Managing and Marketing the Direct Farm Business
There are many components to successfully managing a direct farm business. Taxes and employment encompass such significant portions of law that they merit their own chapters. However, there are many other management details that this chapter will address. First and foremost, contracts are subject to a myriad set of laws, many of which protect farmers from potential abuses. A direct farm business also needs to have effective marketing in order to reach potential customers and sell the product. This marketing plan may encompass many facets, including internet marketing, procurement contracts, and establishing valid intellectual property rights. When a sale is made, the direct farm business must accurately measure its products in order to comply with state law. Finally, a successful direct farm business should consider estate planning in order to ensure efficient transitions in the future.
Contracts are an integral part of every business. Contractual agreements can take many forms: some are small cash transactions and others are detailed documents resulting from lengthy negotiations. Regardless of the type of direct farm business, there are basic contract principles that owners and managers should know to assist in running a smooth operation and for protecting business interests.
General Contract Law
A contract is an agreement between two or more competent parties to do something in exchange for something of legal value. There are three basic elements of a valid contract: an offer, acceptance, and consideration. An offer is a committed and definite proposal that is sufficiently communicated to others. Acceptance is communicated when a party agrees to the exact proposal in the offer using clear and unequivocal terms. The final requirement, consideration, concerns the subject of the contract. Consideration is an explicitly bargained for benefit or detriment that has value in the eyes of the law. This could be money, land, crops, or even a promise to provide products in the future.
The Uniform Commercial Code (UCC) (810 ILCS 5) is a uniform set of laws adopted in every state in order to facilitate interstate commerce. The American Law Institute develops the UCC and then each state adopts it with minor variations the state deems necessary for its local needs. The UCC covers a broad array of commerce issues, such as the rights and duties of creditors and debtors, how loans can be transferred between varying parties, and standards for forming and interpreting leases. Farmers need to be aware of the of the UCC, especially regarding the sale of goods, because it establishes unique rules for commercial transactions, such as defining when a contract is formed between two merchants, setting standards for how contract terms are interpreted, default terms when something is omitted, and defining what remedies are available if the contract is breached. These UCC rules are the default law courts will apply if contracting parties do not come to an agreement or fail to include a term in their agreement. However, businesses are free to negotiate alternative terms for their contract. Relevant provisions of the UCC are covered in more detail in the following discussion.
Oral Contracts, Written Contracts – Which One?
A contract does not necessarily have to be in writing in order to be binding and enforceable. In fact, many contracts are oral contracts, where no writing ever exists. Generally, creation of a contract requires an offer and an acceptance, and there must be performance in the form of mutual exchange of consideration. Small direct farm sales, for example most roadside stand cash transactions, are usually oral contracts. When a farmer sets up a stand and communicates the availability of his produce in some way at a certain price, he has made an offer. By agreeing to pay the purchase price, the consumer accepts the offer, forming an enforceable contract. The consideration is the produce the farmer provides and the money the customer pays. The contract is performed (and thus complete) when the farmer receives the money and the customer receives the produce. In most cases, oral contracts are binding and enforceable—just like a written contract. There are instances, however, where a contract must be in writing to be enforceable.
As early as the 1600s, people recognized that certain contracts are particularly susceptible to misrepresentation. Responding to this, the English Parliament adopted what is known as the “statute of frauds” to require that fraud-prone contracts must be in writing to be enforceable. Following this English tradition, every state in the Union has adopted a version of the statute of frauds. The Illinois Frauds Act (740 ILCS 80) lists a number of circumstances specifically requiring a written contract, but the ones most relevant to farmers is for contracts that will take more than one year to perform, including leases of land that will last more than a year, and sales of real property. Separate from the statute of frauds, the UCC requires contracts for the sale of goods totaling $500 or more to be in writing (810 ILCS 5/2‑201).
Contracts lasting more than a year can present themselves in many different forms. For example, a contract to sell grain could have an execution date that is more than a year away, making it fall within this section of the statute. The statute only applies to contracts that cannot possibly be performed within one year. The mere possibility that a contract will take longer than a year to perform does not force it into the statute. So, for example, a contract to sell the milk of an animal for the rest of its life would not fall within the statute because there is no guarantee that the animal will live longer than one year. Many community supported agriculture (CSA) contracts also might fall within this provision of the statute of frauds. For example, an agreement to receive delivery on produce through the end of the next year may or may not fall within the provision based upon the timing and terms of the contract. If the agreement requires taking delivery at a date that is more than one year away, it generally must be in writing. If the contract is set up in a way that could potentially last over a year but could also be completed within a year under certain circumstances, it does not fall within this provision of the statute of frauds.
The statute provides a slightly different rule when merchants are involved. Illinois law defines a merchant as “a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction…” (810 ILCS 5/2-104). If both parties to a contract are merchants, an oral contract that would otherwise have to be in writing under the statute of frauds is binding if a confirmation of the oral contract is sent in writing within a reasonable time and neither party objects within ten days after the writing is received (810 ILCS 5/2‑201)(2)). The Illinois Supreme Court held that farmers are merchants when they market their crops (Sierens v. Clausen, 60 Ill. 2d 585, 589 (1975)); other activities, such as processing fruits into jellies and regularly marketing the goods, may fall under this special rule as well.
It may also be useful to understand what constitutes a “writing.” To be enforceable, the written document must be signed by the party that has an obligation imposed upon them or someone who is authorized to sign for them. The party seeking to enforce the contract does not necessarily have to have signed the contract. If a contract omit terms or includes a term that is different than what was actually agreed upon, the contract will usually still be binding. In fact, evidence of the oral contract usually cannot be offered as evidence to show the terms of the contract were supposed to be something else (A.C.A. 4-2-201).
Although it may be difficult to understand when a written contract is technically required and when an oral contract will be enforceable, it is always a good business practice to put contracts in writing. Doing so protects legal interests and avoids potential disagreements that can lead to a negative business reputation and possible legal battles. When preparing a written contract, it is important to be thorough and accurate. At the bare minimum, the contract should contain the identities of the parties, what item is being contracted for, including quantities and a clear description including quality standards, the negotiated price, and when performance is expected. It might also include ways the contract can be cancelled and what remedies each side will have if the other fails to perform. Contradictory oral statements made during negotiations will not override the terms contained in a written contract. Taking the time to prepare a well-crafted written document will pay off in increased security of interests, reduced chance of unmet expectations due to ambiguity, and will create a tangible record in case any problems do arise from transactions. Regardless of the dollar amount or the time involved in a contract, it is advisable to have an attorney at least review any important contract before signing it.
Excused Contract Performance
Sometimes one or both parties break one of the technical requirements of a contractual agreement but courts nonetheless refuse to impose liability for breach of contract. Situations where a party might be excused from performing obligations under a contract can be placed into three broad categories. First, if circumstances create a situation where it is impossible to perform the contract a party may be released from their obligations. Second, if performance is technically possible but requiring a party to perform would be extremely unfair under the circumstances then performance might be excused. Finally, a party might not be required to perform if the purpose for entering into the contract no longer exists or would no longer be furthered by performance of the contract.
Impossibility is an unforeseen, unexpected event occurring after a contract was created but before it was performed that makes performance of the contract not possible. This could occur when a particular piece essential to the contract is destroyed or when a particular essential person to the contract dies or is otherwise incapacitated. The thing destroyed or the person incapacitated must be absolutely necessary to the contract in order to fall under impossibility. A small non-essential element being destroyed does not lead to excusing the contract for impossibility. So, for example, if a farmer has a contract to sell a particular animal and the animal dies after the contract is formed, then both parties would be excused from performing under the contract.
This does not mean that every disaster leads to escaping contractual obligations. For example, if a party enters into a contract to sell 100 bushels of corn and, before delivering the harvest, a flood destroys the corn, the farmer is not excused from the contract because of impossibility. This is because the farmer could still purchase corn from another source and use it to fulfill his obligation. Unlike a particular deceased animal, corn is a commodity that could be replaced. A contract becoming more difficult or more expensive to perform is not enough to make it impossible to perform.
Some courts may have sympathy for parties who find themselves in a position where their performance, while not technically impossible, would be so difficult that requiring performance would be overly harsh. Courts have substantial discretion in deciding whether or not performance should be excused because requiring performance would be impracticable, or extremely unfair. For example, if a farmer contracts with a trucking company to deliver 100 truckloads of crops and all of the company’s trucks are subsequently destroyed by fire, it would not be impossible for the trucker to perform, but it may be impractical. The company could purchase a new fleet of trucks and perform the contract, but a judge could find, in his discretion, that requiring performance under these circumstances is overly harsh and should be excused.
A third way that contract performance could be excused is frustration of purpose. This means that a contract was entered into for a particular underlying reason and that purpose no longer exists as it did at the time of contract formation. For example, if a farmer contracts to buy feed for his cattle and all the cattle die from disease, the purpose of the contract (feeding the cattle) has been frustrated. It is still possible for the farmer to buy the feed, but he entered into the contract specifically to feed animals that no longer need to be fed. When the reason for the contract no longer exists, the contract may be set aside because of frustration of purpose.
Whether or not a contract performance will be excused is an intensely fact specific determination. As a practical matter, if problems arise that may lead to a breach or inability to perform the contract, one should first attempt to renegotiate the terms of the agreement with the other party. If negotiations fail, hiring an attorney is the best way to protect oneself and explore legal options.
Laws that Protect Farmers
Although contracts are personal and can vary greatly from negotiation to negotiation, even between the same two parties, there are some restrictions, obligations and remedies that Federal and Arkansas law impose upon certain agricultural contracts.
The Packers and Stockyards Act (P&SA) (7 U.S.C. §§ 181-229b) was enacted in 1921 to facilitate fair competition in livestock, meat, and poultry markets. The act prohibits unfair, deceptive, unjustly discriminatory, fraudulent and anti-competitive practices. Livestock dealers are required to register and be bonded to protect producers. The P&SA will not apply to most direct farm businesses because farmers are not subject to the act when buying livestock for their own purposes or when marketing their own livestock and livestock products. However, the act’s registration and bonding requirements may apply to agricultural cooperatives marketing livestock on their members’ behalf. Furthermore, the act provides several protections for farmers engaged in production contracts. The section on production contracts, below, discusses these in more detail. The Grain Inspection, Packers, and Stockyards Administration (GIPSA), a sub agency of the USDA, administers the P&SA. GIPSA has more information on its website.
The Perishable Agricultural Commodities Act (PACA) (7 U.S.C. §§ 499 et seq.) seeks to ensure fair trading practices for fruits and vegetables by requiring farmers to deliver produce as promised and buyers to pay within a reasonable period of time of receipt. The law requires anyone buying or selling or brokering contracts for more than 2,000 lbs per day or selling more than $230,000 worth of produce in a year to obtain a PACA license. Farmers who sell only their own produce are not subject to the act, but cooperative marketing associations that market the qualifying quantities are subject to it. USDA’s Agricultural Marketing Service (AMS) enforces the law. If anyone violates the fair marketing requirements of the act, the other party to the contract can file a complaint with AMS. More information on licensing and complaints is available through AMS’s website.
The law also establishes a trust right to protect farmers – if the farmer notifies the buyer that they intend to be covered by the trust, the buyer must hold the proceeds of the sales in trust to pay the farmer. The primary benefit of this is that it makes it easier for farmers to get paid when they file a court action and it puts farmers ahead of other creditors if the buyer goes out of business or declares bankruptcy. Producers who are not subject to the act can nonetheless get a PACA license in order to benefit from the PACA trust protections.
For a more in depth summary of the PACA, see the Farmer’s Legal Action Group’s handout, or the National Agricultural Law Center’s overview of the act.
The Agricultural Fair Practices Act (7 U.S.C. §§ 2301-2306) was enacted in 1967 to protect farmers who belong to cooperatives from retaliation or coercion by handlers who are trying to limit producers capacity to market and bargain cooperatively. The act defines handlers as anyone who acquires agricultural products from producers or associations of producers for processing or sale; or grades, packages, handles, stores, or processes agricultural products received from producers or associations of producers; or contracts or negotiates contracts or other arrangements, written or oral, with or on behalf of producers or associations of producers with respect to the production or marketing of any agricultural product; or acts as an agent or broker for a handler in the performance of any of the above functions (7 U.S.C. §2301(2)). The act prohibits handlers from coercing or refusing to deal with a producer for joining a cooperative, discriminating against a producer in price, quantity, quality or other terms due the producer’s membership in a cooperative, attempting to bribe producers to quit or not join cooperatives, making false reports about the activities and finances of a cooperative, or conspiring with anyone else to do any of aforementioned (7 U.S.C. § 2303). If a producer feels a handler has violated the act, they may bring a civil action in the courts for injuries done to themselves, or they may complain to the Secretary of Agriculture, who can then investigate and report the offender to the Attorney General for prosecution (7 U.S.C. § 2305). If a producer brings a civil action, the courts may award attorneys’ fees to the prevailing party, so the loser may have to pay the winner’s litigation costs (id.). Because the act does not allow USDA to bring enforcement actions directly, but rather requires referring them to the Department of Justice, it is not a strongly enforced law.
Special Contracts
Production Contracts are contracts where a company hires a farmer to raise animals or crops for the company, using seed or animals, feed, and other inputs that the company supplies. These types of contracts are governed by Illinois’ Agricultural Production Contract Code (505 ILCS § 17). The code requires that production contracts meet certain standards of readability, such as being entirely in minimum ten point font (which effectively eliminates the fine print) and using commonly understood words and terms. Some contracts contain confidentiality clauses that restrict farmer’s ability to discuss the contract with anyone. The act prohibits these clauses from restricting a farmer’s right to discuss the contract with immediate family members and professional advisors such as attorneys, financial advisors, and farm managers. Although the farmer has a right to discuss the contract with these people, the contract can require that such conversations be treated as confidential and restrict everyone’s ability to disclose terms of the contract to anyone not within the protected relationships. The Farm Security and Rural Investment Act of 2002, (the 2002 Farm Bill) (Pub. L. No. 107-171 § 10503, 116 Stat. 134, 510) also contains a provision that protects poultry and livestock producers from non-disclosure provision in their production contract (codified at 7 U.S.C. § 229b). The Illinois law prohibits terms in contracts that would allow a contractor to unilaterally terminate the contract or terminate it without a good cause. Finally, the production contract code imposes special requirements on contracts that require the farmer to make capital investments, in order to protect farmers from financial losses that may occur from termination of the contract. The Illinois Attorney General enforces the act, and provides a useful summary(.pdf) of the provisions of the act.
Federal law provides several additional protections for poultry and swine producers entering into production contracts.[1] Generally, the Packers and Stockyards Act (P&SA) prohibits poultry dealers and swine contractors from engaging in unfair, unjustly discriminatory or deceptive trade practices (7 U.S.C. 192). When hiring growers to perform production contracts, the P&SA requires the first page of the contracts to conspicuously disclose whether capital investments are necessary to perform the contract (7 U.S.C. 197a(b)). The P&SA authorizes the Secretary of Agriculture, through GIPSA, to institute investigations and compel dealers and contractors to pay damages to injured parties for violations of the act; producers may also petition GIPSA for an investigation and reparation (7 U.S.C. 210). Alternatively, the producer may bring a lawsuit against the dealer or contractor in Federal court (7 U.S.C. 209).
GIPSA exercises its authority over swine contracts on a case by case basis, therefore there are no regulations that specifically address what constitutes unfair, unjustly discriminatory, or deceptive trade practices for swine contracts. However, there are specific GIPSA regulations applicable to poultry production contracts. The rules require poultry dealers to provide the grower with the true written contract on the day they provide the grower with the poultry house specifications (9 C.F.R. 201.100(a)). This is to protect producers from the practice of inducing producers to take out expensive loans to build production houses, then changing the terms of the promised contract after the producer is in a situation where rejecting the contract would put the farmer at risk of losing their business and their home. The contract terms must cover the contract’s duration and grounds for termination, all terms relating to the payment, including how feed costs and live weights and slaughter weights will be calculated, and whether a Performance Improvement Plan (probationary program for growers who fail to meet minimum performance standards) exists and if so, what the factors are for its application (9 C.F.R. 201.100(c). The GIPSA regulation also expands the scope of the anti-non-disclosure rules to allow producers to consult with other producers who have contracts with the poultry dealer (9 C.F.R. 201.100(b)).
Requirements and Output Contracts are two types of agreements that can provide some security to producers as well as those who buy directly from farmers in bulk. The concept behind these agreements is simple. In a requirements agreement, the buyer agrees to purchase all of a product that they may require or use from a certain party. Similarly, an output contract is an agreement by a purchaser to sell all of a product that they produce to a particular buyer. Direct farm businesses may find these types of contracts useful when dealing with institutional buyers or restaurants.
Entering into a requirements or output contract is not a green light for producers to simply increase their production to dramatic levels secure in knowing that a party is contractually bound to purchase everything that they can churn out. The UCC puts some restrictions on these types of contracts. U.C.C. § 2-306 imposes a duty of “good faith” on the parties to the contract (A.C.A. 4-1-304). This means that neither side can demand or produce a quantity that is unreasonably disproportionate to the quantity that was estimated by the parties when striking their deal. If the parties failed to make any estimates at the inception of the contract, the UCC restricts quantities to “normal” or “comparable” quantities to what would ordinarily be required or produced, but does not specifically identify how those terms should be defined
The specific language used in a requirements or output contract can be very important. The contract must use assertive language such as “require,” “need,” “can use,” and so on. Using equivocal language such as might want to use or wish, does not create a binding contract. While such language does not prohibit parties from agreeing to deal with one another, it is not sufficiently definite to impose an enforceable duty on the parties. When parties fail to use definite language but act as though they formed a valid requirements or output contract, they are really acting under a series of mini-contracts. While the two situations could potentially have the same outcome, producers should realize that indefinite terms could lead to their contract not legally binding either party. When drafted carefully, requirements and output contracts can provide some security for parties. Farmers can produce at normal levels with confidence that all of their output will be purchased and buyers are given some assurance that their needs will be filled. It is highly advisable to consult an attorney when entering into a requirements or an output contract. Because of the large volume typically associated with these types of arrangements, parties should be careful when agreeing to terms and should, at a minimum, have an attorney review these documents prior to agreeing to the terms to ensure they fully understand the obligations and likely outcomes of the contract.
Procurement Contracts can be an advantageous way for a direct farm business to make significant sales. The USDA purchases large quantities of commodities through various procurement programs in order to supply food for school lunch programs, prisons, international food aid and other programs. USDA’s programs are varied and complex, although they generally consist of some sort notice to intent to purchase followed by a competitive bidding process. Information for small businesses is compiled here. The Agricultural Marketing Service (a subsidiary of the USDA) also maintains commodity-specific information available here. The state of Illinois also administers a procurement program through the Department of Central Management Services. The Illinois Procurement Code (20 ILCS 500) is not agriculturally specific, but it does provide for set asides of certain contracts for small businesses (30 ILCS 500/45-45) and prioritizes environmentally preferable products (30 ILCS 500/45-26). All initiations for contract bids must be published in the Illinois Procurement Bulletin. More information on selling to Illinois is available here
Marketing is about informing consumers of one’s product and building a reputation so that consumers keep coming back. There are many ways to engage in marketing, such as sales flyers, eye catching posters at the farmers market, road side signs, and internet marketing. This guide only addresses legal issues pertaining to labeling and advertizing, some specific issues related to the Internet, and basic intellectual property issues that may arise.
Labeling and Advertising
Labeling is regulated by the Food and Drug Administration (FDA) under the Food, Drug and Cosmetic Act (21 U.S.C. Chapter 9), which prohibits selling “adulterated” or “misbranded” food. The Federal Trade Commission (FTC) regulates advertising pursuant to the Federal Trade Commission Act (FTCA) (15 U.S.C. §§ 41-58), which prohibits un-truthful and deceptive advertising and unfair advertisements. Although the line between advertizing and labeling is a bit fuzzy, advertising and labeling are subject to consistent rules because the FTC and FDA have a collaborative enforcement arrangement. FTC guidance documents treat advertising as deceptive if it contains a statement or omits information that is likely to mislead consumers and it is material (important to a consumer’s decision-making). A statement is unfair if it causes or is likely to cause substantial consumer injury which a consumer could not reasonably avoid and is not outweighed by the benefit to consumers. These laws have implications for several types of claims a direct farm business may wish to make about its products, whether on its labels or in its advertising. For more thorough guidance, the FDA’s Food Labeling Guide details the intricacies of food claims. The FTC generally uses the same guidelines for claims made in food advertising.
Health Claims describe a relationship between the food (or a component of it) and reducing the risk of a disease or health-related condition. For instance, a label might claim “low fat diets rich in fiber-containing grain products, fruits, and vegetables may reduce the risk of some types of cancer, a disease associated with many factors.” To make a health claim on a label, it must be approved by the FDA. Approved health claims are listed in Appendix C of FDA’s food labeling guide. If a claim is not approved, a food producer can petition the FDA to approve the claim, and must support the petition with sufficient scientific evidence. A label may also contain a qualified health claim, which is a health claim where emerging scientific evidence suggests the claim may be valid, but the evidence is not strong enough to meet the standard necessary to be a health claim. Like with health claims, qualified health claims must be preapproved by the FDA through a petition. Failure to obtain pre-approval causes the food to be “misbranded.”
Structure/Function Claims describe the role of a nutrient in affecting normal structure or function in humans. For instance, “calcium helps build strong bones.” These types of claims are not pre-approved by the FDA, but they must still be truthful and not misleading. For more information on these types of claims, see the FDA’s Small Entity Compliance Guide on Structure/Function Claims.
Nutrient Content Claims characterize the level of a nutrient in a food, such “high in vitamin A.” This also covers claims such as “low fat” and “light” foods. The FDA prohibits these claims unless specifically approved in FDA’s regulations (21 C.F.R. § 101.13 and subpart D). Raw fruits and vegetables and fish are not required to label their nutritional content, but the FDA provides posters for voluntary labeling of their nutritional content.
Internet Marketing
Many small businesses consider an Internet presence an essential part of their business strategy. The Internet and other forms of electronic communication (e.g. email or social networking sites such as Facebook) can open doors to a direct farm business for customers otherwise unable to visit the retail operation due to distance, time, or other factors. USDA's Agriculture and Marketing Service (AMS) has published an informative brochure, How To Direct-Market Farm Products on the Internet(.pdf), that explains many issues related to Internet marketing of farm products. The brochure encourages farm businesses to identify the internet marketing goals (save time, save labor, increase market access, provide customers information) and do research on the potential market before setting up a website. Other things to consider are the cost and feasibility of shipping products and the loss of personal interaction, which may be what customers are looking for in a direct farm business. In addition to setting up a webpage or sending customers email, a direct farm business may wish to list itself on some local or national online farm business directories such as Illinois MarketMaker (an Illinois-wide directory hosted by the University of Illinois) or the IDOA's Food and Agribusiness Guide (a directory hosted by the Illinois department of agriculture). These directories help farmers disseminate information on their products and reach consumers as well as commercial retailers or businesses such as restaurants. Although the various marketing tools available over the Internet can be very beneficial, there are some legal issues unique to the Internet to be aware of.
Shipping Products If the farm’s products are capable of shipping through the mail, a website that allows customers to place orders online can be an important aspect of the direct farm business. Sending perishable goods through the mail, however, can be costly and requires careful packaging. If food needs to be shipped cold, the USDA recommends shipping with dry ice, foam coolers, and polyethylene film to provide additional insulation. The package should be clearly labeled that it contains dry ice, needs to be refrigerated and should be shipped by the fastest means possible, preferably overnight. For consumers, the USDA advises that they check to ensure the food is below 40 degrees when it arrives. The USDA also provides a handy guide of safe handling times for a large variety of mail order foods. Also keep in mind that shipping food out of state can subject the business to Federal laws the operation may not otherwise have to comply with.
The Federal Trade Commission’s (FTC) Mail or Telephone Order Merchandise Rule (16 C.F.R. Part 435) applies to sales made over the Internet. The Rule regulates shipment promises, unexpected delivery delays and customer refunds. To comply with the Rule, a seller must have a reasonable basis for promising shipment within a certain time frame. If online advertising does not specify the shipment period, the seller must have a reasonable basis for believing that they can ship within 30 days. If shipment cannot be made within the promised time period, then the seller must notify the customer of the delay and provide the customer with the option of cancelling the order and receiving a full refund. If a seller cannot fill an order, they have the right to cancel the order, but must notify the customer of the cancellation and refund the customer in full.
Protecting Customers' Personal Information If the business allows consumers to enter personal information into their website, the FTC requires that the business have a plan to safeguard consumers’ personal information. There are no specific requirements that a business’ information security plan must follow. Adequate safeguard measures depend on various factors such as the size and nature of the business, and the amount and type of information collected on the internet. The FTC maintains a website, to assist businesses in complying with consumer protection requirements.
Email Marketing Emailing a weekly, monthly or annual newsletter requires little time or money, and avoids the cost and hassle of printing and sending documents via the mail. Short email updates concerning revised hours of operation or seasonality may be a convenient method of communication between the direct farm business and its customers. All commercial email from a business to a consumer is regulated by the FTC’s CAN-SPAM Act (15 U.S.C. § 7701 et seq.). When sending commercial emails, the “from” and “to” lines and routing information must be accurate and identify who initiated the email, and may not contain deceptive subject lines. The email must give the recipient an opt-out method if they do not wish to receive any more commercial emails from the business. The email must also be identified as an advertisement and include the sender’s valid physical postal address. As a general rule, emails concerning an agreed-upon business transaction or updating the customer on that business relationship are allowed under the Act. Violations of the rules in this act can cost the business steep fines.
Taxation of Internet Sales If the direct farm business sells over the Internet, determining what taxes are owed can be complex. However, for the most part Illinois direct farm businesses will need to collect state and local sales taxes if a sale takes place in Illinois or the product is delivered to an Illinois address. Local taxes where the order is accepted determines what tax rate to apply. If an Illinois retailer ships merchandise out of Illinois, a U.S. Supreme Court decision prohibits states from requiring out of state retailers to collect and remit the sales tax for the state where the product is delivered if the retailer has no physical presence in the state (Quill Corp. v. North Dakota, 504 U.S. 298 (1992)). Instead, it is the responsibility of consumers within the state to report and remit the taxes they owe in their own state. Therefore, if shipping merchandise out of Illinois, businesses do not have to collect and remit the out of state sales tax (86 IAC §§ 130.605, 130.610).
Marketing a business often involves developing and protecting intellectual property (IP), i.e. creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. Specific forms of IP include trademarks, patents, copyrights, and trade secrets. Each may be important to the direct farm business in that ownership gives the right to prevent others from doing certain activities without permission. These rights are important because they protect the investment the owner has made in developing the IP. Understanding IP will also help the direct farm business avoid having any actions for violations of IP rights brought against them.
Trademarks and Trade Names Trademarks may be the most useful form of IP for the direct farm business. A trademark is used to distinguish goods and services from those manufactured or sold by others – it is the symbol that customers use to identify a product and equate with goodwill. A trademark can be a name, symbol, sound, or color. It is also possible to register the design, packaging, or other element of appearance so long as the element is both nonfunctional and distinctive. This is known as "trade dress." By contrast, trade names are used to identify a person’s business or vocation. While there may be some overlap between trade names and trademarks, if a name is used only as a trade name it may not be registered with the USPTO. Courts have held, however, that a trade name may have trademark protection if the business adopts a stylized font and other design features that would set the name apart from regular text.
Mere use of the mark makes it a trademark – the mark does not need to be registered in order to establish rights. However, rights may be limited to the geographic region where the unregistered mark has been used if another business subsequently registers an infringing mark. The older, unregistered mark owner will have superior rights in the region where the mark was being used, and the newly registered mark owner will have superior rights in the rest of the state or country. Therefore, registration is beneficial because it gives notice of the claim of ownership throughout the state or nation, so that the owner can challenge someone else’s use of the mark anywhere, even if the owner is not currently marketing any products in the region. The symbol for trademark, TM, may be used whenever rights are asserted, but the use of the federal registration symbol, ®, may only be used after a mark is registered with the USPTO (not while the application is pending).
Trademark registration is available at the state and federal level. To be valid, the trademark needs to appear on the goods, their container, or on the displays associated with the goods. Federal registration of a trademark is through the United States Patent and Trademark Office (USPTO). Federal registration can be costly: $275-325 per mark per class of product (for instance, a sheep farmer wishing to trademark their wool yarn and their cheese would have to file two applications because yarns and cheeses are in different classes). The USPTO also recommends hiring an attorney who is familiar with trademark law, because applicants are expected to comply with all the procedural and substantive rules. Federal registration has several benefits. It allows the trademark owner to bring suit in federal court (rather than state court) and to register with the United States Customs and Border Protection (CBP) in order to stop the importation of infringing goods into the United States. Federal registration has the added benefits of protecting and ensuring the legitimacy of the trademark throughout the country. For more information, including a link the USPTO’s searchable trademark database, see USPTO’s trademark website at http://www.uspto.gov/main/trademarks.htm.
State registration is much less expensive and cumbersome than the federal system, but it only provides protection within Illinois. Currently it costs $10 to file a two page application, which is accompanied by straightforward instructions. Application forms can be found here. The database of trademarks registered in Illinois can be searched through here. A federal registration lasts 10 years, and a state registration lasts 5, and both can be renewed so long as the mark is being used in commerce.
In order to be registered and enforceable, trademarks may not be generic or highly descriptive terms and cannot infringe on an existing trademark. A phrase or slogan commonly used to refer to a category of product or that merely describes or praises the product is incapable of being distinctive enough to be used as a trademark. For example, an attempt to register the phrase "the best beer in America" as a trademark for Sam Adams Beer was rejected by the USPTO as too descriptive. Similarly, a court rejected the trademark "Beef Stick" because the term merely described the kind of good and did not distinguish the manufacturer. The USPTO will use the “likelihood of confusion test” to determine whether an applicant’s mark infringes on an already registered mark. The examiner looks at the similarity of the two marks and the commercial relationship of the products to assess whether consumers are likely to be confused about who/what company is the source of the product. If the USPTO finds likelihood of confusion, an application will be rejected. This is the same test that courts use when a trademark owner brings a suit asserting someone is infringing on their trademark.
Registering a trademark has two primary advantages. First, as the business builds a reputation with customers, registration protects its reputation from others who might wish to capitalize on the business’s success by using or closely mimicking their trademark. Secondly, it protects the business from infringing on registered trademarks. If a business is found infringing on another’s trademark, it will have to stop using the mark, which could confuse customers. It may also have to pay fines, disgorge profits made from use of the infringing mark, and pay the other side’s attorney’s fees, which can all be very costly.
Patents A patent grants the inventor the right to exclude others from making, using, or selling the invention in the United States or ‘importing’ the invention into the United States for a limited period, generally 20 years. In the United States, a patent is issued by the USPTO. To obtain a patent, an invention must be new, meaning that it was not known or used by others in the United States or "patented or described in a printed publication in a foreign country," and cannot be obvious. There are different kinds of patents, but the most common patents relating to farms are plant patents and patents on genetically modified plants. Plant patents are also available to one who has invented or discovered and asexually reproduced a distinct and new variety of plant, other than a tuber propagated plant or a plant found in an uncultivated state. A plant patent precludes others from asexually reproducing or selling or using the patented plant for 20 years from the filing of the patent application. Plant protection certificates, which provide patent-like protection for sexually reproduced seeds and tubers, are available for newly developed plant cultivars. The Plant Variety Protection Office of the USDA’s Agricultural Marketing Service issues plant protection certificates. If a direct farm business is licensed to use a patented product, such as genetically modified seed, it should be rigorous in complying with the licensing agreement. Some companies are very aggressive about enforcing their contracts.
If a direct farm business believes it has developed a new and non-obvious process or device, they should contact a patent attorney for assistance in obtaining a patent. The inventor should keep in mind that obtaining a patent can be very costly, time consuming, and the potential profitability of the device may not justify pursuing a patent. General information on patents and resources for finding a patent attorney are available from the USPTO’s website at http://www.uspto.gov/web/offices/pac/doc/general/index.html#patent.
Copyrights A copyright protects "original works of authorship fixed in any tangible medium of expression." Although literary works come easily to mind as examples of copyrighted material, in the direct farm business context, copyright protection could extend to categories such as pictures and graphics, sound recordings, movies, and other information related to the direct farm business operation. A copyright does not protect the actual ideas or methods, but rather it gives the owner certain exclusive rights to the way the copyrighted work is used. For example, in many circumstances a copyright owner has the exclusive right to reproduce the work, to make derivative works, and to display the work publicly. The owner also has the exclusive right to authorize others to do the same. Pictures of growing crops or a farmers market used on the direct farm business website or promotional material would qualify for copyright protection. On the other hand, the unpermitted use of another’s pictures (perhaps copied from the Internet) may mean that you are infringing on the copyrights of another.
A work does not have to be published or even registered with the Copyright Office to gain protection. Copyrights attach once a work is "created," meaning it has been fixed in a tangible medium of expression such as a copy or recording. Even so, registration is important for providing a public record of the copyright claim. Registration also provides significant advantages regarding the enforcement of rights in courts and with Customs and Border Protection. Other information on copyrights, including a searchable database of registrations and up-to-date fee information, can be found at the United States Copyright Office’s webpage, http://www.copyright.gov/. The webpage also contains a link to step-by-step instructions on obtaining a copyright.
Trade Secrets A trade secret is information companies make an effort to keep secret in order to give them an advantage over their competitors. Unlike other forms of intellectual property, there is no federal regulation of trade secrets. Even so, most states, including Illinois, have now adopted statutes modeled after the Uniform Trade Secrets Act (765 ILCS 1065). Enforceability generally relies on showing two things:
- that the information had been secret enough to give a competitive advantage; and
- that measures were taken to keep others from obtaining or using the information
Although the agriculture community has traditionally shared innovation, there may be certain trade secrets that provide the direct farm business an important commercial advantage that warrants protection. Typical examples could include a list of regular customers built up over time, a special recipe for apple preserves, or a secret fertilizer method for growing the best vegetables. In such cases the employer should require employees to sign non-disclosure agreements and/or non-compete agreements. A typical non-disclosure agreement includes a definition of the confidential information, any exclusion from confidential information, the obligations of the employee to not disclose the information, and a time period for former employee’s to maintain the secret. There are exclusions on the scope and duration of non-disclosure agreements, so an attorney may be helpful in drafting a proper (enforceable) agreement.
International IP Protection Although perhaps not relevant for most direct farm businesses, information is available from the World Intellectual Property Organization (WIPO), and from the World Trade Organization (WTO), regarding international treaties and agreements applicable to different forms of IP protection for international commerce.
The last issue pertinent to selling products direct from the farm (besides the meat of the matter, food safety regulations) is accurately weighing and measuring the product. The Illinois Weights and Measures Act (225 ILCS 470) and the Department of Agriculture’s implementing rules (8 IAC Part 600) apply to all sales of commodities within the state. The seeks to ensure accurate measurement and delivery of wholesale and retail commodities by establishing standards for how commodities can be measured or weighed and certification of the accuracy of scales. Direct farm business must make sure that any instruments and devices used in commerce for weighing and measuring comply with the provisions of this act.
Commodities in liquid form must be sold by liquid measure or by weight. All other commodities must be sold by weight, by measure of length and area or by count, and vegetables may be sold by the head or bunch (225 ILCS 470/23).
Bushels of agricultural commodities must meet the requirements established by the Department of Agriculture (225 ILCS 470/52). The Standard Weight per Bushel for Agriculture Commodities varies depending on the item. The standards are available at 8 IAC § 600.TABLE B. All other Illinois Standard Weights and Measures can be found 8 IAC § 600.TABLE C.
Pre-packaged commodities must identify on the outside of the package (1) the commodity in the package, (2) the net quantity of the contents in terms of weight, measure or count, and (3) the name and the place of business of the source of the commodity if sold elsewhere than on the premises where it was packed. (225 ILCS 470/24).
Any commercial weighing and measuring device must be marked with the name of the manufacturer and the serial number (225 ILCS 470/36) and must have been issued a Certificate of Conformance by the National Conference on Weights and Measures which signifies that the device complies with the requirements of the National Institute of Standards and Technology’s Handbooks. (225 ILCS 470/30). To find out if a device is certified by the NCWM enter the requested criteria into the NTEP Certificate Database Search.
Inspectors from the Department of Agriculture may make inspections of commercial weighing and measuring devices at any time (225 ILCS 470/10). The inspection fees vary depending on the type and size of the device, and are set out in 8 IAC § 600.310. If the device is found not to be in compliance with the Act, the inspector may order that the device be corrected or confiscated and destroyed (225 ILCS 470/14). Use of devices that are either incorrect or uncertified could incur fines of no less than $500 for the first offense, $1500 on a second offense, and no less than $2500 for a third offense (225 ILCS 470/56).
Section 5: Looking to the Future: Estate Planning
Estate planning may not seem like an important component of managing a direct farm business, but it is critical for farmers who wish to keep the farm in the family for future generations. The USDA estimates that 80% of farmers do not have estate plans in place. Without an estate plan, the estate will have to go through probate court, which can take years to settle how land and assets should be distributed between heirs and creditors. Meanwhile, younger generations may not be able to make business decisions or plant crops necessary to continue the farming operation. The probate court also applies a set of default rules for distribution which may not be beneficial for the business or what the family wants. For instance, if the farm has been used to secure equipment, land may be sold off to pay debtors instead of passing down to children, when there may be other ways to satisfy the debts. Estate planning is highly personal because it involves decisions concerning family and wealth distribution. This guide can not give meaningful information on estate planning. Rather, business owners are strongly encouraged to contact an attorney to develop an estate plan.
Have you…
- Addressed contractual issues for your operations? This requires:
- Understanding terms and consequences of any contracts you have agreed to, both oral and written
- Knowing when the law requires you to have a written contract if you want to enforce it against the other party
- Developed a marketing plan?
- Do your current practices comply with FDA and FTC law? Are any methods you are considering likely to create legal problems?
- Do you have intellectual property you want to protect? Are you infringing on someone else’s intellectual property?
- Gotten your scales and measuring devices inspected and approved by a state authorized agent?
- Considered estate planning for your farm?
[1] Although much of Federal legislation covered in the guide does not apply to purely intra-state commerce, the Packers and Stockyards act likely does due to the provision which states "for the purpose of this Act . . . a transaction in respect to any article shall be considered to be in commerce if such article is part of that current of commerce usual in the live-stock and meat-packing industries…” (7 U.S.C. 183). In Stafford v. Wallace, 258 U.S. 495 (1922), the Supreme Court held that a transaction at a stockyard, wholly within the state, was nonetheless part of the “current of commerce.” More recently, relying on the Supreme Court’s decision in Stafford v. Wallace, the U.S. Court of Appeals for the D.C. Circuit interpreted a nearly identical provision in the Perishable Agricultural Commodities Act, 7 U.S.C. § 499(b)(4), ruling that fruit shipped and delivered purely intrastate, but handled by a dealer who commonly ships fruit out of state, had entered the current of commerce. The Produce Place v. U.S.D.A., 91 F.3d 173 (1996). In their analogy, the court stated:
current of interstate commerce should be thought of as akin to a great river that may be used for both interstate and intrastate shipping; imagine a little raft put into the Mississippi River at Hannibal, Mo., among the big barges bound for Memphis, New Orleans and ports beyond, with St. Louis as the rafter's modest destination. On this view, a shipment of strawberries can enter the current of interstate commerce even if the berries are reserved exclusively for sale and consumption within the state where they were grown.
Id. at 175-176. Under such a standard, an Arkansas producer who contracts with an Arkansas poultry dealer to raise poultry to be sold exclusively to Arkansas consumers may not be subject to the Packers and Stockyards Act and GIPSA’s regulations. However, given the broad sweep of jurisdiction courts have given the agencies, it would be more reasonable to tailor actions to the assumption that the rules do apply.