Recently, I received an inquiry from a client about employment and license restrictions imposed by the USDA. Specifically, the client wanted to know who could be restricted by the USDA, how such determinations were made and the practical impact of restrictions. This week, we look at the potential restrictions and the standard utilized by the USDA to determine who is responsible for the PACA licensee's violations.
A PACA licensee violates PACA when it fails to timely pay produce suppliers, illegally bribes inspectors, unlawfully employs a PACA violator, makes false and misleading statements for fraudulent purposes, or misrepresents the variety, grade or origin of a commodity. The USDA may hold the individual shareholders and officers of a PACA licensee liable for such violations if they are "responsibly connected" with the PACA licensee during the time when the violations occurred.
"Responsibly connected" with a PACA licensee is defined by the PACA Regulations as partners, officers, directors, or holders of more than 10% of the licensee's outstanding shares. At one time, individuals who fit within this definition were presumed to be responsible for the licensee's actions and thus, subject to license and employment restrictions. Once the USDA determined that they were "responsibly connected," no evidence could be presented to overcome that finding.
However, one federal appellate court found the "responsibly connected" standard to be overly harsh to individuals who had no knowledge of a licensee's violations, or who were powerless to prevent such violations. An exception to the "responsibly connected" standard was crafted by the court, wherein individuals were given an opportunity to present evidence establishing that they had no involvement or control of the licensee's financial decisions, despite their title or ownership percentage of the licensee's stock.
Thereafter, Congress included the "responsibly connected" exception crafted by the federal courts in the 1995 amendments to PACA and the Regulations. The definition of "responsibly connected" remained the same, but Congress added a sentence allowing individuals an opportunity to rebut the "responsibly connected" determination if they could show that: 1) they were not "actively involved" in the activities resulting in the company's violations; and 2) they were an officer in title only with no decision making power, or that the entity subject to license was so dominated by one owner that it and its owner were essentially alter egos of each other.
In determining that an individual was "actively involved" or had a role over the licensee's operations, courts have found that there must be a sufficient connection between the individual and the licensee. Factors to consider include the individual's percentage of ownership; the licensee's corporate records and the individual's ability to access those records; the individual's participation in policy or business making decisions; and the individual's knowledge of the company's financial situation. These factors are essential in finding that individuals are "responsibly connected" with a licensee and therefore, subject to employment and license restrictions in their individual capacities.
In terms of employment, the nature of a "responsibly connected" individual's restrictions depends upon the violation committed by the licensee. If a license is revoked, or the licensee has been found to have violated a provision of PACA, a "responsibly connected" individual will be suspended from working within the produce industry for a period of one year. Thereafter, the individual may be employed by another licensee only if the licensee posts a surety bond in an amount determined and required by the USDA.
On the other hand, if a license is suspended for the licensee's failure to pay a reparation award, a "responsibly connected" individual can work within the produce industry, but his or her new employer will be required to post a surety bond. The bond amount will be determined by the USDA and will last for a minimum of two years unless the reparation award is paid early. Thereafter, the individual may be employed without any restrictions. However, the individual's new employer must agree to pay all reparation awards issued against him or her in connection with transactions that occur within the four years following approval of the individual's employment.
Licensing restrictions are similar. A person found to be "responsibly connected" to a PACA violator may not obtain a PACA license for a period of two years following the effective date of the sanction against the licensee. Thereafter, that individual may obtain a new license, but the USDA will require a surety bond to be posted in a certain dollar amount.
If you have any questions regarding this or any other subject, please feel free to contact our office.