Franchise Fury

A hauler with exclusive collection rights in an area that is annexed to a city may continue to serve the area for a limited time, but cannot recoup the full market value of its lost franchise from the city, according to a ruling by a Washington State appeals court.

Dahl-Smyth Inc. (“DSI”) has the exclusive right to provide waste collection services in Walla Walla County under a certificate issued by the Washington Utilities and Transportation Commission (“WUCT”). The city of Walla Walla itself provides waste collection within its boundaries.

Under Washington law, if a city annexes a territory served by a hauler with a WUTC certificate and wants to begin serving the annexed area immediately, it must pay fair market value for the hauler's franchise at a price established by negotiation or by condemnation.

Otherwise, the annexation cancels the hauler's certificate within the annexed territory, but obliges the city to grant a seven-year franchise to the hauler for continued service to the area. This reprieve allows the hauler to amortize its investment and wind down its business in the annexed area.

Now, here's the kicker: the law allows a hauler with a newly minted franchise to sue the city for “measurable damages” stemming from the annexation.

In 1985, DSI sued the city, seeking damages related to the city's annexation of areas where DSI had provided waste collection under a WUCT certificate. The parties agreed to delay the trial, pending the resolution of another legal battle on similar issues in a neighboring community.

A trial was eventually held in October 2000. Each side's expert witnesses offered their own formula for determining DSI's measurable damages.

The trial judge held that the certificate was a property right and, thus, DSI was entitled to compensation if the annexation diminished the certificate's value. The court accepted the testimony of DSI's experts that the value of the certificate was equal to the value of the business. It awarded DSI the sum of $425,000 without any offset for the post-annexation exclusive franchise or the decreased expenses thereafter. The city appealed.

When the state legislature provided for an exclusive franchise period and for measurable damages, it intended “not to compensate the franchisee for the loss in value to the … certificate caused by annexation,” the appeals court said. An annexing city's liability is limited to “incidental and consequential damages … directly connected to the cancellation of the franchise and capable of exact measurement,” the court added.

The appeals court overturned the trial court's decision, and sent the case back for a hearing on damages using the criteria announced in the opinion.

DSI filed a petition asking the state supreme court to accept the case for review. The city filed a response.

A decision on the petition is expected later this spring.

[Dahl-Smyth Inc. v. City of Walla Walla, No. 19982-7-III, Wash. App. Div. 3, Jan. 15, 2002]

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

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