Franchise Fury, Part II

IF A CITY ANNEXES TERRITORY where a private waste hauler has state-sanctioned, exclusive collection rights, the hauler may recoup damages from the city based on the difference in the market value of its rights before and after annexation, according to a ruling by the Supreme Court of Washington State. But if the city allows the hauler to continue to serve the area for a limited time, the award must be offset by the benefit the hauler receives from the extension.

Dahl-Smyth Inc. (DSI) provided exclusive waste collection service in parts of Walla Walla County under a certificate issued by the Washington Utilities and Transportation Commission (WUTC). The WUTC, among other things, sets the rates that a certificate-holder may charge.

Between 1982 and 2000, the city of Walla Walla, which furnishes waste collection within its borders, annexed portions of areas where DSI operated under its certificate. These areas contained some 270 occupied housing units.

Under Washington law, if a city annexes territory covered by a hauler's certificate, the city can provide its own service or retain the hauler's service for a fixed seven-year term. If the city takes over collection, it may purchase the franchise for a negotiated price or condemn the franchise by paying fair market value. If the city allows the hauler to continue to serve the annexed area, the city must pay “measurable damages” resulting from the annexation.

DSI continued to serve the annexed areas for at least 10 years after the annexations occurred, although the city did not always grant DSI formal franchise extensions. After the city began to provide its own collection service, DSI sued the city for damages. The trial judge ruled that the certificate was a property right whose value had been diminished. Therefore, DSI was awarded the sum of $425,000 with no offset for post-annexation earnings.

A mid-level appeals court reversed the lower court's decision, limiting the city's liability to “incidental and consequential damages [caused by] the cancellation of the franchise and capable of exact measurement,” but not including lost profits or lost value. [See Waste Age, April 2002, page 28]

The state supreme court accepted the case for review and reversed the appeals court.

Rejecting the concept of precise calculation, the high court said that damages could be tallied by any “accepted methodology.” It ruled that DSI could recover for “any loss that exceeds the benefit … from the … franchise extensions,” but not “damages for the full loss in value of the certificate plus the benefit of the … extension.”

Moreover, the court said, “lost profits may be used to assess the value of a … certificate for the purpose of awarding ‘measurable damages.’”

Finally, the justices noted that the lower courts were wrong in measuring damages based on rates and customer counts nearly 20 years after the annexations occurred. To avoid an “inflated damage award,” the opinion stated, “the change in fair market value must … be calculated based on data collected [at the time of annexation].”

The case now returns to the trial court for recalculation of the damages.

[Dahl-Smyth Inc. v. City of Walla Walla, 64 P.3d 14 (Wash. 2003)]

The columnist is a Washington, D.C., attorney and serves as general counsel of the Solid Waste Association of North America.

The legal editor welcomes comments from readers. Contact Barry Shanoff via e-mail: [email protected].