Dahl-Smyth, Inc. v. City of Wallas Walla

Dahl-Smyth, Inc. sued the City of Walla Walla under
former RCW 35.13.280 (1965) after Walla Walla annexed certain areas in
which Dahl-Smyth held an exclusive right to provide waste collection
services. Dahl-Smyth initially sued under former RCW 35.13.280, which
deals with annexation by non-code cities and is virtually identical to the
language in former RCW 35A.14.900 (1967). Because Walla

Walla is a code city, the applicable statute is former RCW 35A.14.900.1 In
relevant part, former RCW 35A.14.900 provides that after a franchise is
cancelled by annexation, the franchisee may nevertheless continue to
provide waste collection services within the annexed area for a five-year
period. The statute further provides that the franchisee may sue the city
for "measurable damages" caused by the cancellation of its franchise.
After a trial, the court awarded Dahl-Smyth "measurable damages" of
$425,000, representing the loss in value to its certificate or franchise.
Walla Walla appeals, contending the court erred by awarding Dahl-Smyth
compensation for the loss in value of its certificate or franchise as
"measurable damages" under former RCW 35A.14.900.

On appeal, the precise issue before us is the meaning of "measurable
damages" as that phrase is used in former RCW 35A.14.900. We conclude that
its meaning is not clear and that we must construe the statute as a whole
in order to ascertain its meaning. We conclude that when a city allows a
franchisee to continue its waste collection services for an additional five
years after cancellation, the city's liability to the franchisee as
"measurable damages" does not include the loss in value to the certificate
or franchise. Rather, the city's liability to the franchisee is limited to
measurable incidental and consequential damages proximately caused by the
cancellation of the franchise. We reverse the damage award and remand for
further proceedings consistent with our opinion.

FACTS

Dahl-Smyth has operated a waste collection business in the Walla Walla
area since 1953. As required by statute, Dahl-Smyth holds a Certificate of
Convenience and Necessity under "G Permit" No. 165. The certificate was
issued by the Washington Utilities and Transportation Commission and it
grants Dahl-Smyth the exclusive right to provide solid waste collection
service in designated areas of Walla Walla County.

Walla Walla provides its own solid waste collection service within the
city's boundaries. Consequently, when Walla Walla annexes areas in which
Dahl-Smyth provides waste collection services, Dahl-Smyth loses customers.
But, under
former RCW 35A.14.900, Walla Walla is required to compensate Dahl-Smyth for
the loss of its customers due to annexation.

Under this statute, at the time of annexation Walla Walla could either
(1) acquire the "franchise, business, or facilities" by purchase or
condemnation; or (2) issue a new franchise for a period of five years and
be liable to the franchisee for "measurable damages" resulting from the
cancellation of the franchise.2 Former RCW 35A.14.900; Metro. Servs., Inc.
v. City of Spokane, 32 Wn. App. 714, 718, 649 P.2d 642 (1982).

In 1985, Dahl-Smyth sued Walla Walla. The complaint alleges that from
1960 to 1984, Walla Walla annexed areas where Dahl-Smyth and its
predecessor in interest had provided exclusive waste collection services.
Dahl-Smyth requested damages under former RCW 35.13.280. By agreement of
the parties, Walla Walla did not file an answer until July 1999. The
parties agreed to delay the prosecution of the case until this court filed
an unpublished opinion in the case of Dahl-Smyth, Inc. v. City of College
Place,
No. 7102-2-III (Wash. Feb. 5, 1987).

Like Walla Walla, College Place was sued by Dahl-Smyth after College
Place had annexed areas covered by Dahl-Smyth's certificate. In that case,
Dahl-Smyth asked the court for damages for the decrease in the value of its
certificate due to the annexation and
for the loss of five years of future revenue. College Place, slip op. at
3. Dahl-Smyth explained that it operated on a 10-year business cycle and
that the continuation of its franchise for an additional five years after
cancellation did not fully compensate it for its losses. Specifically,
Dahl-Smyth argued that because its expenses continued for years 6
through 10, it was damaged by the loss of income in those years. Dahl-
Smyth requested as "measurable damages" the loss of five years of future
income. College Place, slip op. at 4-5.

The trial court granted Dahl-Smyth an award for the decrease in the
value of its certificate but rejected its claim for lost profits. The
court compared a claim under
former RCW 35.13.280 to an eminent domain action and reasoned that both
actions do not include damages "for the loss to the business operation."
College Place, slip op. at 4. On appeal, the court affirmed the holding of
the trial court but rejected its reasoning. The court stated that Dahl-
Smyth's claim under former RCW 35.13.280 was not limited to the decrease in
the value of its certificate and it could include other "measurable
damages." But, the court held, a claim for future lost profits was not
"measurable damages" under former RCW 35.13.280 because "lost profits are
not capable of exact measurement." College Place, slip op. at 5.

The parties filed cross-motions for summary judgment. The court
decided several issues on summary judgment. First, the court ruled that
Dahl-Smyth was time-barred from bringing any claim for annexations that
occurred prior to August 15, 1982. Next, the court reasoned that based on
the ruling in College Place, Dahl-Smyth was precluded from advocating that
"measurable damages" included lost profits but further stated that Dahl-
Smyth could recover as "measurable damages" the decrease, if any, in the
value of its certificate.

At trial, Dahl-Smyth presented two experts on the issue of damages.
They testified that a waste collection business is worthless without its
certificate because it is the certificate that generates a 100 percent
market share for the company. Therefore, the value of the company is the
value of the certificate. For that reason, they testified, the generally-
accepted method for valuing a certificate is to use a formula where the
earnings of a company are determined before interest, taxes, depreciation,
and amortization and then a multiplier of between 6 and 7.6 is applied.
Both experts agreed that their calculations necessarily included an
estimate of future revenues less saved expenses.

Not surprisingly, Walla Walla's experts disagreed with Dahl-Smyth's
methodology and offered different formulas for determining Dahl-Smyth's
measurable damages. By their calculations, Dahl-Smyth had no measurable
damages because its customers and revenues increased after annexation.

After trial, the court ruled that Dahl-Smyth's certificate is a
property right that has value over and above lost profit. The court also
concluded that "{i}f this property right is taken away or its use denied by
the defendant municipality, just and reasonable compensation is warranted."
Clerk's Papers (CP) at 1753. The court accepted the testimony of Dahl-
Smyth's experts regarding the proper method for calculating damages.
Specifically, the court held that:

Plaintiff is entitled to measurable damages for the loss of its solid
waste collection territory by reason of annexation by defendant, beginning
with territories annexed beginning August 15, 1982, which is three (3)
years prior to the filing date of this action. The amount of damages is
found to be $425,000.00, based upon calculations and methodology provided
by plaintiff's expert witnesses without any offset including the economic
benefit derived during the five year exclusive service post-annexation or
decreased expenses beyond the five years.

CP at 1753-54. Walla Walla appeals.3

Standard of Review.

We review the trial court's statutory construction of
former RCW 35A.14.900 de novo. Stuckey v. Dep't of Labor & Indus., 129
Wn.2d 289, 295, 916 P.2d 399 (1996). If a statute is plain and
unambiguous, its meaning must be primarily derived from the language
itself. Dep't of Transp. v. State Employees' Ins. Bd., 97 Wn.2d 454, 458,
645 P.2d 1076 (1982). If not, we resort to statutory construction. Our
primary goal is to ascertain and give effect to the Legislature's intent.
Rozner v. City of Bellevue, 116 Wn.2d 342, 347, 804 P.2d 24 (1991). We
read the statute as a whole and try to place the language in the context of
the overall legislative scheme. Miller v. City of Tacoma, 138 Wn.2d 318,
328, 979 P.2d 429 (1999). It is said that we should be guided by reason
and common sense. Kelso v. City of Tacoma, 63 Wn.2d 913, 917-18, 390 P.2d
2 (1964).
ANALYSIS

Walla Walla contends the trial court erred in its calculation of
damages for several reasons. Dahl-Smyth, the City maintains, is
collaterally estopped from claiming the damages it recovered in this case
by virtue of the court's decision in College Place. Moreover, Walla Walla
argues that Dahl-Smyth's experts inflated damages by using rates and
housing units in existence 17 years after the annexation and cancellation
of its certificate. Finally, Walla Walla maintains, the trial court erred
by refusing to award an offset to the City, for the value of the post-
cancellation, five-year exclusive franchise period granted by former RCW
35A.14.900.

Former RCW 35A.14.900 authorized the cancellation of a garbage
collection franchise by annexation and it further provided that if the
municipality exercised this right, the municipality could either: (1) grant
an exclusive five-year franchise to the garbage collector permitting it to
continue business within the area; or (2) acquire by purchase or
condemnation the franchise, business or facility. The statute also
provided that anyone whose franchise or permit had been canceled by
annexation and who suffered "measurable damages" as a result had a cause of
action against the city. Logically, "measurable damages" could refer only
to the first option because if a city either purchased or condemned the
franchisee's rights, there would be no claim for additional damages,
measurable or otherwise. Metro. Servs., 32 Wn. App. at 719. "Measurable
damages" is not defined in the statute.

Like other municipalities, Walla Walla is authorized by statute to
establish a waste collection system. Const. art. XI, sec. 11; RCW
35.21.120. Significantly, the authority to annex areas and to bring those
areas within a municipality's waste collection system has been
characterized as an exercise of police power. Hass v. City of Kirkland, 78
Wn.2d 929, 932, 481 P.2d 9 (1971). In Metropolitan Services, 32 Wn. App.
at 717, Metropolitan argued that its franchise was a vested property right
and, therefore, the city's cancellation of its franchise by annexation
constituted a constitutional taking requiring just compensation. Rejecting
Metropolitan's claim, the court held that the exercise of the police power
to cancel an existing franchise for waste collection does not constitute a
constitutional taking. Consequently, Metropolitan was not entitled to any
compensation for the cancellation of its franchise except as provided by
former
RCW 35.13.280. Metro. Servs., 32 Wn. App. at 719-20.

In contrast, Spokane argued that Metropolitan had been fully
compensated for the cancellation of its franchise by the continuation of
the franchise for the additional five years. Rejecting this argument, the
court reasoned: "the provision allowing an action for measurable damages
would be meaningless if the granting of a five-year franchise fully
compensated the franchisee." Id. at 719. Specifically, the court stated
that a franchisee whose franchise is cancelled and who thereafter is
granted a five-year franchise after annexation may seek damages "for any
loss sustained over and above the benefit derived from the franchise." Id.

Here, the trial court held that Dahl-Smyth's certificate was a
property right, for which Dahl-Smyth was entitled to compensation under
former RCW 35A.14.900 in the event its value was diminished by annexation.
Furthermore, the trial court accepted Dahl-Smyth's evidence that the value
of the business was its certificate and that the certificate could be
valued by valuing the business. In effect, Dahl-Smyth requested and
received as "measurable damages" the very damage award denied in
Metropolitan: just compensation for the loss in value of its franchise.

What is the meaning of "measurable damages" as that phrase is used in
former RCW 35A.14.900? Because its meaning is not clear, we resort to
statutory construction. We begin with the premise that a garbage
collection franchise is a property right, for which the franchisee is not
entitled to compensation in the event of cancellation by annexation, except
as provided in former RCW 35A.14.900. Metro. Servs., 32 Wn. App. at 719-
20.

By enacting former RCW 35A.14.900, the Legislature recognized that
having established exclusive garbage franchises for the benefit of the
public, it would be unjust to authorize their cancellation without some
period of adjustment and some compensation. After the franchise is
cancelled by annexation, a city may take over the franchise and provide its
own garbage services. In that event, a city must pay the franchisee the
full market value of the franchise at a price established either by
negotiation or by condemnation. Alternatively, a city may allow the
franchisee to continue its services for an additional five years after
cancellation. In that event, a city's liability is limited to "measurable
damages." By granting the exclusive franchise period and by providing for
"measurable damages," the Legislature evidenced an intent not to compensate
the franchisee for the loss in value to the franchise or certificate caused
by annexation. Rather, the Legislature limited the annexing city's
liability to incidental and consequential damages proximately caused by the
cancellation of the franchise.

However, even these damages are significantly limited by the
requirement that the damages be "measurable." For instance, in College
Place Dahl-Smyth requested consequential damages in the form of lost
profits. The court correctly rejected a claim for lost profits as too
speculative to qualify as "measurable damages." By limiting a franchisee's
claim for damages to those damages that are "measurable," the Legislature
evidenced an intent to limit claims for damages to those claims that are
directly connected to the cancellation of the franchise and capable of
exact measurement.

Lastly, Walla Walla contends that Dahl-Smyth's damages are fixed as of
the effective date of the annexation. Walla Walla emphasizes the language
of former
RCW 35A.14.900, which cancels the franchise as of the effective date of the
annexation. This would eliminate the five-year, post-cancellation period
from the court's consideration. Again, we must look to the language of the
entire statute. In relevant part, the statute provides for compensation
"{i}n the event that any person, firm or corporation whose franchise or
permit has been canceled by the terms of this section shall suffer any
measurable damages as a result of . . . annexation." Former RCW 35A.14.900
(emphasis added). The terms of former RCW 35A.14.900 include the five-year
adjustment period. We conclude that Dahl-Smyth's claim for "measurable
damages" must be measurable and directly connected to the cancellation, but
not necessarily fixed as of the annexation date.

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Click the case caption above for the full text of the Court's opinion.

Reversed and remanded

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