Who has “control” over a product moving through the supply chain? With the proliferation of legislative and regulatory initiatives involving the flow of commerce, this has become an important issue for warehouse-based third-party logistics providers (3PLs). Is control governed by the Uniform Commercial Code (UCC), contractual agreement or federal law? Increasingly, federal legislators and regulators are taking the position that the party in “control” is the party with “physical possession” of the product. This position is contrary to the traditional commercial understanding that the party in “control” is the party that determines the product’s disposition (shipment, return, rework, destruction, sampling, etc).    

A case in point is the Food and Drug Administration’s (FDA) Reportable Food Registry. Section 417 of the Federal Food Drug and Cosmetic Act requires companies to submit a report to FDA for any food if it is likely to “cause serious adverse health consequences or death to humans or animals.” There is an exemption when “adulteration originated with the responsible party” and the responsible party, among other things, “detected the adulteration prior to any transfer to another person.” The Act defines a warehouse as a “responsible party.” Once the food product arrives at the warehouse, FDA’s interpretation is that the warehouse, not the product owner, has “control” and the responsibility to report when an item is adulterated. This has already created friction in the supply chain as the product owner and the warehouse try to determine who is required to report.

At issue is whether a “transfer” of food has occurred between the product owner and the warehouse. FDA’s current interpretation is that transfer occurs when a change in physical possession of the product occurs. “Whether or not an article of food has been transferred from the customer to the 3PL warehouse is a significant issue for the 3PL industry,” Joel Anderson, President and CEO of the International Warehouse Logistics Association (IWLA), said in a recent letter to FDA. He urged the agency to make clear in its written guidance that a transfer of product occurs upon transfer of ownership, not upon transfer of possession.

“A 3PL never takes title to or ownership of the products in the warehouse-rather he serves as a logistics intermediary in the supply chain,” Anderson said. “We recommend that FDA clarify in the guidance document that ‘transfer’ occurs upon change of ownership, not a change in physical possession or control.”

Another example is pharmaceuticals and a warehouse’s responsibility for the “pedigree.” A drug pedigree is a statement of origin that identifies the details of each prior sale, purchase, or trade of a drug. Under the pedigree requirement, each person who is engaged in the distribution of a prescription drug in interstate commerce, with some exceptions, must provide to the person who receives the drug a pedigree.

The question with pharmaceuticals is: When is the 3PL warehouse responsible for passing on the pedigree document? There is a big difference between a 3PL contractual agreement with the manufacturer to provide the document versus the FDA or state requiring the 3PL to provide the document. IWLA was successful in amending Florida law to remove the 3PL from pedigree compliance, but this issue remains unresolved in other states and at the federal level.

Although Article 7 of the UCC is the lifeblood of the warehouse industry, section 7-103 makes it clear that Article 7 is subject to federal laws and regulations, thus making the question of which party has “control” an important one to answer. 

The UCC is still a factor. It harmonizes the law of commercial transactions in the states. The goal of harmonizing state law is important because of the prevalence of commercial transactions that extend beyond one state. For example, goods may be manufactured in state A, warehoused in state B, sold from state C and delivered in state D.

Article 7 is the last of the articles of the UCC to be revised during the preceding decade. The genesis of this project is twofold: to provide a framework for the further development of electronic documents of title and to update the Article for modern times in light of state, federal and international developments.

As of June 2010, 39 states have adopted the revision. This year, IWLA members were successful in legislative efforts in Florida, Georgia and Wisconsin for adoption of the revisions. The association currently is pressing its efforts in Massachusetts, Ohio, Washington and Michigan.

The 3PL’s regulatory responsibilities in the supply chain will continue to evolve as Congress and federal agencies become more engaged in exerting their authority over the flow of commerce. wt



Patrick O’Connor is president of Kent & O’Connor and serves as IWLA’s D.C. representative.