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The
Interrelationships of Municipalities' Collection Contract
and Haulers' Commercial Customer Subscriptions
By
Constance Hornig
Imagine
that you run one of your municipality's local businesses.
A doughnut shop. Or a stationary store. Or a supermarket.
Your hauler offers you a great collection rate and you
sign a service agreement. It reads:
Thank you
for choosing XXX as your waste services company. Our
aim is to provide this essential service so responsibly
and dependably that you don't need to give it a second
thought. We will do our best to keep you satisfied and
want you to tell us when we don't. THIS AGREEMENT WILL
CONTINUE IN EFFECT FOR SUCCESSIVE 24-MONTH PERIODS UNLESS
IT IS TERMINATED BY YOU, IN WRITING, AS PROVIDED UNDER
"OUR GUARANTY," OR BY EITHER ONE OF US AT LEAST 60 DAYS
BEFORE THE END OF ONE OF THOSE 24-MONTH PERIODS.
Business
rolls on. Clerks quit. Estimated tax payments have to
be filed. A customer slips and falls on a squashed mango.
You are approached by a company offering to collect
recyclables and decrease the refuse collection bill,
and you want to cut back on the number of your weekly
pickups, but with all the other stresses, you didn't
remember that you had to give your existing hauler affirmative
written notice of termination. So you can't change haulers
for another 22 months. Newspapers have featured articles
highlighting dismay from businesses over these restrictive
evergreen provisions.
An Analog:
Evergreen Clauses in Municipal Franchise Agreements
Municipalities
have been faced with similar evergreen provisions requiring
council or board action, often years in advance of stated
expiration, to stop the contract term from rolling forward.
But whereas public entities increasingly are setting
fixed terms in new procurements, customers rarely have
the awareness or leverage to secure the obverse of automatic
extension: a stated expiration date unless the customer
takes affirmative action to renew.
How Can
Local Government Protect Its Residents and Businesses?
When you
enter into new collection agreements or revise your
permit requirements, prohibit evergreen provisions in
customer subscription orders. Include breach of this
obligation in the list of liquidated damages for customer
service issues. (Of course, this is not an issue if
your hauler has an exclusive right or franchise because
in that event customers do not have hauler choice.)
Sole-Source
Negotiations. In a sole-source (re)procurement
with an existing hauler, prohibiting evergreen subscriptions
might not be easy to negotiate. (After all, it is valuable
to the hauler since it increases the likelihood that
the hauler will retain its customers over a long term.)
And there might be issues as to the status of that hauler's
possibly preexisting evergreen customer subscription
orders. Perhaps the hauler can contractually agree not
only to cease offering evergreen provisions in the future
but also to refrain from enforcing evergreen provisions
in preexisting customer subscriptions. (In a related
issue, you might want to require that your hauler charge
uniform rates for the same service level. This raises
the question as to whether a customer with a preexisting
customer subscription agreement can insist on its hauler
honoring the contract rate, which may be lower than—and
therefore not uniform with—rates under the newly
procured contract or franchise.)
Competitive
Procurements. In a competitive procurement,
it may be easier to secure a no-evergreen prohibition
since a proposer will not want to lose evaluative points
for taking exception to the terms of the proposed agreement.
Furthermore, if you are competitively procuring a new
agreement, an incumbent hauler will not necessarily
win, so the status of preexisting customer subscription
orders is mooted.
Solid
Waste Code and Permit Requirements. This
highlights an important legal point: Haulers may complain
that requiring them to refrain from enforcing preexisting
customer subscription orders is unconstitutional under
the Contracts Clause of the United States and California
Constitutions (US Const., article I, 10; CA Const.,
article I, 9). If you amend your solid waste code or
permit requirements, you are acting in a regulatory
capacity without securing consensual agreement of the
hauler, as in the case of either a sole-source negotiation
or a competitive procurement of a collection contract.
Are you interfering with their contract?
Ask: What
are the haulers' reasonable expectations?
The Contracts
Clause and Reasonable Expectations
The Supreme
Court has upheld changes in pension benefits against
constitutional impairment of contracts allegations based
on a doctrine of reasonable expectations: "Laws which
restrict a party to those gains reasonably to be expected
from the contract are not subject to attach under the
Contract Clause, notwithstanding that they technically
alter an obligation of a contract" (El Paso v Simmons
[1965] 379 US 497, 515 [13 L.Ed.2d 446, 458, 85
S.Ct. 577], see findlaw.com).
Local governments
might argue that haulers' reasonable expectations for
subscriptions cannot run longer than the term of their
permits, which often are renewable annually. (The 2nd
Circuit in the New York City case discussed below determined
that haulers have no property right in future licenses
where the city had broad discretion to grant or deny
them.) In addition, where the local government has given
haulers a statutory five-year notice of intent to procure
exclusive services, the hauler's expectation cannot
exceed the five-year period.
In the influential
US 2nd Circuit of Appeals, there is a solid waste case
in point: Sanitation and Recycling Industry, Inc.
v City of New York, Docket No. 96-7788 (1996).
When New
York engaged on a campaign to purge the waste industry
of mob influence, it enacted a new law limiting private
carting contracts to two years and giving customers
the right to terminate their contract if their hauler
assigned it to another company. Transition provisions
in the law allowed existing private contracts to run
their original duration, but not more than two years
from enactment. Thereafter, current contracts were generally
terminable at will. Haulers (such as Dibenedetto, Corrieri,
Ferrante, Occhiogrosso, Toscano, Dell'Olio, Dellvena,
Flori, Tesi, Lomanginao, Sirico, Panza, Archina, and
Falso Carting Co. Inc.) sued the city, alleging violation
of their constitutional Contract Clause rights.
The haulers
argued that although the city had regulated them for
many years, it had never before regulated the duration
of their contracts. The court countered that they had
been subject to regulation for decades and could have
anticipated regulation of this sort. The court ruled
that the city's new law was a reasonable means to achieve
its legitimate purpose of eradicating bid-rigging, evergreen
contracts, and predatory pricing in the carting industry,
"a broad societal goal, not the pursuit of the interests
of a narrow class."
Prohibiting
evergreen provisions in customer subscription agreements
raises a second possible legal objection: Haulers may
argue that requiring them to refrain from enforcing
preexisting customer subscription orders constitutes
an unconstitutional "taking" of property - additional
haul receipts - without just compensation.
First, evergreen
clauses render it much more likely that the term would
roll on, but alert customers can exercise their termination
rights. Haulers might have a likely, but not certain,
future revenue expectation.
Second, cases
respecting new laws banning billboards might provide
helpful analogies to the solid waste industry. In zoning
and land-use law, if the ban is phased in over time,
companies are given a reasonable period to amortize
their investment. Some states have enacted laws limiting
or prohibiting termination of haul permits or licenses
to allow haulers to recover their investment, and the
notice period arguably provides an outside date for
reasonableness.
Put Customer
Subscription Terms on Your Radar Screen
Historically
and practically, most customers do not change
haulers. Given a choice, they stick with the same haulers
for years. In principle, however, hauler choice is important.
(You might have experienced this right-to-choice conviction
if you have ever tried to implement mandatory service
combined with exclusive franchising!)
Yet
there are many reasons your citizens might want to change,
most relating to price. As many of us struggle to achieve
increased diversion, we also have an interest in commercial
generators' ability to arrange for recyclables collection
from providers other than the refuse hauler.
Finally,
if you have open competition for residential and/or
commercial haulers in your community and do not regulate
rates, your citizens might not get the true benefit
of market competition when they cannot easily change
haulers. When they are constrained by evergreen clauses
in their subscription orders, they can't shop for the
best rates, which of course is one of the reasons hauler
include evergreen clauses: They not only retain business
but also avoid the setup or wind-down costs of establishing
new accounts and delivering/removing containers.
So watch
for opportunities to prohibit evergreen customer subscriptions,
limit the term length, and increase customers' flexibility
to switch service.
Author
Constance Hornig, Esq., heads her own law firm in Los
Angeles, CA.
MSW
- May/June 2003
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