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Buckeye Recyclers Takes On CHEP
Ohio recycler sues CHEP over pallet ownership, other issues

By Ed Brindley
Date Posted: 10/1/2001

Buckeye Recyclers, Inc., located in South Charleston, Ohio, filed a complaint against Chep USA in the Court of Common Pleas for Clark County, Ohio on September 18, 2001. This law suit was just beginning at our deadline, but much can be said even though the bell just rang on "Round 1." While Buckeye is the sole plaintiff, the impact of this suit one way or the other on everybody in the pallet industry is undeniable.

For the benefit of readers who are not familiar with the growing discontent between the pallet industry and Chep’s pallet rental pool, a historical perspective comes first, and then the details that relate to this specific case.

Chep/Pallet Recycling Background

The North American pallet recycling industry and Chep USA have had a rocky history ever since Chep first entered the U.S. about ten years ago. The pallet recycling industry in North America was more advanced in just about every way when Chep first surfaced here than it was in other parts of the world. Made up of independent minded entrepreneurs, the recycling industry was accustomed to doing things the American way, which has some sharp contrasts to the typical European way of thinking. While still rapidly growing, the U.S. pallet recycling industry was set in its pattern, and Chep was not accustomed to dealing with an established recycling industry in its other markets.

Thus, when Chep sent a registered letter during its early days to recyclers, explaining that Chep owns the blue pallets that contain its logo, Chep and the pallet recycling community found themselves immediately on opposite sides. Recyclers felt that Chep had taken a bully position with the way it worded the letter, and Chep believed it was stating the ownership facts to inform those who didn’t know.

Chep came from markets where in some cases it had grown up along with the pallet manufacturers. Recycling in those markets was almost nonexistent, partly because Chep started years ago and partly because the Chep and EuroPallet pallets dominated the market and there was no 48x40 pool.

During its U.S. history, Chep studied the U.S. market and convinced some leaders in the grocery industry that is has the solution to the industry’s "pallet problem." Chep launched its U.S. pallet pool and nurtured the pool’s growth until it has over 40 million rental pallets in North America. While the European pool is still larger, growth in the U.S. market has been the Chep rallying cry for the last several years.

Throughout that time, Chep has worked within the structure of our industry to have its pallets manufactured and depots managed, including both sortation/storage and repair depots. It has been a rocky road. Chep officially talks about how it depends upon the pallet people and their services, which is true. The company works with a fairly limited number of hand-picked pallet manufacturers and a pallet management provider for its Wal-Mart distribution centers. Quite a few pallet recyclers have helped manage the Chep depot network, but many have come and gone. Chep seems to be developing its super-depot network, phasing out many of its former depots. Although Chep would not like to admit it, it has managed the company over the years using a strong hand over suppliers. Certainly Chep is a large company and possesses the power of such. In contrast, the pallet industry consists of thousands of entrepreneurial companies competing in the marketplace.

The main concern that pallet people have concerning Chep is the domineering attitude the company takes. It runs its business and seems to have little regard if its decisions cause hardships in the industry, even with its suppliers. Numerous conversations with Chep suppliers support the fact that they like the business but are almost universally not consulted about anything that relates to taking care of this significant customer.

A casual visitor to the Pallet Board, the industry’s discussion board on the Pallet Enterprise’s Web site, will quickly learn that many pallet people believe Chep is hurting the pallet industry. Many recyclers contend that Chep does not deliver on its promises, and the quality of its pool has gone down hill in recent years. In other parts of the world Chep often has a more active role in the operational side of its pools, particularly managing repair depots. Many people have believed for years that Chep ultimately plans to directly handle most of its operational tasks in the U.S. including manufacturing and repairing pallets. Certainly Chep has started to work on its super-repair depot network.

Until fairly recently, all the pallet industry has done is complain about Chep. After the Edgar Lozano incident in San Antonio, people became more aware of Chep’s strong arm tactics. The industry started talking more aggressively about trying to put up a fight. Edgar was jailed without any real justification, and his business has suffered due to Chep’s actions and the unwarranted adverse publicity. Edgar is suing Chep; the trial is scheduled for next spring.

NEPA, a leading Northwest pallet company, has recently brought legal action against Chep. The suit claims that Chep has not paid its legal obligation to NEPA. Chep has bounced back and forth about paying for some services provided by recyclers who receive Chep pallets as part of their standard way of doing business. While this is a non-binding court action, it signals a more aggressive stance being taken by a major pallet company.

Now, Buckeye Recyclers, a recognized recycling leader, has filed a suit in the Ohio courts. This case stands out for several reasons. First, the company is owned and operated by Sam McAdow, Sr., a highly respected businessman who is also an experienced lawyer. Sam served at one time under Governor Rhodes, a Republican Ohio governor in the 70s. Second, the company and its leadership role are highly respected. Third, the law firm handling Buckeye’s case is considered to be one of the best. Fourth, planning for this case has been going on for a long time. It is not a knee jerk reaction by a recycler who has an axe to grind.

While Buckeye’s suit is not an industrywide class action suit, it is possible that it could develop into a more encompassing action before all is said and done.

Overview of Buckeye Law Suit

The complaint filed by Buckeye Recyclers begins with numerous facts that relate to five claims made by the plaintiff. For example, it states, "Defender, Chep USA, does not require the identical pallet to be returned but accepts any similarly marked pallet. None of the Chep pallets are identifiable other than by their outward appearance; it is impossible to specifically identify any one, specific Chep pallet and as such Chep pallets are fungible within that pool."

In the final paragraph of facts, Buckeye states that it acquired any Chep pallets in its possession during the ordinary course of business, and that Chep has no absolute right to assert ownership of pallets that leak out of the system, especially those pallets for which Chep has been reimbursed after it was lost. Buckeye further asserts that Chep USA, by its conduct, has abandoned these incidentally acquired Chep pallets. Buckeye further asserts that it has become the owner of these pallets and has the right to exercise dominion and control over them.

Buckeye outlines five counts in its claims, four of which are summarized in the sidebar.

Where Do We Go from Here?

Pallet recyclers have been complaining about what they feel is unfair treatment by Chep for years. However, this is the first time that a member of our industry has undertaken legal action of this magnitude against Chep. We will attempt to keep readers abreast of developments in this case. Recyclers can have their voices heard by participating more fully as details unfold.

The bell tolls for Round One!

Count One: Deceptive Trade Practices and Declaratory Judgment.

The suit states, ..."Chep does not require that the specific Chep pallet be returned. Instead, Chep’s contracts require that a Chep pallet be returned...A distributor is permitted to return to Chep either the original pallet received, another Chep pallet, or monetary compensation.

"As such, Chep’s placement of its pallets into circulation in the state of Ohio constitutes a sale of the goods rather than a lease or bailment of its pallets, and pallets that are delivered to Buckeye pass to it as an ordinary sale or exchange.

"Because pallets have been transferred to Buckeye free and clear of any ownership rights claimed by Chep, Chep has no legal right to interfere on the recycler’s relationship with a distributor or other party that conveyed pallets to Buckeye."

Further, it states, "Notwithstanding its lack of a legal right to claim ownership in pallets that have passed to Buckeye, Chep has on regular basis sent Buckeye and other recyclers correspondence asserting that Chep has an ownership right in any pallet received by Buckeye that is painted blue and contains Chep’s logo. This correspondence demands that Buckeye not purchase, accept, collect, repair, sell or otherwise dispose of pallets Chep claims to own. Such correspondence contains false assertions of fact and law in violation of the Deceptive Trade Practices Act."

Count Two: Abandonment and/or Inadvertent Loss

Count Two states..."The agreement does not require the distribution centers to institute any special searches for missing pallets, but merely requires that an accounting be made and that the liquidated damages provision be paid. Under the agreements, Chep either consents to its pallets passing out of the control of its agents or negligently allows pallets to pass from its control into the possession of Buckeye or other recyclers.

"Through Chep’s unwillingness or inability to control leaks in the distribution chain, pallets have passed out of the cycle and into the possession of one of any number of entities, including recycling companies...Such actions and neglect constitute abandonment of property by Chep.

"Alternatively, if Chep has not abandoned pallets..., it has lost such pallets by failing to monitor their location and the finder of such pallets the right to recover the reasonable expenses that he incurred and were necessary to recover and preserve the lost property."

Count Three: Common Law Lien

Count Three states "When Buckeye receives shipments of pallets from distributors, it first sorts the pallets to separate Chep pallets and other pallets. In so doing, to the extent Chep retains an ownership interest in such pallets, Buckeye confers a benefit on both Chep and the distributor. The distributor is saved the time and effort...and Chep is given the opportunity to pick up the pallets..."

"Buckeye’s services save Chep and/or the distributor the labor costs that would otherwise be incurred...Chep has expressly or implicitly consented to Buckeye providing the services in question by Chep’s failure to effectively police the collection of its pallets...

"As such Buckeye, under the common law of Ohio, has a lien on Chep pallets it receives and sorts..."

Count Four: Unjust Enrichment

"Chep receives the benefit of the sorting of pallets by Buckeye and other recyclers and has expressly or implicitly consented to Buckeye providing the services in question by Chep’s failure to effectively police the collection of its pallets, and...As such, Chep has been unjustly enriched by the efforts of Buckeye. Buckeye is entitled to money damages in compensation for its unjust enrichment of Chep..."

Request for Relief

Buckeye asks for judgment in its favor through (A) "an award of damages against defendants in an amount to be determined at trial and a preliminary and permanent injunction restraining defendants from any and all use of plaintiff’s trade secrets and enjoining defendant from making deceptive representations concerning its ownership of pallets or the obligations of those in possession of its pallets.

(B) declaring the respective rights of Chep and Buckeye in pallets received by Buckeye that Chep claims to own; and (C) an award of interest, costs, attorney fees and any and all other relief to which plaintiff may be entitled, in equity or at law.

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