Franchise Disguised

NO MATTER HOW IT'S PACKAGED, a franchise cannot be awarded without certain formalities, according to a ruling by a Kentucky appeals court. For the past 13 years, Kentucky law has required county governments to prepare solid waste management plans for their respective jurisdictional limits. To fulfill this obligation, officials in Franklin County entered into a host community agreement (HCA) with BFI Waste Systems of North America (BFI). The HCA, among other things, allotted space in BFI's landfill for solid waste generated in the county's unincorporated area, provided for the expansion of the BFI landfill to meet the county's future disposal needs and required BFI to pay the county a percentage of its revenue from out-of-county waste handled at the landfill. BFI's payments and services under the agreement were in lieu of all state-sanctioned license fees otherwise payable to a county by a privately owned waste management facility. In addition, BFI agreed to indemnify the county from all liability associated with the design, construction or operation of the facility. BFI also would provide free disposal for some waste from county projects and activities and a cut-rate price for self-disposal of household wastes.

The HCA, which was neither publicly advertised nor competitively bid, was conditioned on BFI receiving a state permit to build and operate its proposed landfill expansion and the county approving necessary zoning changes and incorporating the landfill expansion into its solid waste plan.

Shortly thereafter, a group of citizens who live near the landfill filed suit in the Franklin Circuit Court against BFI and the county challenging the HCA's validity. After hearing legal arguments from both sides, the trial court ruled in favor of the plaintiffs, finding that the agreement created a franchise affording special privileges or treatment to BFI without heeding the competitive bidding requirements of the state constitution. The defendants appealed.

Affirming the judgment in favor of the local residents, the state court of appeals noted that Section 164 of the Kentucky Constitution forbids a local government from granting any franchise or privilege unless it first publishes a notice, receives bids, and selects the highest and best bidder. Admittedly, no advertising or bidding occurred. Thus, the question was whether the HCA had created a franchise.

The appeals court quoted approvingly from a 1996 state supreme court case with similar facts. “[A] franchise is [generally defined as] a right or privilege granted by a sovereign to a party to do some act which such party could not do without a grant from the government,” the high court said.

The appeals court found that the HCA gave the county “significant financial rewards … contingent upon local approval of BFI's proposed expansion.” BFI got what it wanted, the opinion stated: “the right or privilege to expand its … landfill,” which is not a right or privilege generally available to all. Such “privileges are subject to bidding and advertising requirements, which were not met in this case.”

[BFI Waste Systems of North America Inc. v. Huntington Woods Neighborhood Ass'n Inc., 2003 WL 22753022, Ky. App., Nov. 21, 2003]

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The columnist is a Rockville, Md., attorney and serves as general counsel of the Solid Waste Association of North America.