The U.S. Department of Agriculture published its final Strengthening Organic Enforcement rule on Jan. 18.
SOE’s goal is to stem the perceived rising tide of organic fraud and ensure the integrity of the National Organic Program. The regulatory changes are sweeping, and will draw in more links in the organic supply chain for compliance and record-keeping. Affected entities have until March 19, 2024, to comply.
USDA implemented its organic regulations over two decades ago to manage a far simpler market. Supply chains were “short and transparent” — i.e., farm to wholesaler to retail consumer. Organic regulations were outpaced as supply chains grew increasingly complex and globalized to meet the needs of what is now a $63 billion+ organic industry. Uncertainty grew as a number of high-profile organic fraud cases came to light. And USDA’s inconsistent interpretation and implementation of organic regulations did little to inspire confidence. These concerns threatened the reputation of organic labeling and sparked USDA’s significant policy shift toward greater oversight and enforcement. SOE is the embodiment of this policy shift.
This article outlines SOE’s principal changes and highlights potential risks to participants in the organic supply chain, both from government agencies and the Plaintiffs’ Bar.
SOE’s Key Changes
SOE implements numerous changes that will affect most entities along the organic supply chain. Some key changes include:
- Certified Entities: More entities that “handle” organic products must be certified. SOE amends the definition of “handle” to include operations that trade and facilitate trade: importers, exporters, and brokers who were previously exempt from certification. It also lists more “handling” activities: aggregating, culling, packaging, repackaging, storing, among others. These changes may require formerly exempt entities to seek certification for the first time.
- Exempt Entities: SOE removes the distinction between “exemptions” and “exclusions”; both are now exemptions. Exemptions are generally limited to low-risk operations that do not process organic products. However, some final retail establishments still may be exempt under SOE. For example, a retail establishment is likely exempt if it simply transfers organic nuts from shipping packaging into bulk food dispensers or individual containers for retail sale. Exempt entities should be mindful that they are still subject to certain contamination prevention and record-keeping requirements.
- Certified Entity Record-keeping: SOE imposes a five year record retention requirement on certified entities. Certified entities must document all organic products from the time of purchase or acquisition to sale or transport in sufficient detail to be “readily understood and audited.” This includes a new fraud prevention record-keeping requirement—maintaining records “traceable back to the last certified operation.”
- Exempt Entity Record-keeping: SOE did not change the three year record retention requirement for exempt entities. Exempt entities must maintain records sufficient to: (1) demonstrate that their products are organically produced and handled; and (2) be able to verify quantities of all organic products received, shipped, and sold. Certified entities also may turn to exempt entities for help fulfilling their traceback obligations.
- Fraud Prevention Plans: Certified entities must implement a “robust” fraud prevention plan as a part of their Organic System Plan. SOE suggests, among other things, creating a map or inventory of the supply chain, identifying critical control points where organic fraud or integrity loss is possible, and developing a suspected fraud reporting process to certifying agents and the NOP.
- Non-retail Container Labeling: Non-retail containers must include a label clearly identifying a product as organic to alert handlers that the container may require special care. Labels also must include information linking the container to audit trail documentation. Audit trail documentation must be sufficient to identify the source, transfer of ownership, and last certified operation to handle the product.
- Annual Inspections: Certifying agents must conduct annual “mass-balance audits” to confirm the quantities of organic products a certified entity buys and sells, and “traceability audits” to confirm that certified entities meet SOE’s record-keeping requirements. SOE also requires certifying agents to conduct unannounced inspections for at least five percent of the operations they oversee each year. Certifying agents will not allow certification to continue if an entity cannot or will not submit to an unannounced inspection.
- Penalties and Potential Litigation Exposure: Failure to comply with SOE’s requirements could result in NOP enforcement action by USDA. Enforcement actions can assess penalties ranging from suspension of organic certification, civil penalties of over $20,000 per violation, and/or revocation of organic certification. And the Federal Trade Commission (“FTC”) has sued entities for allegedly advertising and selling products bearing an organic label that were not, in fact, organic.
Aside from the specter of USDA and FTC enforcement, SOE may renew interest in organic-oriented class action litigation. Some federal courts of appeal have held that state consumer protection claims attacking an entity’s organic certification status conflict with, and are therefore preempted by, federal law. See, e.g., Maranette v. Abbott Labs. Inc., 886 F.3d 112 (2d Cir. 2018). But these courts expressly left open a grey area to attack the facts underlying organic certification. What this means is unclear, even in the few circuits that have addressed it. Developments in state court may provide some guidance. For example, in Quesada v. Herb Thyme Farms, Inc., 62 Cal. 4th 298 (2015) the California Supreme Court ruled that challenges to mislabeled organic products fall within the scope of California’s consumer protection statutes and are not preempted. And label claims that may appear in tandem with a USDA organic label—i.e. “healthy” or “nutritious”—may continue to be ripe targets for the Plaintiffs’ Bar.
All entities in the organic supply chain will need to comply with SOE’s requirements by March 19, 2024. These entities should:
(1) determine whether organic certification is necessary;
(2) make needed updates to their Organic System Plans if already certified;
(3) ensure all records and labels are up to date to safeguard against administrative action and litigation; and
(4) prepare for possible unannounced annual inspections.
Christopher Van Gundy and Anna McLean are partners and James Glassman is an associate at Sheppard, Mullin, Richter & Hampton. They are litigators and members of the firm’s Food & Beverage industry team.