Summary of a Recent
Judicial Development in
Production Contracts, Packers and Stockyards Act

Contract that Included Assumption of Risk Clause Was Not "Insurance"

John Pesek
National AgLaw Center Research Associate

Summary of Decision

In Kinkaid v. John Morrell and Co., 321 F. Supp. 2d 1090, (N.D. Iowa, 2004), the court found that the "risk of loss" provision in the contract with the plaintiffs did not constitute insurance and that, even if it read insurance into the contract, there still was no unfair or deceptive action on the part of the defendants. Id.

Background

The plaintiffs (Scott Kincaid, Alan Hoefling, and Lori Sokolowski, referred to collectively as the producers) sold their swine to the defendants (John Morrell and Co. and Tyson Fresh Meats, Inc., referred to as the packing companies). Id. at 1093. The producers alleged that the packing companies were within the meaning of the Packers & Stockyards Act (PSA), and that at the time they shipped the swine to the producers, the packing companies' invoices listed deductions for "insurance." Id. These deductions in the invoices represented charges for the packing companies' assumption of risk when the swine were in transit until the time of slaughter. Id.

Arguments

In their complaint, the plaintiffs alleged various violations of the PSA, namely: 1) failure to make timely payment to plaintiffs; 2) engaging in unfair acts and deceptive devices with regard to livestock purchased from the plaintiffs with the purpose or effect of defrauding the plaintiffs of all sums due; 3) violating provisions of 7 U.S.C. § 1929(a) by engaging in or using unfair, unjustly discriminatory or deceptive trade practices against plaintiffs; and 4) engaging in any course of business with the effect of manipulating or controlling prices. Id.

The plaintiffs asked the court for the following relief: 1) a determination of whether class action relief was necessary; 2) an order directing that notice be given to a class by first class mail; 3) that defendants' conduct be found unlawful, with the amount of damage and loss sustained be determined and judgment be entered for all damages due to the plaintiffs and the class; 4) that the court establish a claims procedure for recovery of the wrongfully withheld sums due to the plaintiffs and class members; and 5) an award of attorneys fees. Id. at 1094.

The defendants moved for a motion to dismiss the claims, arguing that the plaintiffs failed to state a claim upon which relief could be granted. Id. They asserted: 1) that they did not sell "insurance" in violation of state laws and regulations; and 2) even if they did sell "insurance," the producers' claims still should fail under the PSA because the producers failed to allege any unfair or deceptive practice, because the producers did not allege that the packaging companies failed to pay for the hogs that were lost during transit. Id. at 1096.

Analysis and Holdings

In a Rule 12(b)(6) motion, the question presented to the court is not whether the plaintiff will ultimately prevail, but rather whether there is sufficient evidence in support of their claim. Id. at 1095 (citing Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). In applying this standard, the court looks at all available evidence in the light most favorable to the complaining party (in this case, the producers). Id. (citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957)).

In John Morrell's argument for dismissal, Morrell alleged that they agreed to pay regardless of contingency or peril that would have resulted in the death of the hogs during transit. Id. at 1097. Also, Morrell stated that such provisions were common practice and in fact encouraged by the Uniform Commercial Code (UCC). Id. Tyson, in its argument, stated that it is in the business of buying hogs and an incidental part of that purchase was a small fee for the risk of death or loss of the hogs while in transit. Id.

The court concluded that under Iowa law, the definition of "insurance" is determined by a test: whether one party, for compensation, assumes the risk of another and the party that assumes the risk agrees to pay a certain fixed sum on the happening of a contingency, and the payment is made to the other party. Id. at 1098 (citing State v. Schares, 548 N.W. 2d 894, 896 (Iowa 1996)). Even if an agreement satisfies this test, it may still not constitute "insurance." Id. The determinative test is the true character or form of the transaction in which any risk transference occurs. Id. at 1099.

The district court held that the only factor of the test that was in dispute in this case was the second factor, because the packaging companies argued that the payment was not based on the occurrence of some contingency, but was guaranteed regardless of any occurrence. Id. at 1100. The court concluded that the principal purpose of the contract was the sale and slaughter of the hogs. Id. Therefore, the court held that the mere presence of a risk transference provision did not turn the contract into one for "insurance." Id. The court stated, "It is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Id.

For their second argument for dismissal, the defendants stated that the producers failed to state a valid claim under the PSA. Id. at 1101. Both defendants argued that the producers failed to show that the packaging companies violated a specific provision of the PSA or had any anticompetitive effects. Id. The defendants stated that, even if they did sell "insurance," it had no adverse effect on competition. Id. First, the court stated that to show unfair or deceptive practices was not the same as having to show monopolistic or anticompetitive practices. Id. at 1103. The producers failed to show any practice that would constitute monopolistic behavior; therefore, they abandoned that claim. Id. at 1104. The producers claim rested on showing unfair and deceptive practices, but the court decided in favor of the packaging companies by holding that even if insurance was read into the contract, no unfair or deceptive practices had occurred. Id.

The case was decided on June 18, 2004.