A group of pallet recyclers in California is in a legal show down with CHEP USA over fair compensation for recovery, storage, handling and transport fees involving the safe return of CHEP-marked pallets. Several individual cases are now being consolidated under one major legal challenge from several members of the North American Pallet Association (NAPA).
CHEP has sued this group in state court claiming conversion, interference with CHEP’s possession of its pallets, unfair trade practices among other allegations. CHEP has also sought the court to declare AB 1760 unconstitutional. This law was passed a few years ago to provide some guidance on how pallet recyclers should deal with merchandise pallets (proprietary or pooled pallets) in California.
The independent pallet recyclers are represented by Ron Vera and the Vera Law Group. They are claiming unjust enrichment, unfair business practices and declaratory relief for the constitutional validity of AB 1760. It will take a while for these cases to make their way through the courts. They are probably going to trial next year.
The pallet recyclers involved in these cases include G.O. Pallets, Inc., Quality Pallets, Inc., AG Pallets, Inc., Salas Pallet Recycling, LP, Benard & Sons Pallets, Inc., ECO Pallets, Inc., and SAQ Pallets Inc. Most of the companies targeted by CHEP’s legal campaign are Hispanic-owned, small businesses in California.
CHEP claims that the pallet recyclers have violated the Cartwright Act, which prohibits two or more persons conspiring together to restrict trade or commerce. In CHEP’s complaint, the rental giant suggested that the recyclers are colluding together to go after a significant number of CHEP pallets and requiring the company to pay a significant fee for their return. CHEP stated that this strategy essentially “forces CHEP to become their customers” if it wants its pallets back. Recyclers are countering the exact opposite claiming that CHEP has set up a rental system allowing pallets to be sent to companies outside of its network. These pallets are then collected by recyclers who return them at a price set by CHEP. In reality, CHEP appears to be the entity that has not allowed the market to set prices for these retrieval, storage and handlings services. Most recyclers assert that they are not seeking CHEP pallets but that they encounter them while collecting white-wood cores. Frequently cores suppliers will not sort out the rental pallets instead they will just find another pallet recycler who will take everything they give them.
CHEP’s claim is correct that the recyclers want at least $5 per pallet, which is about 20% of the cost of a new pallet. But the real question is, “What would this service cost CHEP if the recyclers didn’t do it and what is a reasonable profit for independent recyclers to make when a competitor has established a system that basically forces them to work with this rental provider?”
The rental provider estimated that 15% of its total proprietary U.S. pallet pool enters California each year.
Edgar Montes, a NAPA board member and litigant in the cases, commented, “We believe the law is on our side and a major corporation should be able to do what’s right.” The recyclers are seeking more compensation than CHEP has offered in its revised Asset Recovery Program (ARP). CHEP offers the same basic ARP across the country with some modifications for travel distance and higher costs in select metro areas. CHEP has always maintained that its ARP reflects acceptable industry rates for these services. But the problem is that CHEP doesn’t negotiate its ARP in most cases. Recyclers contend that CHEP can’t set the rate unilaterally and then claim criminal conduct for recyclers who don’t comply.
Besides the current lawsuits, there is significant disagreement between CHEP and recyclers when it comes to the interpretation of AB 1760 law. Montes declared, “We don’t agree with CHEP’s interpretation of the law. We believe that we have a right to take possession of the pallets if they don’t pay a fair storage fee.” CHEP points to the law stating that the provider of the pallet to the recycler nor the recycler has complied with notification, documentation and proof requirements of the law.
AB 1760 outlines the conditions under which proprietary pallets can be bought, sold and declared abandoned property. You can see the entire law at https://legiscan.com/CA/text/AB1760/id/2607894. Or you can read the sidebar detailing the key section.
The law raises more questions than it really answers sometimes. And it addresses scenarios that don’t reflect the facts on the ground when it comes to the core disagreements. For example, most recyclers are not really arguing ownership of most marked proprietary pallets, especially CHEP. The question is has the pooler neglected or abandoned them by allowing customers to ship outside of its network? The law does address that concern by placing a 35-day limit on how long CHEP has to reply or risk losing its asset.
But other issues are much less clear. For instance, what constitutes “reasonable storage fees” or “timely basis” when it comes to retrieval. Plus, the costs to the recyclers are not just storage fees. Truly costs include a wide variety of hard costs and lost opportunity costs. This depends on whether or not a recycler pays for all or some of the pallets in a trailer load. It also depends on how the sorting and handling process at a recycler site affects the normal flow of white-wood pallet operations. Some hard costs include fuel, transportation, handling, sortation, storage, admin, legal and financing costs. CHEP pallets are heavier, which can lead to more strain on employees and workers compensation claims. Every CHEP pallet in a core trailer means one or more fewer white-wood pallets that a recycler has to sell. When Penn State researchers conducted analysis of previous recycling operations years ago, they found that one of the biggest hidden costs when it came to dealing with proprietary pallets is the lost opportunity cost for their transportation operations because many recyclers have limited trucks and drivers.
The recyclers explained in their lawsuit, “Cross Complainants (recyclers) receive CHEP pallets from CHEP’s own clients or the end user of such clients, because CHEP does not pick up and store CHEP’s pallets on a timely basis. Such failure to pick up their pallets is, by design, a tremendous cost savings feature for CHEP.” The recyclers suggest that they are subsidizing CHEP each day in the range of $5-8 per pallet when you consider all the costs involved.
CHEP contended in its lawsuit that the recyclers have developed an unlawful scheme to use the new law to demand artificially high pallet storage rates, which can be at least 20% of the cost of a new pooled pallet. CHEP stated, “Defendants have agreed between and among themselves to charge CHEP this inflated price, which is many multiples higher than the market-accepted ARP rate for inadvertently acquired pallets, to which Defendants are not even entitled.” CHEP stated that these recyclers have no right to be in possession of these pallets because they have no legal relationship with CHEP. But if that is the case, what about all the other parties in the supply chain who are not participating distributors or recyclers in the ARP?
CHEP has indicated that a negative ruling could have a substantial impact on their business operations and interstate commerce. The rental provider estimated that 15% of its total proprietary U.S. pallet pool enters California each year. And if a lot of those pallets get declared abandoned, they could be sold off or disposed of in a landfill or used for scrap lumber. CHEP warned, “Defendants not only detrimentally affect the national supply chain, but are restraining CHEP’s ability to exercise its core business model, which entirely depends on the recovery and reuse of CHEP’s pallets.”
CHEP also suggested that the recyclers want to target CHEP pallets and that the situation is not as dire as they claim. CHEP said, “The Defendants entire business model revolves around intentionally acquiring pallets. Even if Defendants were only acquiring pallets as part of a larger mixed load of pallets, no one is forcing (or even asking) Defendants to buy or take possession of these pallets.”
But recyclers counter that many suppliers, some of whom are CHEP customers, want a single source provider to take all the pallets or none at all, including rental or other proprietary pallets. At the end of the day, it is the pallet receiver and shipper that decides what gets put into a trailer. Recyclers can refuse to accept colored pallets or proprietary pallets. But if they do that, they risk losing the core account or may have to pay more per pallet to keep the business.
Recyclers point to the fact that CHEP could stop the problem if the pooler limited where customers could send them, developed a nationwide tracking system for each pallet, or hired more agents to look for and pick up pallets. Or CHEP could establish more pricing incentives to get pallets back. But each of these options put the pooler in a tough position with customers, retailers or key players in the supply chain. It is much easier to just collect stray pallets at the end of the process when they collect at recycler facilities. While the majority of proprietary pallets are collected at retail partners and participating distributors, there are still a lot of them that leak out every year.
The recycler’s complaint noted, “Because CHEP has failed to address the down-market stream of the use and location of CHEP pallets, these pallets quietly accumulate.” The rental company sought a remedy in the California legislature in 2012 by lobbying the state assembly to pass legislation outlawing recycler possession of proprietary/pooled pallets in most situations. CHEP then used that law to work with local law enforcement to force independent recyclers to return pallets or face criminal legal action. AB 1760 was written in response to that law.
According to Montes, the recyclers in the lawsuit have returned CHEP pallets or allowed them to be collected. These companies are documenting the CHEP pallets they receive, and the costs involved. Both sides are going to create a case for what they owed. CHEP estimates its damages are likely to be in the tens of millions of dollars, and it is seeking three times damages and fees.
At stake is more than just the fate of these Southern California recyclers, both sides are seeking to shape how AB 1760 can be used or if it can be limited by applying stringent documenting requirements. CHEP is also claiming the law equates to taking of private property without compensation. But the recyclers defend the law only spells out how long a proprietary owner can wait to pick up a pallet before it is declared abandoned. CHEP’s legal argument is seeking to have the law declared unconstitutional due to an alleged violation of the “taking clause” of the 5th and 14th amendments of the U.S. Constitution as well other federal statutes.
How the courts in California interpret this law could affect what other jurisdictions do across the country. The reality is that this is not a short fight. Both sides are dug in and prepared for a long battle. Montes said, “We intend to see this through.”
AB 1760 Key Provisions
AB 1760 states, “Nothing in this section prohibits a junk dealer or recycler from acquiring good faith possession of merchandise pallets based on the representations of the seller that the indicated owner cannot be located or has failed to retrieve the merchandise pallets on a timely basis. If the indicated owner can be located, a junk dealer or recycler who acquires good faith possession shall give notice of good faith possession to the indicated owner of the merchandise pallets. The seller shall retain a copy of this notice of good faith possession for at least two years. A junk dealer or recycler who acquires good faith possession may require payment of reasonable storage fees for the merchandise pallets if the indicated owner demands a return within 35 calendar days after the junk dealer or recycler notifies the indicated owner of having acquired good faith possession. After 35 calendar days from when the junk dealer or recycler provides notice of good faith possession to the indicated owner, the owner shall be deemed to have relinquished possession of the merchandise pallets, at which time the junk dealer or recycler may either sell the pallets or charge reasonable storage fees if the indicated owner demands a return and the pallets are still in the possession of the junk dealer or recycler.”
You can see the entire law at https://legiscan.com/CA/text/AB1760/id/2607894.
