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
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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
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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
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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.
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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
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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
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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
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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
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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,
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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
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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