California Supreme Court ruling in franchise fee case offers more questions than answers

Aug 24, 2022

City officials who have questions about the impact of this ruling should consult their city attorney

The California Supreme Court recently issued an opinion in a case challenging the franchise fees that the city of Oakland charges to certain waste hauling companies. In Zolly v. City of Oakland, the court concluded that it did not have enough evidence to rule as a matter of law that the fees are exempt from the voter approval requirements that apply to taxes under Proposition 26, Article XIII C of the California Constitution. The case was then sent back down to the lower court for further proceedings. In the meantime, the legal landscape pertaining to franchise fees remains unsettled.

In the case, the city argued that the fees were categorically exempt from voter approval requirements under subsection (e)(4) of Section 1 of Article XIII C, which exempts charges “imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.”

The League of California Cities supported this argument in a pair of amicus filings (available here and here), noting that the court had recently ruled in another case that a franchise to use public streets or rights-of-way is a form of property.

In this case, the court ruled that a franchise cannot be considered “local government property” within the meaning of article XIII C. They reasoned in part that the term “local government property” seems to refer to physical objects under the control of a local government — such as land, streets, or rights-of-way — rather than intangible property interests, such as a franchise. The court also noted that, even if the franchise were property, it was not property “of the city” before the city conferred it on the haulers.

The court then concluded that the city failed to demonstrate that the waste haulers paid the challenged fees in exchange for a specific use of the streets or right-of-way that they would not have otherwise enjoyed had they not paid the fee. They also noted that the city “suggested during oral argument that the waste haulers may have attained the special ability to drive heavy vehicles and to place waste receptacles on Oakland’s streets, but these statements by counsel are not evidence and do not amount to an admission or stipulation of fact.”

Thus, while this theory could not be resolved as a matter of law without evidence, Oakland will have an opportunity to present evidence supporting this theory when the case resumes before the lower court.

The court also seemed to suggest that the franchise fees might fit within another exemption under article XIII C, citing an argument made by taxpayer advocates in a friend-of-the-court brief.  Specifically, the court called out the exemption under subsection (e)(1) for “a charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.”

Although this exception limits fees to the “reasonable costs” of service, the court stated that it was leaving open the question “of how the ‘reasonable costs’ language … may apply to franchise fees, including whether the term, considered in light of the voters’ intent behind Proposition 26, should be understood to extend beyond the purely administrative costs involved in granting a franchise.”

Two concurring justices criticized the majority for leaving this question open, perhaps because the question implicates the use of trash franchise fees for general fund purposes.

The court’s opinion answers the question of whether the city’s franchise fees are categorically exempt from the voter approval requirements as a matter of law — and concludes they are not. But the opinion also leaves open the possibility that franchise fees are exempt on appropriate facts. Since it remains unclear exactly what those facts might be, more litigation is likely. The Oakland case will be remanded for further proceedings before the lower court and similar disputes are pending involving Los Angeles County’s landfill charges.

City officials with questions about the impact of this ruling should consult their city attorney.