BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 841
                                                                  Page  1

          Date of Hearing:   June 21, 2011

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                      SB 841 (Wolk) - As Amended:  May 12, 2011

                              As Proposed to Be Amended

           SENATE VOTE  :   39-0

           SUBJECT  :   SOLID WASTE: ENTERPRISES: CONTRACTS

           KEY ISSUE:   SHOULD A LOCAL AGENCY BE RESTRICTED, AS SPECIFIED, 
          FROM ENFORCING AN INDEMNITY OBLIGATION AGAINST A SOLID WASTE 
          ENTERPRISE FOR CLAIMS ARISING FROM FAILURE TO OBTAIN VOTER OR 
          PROPERTY OWNER APPROVAL OF A FEE OR OTHER CHARGE IN VIOLATION OF 
          ARTICLES XIII C OR XIII D OF THE CONSTITUTION?

           FISCAL EFFECT  :  As currently in print this bill is keyed 
          non-fiscal.

                                      SYNOPSIS
                                          
          This bill, sponsored by members of the solid waste industry, 
          seeks to restrict the ability of local governments that 
          negotiate solid waste fees and franchise agreements with solid 
          waste companies to obligate those companies to indemnify them 
          for any portion of franchise fees that may be found by a court 
          to violate voter approval requirements under Propositions 218 
          and 26.  As proposed to be amended, this bill would apply a 
          qualified enforceability rule to an indemnity obligation, as 
          specified, that would render it unenforceable to the extent that 
          claims for failure to obtain necessary voter approval for the 
          fee at issue arise out of, pertain to, or relate to the 
          liability of the local agency for failure to comply.  In 
          addition, this bill would deem an indemnity obligation 
          unenforceable if it requires a solid waste enterprise to refund 
          fees to its customers that have not been retained by the solid 
          waste company but that are being held by the local agency 
          instead.  Proponents of the bill, primarily associations of 
          solid waste handling companies, argue that these restrictions on 
          indemnity obligations are needed to protect waste companies from 
          unfairly being required to indemnify local agencies for Prop 218 
          and 26 compliance decisions, particularly when, as the companies 
          contend, they have no ability to determine the amount of these 








                                                                  SB 841
                                                                  Page  2

          fees or to impose them in the first place.  The bill is opposed 
          by the El Dorado Board of Supervisors, who argue that the bill 
          is unnecessary because it addresses a problem that does not 
          appear to exist, and in any case, may weaken public safeguards 
          associated with indemnification provisions.  This bill is double 
          referred to the Assembly Natural Resources Committee.

           SUMMARY  :  Restricts the enforceability of any indemnity 
          obligation, as specified, in a contract or request for proposal 
          between a solid waste enterprise and a local agency, related to 
          liability for failure to obtain voter approval of fees or 
          charges in violation of constitutional requirements enacted by 
          Propositions 218 and 26.  Specifically,  this bill  :    

          1) Defines "indemnity obligation" to mean an indemnity 
             obligation related to the failure of a local agency to obtain 
             voter or property owner approval of a fee, levy, charge, 
             assessment, or other exaction that may be required by 
             articles XIII C or XIII D of the state Constitution, if that 
             indemnity obligation is expressly assumed by or imposed upon 
             the solid waste enterprise, including pursuant to ordinance, 
             contract or franchise, for the benefit of the local agency.

          2) Provides that an indemnity obligation, including the duty and 
             cost of defense, shall be subject to the following 
             restrictions:

             a)    An indemnity obligation or other provision, clause, 
                covenant, or agreement that purports to obligate a solid 
                waste enterprise to indemnify a local agency against 
                liability for claims by a third party for failure to 
                obtain voter or property owner approval of a fee, levy, 
                charge, assessment, or other exaction in violation of 
                Article XIIIC or Article XIIID of the California 
                Constitution, is not enforceable to the extent the claims 
                arise out of, pertain to, or relate to the liability of 
                the local agency. 

             b)    An indemnity obligation is not enforceable if it 
                requires a solid waste enterprise to refund fees to its 
                customers, if the fees are collected and retained by the 
                local agency, or collected on behalf of the local agency 
                by the solid waste enterprise and have been remitted by 
                the solid waste enterprise to the local agency, and in 
                either case have been found by a final judgment of a court 








                                                                  SB 841
                                                                  Page  3

                to have been imposed in violation of Article XIII C or 
                Article XIII D of the California Constitution. 

          3) Provides that an indemnity obligation is subject to the above 
             restrictions if it meets either of the following conditions:

             a)    The indemnity obligation is imposed or required by a 
                provision, term, condition, or requirement contained in an 
                ordinance, contract, franchise, license, permit, or other 
                entitlement or right adopted, entered into, issued, or 
                granted by a local agency for solid waste handling 
                services, including the recycling, processing, or 
                composting of solid waste.

             b)    The indemnity obligation is authorized or required in a 
                request for bids or proposals in connection with a 
                contract or franchise specified above.

          4) Provides that provisions of this bill are not subject to 
             waiver, and any attempted waiver must be null and void as 
             against public policy.

          5) Provides that this bill cannot be intended to do any of the 
             following:  

             a)    Add to or expand local agency authority to determine 
                aspects of solid waste collection and handling specified 
                in Section 40059 of the Public Resources Code.
             b)    Alter the authority of business entities to collect or 
                process materials that are not solid waste.
             c)    Determine whether or not a fee, levy, assessment, or 
                exaction requires voter or property owner approval by 
                articles XIII C or XIII D of the state Constitution.

          6) Makes several Legislative declarations, including that these 
             provisions are not intended to address or to determine 
             whether fees for solid waste handling services are fees 
             imposed as an incident of property ownership or fees imposed 
             for a property-related service, within the meaning of Section 
             2 of Article XIII D of the California Constitution.

          7) Provides for prospective application of these provisions to 
             any provision, term, condition, or requirement contained in 
             an ordinance, contract, franchise, license, permit, or other 
             entitlement or right adopted, entered into, issued, or 








                                                                  SB 841
                                                                  Page  4

             granted on or after January 1, 2012.

          8) Establishes that these provisions shall become operative on 
             July 1, 2012.

           EXISTING LAW  :  

          1)Provides that indemnity is a contract by which one engages to 
            save another from a legal consequence of the conduct of one of 
            the parties, or some other person.  (Civil Code Section 2772.)

          2)Provides that in the interpretation of a contract of 
            indemnity, unless a contrary intention appears, the person 
            indemnifying is bound, on request of the person indemnified, 
            to defend actions or proceedings brought against the latter in 
            respect to the matters embraced by the indemnity, but the 
            person indemnified has the right to conduct such defenses, if 
            he chooses to do so.  (Civil Code Section 2778.)

          3)Provides that a contractual duty to defend another against 
            specified claims necessarily arises as soon as such claims are 
            made against the promise, and may continue until they have 
            been resolved.  (Crawford v. Weather Shield Mfg. Inc. (2008) 
            79 Cal.Rptr.3d 721.)

          4)Provides that any indemnity obligation, related to the failure 
            of a local agency to comply with solid waste diversion 
            requirements under the Integrated Waste Management Act of 
            1989, that is expressly assumed by, or imposed upon, a solid 
            waste enterprise for the benefit of the local agency shall be 
            subject to specified restrictions, including but not limited 
            to the following:

             a)   An indemnity obligation shall not be enforceable if the 
               board imposed penalty is based solely upon the failure of 
               the local agency to establish and maintain a source 
               reduction and recycling element, as specified.

             b)   Any board imposed penalty based upon a local agency's 
               failure to meet the solid waste diversion requirements 
               resulting in whole or in part from the solid waste 
               enterprise's breach of contract or noncompliance with any 
               other authorization, shall be apportioned in accordance 
               with the percentage of fault of the local agency and the 
               solid waste enterprise.








                                                                  SB 841
                                                                  Page  5


             c)   A solid waste enterprise is not liable for the indemnity 
               obligation to the extent that the solid waste enterprise's 
               breach or noncompliance resulted from the action or failure 
               to act of the local agency.  (Public Resources Code Section 
               40059.1(c).)

          5)Provides, generally, that any agreement affecting a 
            construction contract that purports to insure or indemnify, 
            including the cost to defend, the builder or the general 
            contractor by a subcontractor against liability for claims of 
            construction defects are unenforceable to the extent the 
            claims arise out of, pertain to, or relate to the negligence 
            of the builder or contractor, among other things.  (Civil Code 
            Section 2782(c).)

          6)Provides that local government bears the burden of proving by 
            a preponderance of the evidence that a levy, charge, or other 
            exaction is not a tax, that the amount is no more than 
            necessary to cover the reasonable costs of the governmental 
            activity, and that the manner in which those costs are 
            allocated to a payor bear a fair or reasonable relationship to 
            the payor's burdens on, or benefits received from, the 
            governmental activity.  (Sec. 1 of Article XIII C of the 
            California Constitution, as amended by Proposition 26 (2010).)

          7)Prohibits local government from imposing, extending, or 
            increasing any general tax unless and until that tax is 
            submitted to the electorate and approved by a majority vote, 
            or any special tax, as defined, unless and until that special 
            tax is submitted to the electorate and approved by a 
            two-thirds vote.  (Sec. 2 of Article XIII C of the California 
            Constitution.)

          8)Provides that, except for fees or charges for sewer, water, 
            and refuse collection services, no property-related fee or 
            charge shall be imposed or increased unless and until that fee 
            or charge is submitted and approved by a majority vote of the 
            property owners of the property subject to the fee or charge 
            or, at the option of the agency, by a two-thirds vote of the 
            electorate residing in the affected area.  (Sec. 6(c) of 
            Article XIII D of the California Constitution.)

           COMMENTS  :  This bill, sponsored by members of the solid waste 
          industry, seeks to restrict the ability of local governments 








                                                                  SB 841
                                                                  Page  6

          that negotiate solid waste fees and franchise agreements with 
          solid waste companies to obligate those companies to indemnify 
          them for any portion of franchise fees that may be found by a 
          court to violate voter approval requirements under Propositions 
          218 and 26.  As proposed to be amended, this bill would apply a 
          qualified enforceability rule to an indemnity obligation, as 
          specified, that would render it unenforceable to the extent that 
          claims for failure to obtain necessary voter approval for the 
          fee at issue arise out of, pertain to, or relate to the 
          liability of the local agency for failure to comply.  In 
          addition, this bill would deem an indemnity obligation 
          unenforceable if it requires a solid waste enterprise to refund 
          fees to its customers that have not been retained by the solid 
          waste company but that are being held by the local agency 
          instead.  The author and sponsor contend that these restrictions 
          on indemnity obligations are needed to protect waste companies 
          from unfairly being required to indemnify local agencies for 
          Prop 218 and 26 compliance decisions particularly when, as the 
          companies contend, they have no ability to determine the amount 
          of these fees or to impose them in the first place.  

           Background on solid waste franchise fees  :  Solid waste 
          enterprises are companies engaged in the business of collecting, 
          transporting, storing, or processing solid wastes.  (Public 
          Resources Code Sections 40193, 40195.)  The California 
          Integrated Waste Management Act of 1989 (Division 30 of the 
          Public Resource Code, commencing with Section 40000) allows 
          local governments to determine most aspects of solid waste 
          handling and recycling services, including the means of 
          collection and transportation and the assessment of charges and 
          fees.  The Act also authorizes local governments to contract 
          those services to private solid waste companies, by means of 
          nonexclusive franchise, contract, license, or otherwise, under 
          terms and conditions prescribed by the local agency.  (Public 
          Resources Code Section 40059.)  

          According to representatives of solid waste companies sponsoring 
          and supporting this bill, local governments have the upper hand 
          in negotiating franchise agreements because there is a very 
          limited demand for large-scale solid waste handling services, 
          i.e. there are a limited number of municipal "suppliers" of 
          solid waste in a particular geographical region.  Local 
          government agencies typically impose so-called "franchise fees" 
          in solid waste franchise agreements that, according to 
          supporters of the bill, are added only after a company is chosen 








                                                                  SB 841
                                                                  Page  7

          from the competitive bidding process, ratepayer fees for solid 
          waste handling service are determined from the bid, and the 
          franchise agreement is ratified.  Furthermore, the sponsor and 
          supporters of the bill contend that such franchise fees are not 
          negotiated between the local agency and the solid waste company, 
          often exceed the costs to local governments in overseeing or 
          supervising franchises, and are usually imposed without voter 
          approval-circumstances which, if true, would potentially render 
          such fees constitutionally impermissible under Propositions 218 
          and/or 26.  For these reasons, the solid waste companies assert 
          that they "have no role in determining the amounts or types of 
          these fees", and that local governments should not be permitted 
          (through indemnification obligations) to pass their risk of 
          imposing potentially unconstitutional fees on to private 
          companies "that had no responsibility for determining the amount 
          of these fees or imposing them in the first place."

           Stated Need for the Bill.   According to the sponsor, although no 
          court has yet held that solid waste fees are subject to 
          Proposition 218, some municipalities are nevertheless seeking 
          indemnification from the solid waste industry, even with respect 
          to that portion of waste collection rates that are retained by 
          local government as franchise fees.  The author and sponsor 
          state that even though Proposition 218 indemnification has been 
          proposed in only a handful of situations to their knowledge, 
          they fear that recent passage of Proposition 26 will contribute 
          to a sharp increase in the use of such indemnity provisions.  
          According to the author:

               With the passage of Proposition 26, franchise and other 
               fees imposed on solid waste handling enterprises by local 
               agencies as a condition of their franchise agreements may 
               be limited to the actual costs of these agencies in 
               granting and supervising these franchises. Therefore, 
               these fees would no longer be valid for the purposes of 
               providing a subsidy to the general funds of cities and 
               counties, and will likely be subject to legal challenge 
               under Propositions 26 and 218.

               Since the passage of Proposition 218, and increasingly 
               after the passage of Proposition 26, local agencies are 
               likely to require that private solid waste handling firms 
               indemnify these local agencies if their franchise and 
               other fees are successfully challenged in court.  This 
               practice, however, removes the incentive on local 








                                                                  SB 841
                                                                  Page  8

               agencies to responsibly moderate their own fees and 
               charges. SB 841 is consistent with existing policy . . ., 
               which establishes reasonable limits on the form of 
               indemnity obligations local agencies can require from 
               their solid waste franchisees. 

          To prospectively address this perceived problem, this bill is 
          specifically intended to restrict the ability of local 
          governments that negotiate solid waste fees and franchise 
          agreements with solid waste companies to cause those companies 
          to indemnify them for any portion of franchise fees that may be 
          found by a court to violate constitutional voter approval 
          requirements pursuant to Propositions 218 and 26.

           As proposed to be amended, this bill adopts a rule based on 
          proportional responsibility to limit enforceability of an 
          indemnity obligation.   Existing law, Section 40059.1 of the 
          Public Resources Code, places certain restrictions on the 
          ability of local agencies to require their solid waste 
          franchisees to indemnify local government from fines and 
          penalties for the agency's failure to meet state waste diversion 
          requirements, including a provision that liability "shall be 
          apportioned in accordance with the percentage of fault of the 
          local agency and the solid waste enterprise."  A similar type of 
          proportionality rule applies in construction defect cases with 
          respect to indemnity of builders or contractors by a 
          subcontractor.  In those cases, the law provides an indemnity 
          obligation is unenforceable to the extent that the claims of 
          construction defect arise out of, pertain to, or relate to the 
          negligence of the builder or contractor (i.e. the indemnified 
          party.)

          In order to more closely track the qualified indemnification 
          restrictions in the solid waste diversion statute (after which 
          this bill is openly modeled), the author proposes to amend the 
          bill to adopt a similar rule, based on proportional 
          responsibility, to restrict but not completely prohibit 
          enforceability of an indemnity obligation.  The amendment is:

               On page 3, strike lines 27 to 31 and insert:

               An indemnity obligation or other provision, clause, 
               covenant, or agreement that purports to obligate a 
               solid waste enterprise to indemnify a local agency 
               against liability for claims by a third party for 








                                                                  SB 841
                                                                  Page  9

               failure to obtain voter or property owner approval of 
               a fee, levy, charge, assessment, or other exaction in 
               violation of Article XIIIC or Article XIIID of the 
               California Constitution, is not enforceable to the 
               extent the claims arise out of, pertain to, or relate 
               to the liability of the local agency.

          Under the proposed amendment, a solid waste company will 
          continue to have zero liability if the extent of its 
          responsibility for failure to comply with Propositions 218 and 
          26 is also zero.  In other situations, the bill would operate to 
          apportion liability to the extent the solid waste handler and 
          the local agency are found responsible for the failure to 
          comply.

           As proposed to be amended, the bill clarifies the collection and 
          retention of fees that are the subject of the second restriction 
          on indemnity obligations.   In order to address concerns that 
          were articulated in a previous Senate committee, the author 
          proposes to amend the bill to clarify that solid waste companies 
          sometimes collect required fees on behalf of the local agency 
          and then remit those sums to the local agency, and sometimes the 
          local agency collects and retains the fees itself.  In either 
          case, however, the local agency retains the benefit of the fees, 
          not the solid waste company, and therefore, according to the 
          author, any provision to obligate a solid waste company to 
          refund fees it does not retain should not be enforceable as a 
          matter of sound policy.

          These proposed amendments are:

               On page 3, line 32, strike "Requires" and insert "An 
               indemnity obligation is not enforceable if it requires"

               On page 3, line 33, after "are", insert "collected and 
               retained by the local agency, or"

               On page 3, line 35, strike "and if the fees are" and insert 
               ", and in either case have been"

           Prospective application of this bill to avoid affecting existing 
          contracts and requests for proposals.   In order to avoid 
          impacting existing contracts and to give parties time to become 
          aware of the proposed restrictions on indemnification, this bill 
          would apply prospectively and not become operative until July 1, 








                                                                  SB 841
                                                                  Page  10

          2012, representing the date six months after January 1, 2012, 
          the date the bill otherwise becomes effective if ultimately 
          signed into law by the Governor.  In other words, the 
          indemnification restrictions under this bill would only apply to 
          contract terms entered into after July 1, 2012, and would not 
          affect any agreements adopted or entered into before that date.

           ARGUMENTS IN SUPPORT  :  Several associations of solid waste 
          companies wrote to the Committee in support of this bill.  
          According to these associations:

               We support this bill because it properly balances the 
                                                                                              interests of local government with those of the private 
               sector by establishing reasonable limits of the ability 
               of cities and counties to require Proposition 218 
               indemnity protection from waste haulers.

               SB 841recognizes that solid waste enterprises play no 
               role whatsoever in determining the amounts or types of 
               these local agency fees, or in deciding whether or not 
               to observe the requirements of Proposition 218 (in case 
               the law is one day interpreted to apply to such fees.)  
               In short, industry members have no ability whatsoever 
               to mitigate whatever risk may follow the decision not 
               to comply with 218.  SB 841 will preserve a vital and 
               important degree of accountability on local governments 
               and will help ensure that liability for fees retained 
               by local governments remains where it should, namely, 
               with the very local governments imposing the fees.

           ARGUMENTS IN OPPOSITION  :  The El Dorado County Board of 
          Supervisors writes in opposition to the previous version of this 
          bill:

               We believe SB 841 will result in additional legal 
               requirements where none are needed and will remove 
               public safeguards . . . against malfeasance by a less 
               than honest service provider.  The procedures, scope 
               and limitations related to indemnification are clearly 
               and appropriately defined in the Civil Code.  
               Elimination of the indemnities is a victory for those 
               with less than honest intentions as the responsible 
               providers will always honor their contract.

               It is our understanding that, to date, there is no 








                                                                  SB 841
                                                                  Page  11

               evidence that a local government entity has entered 
               into a contract or has attempted to require a contract 
               for solid waste disposal services (that violates 
               Proposition 218 or 26.)  If enacted in its current 
               form, SB 841 can only serve to complicate, frustrate, 
               and potentially burden a local agency's ability to 
               comply with Ýwaste diversion] mandates through the 
               implementation of requirements to address a problem 
               that does not appear to exist.

          It is not known at this time whether the proposed amendments 
          address the opposition's concerns or whether El Dorado County 
          continues to be opposed. 

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          California Refuse Recycling Council (sponsor)
          Central Contra Costa Solid Waste Authority
          Inland Empire Disposal Association
          Los Angeles County Waste Management Association
          Republic Services
          Solid Waste Association of Orange County
          Waste Management
           
            Opposition 
           
          El Dorado County Board of Supervisors


           Analysis Prepared by  :    Anthony Lew / JUD. / (916) 319-2334