Business and Financial

As farm machinery has become more complex and reliant on computer software, the right-to-repair issue has become a prominent issue in the farm community.  Farmers are sometimes prevented from repairing their own equipment because they do not have access to needed diagnostic tools or are otherwise barred due to embedded software.  Farmers have voiced their criticism of manufacturers as right-to-repair has become a prominent issue in the agricultural community.

In an effort to address the right-to-repair issue, the American Farm Bureau Federation (AFBF) and John Deere recently entered into a memorandum of understanding (MOU) in which Deere agrees to provide access to documentation, data and diagnostic tools used by the company’s authorized dealers.  This development was likely a response to pressure that Deere and other manufactures were under to allow right-to-repair.  New York recently passed a right-to-repair law and Senator Tester introduced right-to-repair legislation in the U.S. Senate earlier this year. 

Software User License

The issue of right-to-repair is related to a user’s license.  The term “license” has a specific meaning under the law.  Someone who holds a license for a product is allowed to use the product but does not own the product.  In 2016, Deere began using a user’s license for the software in its machines.  Essentially, when a customer would buy a machine from Deere, the buyer had ownership of the steel but did not own the software that makes the machine operate.    

Software licensing has its roots in 1980’s software.  The burgeoning consumer software industry initially sold its software to customers and retained no rights to the software.  These software developers began to see purchasers of their software reverse engineer the software and development slightly different software that resulted in the same functionality.  In essence, a person could buy the software, make a change to the software to potentially avoid copyright infringement, but end up with software that did the same thing as the originally purchased software.  This process essentially allowed for the stealing of intellectual property from the software developer, but the developers had little legal recourse.

To overcome this loss of intellectual property, software developers began selling a license to use the software.  The software license allowed the purchaser to use the software, but the software developer retained ownership.  The license agreement expressly prohibited reverse engineering or using the software in other ways that jeopardized the software developer’s intellectual property.  By keeping ownership,  software developers could take legal action against people who tried to copy and resell the software.

The software license worked reasonably well for many years.  The vast majority of software users were oblivious to the license agreement and continued using the software as they always had.  The licensing arrangement help protect the software developers’ intellectual property.  However, in the last twenty years or so, software began to be embedded in electronic devices blurring the lines between the software and the hardware. A new tractor seems to be as much a computer running software as it does a power unit pulling implements.  

Right-to-Repair

The integration of software into farm machines came to light in 2016 when John Deere implemented a software user license agreement to presumably protect its intellectual property.  Its licensing agreement clearly stated that reverse engineering or copying of the software is prohibited.  However, Deere seems to have taken it one step further.  Farmers and independent repair shops were prohibited from having the diagnostic tools and manuals required to make repairs.  This denial of diagnostic tools effectively made it impossible for farmers and independent mechanics to make repairs on some John Deere equipment.  Many people in the farm community expressed their concern about the license agreement and saw it as scheme to keep the repairs, and the fees from those repairs, all within the John Deere dealer network.  Farmers wanted to be able to repair their own equipment, or use other independent third parties, to potentially save money and to have more timely service, especially during busy times like planting and harvest.

Due to pressure from a combination of the new legislation in New York, the right-to-repair legislation introduced in the Senate and dissatisfaction expressed by farmers, John Deere likely felt it was best to make some concessions with farmers while keeping ownership of the software.  This speculation is supported by the fact that AFBF agreed to “refrain from introducing, promoting, or supporting federal or state "Right to Repair" legislation that imposes obligations beyond the commitments in this MOU.”  So, it seems AFBF agreed not to pursue right-to-repair legislation in exchange for Deere loosening its prohibitions of right-to-repair.

While it is impossible to foresee all the future implications for an agreement like the one between AFBF and Deere, it does seem that it is a reasonable compromise.  Farmers can now have access to diagnostic tools to allow for self-repairs while Deere keeps ownership of its software.  Critics argue the agreement does not go far enough and Deere still has too much control over self-repairs.  We will see over the next few years if the agreement is, in fact, a reasonable compromise.

Memorandum of Understanding

It is noteworthy that the agreement between AFBF and John Deere is memorialized within a Memorandum of Understanding.  For those not familiar with an MOU, there may be some curiosity as to its legal context.  MOUs are most often used at the beginning of a negotiation to ensure that both parties are starting with the same understanding of their current positions, to make clear what each party is seeking from the negotiation and that it is worthwhile for both parties to move forward.  Unlike a contract, an MOU is generally not legally enforceable.  Because the agreement is an MOU, neither AFBF nor Deere is legally bound to its terms.  Neither party has legal recourse if the other party does not honor its commitments as outlined in the MOU. If either party reneges on its commitments, the party at fault will likely receive criticism in the public opinion realm but will likely have no legal liability.

Conclusion

The John Deere software licensing issue is a good example of how new technology can require new strategies and concepts in the law.  Prior to the 1980’s, copyright law had worked just fine for books and movies but it did not work well for the new medium of software.  So, the concept of software licenses was developed to address the threats to the software industry. Twenty years later when the line between software and hardware began to blur, software licenses were again modified to protect the developer of the software.  In the case of John Deere, perhaps they went a bit too far in enforcing their licenses.  The threat of unfavorable legislation and criticism from customers probably caused John Deere to walk back their stance on prohibition of diagnostic tools to allow self-repairs.  Hopefully, the agreement between John Deere and AFBF has found a reasonable middle ground that benefits all parties.

Direct food marketing in Ohio is hot. The latest USDA survey identified 7,107 Ohio farms with direct food sales--third highest in the nation.  That might be why our program receives more legal inquiries about food sales than any other area of law.  And that is also why we’re hosting a three-part webinar series on “Starting a Food Business,” providing an introduction to what a producer needs to know about selling home-based and farm-raised foods directly to consumers and retailers.

The free webinar series will be from 7—9 p.m. on January 24, February 28, and March 28 in 2023, with these different topics each night:

• January 24:  Start-Up Basics.  What do you want to sell?  We’ll review initial considerations for selling your food product.  We’ll cover food safety, licensing, legal, and economic considerations for starting up a food business.
• February 28:  Selling Home-Based Foods.  Learn about food product development, Ohio’s Cottage Food and Home Bakery laws, and requirements for selling canned foods.
• March 28:  Selling Meat and Poultry.  A look at the economics, processing options, and labeling and licensing requirements for selling meat and poultry.

Our teaching team for the webinar series includes:

• Nicole Arnold, Asst. Professor and Food Safety Field Specialist for OSU Extension.  Nicole supports food handlers, consumers, and educators with food safety education and risk communication efforts.
• Peggy Kirk Hall, Assoc. Professor and Agricultural Law Field Specialist for OSU Extension.  Peggy directs OSU Extension’s Agricultural & Resource Law Program and regularly teaches and writes on food laws.
• Emily Marrison, OSU Extension Educator in Family and Consumer Sciences.  Emily’s food science background provides expertise and insight on food safety, product development, and selling home-based foods.
• Garth Ruff, Beef Cattle Field Specialist for OSU Extension.  Garth has a background in animal science and specializes in livestock production and marketing, farm management, and meat science.

The webinar series is free, but registration is necessary.  Find details and the registration link at go.osu.edu/foodbusiness. 

Sometimes, a business owner may find themselves in a position where they want to move from one business endeavor to another.  For example, the owner of XYZ Car Repair LLC decides to discontinue the car business and begin farming.  The owner would like to use their existing LLC to operate the new farming operation.  Is this possible?    

The answer is yes.  The same LLC (or any business entity) can be used to operate different businesses.  Using the example above, the owner could simply use XYZ Car Repair LLC for their farming operation.  While operating a farm under the name of a car repair business may be a bit odd, it is possible. Fortunately, the name of an entity can be changed.

An entity name can be changed by amending its Articles of Organization.  For an LLC, a Certificate of Amendment (Form 611) is filed with the Ohio Secretary of State requesting to change the name of the LLC.  If the new name is available and not in use by another entity, the request will be granted.  The name-change process involves filing a simple form online and paying a $50 fee. A similar method is used to change the name of other entity types.

If a name of an entity is changed, the IRS needs to be informed of the name change.  If the entity has not yet filed a tax return, a letter must be sent to the IRS informing it of the name change.  If the entity has already filed a tax return, the name change can be identified on the tax return.  Also, the bank that holds the entity’s bank account must be informed of the name change as well as all vendors.

In addition to changing the name, the purpose of the LLC may also need to be changed.  When an LLC is registered with the Ohio Secretary of State, a purpose may be included with the articles.  The purpose is sometimes used to limit the scope of the activities of the LLC.  If no purpose is identified, the LLC can engage in any lawful purpose.  Using the example above, assume the owners of the LLC included a purpose of “car repair and related business activity” for the LLC’s purpose.  Before the LLC is used for farming, the LLC’s purpose should be changed to “farming” or “any lawful” purpose.  The purpose identified on the articles of organization should match the actual operations of the LLC.  The purpose is found by searching the entity on the Ohio Secretary of State website.

There may be circumstances where it may be just as easy, or easier, to set up a new LLC rather than using the same LLC for a different purpose.  A new LLC can be registered with the Ohio Secretary of State for $99.  A new tax ID number can be obtained online for no cost.  It may be more convenient to establish a new entity rather than explaining to your bank and vendors that you have the same LLC with a different name.

To summarize the above discussion, it is possible to use an entity for a new business endeavor.  However, you may want to change the name and/or the purpose of the LLC, both of which can be done by filing an amendment to the Articles of Organization.  It is also worthwhile to explore establishing a new LLC for the new business as it may be easier than changing names and purpose.

According to the last Census of Agriculture, about 87% of farms in Ohio are sole proprietorships.  This means that the vast majority of farms have no formal business structure.  However, we often hear of the need to have a business entity for liability protection, taxes or for a variety of other reasons.  So, how do you know if you need a business entity.

Like most legal answers, it depends.  LLCs and corporations can help with liability protection. These entities prevent the owners from having personal liability for the acts of the entity or anyone acting on behalf of the entity.  For example, if an employee of an LLC causes an accident driving equipment on a roadway, the owners of the LLC will not usually be personally liable.  The assets in the LLC are at risk but not the other assets outside of the LLC.

While LLCs do provide liability protection, they are no substitute for liability insurance.  The most important liability risk management strategy should always be a good liability insurance policy.  LLCs and corporations are good backup plans if the insurance policy does not cover the liability in some way.  Therefore, business entities can help with liability protection, but they are not a necessity like insurance.  Generally, the more owners and employees a business has, the more liability protection benefit an LLC or corporation will provide.

Business entities are often more valuable as a succession planning tool than they are for liability protection.  For example, land that is or will be owned by multiple family members is subject to the risks of partition.  Partition is the process where a co-owner of land forces the land to be sold as a way of “cashing out” their ownership in the land.  Land held in business entities is not subject to partition.  Those who own land with other people should strongly consider an LLC or other entity to protect against partition.

Business entities can be tax management tools as well.  For example, a sole proprietorship can only file taxes as a sole proprietor on a Schedule F or Schedule C.  That same sole proprietorship can convert to an S-Corp which often reduces self-employment tax liability.  Farm and business owners who seek the best fringe benefits such as health insurance and retirement benefits may want to be taxed as a C-Corp.  As these examples illustrate, business entities can provide tax management options that sole proprietorships do not.

Business entities do have several disadvantages.  One is the cost of establishing the entity.  The cost depends on the number of owners, the assets that will be put into the LLC and the terms of the governing document.  Establishing an entity can cost several thousand dollars or more in legal fees. Another disadvantage is managing the entity.  Each entity will need its own bank account, accounting, and tax return.  If an entity is not properly managed, it may not provide the expected liability protection or tax structure.

Liability management, succession planning and tax management are just a few of the many factors that should be considered when deciding if a business entity is worthwhile.  The best course of action is to meet with your attorney and accountant to assess the benefit that a business entity may have for your farm or business.  If the benefits outweigh the disadvantages, then you should strongly consider establishing a business entity.  If benefits do not outweigh the disadvantages, you may not need an entity and that is OK.  Many successful businesses are sole proprietorships and yours can be as well.