Nothing in this article should be considered legal advice. Please contact your attorney before following any particular action in regards to proprietary pallets.
