COLLECTION CONTRACTS: POST-CARBONE

Constance Hornig

For many, flow control is code for coercion, because some state and local governments require haulers to deliver their waste to specific disposal sites through law and ordinance.

In the C&A Carbone Inc. v. Town of Clarkstown case, the U.S. Supreme Court ruled against an ordinance requiring waste to be delivered to the New York town's transfer station. New Jersey's flow control statute also was ruled invalid by the U.S. 3rd District Court in the Atlantic Coast Demolition & Recycling Inc. et al. v. Board of Chosen Freeholders of Atlantic County case.

Yet flow control can include both unilateral mandate and bilateral agreement. For example, disposal sites may be designated by contract. In California, collection is often provided through franchises which often specify disposal locations. In the SSC Corp. v. Town of Smithtown case, a U.S. Court of Appeals invalidated a flow control ordinance but upheld a contract which required a hauler to deliver waste to the local waste-to-energy plant. The options for local governments run the gamut:

* Ordinances. Ordinances are coercive. Local governments adopt ordinances and impose requirements unilaterally. No consent is involved.

* Licenses and Permits. Requirements can be mandated through licenses and permits, although they may be applied for voluntarily. Little, if any communication exists between regulator and regulated, but they are less coercive than an ordinance.

* Contracts. Local governments, like private parties, can enter into contracts. Here, the parties are in agreement.

Municipal collection remains local governments' strongest flow control option. Alternatively, flow control issues are mooted if a local government switches from tip fee-based revenue, which depends on receiving waste, to land-based revenue, which is independent of waste receipt.

However, developing a municipal collection system or assessing property taxes may not be politically or financially feasible. The next best practical option may be contracts with designation clauses.

Contracting Strategies

Many local governments would rather contract or franchise with private haulers to collect its solid waste. This may involve using their own waste facilities or possibly one owned by another.

Depending on its fi-nancial needs, the chosen facility may require the delivery of all the community's waste by the hauler.

However, the Court in Smithtown noted that local governments are vulnerable to the Comprehensive Environmental Response, Compen-sation and Liability Act, and if it cannot designate a disposal site, it cannot control potential liability.

These local governments might consider three broad contracting strategies:

1. Competitively Bidding Collection Contracts. Contracts which include a facility designation clause might deflect interstate commerce challenges which equate monopoly services with unconstitutional discrimination against interstate commerce.

In Carbone, the Supreme Court set the stage for discussions on competition and interstate commerce. This past spring, it refused to review the Tri-County Industries Inc. v. County of Mercer, Mercer County Solid Waste Authority and DEP case, stating that a plan which uses a fair, open and competitive process without discrimination against out-of-state parties might withstand a constitutional challenge.

In U.S.A. v. Town of Babylon, N.Y., the companion case to Smithtown, the Court of Appeals also discussed the town's competitively securing collection contracts in the context of market participation (which excepts state and local governments from commerce clause constraints) versus regulation (which leads to commerce clause scrutiny).

It noted that the town could hire or even favor a hauler if they didn't exclude anyone from the bid. Even if the town was not a market participant - and therefore subject to the dormant commerce clause - its open bidding process did not discriminate against or impose any burden on interstate commerce.

Consider the facts. Babylon distributed 69 bid packages across the nation (24 out-of-state). There were no geographical eligibility limitations. It notified national trade publications, spoke with representatives of industry trade groups and phoned national waste hauling firms.

The Court said the town could evaluate bids on criteria which included identical experience, local offices and central truck yards. (The winning, lowest bidder was already collecting in the town.)

The Court found ample reasons for the local-facilities requirement; the small burden on interstate commerce is outweighed by non-discriminatory local interests in reliable, consistent collection service. (The court noted that the nature of garbage collection services is local; trucks must be available on a moment's notice for back-up service; the town can better monitor its contract requirements, including fleet inspection; complaints can be filed more easily.)

If state law or charters require that collection contracts be publicly bid, then the local government must establish a competitive bid. But where the bid process is not prescribed by law, local governments have flexibility soliciting expressions of interest, requests for qualifications (RFQs) and requests for proposals (RFPs) as well as in their evaluation and award criteria.

In order to fend off flow control challenges, ask the bidder to specify where the waste will be disposed, subject to municipality's approval. In the collection contract, the municipality might reserve the right to disapprove of the selected facility and designate alternative sites.

Rates are likely to be more stable if the bid package requires the bidder to submit price proposals for cents/ton-mile for specified haul distances by the shortest available routes. This assures that the price is pre-determined if the designated site is changed.

The essence of the competitively-procured collection contract is negotiated agreement, not unilateral adhesion.

2. Enter Into Bilateral, Negotiated Collection Agreements. Emphasize "agreement." Bidders submit proposals voluntarily and, following negotiations, enter into non-adhesive contracts.

Following negotiation with the winning bidder, the collection contract might contain language like: "This contract shall be interpreted and construed reasonably and neither for nor against either party hereto, regardless of the degree to which either such party participated in its drafting. The [contract hauler] acknowledges that it determined to participate in the competitive procurement of this contract upon its own choice and initiative. The parties have negotiated this contract at arms' length and with advice of their respective attorneys, and no provision herein shall be construed against the [municipality] because it prepared this contract in its executed form."

3. Evaluate Risk of Litigation: Who and When? The municipality might consider if its competitive bidding process will be challenged. The municipality may consider the risk of developing a new, green-field facility too great. However, this risk may pale in comparison with a municipality's issuing bonds to finance its facility or in an existing put-or-pay service agreement with another public or private entity.

Almost anybody can challenge, but municipalities should discuss the following considerations, which can depend on state law, with their counsel:

* Non-Responsive or Losing Bidders.

Consider the municipality's location and economic flow control. Do potential bidders own other facilities within economically feasible haul distances?

The firms that own facilities will be motivated to earn both haul fees and processing/disposal fees. Their tip fees might be lower. They might strike the RFP's designation provision, arguing it is unconstitutional.

If haulers are not vertically integrated, their disposal costs or processing tip fees are passed through to the generators, and they are compensated for the haul distance. These haulers should have no economic incentive to challenge a designation clause in their collection contract.

* Non-Bidders. Arguably, a hauler that doesn't submit a bid should be in a weaker position and have a harder time establishing legitimacy than one whose bid is rejected. But they may find other grounds for standing to sue.

* Winning Bidder and Contracting Hauler. The hauler in Smithtown contracted with Smithtown to provide collection services and take the town's waste to the Huntington, N.Y., WTE facility to fulfill Smith-town's waste commitment to the facilities. Following Carbone, the agreement initially was ruled invalid in federal court, although the case was reversed on appeal.

You can detour such challenges by:

* Qualifying the contractual designation clause with "to the extent provided by law" so attorneys for both sides confirm that the agreement is legal, valid, binding and enforceable.

* Mention in the contract the municipality's right to terminate if the hauler contests the validity of the agreement or, specifically, the designation clause, or if that clause is found to be invalid and unenforceable. Provide that the designation clause is not severable from the agreement.

Additionally, the contractor might acknowledge that the municipality reserves its right to provide collection services itself.

To discourage a contractor from challenging a designation provision, a municipality might include an option to acquire the contractor's equipment and facilities at fair market value upon termination.

* Competing Waste Facility Owner.

On one hand, a competing facility owner might not sue because his damages are too speculative and uncertain. His customers - waste haulers - chose to respond to the municipality's bid and conduct business with it rather than with him.

On the other hand, if the municipality's tip fees are greater than those of the competing facility, it might be easy for the owner to show that the hauler would have delivered waste to his or her facility and estimate its revenue loss.

If it does business within the municipality, the facility owner might make use of taxpayer suits.

* Citizens and Taxpayers. Legislation allowing citizens and/or taxpayers to challenge municipal taxes and expenditures vary by state. Some laws have required a showing of financial waste. Others may require a showing of illegality.

Some challenges allege that solid waste charges, assessments or parcel fees levied on property are an invalid tax unauthorized by state statute or charter rather than a valid service charge.

Similarly, the availability of a taxpayer's suit might depend on characterizing a non-competitive or above-market disposal fee as a tax rather than a service charge.

Even if the municipality's disposal fee is non-competitive, the municipals may be able to show that the higher fee is necessary to cover actual costs, including debt service on bonds that finance the facility, operations and maintenance costs.

The higher tip fee may reflect costs not faced by its competitor, such as state-mandated waste planning and diversion programs as well as differing debt service/ capital amortization schedules, permitting, clean-up, closure and post-closure costs uniquely applicable to its facility.

Challenges can be made at any time during or after the agreement's execution. However, if the bid process was conducted according to state law or charter, and not just as a policy matter, the law or charter may provide for a challenge only within a specified period, after which the suit would be foreclosed.

To help build the strongest possible case against commerce clause challenges, secure collection contracts with designation clauses using competitive bids and negotiate with a short-list of bidders.

Evaluate risk of challenge by looking at the probable group of bidders and analyze their economic interests in not only collection, but integrated waste management services.