Round One Goes to CHEP
By Chaille Brindley
Date Posted: 10/1/2003
After a heated legal battle between CHEP and one of the largest recyclers in
Many looked to the Buckeye case as a bellwether for how federal courts across the country will deal with legal questions about CHEPís ownership of stray CHEP-marked pallets and rights to reclaim them. Buckeye sued CHEP claiming the leasing giant abandoned its property by allowing customers to ship CHEP-marked pallets to those with no contractual agreement with CHEP. The federal court for the southern district of Ohio ruled in favor of CHEP. The decision by Judge Walter Herbert Rice has strengthened CHEPís ownership claims while leaving many recyclers wondering what to do next.
There were a number of key issues being considered including: deceptive trade practices, property abandonment/inadvertent loss, common law lien, interference with business relationships, and unjust enrichment (fair compensation). The court sided with CHEP on all counts except for unjust enrichment. CHEP filed three counterclaims: return of CHEP-marked pallets, conversion (the civil version of theft) and a permanent injunction against Buckeye. The court will hear a trial on the three motions by CHEP and Buckeyeís unjust enrichment claim.
While the decision does settle the ownership issue for Buckeye, at least for now, the fight is far from over for the recycling industry as a whole. If it gets appealed up the federal ranks, it would begin to become law for the areas the court has jurisdiction over. The case would only become a national law if the U.S Supreme Court rules on it. In other areas of the country the current district court ruling could prove legally persuasive if a case is brought. But a judge in another case could discount all or part of the Buckeye decision too. It all depends on how well the current ruling stands up to scrutiny by other courts. If you are looking for concrete answers, the current ruling does not offer any. Until the ownership issue makes its way up the federal court system, everything is just a game of poker.
In reaffirming CHEPís absolute ownership claims, Judge Rice pointed to CHEPís consistent claim that it always retains ownership of its pallets and the extensive education and recovery program it has in place as evidence that CHEP has not abandoned its property. Judge Rice wrote, "The evidence demonstrates without question that CHEP has at all times retained ownership in its pallets." Judge Rice did not distinguish between CHEPís closed loop system and CHEPís open system caused by the flow of pallets to non-participating distributors (NPDs).
Called the Accelerated Volume Program (AVP), CHEP began allowing its lessees to ship pallets downstream to entities outside of its network as part of its aggressive growth strategy in the late 1990s. By opening up its pool, CHEP took some of the controls off its system causing the leakage to significantly increase. The AVP forces the retrieval of stray pallets onto the backs of third parties including competitors. From the testimony provided, it is clear that the leakage, which ran from 35-40% in some cases, came as no surprise to CHEP.
CHEP estimates that its pallets have been shipped to more than 20,000 NPDs. In a 2002 survey, CHEP realized that over 9 million of the approximately 67 million CHEP pallets in circulation were in the hands of NPDs. Yet the judge did not deem the development of a business model with this flaw as a factor in deciding property abandonment.
Intent, not poor system design or performance, was Judge Riceís primary measurement for deciding whether or not CHEP abandoned its pallets. Consider the following from the Buckeye ruling, "CHEPís success rate in recovering its pallets is immaterial. The fact of the matter is, it has always expressed an unambiguous intent to retain ownership of its pallets. That is the linchpin of the abandonment doctrine, not whether it has successfully advanced its claims of ownership."
Given the courtís attitude toward Buckeyeís claims, maybe the case would have been better received if it had focused on CHEP setting up a system that burdened third parties not the ownership issue. The judge seemed to be open to this concern given the fact that he has agreed to hear the argument on unjust enrichment.
There may be a positive angle for recyclers if Judge Rice studies all the facts and determines that CHEPís current Asset Recovery Plan does not adequately compensate the industry for its services. The level of compensation remains to be settled although the fact that some recyclers have agreed to CHEPís current terms may hurt Buckeyeís cause.
Will the Buckeye decision lead CHEP to be more aggressive in retrieving CHEP-marked pallets? Publicly, the company says it will "continue to work in good faith with the recycler community." Look for CHEP to continue to push its Asset Recovery Program and the regional white wood program, which is currently being setup across the country. To CHEPís credit, it has worked to improve relations with the industry over the past year including paying recyclers for services, holding forums at the annual NWPCA meeting and offering new business opportunities for sorting white wood pallets.
Many in the industry had high hopes for the Buckeye case. Buckeye Diamond Logistics, a recognized recycling leader, stood as good a chance as any small recycler to challenge CHEP in court. Buckeye is owned and operated by a highly respected, street smart businessman who just so happens to be a lawyer. Buckeye Diamond Logistics researched the issue for a long time and solicited the help of one of the best law firms in the state to handle the case.
What made the Buckeye case so special? This is the first time that a recycler took CHEP head on in court on the ownership issue. CHEP not recyclers has been the initiator of most legal action in the past. CHEP typically pushes for the parties involved to come to terms before it ever goes to trial. Most pallet companies are more than happy to settle instead of face the long, expensive process of litigating a trial.
The Buckeye case may not be over. Depending on what the judge finds when it comes to the issue of just compensation for recycling services, Buckeye may choose to appeal the decision. The remaining issues in the case may go to trial or could be settled depending on what both sides want to do. A trial date has been set for
The Buckeye decision may have temporarily dazed those working to secure recycler rights, but it is far from a knock-out punch to the industry.
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