MEMORANDUM. Categories of Products that May Be Represented as Wholly or Partially Organic

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1 KELLER AND HECKMAN LLP MEMORANDUM TO: FROM: Joseph P. Simrany Rick Mann DATE: November 8, 2002 RE: USDA s Final Rule on Organic Food This memorandum provides an overview of the final rule on Αorganic food released by the U.S. Department of Agriculture s (USDA) Agricultural Marketing Service (AMS) on December 21, Fed. Reg (Dec. 21, 2000). The rule which follows AMS March 13, 2000 proposal (65 Fed. Reg )seeks to establish a National Organic Program (NOP) to define the circumstances under which food products may be represented as organically produced in the United States. The final rule largely stands by the positions taken in the March 2000 proposal. Thus, AMS is maintaining its previously proposed prohibition on the use of technologies such as biotechnology (i.e., the use of food that contains or that is produced using genetically modified organisms (GMOs)) and irradiation in organic foods. Perhaps the most notable tightening of organic criteria under the new rule is the requirement that food labeled as made with organic ingredients contain at least 70% organic ingredients, rather than 50%, as under the March 2000 proposal. It is important to note that these regulations generally govern food products made from commodities or ingredients produced in the United States at domestic facilities that are certified as being in compliance with the National Organic Program. For products with substantial imported ingredients, such as tea, organic representations may be made only if (1) the applicable foreign government has entered into an equivalency agreement with the United States regarding that government s organic program and the product is produced in compliance with that program, or (2) the product has been produced and handled appropriately by a foreign facility that has received USDA certification through an agent operating outside the United States but accredited by USDA to grant such certification. Categories of Products that May Be Represented as Wholly or Partially Organic As under the March 2000 proposal, the final rule sets forth four categories of products that may, to varying degrees, be represented as organic or containing organic ingredients: % organic products may be marketed as 100% Organic ;

2 2. Products with no less than 95% organic ingredients may be represented as ΑOrganic; 3. Products that contain at least 70% organic ingredients may be marketed as Made with Organic (specified ingredients) (or specified food groups), naming up to three specific organic ingredients or organic food groups; and 4. Products in package form that are less than 70% organic may identify specific organic ingredients in the list of ingredients. A product s organic composition is determined by calculating the percentage of organic ingredients in the product (by weight or fluid volume) exclusive of water and salt. 1. Products Marketed as 100% Organic Composition. Under the rule, products marketed as 100% Organic must be raw or processed agricultural products that contain no less than 100% organic ingredients and that are processed without the benefit of so-called incidental additives or processing aids. 1 In addition, neither the finished product nor the individual ingredients may be produced using GMOs, ionizing radiation, or sewage sludge. As was true under the March 2000 proposal, it appears that many processed products would have difficulty meeting these restrictive standards. Marketing. Marketers of 100% organic products would be permitted to display the following information on the principal display panels (PDPs) of products in package form, on retail display materials and containers for products in bulk form at the point of retail, and in labeling materials or advertising for the product: The term 100% Organic to describe the product, e.g., 100% Organic Rice ; The USDA organic seal; 2 and Identifying marks of any USDA-accredited agents that certified the operation producing the finished product or operations producing raw product or ingredients used in the finished product. 1 In the preamble to the final rule, AMS reiterates its prior position that minor ingredients, including not only flavors and colorings but also processing aids and incidental food additives, are to be treated the same as any other ingredients for purposes of determining whether a product is eligible for 100% organic or organic labeling. According to AMS, there is no exception for minor ingredients even though the percentage of the ingredient is extremely small compared to the rest of the product s ingredients. Id. at AMS has redesigned the USDA seal in response to criticism that the old design implied that USDA was the certifying agent and that the shield or badge design indicated a certification of product quality and assurance of safety. The new, simpler seal design is set forth in 7 C.F.R , 65 Fed. Reg. at

3 In addition, for products in packaged form (including products in the 70% organic and 95% organic categories), the product s information panel (IP) would be required to identify as Organic, the name of the agent that certified the handler of the finished product, preceded by the phrase Certified organic by or similar language. In a change from the March proposal, identification of the total percentage of organic ingredients in the product on the IP would be optional rather than mandatory. 2. Products Marketed as Organic Composition. AMS will permit raw or processed agricultural products to be marketed as organic, e.g., Organic Rice, if the products contain no less than 95% organic ingredients. The non-organic ingredients must be specifically approved for use in organic products in the relevant portions of the National List. As discussed in greater detail below, the National List includes both general categories of products that may be used (e.g., agricultural products that are not organically produced) and specific substances (e.g., calcium hypochlorite). Neither the finished product nor the individual ingredientsχorganic or otherwiseχmay be irradiated or produced using GMOs. Under the final rule the nonorganic ingredients are subject to a commercial availability requirement. 7 C.F.R , 65 Fed. Reg Handlers must document that organic forms of agricultural commodities used as ingredients are not commercially available before using the nonorganic forms of these commodities as ingredients. 3 This requirement affects, for example, the ability to use nonorganic spices and herbs in products marketed as organic. USDA intends to issue standards on how to determine whether an organic version of an ingredient is commercially available before the rule goes into effect and is currently soliciting comments on issues relating to developing standards on commercial availability. Comments are due by March 21, This provision was adopted in response to comments contending that allowing nonorganically produced agricultural products within the 5% would significantly weaken demand for many organically produced commodities, especially herbs and spices. 65 Fed. Reg. at The final rule asks commenters to address a number of specific questions on commercial availability. Id. at While recognizing the potential benefit (in promoting use of organic ingredients) of applying the commercial availability standard to all agricultural products in a processed product, USDA expresses concern in the final rule that enforcing this provision could impose an excessive burden on handlers. The Agency notes that it is unclear whether a consensus exists on criteria for commercial availability within the organic community. The Agency also acknowledges the potential for inequity and enforcement problems if there is disagreement among certifying agents regarding when and under what circumstances an ingredient is commercially available. Id. 3

4 Marketing. Marketers of products represented as Organic would be permitted to display the following information on the PDPs of products in package form, on retail display materials and containers for products in bulk form at the point of retail, and in labeling or advertising for the product: The term Organic to describe the product; 5 The USDA organic seal; and Identifying marks of any USDA-accredited agents that certified the operation producing the finished product or operations producing raw product or ingredients used in the finished product. In addition, for products in packaged form, the product s IP would be required to (1) identify, as organic, in the list of ingredients, each organically produced ingredient, and (2) provide the name of the agent that certified the handler of the finished product, preceded by the phrase Certified organic by or similar language. Identification on the IP of the total percentage of organic ingredients in the product, using the phrase Contains X percent organic ingredients would be optional. 3. Products Marketed as Made with (Specified Organic Ingredients) Composition. Agricultural products marketed as Made with Organic (specified ingredients) would be required to contain 70% to 95% organic ingredients. Substances used in the production of the organic ingredients, such as processing aids, must appear on the National List. The nonorganic ingredients must also be on the National List, although they may be produced and handled without regard to the National List. Thus, for example, it would be permissible to include in such a product nonorganic agricultural products (which are categorically permitted on the National List) that contain synthetic substances, such as certain antimicrobial agents, that are not on the National List. The use of GMOs and ionizing radiation, however, would still be prohibited for all ingredients, organic and nonorganic. Marketing. AMS is permitting products in this marketing category to declare up to three organic ingredients on the PDPs of products in package form, e.g., Made with Organic Mushrooms, Onions, and Garlic In a change from the March 2000 proposal, under the final rule the product may be labeled as made with organic followed by up to three specified food groups rather than specified ingredients. 7 C.F.R , 65 Fed. Reg. at For 5 A provision has been added to Section (a) specifying that the term organic may not be used in a product name to identify an ingredient that is not organically produced. For example, it would be misleading and contrary to this provision, according to USDA, to label products as organic chocolate ice cream and organic cherry sweets if the ice cream and candy were at least 95 % organic but the chocolate and cherry flavoring are not organically produced 4

5 example, a soup made with organically produced potatoes, carrots and onions may be labeled either as soup made with organic potatoes, carrots and onions or as soup made with organic vegetables. The second option would not be available if the soup also contained nonorganically produced vegetables. Pursuant to Section , only products from the following food groups may be labeled as organic in a made with... label: beans, fish, fruits, grains, herbs, meats, nuts, oils, poultry, seeds, spices, sweeteners, 6 vegetables, or processed milk products. 7 Just as only three individual ingredients may be identified in made with... labeling, no more than three food groups can be identified in a made with... statement. Both the Made with Organic (specified ingredients) declaration and an identifying mark of the relevant USDA-accredited agent will be permitted to appear in product labeling and advertising materials, in retail displays and display containers for products in bulk form at the point of retail sale, and on the PDPs of products in packaged form. The rule will not permit the USDA organic seal to appear on such materials, however. The IP of products in packaged form represented as Made with Organic (specified ingredients) must (1) identify, as organic, in the list of ingredients, each organically produced ingredient, and (1) identify in the list of ingredients each organically produced ingredient, and (2) provide the name of the agent that certified the handler of the finished product, preceded by the phrase Certified organic by or similar language. Identification on the IP of the total percentage of organic ingredients in the product, using the phrase Contains X percent organic ingredients, is optional. 4. Products Containing Less than 70% Organic Ingredients Composition. The final marketing category applies to products that contain less than 70% organic ingredients. While the organic ingredients obviously would be required to conform to the NOP regulations, the nonorganic ingredients in such products could be produced and handled without regard to the organic program requirements. Marketing. These products would be permitted to reference the term organic only by identifying the organic ingredients in the list of ingredients on the product s IP. Declaring the total percentage of organic ingredients in the product on the IP would be optional. Identification of organic ingredients would be required if the percentage of organic ingredients is declared. For your convenience, the proposed composition and select marketing allowances for each product category are summarized in the following table: 6 In the preamble, USDA describes the organic sweeteners category as consisting of organically produced and processed sugar cane, sugar beets, corn syrup, maple syrup, etc. Id. at In the preamble USDA explains that organically produced and processed butter, cheeses, yogurt, milk, sour cream, etc. may be combined in a product and identified as organic milk products. Id. at

6 USDA S ORGANIC RULE Categories of Organic Claims Product Composition % Organic May be used to modify product name Product label and promotional materials may bear USDA organic seal and certifying agent seal(s) 2. Organic May be used to modify product name Product label and promotional materials may bear USDA organic seal and certifying agent seal(s) 3. Made with Organic (specified ingredients) Phrase may appear in product labeling and promotional materials along with identification of no more than 3 specific organic ingredients or 3 organic food groups Product labeling and promotional materials may bear certifying agent seal but not USDA organic seal Organic Ingredients 100% exclusive of water and salt No processing aids Must not contain or be created using GMOs (cannot be produced using GM methods or products of GM methods as ingredients or processing aids) Must not be produced using ionizing radiation or sewage sludge No added sulfites, nitrates, nitrites during production or handling 95% exclusive of water and salt Processing aids must be on National List Must not contain or be created using GMOs (see above), ionizing radiation or sewage sludge No added sulfites, nitrates, nitrites during production or handling 70-95% exclusive of water and salt See above Nonorganic Ingredients None 5% Must be on National List Must not contain or be created using GMOs, ionizing radiation, or sewage sludge Handlers must document that organic forms of agricultural commodities used as ingredients are not commercially available Up to 30% Must themselves be on National List, but may be Αproduced and handled without regard to the National List Must not contain or be created using GMOs, ionizing radiation, or sewage sludge 4. Ingredient List Declaration of Organic Ingredients Products are limited to using organic to modify declaration of organic ingredients in ingredients list of foods in package form NO USDA/certifying agent seals permitted Less than 70% See above May be produced and handled without regard to the National Organic Program requirements 6

7 USDA S ORGANIC RULE Categories of Organic Claims Product Composition Organic Ingredients Nonorganic Ingredients The National List The National List identifies nonorganic substances that are permitted or specifically prohibited for use in or on agricultural products represented as Organic or Made with Organic (specified ingredients). The list is actually a collection of six regulations that identify: Synthetic substances that may be used in organic crop and livestock production; Nonsynthetic (i.e., natural ) substances that are prohibited for use in crop and livestock production; Nonagricultural substances allowed as ingredients in or on processed products labeled as Organic or Made with Organic (specified ingredients), and Nonorganic agricultural products allowed as ingredients in or on processed products labeled as Organic or Made with Organic (specified ingredients). AMS will categorically allow the use of nonorganically produced agricultural products, so long as such products do not run afoul of the prohibitions on GMOs, irradiation, sewage sludge, and similar production measures. Certification Requirements for Organic Production and Handling Facilities Under the final rule, organic certification would generally be required for operations (or specified portions thereof) that produce or handle 8 agricultural products within the first three marketing categoriesχi.e., products to be represented as 100% Organic, Organic, or Made with Organic (specified ingredients). A company seeking certification would need to submit to a USDA-accredited certifying agent an organic production or handling system plan, which would include a description of the following: Practices and procedures to be performed in the production or handling of organically produced products; Each substance to be used as a production or handling input, including a description of its composition, source, and intended use; 8 Handling operations are broadly defined under the rule to include [a]ny operation or portion of an operation (except final retailers of agricultural products that do not process agricultural products) that receives or otherwise acquires agricultural products and processes, packages or stores such products. 7 C.F.R , 65 Fed. Reg

8 Monitoring procedures that will be used to verify compliance; The record-keeping system (certified operations would be required to maintain certain records for five years); and Practices and procedures necessary to prevent contamination of organic products, i.e., contact with prohibited substances or the commingling of organic and nonorganic products. Following receipt of the application packet, the certifying agent would conduct a precertification inspection of the applicant s operation. If certification is granted, the operation would be subject to inspections and certification update procedures on an annual basis. In addition, either AMS or the certifier would be permitted to conduct unannounced inspections at any time to ensure compliance with the National Organic Program (NOP) requirements. A limited number of operations would be wholly or partially exempt from the certification requirement. These include the following: Handling (including storage) operations that receive and sell pre-packaged or otherwise contained organically produced products are exempt from the NOP requirements so long as the products remain in their original containers. The operation must implement, as necessary, procedures to prevent contamination of organically produced products. This would apply to warehouses Operations that handle products with less than 70% organic ingredients are generally exempt from the NOP requirements. The operation must implement, as necessary, procedures to prevent contamination of organically produced products, and must also adhere to certain labeling and recordkeeping requirements. Provisions Relating to GMOs As noted above, in keeping with the March 2000 proposal, AMS is prohibiting the use of biotechnology in the production of organic foods. Specifically, the final rule provides that an ingredient is not organic if it has been produced using excluded methods or products of excluded methods as ingredients or processing aids. 7 C.F.R , 65 Fed. Reg. at Excluded methods are deemed to include a variety of methods used to genetically modify organisms or influence their growth and development by means that are not possible under natural conditions or processes and are not considered compatible with organic production. 7 C.F.R , 65 Fed. Reg. at According to AMS, such methods would include, cell fusion, micro- and macroencapsulation, and recombinant DNA technology, but would not include the use of traditional breeding, conjugation, fermentation, hybridization, in vitro fertilization, or tissue culture. As under the March 2000 proposal, AMS is requiring that nonorganic ingredients in products marketed as Organic or Made with Organic (specified ingredients) must not contain products of excluded methods or be created using excluded methods. In addition, the 8

9 rule contains specific prohibitions on the use in organic systems of seeds, annual seedlings and planting stock, pest control substances, and organisms produced with excluded methods. The Agency=s general approach to GMOs is problematic from a compliance standpoint, as organic food processors will undoubtedly struggle to find and document sources of non-gmo materials. Moreover, much enforcement discretion lies with certifying agents, some of whom might be inclined to take an unreasonable approach to matters such as accidental contamination. According to AMS, compliance monitoring and oversight will rely on certifiers review of purchasing procedures and records, rather than on product testing. USDA rejects the suggestion that it is establishing a zero tolerance for the presence of GMOs. According to the Agency, a positive detection of a product of excluded methods would trigger an investigation by the certifying agent to determine if a violation of organic production or handling standards had occurred. The presence of a detectable residue alone does not necessarily indicate use of a product of excluded methods that would constitute a violation of the standards. Id. at Coupled with the broad enforcement discretion of certifying agents, such language provides little comfort and direction to the industry. AMS has rejected commenters requests that it establish a threshold for the unintended or adventitious presence of GMOs in organic products. According to the Agency, there is not a sufficient consensus to allow it to establish a standard. 9 AMS points out that practices for preserving product identity, including segregating genetically engineered and nongenetically engineered products are evolving in some conventional markets. The Agency anticipates that these evolving industry best practices and standards will become the standards for implementing the provisions in this regulation relating to the use of excluded methods. Id. AMS also rejects as beyond the scope of its authority requests that it address the issue of contamination of organic crops by GMOs due to genetic drift. According to the Agency, [a]s long as an organic operation has not used excluded methods and takes reasonable steps to avoid contact with the products of excluded methods as detailed in their approved organic system plan, the unintentional presence of the products of excluded methods should not affect the status of an organic product or operation. Id. at The Agency s decision to prohibit the presence of GMOs in nonorganic ingredients is particularly disappointing and would appear to be needlessly restrictive, especially with regard to products represented as Made with Organic (specified ingredients). Although we have not extensively considered the issue, it seems that such a restriction could be challenged on First Amendment grounds as an impermissible restriction on truthful and nonmisleading commercial speech. 9 The Agency notes that to establish a threshold it would need to know (1) the effects of pollen drift, (2) the extent of mixing at various points throughout the marketing chain and (3) the extent of adventitious presence of genetically engineered seed in nonengineered seed lots all of which information, according to AMS, is now largely unknown. The Agency also notes that the testing methodology for detecting GMOs has not yet been fully validated and [w]ithout recognized methods of testing for and quantifying all traits in a wide range of food products... it would be very difficult to establish a reliable numerical tolerance. Id. at

10 Effect on State Organic Programs Consistent with the OFPA, AMS will permit state organic certification programs for production and handling operations within the state. 10 A proposed state certification program, and any amendments thereto, must be approved by AMS prior to implementation. Proposed state standards must meet the general requirements for organic programs in the OFPA and must be at least equivalent to the AMS organic regulations. More restrictive requirements would be permitted only if such requirements were based on unique environmental conditions or production or handling practices particular to the state or region. An application for more restrictive state standards would need to demonstrate that the NOP regulations were insufficient to address the issue. Such stringent standards would apply only to products produced within the state and could not be used to restrict the marketing of organic products produced in other states. 11 Transportation Issues The final rule does not change the basic scheme outlined in USDA s previous proposals, namely, AMS expects certified organic operations to implement and document measures (1) to prevent the commingling of organic and conventional products, and (2) to assure that organic products are protected from contact with prohibited substances. It is the responsibility of certified operations to ensure that contracted shippers and distributors protect the integrity of the organic products they are transporting. Certification is not required of operations that simply transport organic foods. As noted above, operations that merely store organic products are exempt so long as the operation simply receives pre-packaged or otherwise contained organically produced products and the products remain in their original containers States may choose their degree of involvement in administering the National Organic Program. A state may have a State Organic Program (SOP), in which case the state is responsible for administering a compliance program for enforcement of the NOP and any more restrictive requirements contained in the USDA-approved SOP. The state enforcement authority is limited to review and investigation of complaints of noncompliance involving (1) organic production or handling operations operating within the state and (2) accredited certifying agents operating within the state. A state may have a state certifying agent as well as an SOP or may have neither. If a state has no SOP, it has no responsibility for compliance under the NOP. 11 USDA explains in the preamble to the rule that an SOP may not discriminate against agricultural commodities produced in other states in accordance with the OFPA and the organic rule. Id. at The Agency adds that a USDA-accredited agent must accept the certification decisions made by another USDA-accredited certifying agent as its own. Id. at The storage operation must implement, as necessary, procedures to prevent contamination of organically produced products. 10

11 Compliance and Enforcement Consistent with the March 2000 proposal, the final rule empowers certifying agents as well as AMS officials to issue notices of noncompliance to certified operations and to initiate suspension or revocation of certification. The notice of noncompliance must (1) describe each allegation of noncompliance, (2) describe the facts upon which the notice is based, and (3) provide a date by which the operation either must rebut or correct each allegation of noncompliance. If the operation fails to rebut or sufficiently correct the alleged noncompliance, the certifying agent may issue a notice of proposed suspension or revocation of certification. The certified operation may request a mediation, or may decide to appeal the matter to AMS. If the certifying agent believes the operation has willfully violated the OFPA or NOP regulations, he may forego the notice of noncompliance and proceed directly to the notice of proposed suspension or revocation of certification. If the operation fails to correct the noncompliance, to resolve the issue through rebuttal or through a mediation procedure provided in the final rule, or to file an appeal with AMS, the organic certification is suspended or revoked, as applicable. An operation that has had its certification revoked will not be eligible to receive certification for five years following the date of revocation. In an effort to balance the considerable discretion afforded to certifying agents, AMS has proposed to permit certified operations to file complaints with AMS if they believe they have been treated unfairly or that a certifying agent is not following the NOP requirements. AMS will address the noncompliance of certifying agents through a noncompliance procedure set forth in Section In a change from the March 2000 proposal, USDA has incorporated into the regulations the penalty provisions contained in the OFPA. A new paragraph (g) of Section provides that in addition to suspension or revocation, any certified operation that knowingly sells or labels a product as organic, except in accordance with the OFPA, shall be subject to a civil penalty of not more than $10,000 per violation. The regulation also provides that any certified operation that makes a false statement under the Act to the Secretary of USDA, a state organic program s governing state official or a certifying agent shall be subject to the provisions of 18 U.S.C Section 1001 of title 18 provides that violations of that section are subject to a substantial fine and/or imprisonment for up to 5 years Effective Date and Implementation Schedule The final rule becomes effective two months after its publication in the Federal Register, i.e., February 20, 2001, but will not be fully implemented until 18 months after its effective date, i.e., August 20, For labeling purposes the key date is the implementation date, not the effective date of the rule. As of August 20, 2002, all agricultural products that are sold, labeled or represented as 100 percent organic, organic, or made with (organic ingredients) must be 11

12 produced and handled in compliance with the final rule. Products entering the stream of commerce prior to August 20, 2002 will not have to be relabeled. 13 Note that once its certifying agent is accredited by AMS, an organic operation is automatically certified and may begin following the labeling requirements of the final rule even though the implementation period has not ended. However, the USDA organic seal may not be used on any 100 percent organic or organic product until 18 months after the rule s effective date. * * * In addition to the provisions discussed above, AMS has also established measures relating to crop and livestock production standards, accreditation of certifying agents, and assessment of fees. While these issues are not addressed in this memorandum, we would of course be happy to provide additional information on any aspect of the proposal that is of interest. Please give us a call, should you need any additional information about this significant new regulation. 13 The preamble states that products entering the stream of commerce prior to the effective date will not have to be relabeled (id. at 80551); however, read in context and based on other statements in the preamble regarding phaseout of old labels (see id. at 80587), we think it is clear that AMS meant to say that relabeling would not be required for products entering the stream of commerce before the implementation date of the rule, i.e., August 20,