Zolly v. City of Oakland

IN THE SUPREME COURT OF

CALIFORNIA

ROBERT ZOLLY et al.,

Plaintiffs and Appellants,

v.

CITY OF OAKLAND

Defendant and Respondent.

S262634

First Appellate District, Division One

A154986

Alameda County Superior Court

RG16821376

August 11, 2022

Justice Liu authored the opinion of the Court, in which Chief

Justice Cantil-Sakauye and Justices Kruger, Groban, and

Guerrero concurred.

Justice Jenkins filed a concurring opinion, in which Justice

Corrigan concurred.

ZOLLY v. CITY OF OAKLAND

S262634

Opinion of the Court by Liu, J.

Through a series of ballot initiatives, California voters

have imposed several constitutional limitations on the ability of

local governments to tax. Because these limitations may apply

to charges that a local government does not formally designate

as taxes, whether particular charges fall within the scope of the

Constitution’s taxation limitations is a recurring issue that both

voters and the courts have addressed.

In 2012, the City of Oakland approved two contracts

granting private waste haulers the right to “transact business,

provide services, use the public street and/or other public places,

and to operate a public utility” for waste collection services. As

“consideration for the special franchise right,” the waste haulers

agreed to pay certain fees to Oakland. We granted review to

decide how such fees should be treated under article XIII C of

the California Constitution, which sets forth voter approval

requirements that apply to taxes imposed by local government.

(All references to articles are to the California Constitution.)

Oakland claims that article XIII C, as amended in 2010 by

Proposition 26, categorically exempts its challenged fees from

such voter approval requirements, while plaintiffs Robert Zolly,

Ray McFadden, and Stephen Clayton argue that the fees are

exempt only if the amount of the fee bears a reasonable

relationship to the value of the franchise.

We hold that Oakland has not shown on demurrer that its

challenged fees are exempt from article XIII C’s voter approval

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requirements. Accordingly, we affirm the Court of Appeal’s

judgment.

I.

Proposition 26 provides the general definition of a “tax”

and a list of enumerated exemptions that are at the center of

this dispute. To understand this measure, it is helpful to place

it in the context of other voter initiatives that have limited the

ability of local governments to tax, beginning in 1978 with the

passage of Proposition 13.

Proposition 13 required the imposition of any “special

taxes” to be approved by two-thirds of the qualified electors of

the city, council, or special district. (Art. XIII A, § 4.)

Proposition 13 did not define “special taxes.” In City and County

of San Francisco v. Farrell (1982) 32 Cal.3d 47, “we construe[d]

the term ‘special taxes’ . . . to mean taxes which are levied for a

specific purpose . . . .” (Id. at p. 57.)

In 1996, California voters passed Proposition 218, which

amended the Constitution’s voter approval requirements for

local revenue-raising measures by adding articles XIII C and

XIII D. (Citizens for Fair REU Rates v. City of Redding (2018)

6 Cal.5th 1, 10.) Article XIII D, which is not relevant here,

“limits the authority of local governments to assess taxes and

other charges on real property.” (Citizens for Fair REU Rates,

at p. 11.) Article XIII C “buttresses article XIII D by limiting

the other methods by which local governments can exact

revenue using fees and taxes not based on real property value

or ownership.” (Citizens for Fair REU Rates, at p. 10.)

Specifically, article XIII C provides that “[a]ll taxes imposed by

any local government shall be deemed to be either general taxes

or special taxes.” (Art. XIII C, § 2, subd. (a).) General taxes

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must be approved by a majority vote at a general election, while

special taxes must be approved by a two-thirds vote.

(Art. XIII C, § 2, subds. (b), (d).)

Proposition 218 did not define what constitutes a “tax.”

The electorate addressed that issue in 2010 with the enactment

of Proposition 26. (Jacks v. City of Santa Barbara (2017) 3

Cal.5th 248, 260 (Jacks).) This measure amended article XIII C

to provide that a “ ‘tax’ means any levy, charge, or exaction of

any kind imposed by a local government.” (Art. XIII C, § 1,

subd. (e).) This general definition is qualified by seven

exemptions:

“(1) 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.

“(2) A charge imposed for a specific government service or

product provided 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 providing the service or product.

“(3) A charge imposed for the reasonable regulatory costs

to a local government for issuing licenses and permits,

performing investigations, inspections, and audits, enforcing

agricultural marketing orders, and the administrative

enforcement and adjudication thereof.

“(4) A charge imposed for entrance to or use of local

government property, or the purchase, rental, or lease of local

government property.

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“(5) A fine, penalty, or other monetary charge imposed by

the judicial branch of government or a local government, as a

result of a violation of law.

“(6) A charge imposed as a condition of property

development.

“(7) Assessments and property-related fees imposed in

accordance with the provisions of Article XIII D.” (Art. XIII C,

§ 1, subd (e)(1)–(7).) Here the parties dispute the scope of the

fourth exemption.

Following this list of exemptions, Proposition 26 provides

that “[t]he 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.”

(Art. XIII C, § 1, subd. (e).)

Proposition 26 also amended article XIII A to include a

similar, though not identical, definition and list of exemptions

regarding what constitutes a tax imposed by the state

government. (Art. XIII A, § 3.)

II.

In this case, the trial court sustained Oakland’s demurrer

to plaintiffs’ second amended complaint alleging that certain

franchise fees were imposed in violation of article XIII C. In

considering whether a demurrer should have been sustained,

“we accept as true the well-pleaded facts in the operative

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complaint . . . .” (Aryeh v. Canon Business Solutions, Inc. (2013)

55 Cal.4th 1185, 1189, fn. 1.)

Plaintiffs allege that in 2012, Oakland initiated a

procurement process for franchise contracts regarding garbage,

mixed materials and organics, and residential recycling

services. Following a settlement between the two firms that

submitted proposals, Oakland awarded the garbage and mixed

materials contracts to one firm and the residential recycling

contract to the other firm.

Oakland’s ordinance approving the mixed materials and

organics contract provided for an initial annual franchise fee of

$25,034,000, with subsequent franchise fees “ ‘ “adjusted

annually by the percentage change in the annual average of the

Franchise Fee cost indicator.” ’ ” (Zolly v. City of Oakland (2020)

47 Cal.App.5th 73, 79 (Zolly).) Thereafter, Oakland passed an

ordinance reducing this franchise fee by $3.24 million. The

ordinance approving the residential recycling contract provided

for an initial annual franchise fee of $3,000,000, with a similar

mechanism for annual adjustments.

Based on “ ‘citizen complaints,’ ” an Alameda County

grand jury “ ‘undertook a comprehensive investigation related

to the solicitation and award’ ” of these contracts. (Zolly, supra,

47 Cal.App.5th at p. 79.) The grand jury found that Oakland’s

fees were disproportionately higher than franchise fees paid to

other Bay Area municipalities and special districts. It also

found Oakland’s procurement process was mishandled and

subject to political considerations.

Plaintiffs are owners of multifamily properties who pay

their tenants’ waste collection bills. Their second amended

complaint alleges that Oakland’s fees violated article XIII C

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because “ ‘[n]either of the franchise fees bears a reasonable

relationship to the value received from the government and they

are not based on the value of the franchises conveyed.’ ” (Zolly,

supra, 47 Cal.App.5th at p. 81.) The trial court sustained

Oakland’s demurrer to the second amended complaint, finding

that plaintiffs’ allegations that the challenged fees were passed

along indirectly to ratepayers were insufficient to establish that

they were taxes imposed on consumers. The Court of Appeal

affirmed in part and reversed in part. As relevant here, it held

that plaintiffs adequately stated a cause of action under article

XIII C by alleging that Oakland’s challenged fees did not bear a

reasonable relationship to the franchises’ values, as required by

section 1, subdivision (e) of that article.

The Court of Appeal relied on our opinion in Jacks, supra,

3 Cal.5th 248. There, we addressed the circumstances in which

franchise fees constitute “taxes” subject to the Constitution’s

voter approval requirements. Because the franchise fee there

had been imposed prior to 2010, we limited our discussion to the

interpretation of Proposition 218. (Jacks, supra, 3 Cal.5th at

p. 263, fn. 6.) First, we acknowledged that “franchise fees” have

“[h]istorically . . . not been considered taxes.” (Id. at p. 267.)

Next, we observed that the common denominator among the

“categories of valid fees” we had previously recognized as falling

outside the Constitution’s taxation limitations was that the

charge or fee “was restricted to an amount that had a reasonable

relationship to the benefit or cost on which it was based.” (Id.

at pp. 267–268.) This “broader focus on the relationship

between a charge and the rationale underlying the charge

provides guidance in evaluating whether the [franchise fee in

question was] a tax.” (Id. at p. 269.) We held that although a

franchise fee is not per se a tax, “[t]o the extent a franchise fee

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exceeds any reasonable value of the franchise, . . . the excessive

portion is a tax.” (Ibid.)

The Court of Appeal first rejected Oakland’s argument

that Jacks’s holding should be limited to the narrow context

where a surcharge is placed directly on customers’ bills, instead

reasoning that “Jacks instructs us to look beyond any label and

determine whether such a fee ‘reflect[s] a reasonable estimate of

the value of the franchise.’ ” (Zolly, supra, 47 Cal.App.5th at

p. 85.)

The Court of Appeal then considered whether the adoption

of Proposition 26 altered the analysis. The court assumed the

applicability of article XIII C, section 1, subdivision (e)(4), which

refers to charges “imposed for entrance to or use of local

government property, or the purchase, rental, or lease of local

government property,” and then focused its analysis on whether

that exemption contained a reasonableness requirement. (Zolly,

supra, 47 Cal.App.5th at p. 86.) The Court of Appeal observed

that although the text of the specific exemption lacked an

express reasonableness requirement, article XIII C, section 1,

subdivision (e) contained a “broad statement regarding the

government’s burden of proof,” including a requirement that the

local government bear the burden of proving that a charge is

“ ‘no more than necessary to cover the reasonable costs of the

governmental activity.’ ” (Zolly, at p. 86.)

Turning to the ballot materials, the Court of Appeal found

that they “uniformly indicate a desire to expand the definition

of what constituted a ‘tax’ for purposes of article XIII C.” (Zolly,

supra, 47 Cal.App.5th at p. 87.) This included the specific intent

to prevent local governments from disguising taxes as “fees” in

order to generate revenue without adhering to existing voter

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approval requirements. (Ibid.) In light of this “clear” intent to

close loopholes and expand the definition of a tax, the Court of

Appeal concluded that franchise fees “must still be reasonably

related to the value of the franchise” to be exempt under article

XIII C, section 1, subdivision (e). (Zolly, at p. 88.)

In addition, the Court of Appeal rejected Oakland’s

argument that the challenged fees were not taxes “ ‘ “imposed

by local government” ’ ” because they were merely

“consideration” for a contract negotiated between Oakland and

the utilities. (Zolly, supra, 47 Cal.App.5th at p. 88.) The Court

of Appeal reasoned that allowing charges to escape the bounds

of article XIII C on that theory would enable local governments

to contract with third parties to impose a desired tax on

residents, thereby undermining the purposes of Propositions

218 and 26. (Zolly, at p. 88.) The Court of Appeal also reasoned

that our opinion in Jacks “implicitly rejected this argument.”

(Zolly, at p. 88.) In particular, the Court of Appeal observed that

although the charge at issue in Jacks was similarly established

“ ‘[p]ursuant to an agreement between [the utility provider] and

defendant City of Santa Barbara,’ ” this fact did not

automatically exempt the charge from being treated as a tax.

(Zolly, at pp. 88–89, quoting Jacks, supra, 3 Cal.5th at p. 254.)

Instead, the court held, the crux of the analysis remained

whether the fees imposed bear a reasonable relationship to the

value received from the government.

III.

As an initial matter, Oakland argues that plaintiffs lack

standing because they are not “directly obligated” to pay for the

franchise fees; instead, any economic injury they suffer is only

indirectly passed on to them in the form of waste management

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fees charged by the waste haulers. Although Oakland did not

raise this issue below, “ ‘[c]ontentions based on a lack of

standing involve jurisdictional challenges and may be raised at

any time in the proceeding.’ ” (Californians for Disability Rights

v. Mervyn’s, LLC (2006) 39 Cal.4th 223, 233, quoting Common

Cause v. Board of Supervisors (1989) 49 Cal.3d 432, 438.)

Absent specific requirements for a statutory cause of

action, standing in civil cases is governed by the “general

standing requirements under [Code of Civil Procedure] section

367.” (Weatherford v. City of San Rafael (2017) 2 Cal.5th 1241,

1249.) Code of Civil Procedure section 367 requires that an

action “be prosecuted in the name of the real party in interest,”

and we have defined a “ ‘real party in interest’ ” as “ ‘any person

or entity whose interest will be directly affected by the

proceeding,’ ” including anyone with “ ‘a direct interest in the

result.’ ” (Connerly v. State Personnel Bd. (2006) 37 Cal.4th

1169, 1178, quoting Sonoma County Nuclear Free Zone ‘86 v.

Superior Court (1987) 189 Cal.App.3d 167, 173.) In their

operative complaint, plaintiffs allege that Oakland’s fees have

caused their waste collection rates to increase every month.

Such “lost money or property . . . is itself a classic form of injury

in fact.” (Kwikset Corp. v. Superior Court (2011) 51 Cal.4th 310,

323.) Accordingly, plaintiffs’ allegations of economic injury

caused by the challenged fees are sufficient to confer standing.

Oakland relies on Chiatello v. City and County of San

Francisco (2010) 189 Cal.App.4th 472 (Chiatello) and County

Inmate Telephone Service Cases (2020) 48 Cal.App.5th 354

(County Inmate) for the proposition that plaintiffs must be

directly obligated to pay the fees in order to challenge them

under Proposition 26. But those cases are distinguishable.

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Although Oakland reads Chiatello to establish a general

limitation on standing in tax challenges, Chiatello involved a

specific statutory cause of action under Code of Civil Procedure

section 526a. (Chiatello, supra, 189 Cal.App.4th at pp. 480–

481.) For that specific cause of action, the relevant statutory

provisions limited standing to an individual “ ‘who is assessed

for and is liable to pay . . . a tax’ ” in a given “ ‘county, town, city,

or city and county of the state . . . .’ ” (Id. at p. 481, citing Code

Civ. Proc., § 526a.) No similar requirement is present in article

XIII C.

In County Inmate, inmates in nine counties challenged the

allegedly inflated commissions paid by telecommunications

companies to the counties under contracts giving them the

exclusive right to provide telephone services. The inmates

alleged that the companies passed on the cost of the

commissions to the inmates and their families. But the Court of

Appeal held that because the inmates had “no legal

responsibility to pay anything to the counties,” they lacked

standing to “contend the commissions are an unconstitutional

tax” under Proposition 26 and to seek a refund of those taxes.

(County Inmate, supra, 48 Cal.App.5th at pp. 361, 360.) As

support for a “general rule . . . that a person may not sue to

recover excess taxes paid by someone else,” the court cited

Grotenhuis v. County of Santa Barbara (2010) 182 Cal.App.4th

1158. (County Inmate, at p. 360.) But that decision does not

claim to pronounce any general limitation on standing. Instead,

Grotenhuis involved the statutory requirements for a “tax

refund action” under Revenue and Taxation Code section 5140,

which expressly limits such an action to a “ ‘person who paid the

tax.’ ” (Grotenhuis, at p. 1164.) That provision governs refund

actions involving property taxes; different provisions apply to

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refunds involving other forms of taxes. (See Rev. & Tax. Code,

§ 19382 [franchise and income taxes]; id., § 6932 [sales and use

taxes].) Accordingly, County Inmate’s reliance on Revenue and

Taxation Code section 5140 as support for a general limitation

on standing in all cases where plaintiffs seek a tax refund,

without regard to the specific form of tax at issue, is misplaced.

In light of plaintiffs’ allegations of an economic injury

caused by the challenged fees, we hold that plaintiffs have

standing to file this suit.

IV.

In arguing that its challenged fees are not subject to the

Constitution’s voter approval requirements, Oakland first

contends that the fees in question do not fall within Proposition

26’s general definition of a “tax” due to the manner in which they

were negotiated and agreed upon. Second, Oakland argues that

even if the fees fall within the definition of a “tax,” Proposition

26 categorically exempts all franchise fees from the

Constitution’s voter approval requirements. We address each

argument in turn.

A.

Turning to the general definition of a “tax” under

Proposition 26, Oakland does not dispute its fees are a “levy,

charge, or exaction of any kind.” (Art. XIII C, § 1, subd. (e).)

Instead, Oakland argues that these fees are not “imposed by a

local government” because they were a product of voluntary

contractual negotiations and are thus “consideration paid in

exchange for those valuable franchise rights, including the right

to do business with the municipality.” Plaintiffs argue that

Oakland’s view would improperly add a “coercion requirement”

to the term “imposed.” According to plaintiffs, it is sufficient

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that Oakland “established” the fees by exercising its legal

authority to execute the two franchise agreements and then

enacted those charges into law by ordinance. We agree with

plaintiffs.

The text of article XIII C dispels the notion that a local

government can only “impose[]” a tax by means of coercion. We

have held, in the context of the Constitution’s taxation

provisions, that the “ordinary meaning” of “ ‘impose’ ” is merely

to “ ‘establish.’ ” (California Cannabis Coalition v. City of

Upland (2017) 3 Cal.5th 924, 944.) Additionally, the term

“imposed” is used multiple times throughout article XIII C,

including in the first and second exemptions. (Art. XIII C, § 1,

subd. (e)(1), (2).) Because those exemptions apply to situations

where a private party is paying a charge in exchange for a

government benefit, service, or product, they plainly cover

transactions resulting from contractual and voluntary

negotiations between a private party and local government

entity.

Proposition 26’s use of the same term when referring to

development charges, another form of voluntary charges, also

indicates that the word “imposed” was not intended to limit

article XIII C’s application to situations involving compulsory

charges. Prior to Proposition 26, courts had recognized that a

general distinction between taxes and other charges was that

“[m]ost taxes are compulsory rather than imposed in response

to a voluntary decision to develop or to seek other government

benefits or privileges.” (Sinclair Paint Co. v. State Bd. of

Equalization (1997) 15 Cal.4th 866, 874.) Case law typically

justified excluding property development charges from the

category of special taxes on that basis. (See, e.g., Shapell

Industries, Inc. v. Governing Board (1991) 1 Cal.App.4th 218,

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240 [“Under one line of reasoning, development fees are not

taxes at all since . . . they are not compulsory but rather apply

only to those who voluntarily choose to develop”]; Terminal

Plaza Corp. v. City and County of San Francisco (1986) 177

Cal.App.3d 892, 907 [reasoning that development fee was not a

special tax where it “is not compulsory in nature”].) Against this

backdrop, Proposition 26’s use of the term “imposed” in

connection with these voluntary development fees confirms that

the voters did not intend to limit the term to situations where a

charge is imposed through coercion. (See Art. XIII C, § 1,

subd. (e)(6) [“[a] charge imposed as a condition of property

development”].)

Relatedly, Oakland argues that its fees were not

“imposed” on customers because customers “may” only feel the

indirect impact of those charges if the service provider uses it as

“one cost factor among many in setting rates to customers.” But

as explained above, whether customers were directly obligated

to pay the charge to Oakland is immaterial. It is sufficient that

Oakland, pursuant to its legal authority, enacted these

franchise fee agreements into law, thereby imposing these fees

on the waste haulers that are indisputably obligated to pay

them. If Oakland is suggesting there is uncertainty as to

whether any portion of customers’ bills is actually attributable

to the fees, that is a factual issue bearing on plaintiffs’

allegations of financial injury that cannot be resolved on

demurrer.

B.

Having determined that the challenged fees fall within

Proposition 26’s general definition of a tax, we now consider

whether Oakland has demonstrated on demurrer that these fees

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are exempt from the Constitution’s voter approval requirements

by virtue of Proposition 26’s express exemptions.

While the parties’ briefing initially focused on whether

article XIII C, section 1, subdivision (e)(4) (Exemption 4)

includes a reasonableness requirement, we ordered

supplemental briefing on the antecedent question of whether

Oakland’s fees fall within the scope of that exemption. In

response, Oakland makes two arguments based on Exemption

4’s two clauses. First, it contends that because the franchise at

issue includes both the right to use government property and

the right to take profit from that use, it is itself a form of “local

government property.” Accordingly, any fee paid for the

franchise constitutes a “charge imposed for . . . the purchase . . .

of local government property” under the second clause of

Exemption 4. Second, Oakland argues that its fees also qualify

as charges “imposed for . . . use of local government property”

under the first clause of Exemption 4 because “the right to ‘use

the public street and/or other public places’ was expressly

identified as one part of the franchise property interests

conveyed by Oakland to the private waste-haulers.”

Beginning with the second clause of Exemption 4, we

reject Oakland’s argument that a franchise is “local government

property” within the meaning of article XIII C. It is true that

we stated in Jacks and other cases that “[a] franchise to use

public streets or rights-of-way is a form of property . . . .” (Jacks,

supra, 3 Cal.5th at p. 262; see City & Co. of S.F. v. Market St.

Ry. Co. (1937) 9 Cal.2d 743, 747 [“A franchise is property.”].)

But none of those general statements were made in relation to

the term “local government property” as used in article XIII C.

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The word “property” is commonly used in two different

senses. First, “ ‘property’ is used simply to refer to the physical

object in question — that is the thing itself.” (Pacific Gas &

Electric Co. v. Hart High-Voltage Apparatus Repair & Testing

Co., Inc. (2017) 18 Cal.App.5th 415, 426.) Second, the word may

“ ‘ “denote the legal interest (or aggregate of legal relations)

appertaining to such physical object.” ’ [Citation.] When used

in the latter sense, ‘property’ is composed of a ‘ “complex

aggregate of rights (or claims), privileges, powers, and

immunities.” ’ ” (Ibid.; see also In re L.T. (2002) 103

Cal.App.4th 262, 263; 51 Cal.Jur.3d (2022) Property, § 1.)

Oakland, invoking this latter sense of the word, argues that a

franchise is “local government property” because it is a “bundle

of property interests.” Similarly, our previous statements

equating franchises to “property” were premised on this broader

understanding. (See Jacks, supra, 3 Cal.5th at p. 254 [“the right

to use public streets or rights-of-way is a property interest”],

italics added.)

However, the term “local government property” in article

XIII C seems to refer to physical objects under the control of a

local government, such as its streets and rights-of-way. The

first clause of Exemption 4 refers to charges imposed for “the

entrance to or use of local government property,” suggesting

that “local government property” means physical land, objects,

or equipment that those who pay the charge can either enter or

use. The second clause of Exemption 4 refers to “the purchase,

rental, or lease of local government property”; there, too, the

phrase seems readily understood to mean tangible property

such as land or buildings. Similarly, article XIII C, section 1,

subdivision (e)(6) and (7) refers to a “charge imposed as a

condition of property development” and to “[a]ssessments and

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property-related fees imposed in accordance with the provisions

of Article XIII D.” In both contexts, the term “property” refers

to actual physical objects or land, not property interests in such

objects. (See art. XIII D, § 2, subd. (g) [defining “property

ownership” as including “tenancies of real property”].)

But even if the term “property” in article XIII C includes

property interests such as franchises, we conclude that a

franchise cannot be local government property within the

meaning of article XIII C for a separate reason. Although a

franchise becomes a property interest that vests in the holder

once granted, it does not exist as the local government’s property

prior to that vesting. Even when we have referred to franchise

rights as “property,” we have never held that such rights are

property of the government awarding the franchise. Instead, we

have characterized a franchise as “property rights created by the

original grant” (O’Sullivan v. Griffith (1908) 153 Cal. 502, 505),

which are then “ ‘vested in [the] individuals’ ” who own the

franchise (Spring Valley W. W. v. Schottler (1882) 62 Cal. 69,

106). Because a franchise “becomes property in the legal sense

of the word” only “[w]hen granted” to a franchise-holder (12

McQuillin, The Law of Municipal Corporations (3d ed. 2006)

§ 34.2), it cannot be said to be property belonging to the local

government before the grant occurs. It is not “local government

property” under article XIII C.

At oral argument, counsel suggested that Oakland, even

though it does not have a property interest in the franchise

itself, nonetheless has a property interest in its antecedent right

to grant a franchise. But even if so, the challenged fees here

were paid for the franchise that vested in the payors, not for the

right to grant that franchise to another party. Accordingly, the

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fees were not for the “purchase of” the “local government

property” that Oakland posits.

We turn next to Oakland’s argument regarding the first

clause of Exemption 4 — namely, that the fees are charges

“imposed for . . . use of local government property.” Here,

Oakland relies on our general statement in Jacks describing a

franchise as encompassing “the right to use public streets or

rights-of-way” (Jacks, supra, 3 Cal.5th at p. 254) and the terms

of the specific ordinances enacting its challenged fees. The

ordinances describe the franchises as including the rights to

“transact business, provide services, use the public street and/or

other public places, and to operate a public utility for Mixed

Materials and Organics [or Residential and Commercial

Recycling] collection services.” We conclude that Oakland has

not proven, on demurrer, that its challenged fees fall within the

first clause of Exemption 4.

Oakland has not demonstrated as a matter of law that the

payors paid the challenged fees in exchange for a specific use of

government property that they would not have enjoyed had they

not paid the fee. The text of Exemption 4 supports such a fact-

specific requirement by focusing on the actual benefit exchanged

between the payor and local government. Exemption 4 does not

use the term “franchise fees”; instead, it exempts “[a] charge

imposed for entrance to or use of local government property.” By

describing the qualitative rationale for the charge instead of

using any formal labels, this language indicates that the voters

intended to exempt only those fees that adhered to the rationale

underlying that exemption — i.e., fees paid as consideration for

a specific use of government property.

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Comparing this language to article XIII C’s other

enumerated exemptions reinforces this conclusion. Like

Exemption 4, the first two exemptions use the same “imposed

for” language when referring to a charge paid in exchange for an

exclusive benefit — “a specific benefit conferred or privilege

granted” (art. XIII C, § 1, subd. (e)(1)) or “a specific government

service or product” (id., subd. (e)(2)). Article XIII C, section 1,

subdivision (e)(3) also uses this “imposed for” language when

referring to situations where a payor pays a fee in exchange for

the provision of government services that allow it to operate in

a regulated sphere. (See Voter Information Guide, Gen. Elec.

(Nov. 2, 2020), analysis of Prop. 26 by Legis. Analyst, p. 58

[distinguishing between “regulatory fees” that “benefit the

public broadly, rather than providing services directly to the fee

payer”].) Accordingly, when Exemption 4 refers to a charge

“imposed for . . . use of local government property,” that latter

term is most sensibly read to refer to the specific benefit that is

being exchanged. By contrast, article XIII C, section 1,

subdivision (e)(5) employs different language — “imposed by [a

government entity] as a result of a violation of law” — when

describing fines or penalties. (Italics added.) Such a distinction

makes sense because fines and penalties are not paid in

exchange for a specific benefit.

So understood, Exemption 4’s “imposed for” language

applies naturally to traditional types of entrance and user fees

for local government property. For fees such as a park entrance

fee, there is little question that payment is a necessary condition

for “entrance to or use of” the property. (Art. XIII C, C, § 1,

subd. (e)(4).) In other words, entrance to or use of a public park,

bridge, or other government property is limited unless the

entrance or user fee is paid. Specific kinds of franchise fees may

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ZOLLY v. CITY OF OAKLAND

Opinion of the Court by Liu, J.

also meet this requirement. In Jacks, for example, the utility

had obtained a right to “construct and use equipment along,

over, and under” public roadways to facilitate the distribution of

electricity. (Jacks, supra, 3 Cal.5th at p. 254.) By paying the

franchise fee, the utility there had gained a specific “use of local

government property” beyond what was otherwise available to

the public (i.e., an easement to install equipment). (Art. XIII C,

§ 1, subd. (e)(4), see also Mahon v. City of San Diego (2020) 57

Cal.App.5th 681, 683–684 [describing a “franchise fee” paid by a

private electric utility to a city as compensation for the

“undergrounding” of electrical equipment].)

Here, Oakland has yet to demonstrate that the waste

management providers gained any “use of local government

property” in exchange for their payment of the challenged fees.

(Art. XIII C, § 1, subd. (e)(4).) Although the ordinances refer to

the service providers’ ability to “use the public street and/or

other public places,” Oakland has not established that this “use”

means anything more than the generally available prerogative

to drive on public roads and rights-of-way. (Cf. City of San Diego

v. Southern Cal. Tel. Co. (1949) 92 Cal.App.2d 793, 800 [“There

is a natural distinction between the ordinary use of streets by

the public for travel and other purposes, and the exclusive and

more or less permanent use of portions of streets for [utilities to

lay their equipment].”].) Counsel for Oakland suggested during

oral argument that the waste haulers may have attained the

special ability to drive heavy vehicles and to place waste

receptables on Oakland’s streets, but these statements by

counsel are not evidence and do not amount to an admission or

stipulation of fact. (Adelstein v. Greenberg (1926) 77 Cal.App.

548, 552.) Because there is a factual question as to whether the

challenged fees were paid as consideration for a special “use of

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ZOLLY v. CITY OF OAKLAND

Opinion of the Court by Liu, J.

local government property” within the meaning of article XIII C,

the applicability of Exemption 4’s first clause cannot be resolved

in Oakland’s favor on demurrer. As we conclude Oakland has

not demonstrated that Exemption 4 applies to its challenged

fees, we do not address the Court of Appeal’s holding that

Exemption 4 should be interpreted to include a requirement

that an exempt fee be “reasonably related to the value of the

franchise.” (Zolly, supra, 47 Cal.App.5th at p. 88.)

Finally, we note that several amici argue that Oakland’s

challenged fees should be subject to article XIII C, section 1,

subdivision (e)(1) (Exemption 1), which exempts a charge

“imposed for a specific benefit conferred or privilege granted

directly to the payor that is not provided to those not charged,”

but only if the charge “does not exceed the reasonable costs to

the local government of conferring the benefit or granting the

privilege.” While counsel for plaintiffs acknowledged this

possibility during oral argument, Oakland resists the

application of Exemption 1. Yet the language of the ordinances

enacting these franchise fee agreements states that the

“franchise property interests conveyed here” include the right to

“transact business, provide services, . . . and to operate a public

utility.” This language could potentially support amici’s

argument, given that the text of Exemption 1 appears to apply

to such specific benefits. But we have no need to decide that

question here. We also leave open related questions of how the

“reasonable costs” language in Exemption 1 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. (See Jacks, supra, 3 Cal.5th at pp. 262,

269 [explaining how a “reasonable value” requirement “fit[s]

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ZOLLY v. CITY OF OAKLAND

Opinion of the Court by Liu, J.

within” the historical approach to distinguishing between taxes

and other charges, including the “broader focus on the

relationship between a charge and the rationale underlying the

charge”].) We have no occasion to further elaborate these terms,

as Oakland has not sought to show that Exemption 1 applies to

its challenged fees.

CONCLUSION

Because Oakland has not shown, as a matter of law, that

article XIII C, section 1, subdivision (e)(4) applies to the

franchise fees at issue here, the trial court erred in sustaining

Oakland’s demurrer. We affirm the Court of Appeal’s judgment

and remand for proceedings consistent with this opinion.

LIU, J.

We Concur:

CANTIL-SAKAUYE, C. J.

KRUGER, J.

GROBAN, J.

GUERRERO, J.

21

ZOLLY v. CITY OF OAKLAND

S262634

Concurring Opinion by Justice Jenkins

I agree with the majority that the trial court should have

overruled the City of Oakland’s demurrer to the second

amended complaint of plaintiffs Robert Zolly, Ray McFadden,

and Stephen Clayton (plaintiffs) because Oakland has failed to

show that the fees at issue here are, as a matter of law, exempt

from the voter approval requirements of article XIII C of the

California Constitution. (All references to articles are to the

California Constitution.) Although I also largely agree with the

majority’s reasoning, as explained below, I believe that some of

the majority’s discussion is unnecessary to resolution of this

case and I do not join that discussion. I therefore concur in the

judgment.

I.

For purposes of its voter approval requirements, article

XIII C defines a “ ‘tax’ ” as “any levy, charge, or exaction of any

kind imposed by a local government.” (Art. XIII C, § 1, subd.

(e).) As the majority explains, Oakland argues that the fees at

issue here “are not ‘imposed by a local government’ because they

were a product of voluntary contractual negotiations and are

thus ‘consideration paid in exchange for those valuable

franchise rights, including the right to do business with the

municipality.’ ” (Maj. opn., ante, at p. 11.) I agree with the

majority’s rejection of this argument and its basis for doing so.

(Id. at pp. 12–13.)

1

ZOLLY v. CITY OF OAKLAND

Jenkins, J., concurring

Oakland alternatively argues that the fees in question fall

within one of the express exemptions to article XIII C’s

definition of a “ ‘tax’ ” and therefore are not subject to the voter

approval requirements. Oakland relies exclusively on article

XIII C, section 1, subdivision (e)(4) (Exemption 4), which applies

to “[a] charge imposed for entrance to or use of local government

property, or the purchase, rental, or lease of local government

property.” (Ibid.)

I agree with the majority that Oakland has failed to show

that, as a matter of law, the fees fall within this exemption.

Oakland contends in part that the franchise itself is a form of

“local government property” within the meaning of Exemption

4, and that the fee is a charge imposed for “the purchase . . . of

[that] local government property.” However, as the majority

explains, because “a franchise ‘becomes property in the legal

sense of the word’ only ‘[w]hen granted’ to a franchise-holder,”

and does not constitute “property belonging to the local

government before the grant occurs,” the franchise “is not ‘local

government property’ under article XIII C.” (Maj. opn., ante, at

p. 16.) Oakland also argues that the fees qualify under

Exemption 4 as charges “imposed for . . . use of local government

property” because “the right to ‘use the public street and/or other

public places’ was expressly identified as one part of the

franchise property interests conveyed by Oakland to the private

waste-haulers.” However, as the majority explains, “Oakland

has not demonstrated as a matter of law that the payors paid

the challenged fees in exchange for a specific use of government

property that they would not have enjoyed had they not paid the

fee.” (Maj. opn., ante, at p. 17.) Because Oakland has failed to

show that, as a matter of law, any part of the fees come within

Exemption 4, its demurrer should have been overruled.

2

ZOLLY v. CITY OF OAKLAND

Jenkins, J., concurring

II.

Regarding the first aspect of Oakland’s argument for

applying Exemption 4, the majority offers additional comment.

Responding to Oakland’s assertion that the franchise itself is a

form of “local government property” that the fees are paid to

“purchase,” the majority first opines: “[T]he term ‘local

government property’ in article XIII C seems to refer to physical

objects under the control of a local government, such as its

streets and rights-of-way.” (Maj. opn., ante, at p. 15.)

I do not join this discussion because, in my view, it is

unnecessary to resolve this case. The majority’s conclusion —

with which I agree — that the franchise itself does not

constitute “local government property” within the meaning of

Exemption 4 completely disposes of Oakland’s argument that

the fee is payment for the “purchase . . . of local government

property.” We therefore need not speculate on whether “the

term ‘local government property’ in article XIII C seems to refer

[only] to [actual] physical objects” and not to mere “property

interests in such objects.” (Maj. opn., ante, at pp. 15, 16.)

At the end of its opinion, the majority “note[s]” the

argument of several amici that the fees here at issue are “subject

to article XIII C, section 1, subdivision (e)(1) (Exemption 1),

which exempts a charge ‘imposed for a specific benefit conferred

or privilege granted directly to the payor that is not provided to

those not charged,’ but only if the charge ‘does not exceed the

reasonable costs to the local government of conferring the

benefit or granting the privilege.’ ” (Maj. opn., ante, at p. 20.)

As the majority explains, “we have no need to decide” in this case

whether “Exemption 1 applies to [the] challenged fees” because

“Oakland has not sought to show” that it does. (Maj. opn., ante,

3

ZOLLY v. CITY OF OAKLAND

Jenkins, J., concurring

at pp. 20, 21.) Nor, accordingly, need we speculate or comment

on what questions might “relate[]” to Exemption 1’s possible

application. (Maj. opn., ante, at p. 20.) I therefore do not join

the majority’s statement that “the text of Exemption 1 appears

to apply to . . . specific benefits” other than the use of Oakland’s

property, or the majority’s comments about questions that may

be “related” to that issue. (Maj. opn., ante, at p. 20.)

With these limitations, I concur in the judgment.

JENKINS, J.

I Concur:

CORRIGAN, J.

4

See next page for addresses and telephone numbers for counsel who

argued in Supreme Court.

Name of Opinion Zolly v. City of Oakland

__________________________________________________________

Procedural Posture (see XX below)

Original Appeal

Original Proceeding

Review Granted (published) XX 47 Cal.App.5th 73

Review Granted (unpublished)

Rehearing Granted

__________________________________________________________

Opinion No. S262634

Date Filed: August 11, 2022

__________________________________________________________

Court: Superior

County: Alameda

Judge: Paul D. Herbert

__________________________________________________________

Counsel:

Zacks, Freedman & Patterson, Andrew M. Zacks; Katz Appellate Law

and Paul J. Katz for Plaintiffs and Appellants.

Horvitz & Levy, Jason R. Litt, Jeremy B. Rosen and Joshua C.

McDaniel for McLane, Bednarski & Litt LLP and Rapkin & Associates,

LLP, as Amici Curiae on behalf of Plaintiffs and Appellants.

Jonathan M. Coupal, Timothy A. Bittle and Laura E. Dougherty for

Howard Jarvis Taxpayers Association as Amicus Curiae on behalf of

Plaintiffs and Appellants.

Peluso Law Group and Larry A. Peluso for Reuben Zadeh, Mable Chu

and Herb Nadel as Amici Curiae on behalf of Plaintiffs and Appellants.

Barbara Parker, City Attorney, Doryanna Moreno, Maria Bee, David

Pereda, Celso Ortiz and Zoe Savitsky, Assistant City Attorneys; Chao

ADR, Cedric C. Chao; DLA Piper, Tamara Shepard, Mauricio

Gonzalez, Stanley J. Panikowski and Jeanette Barzelay for Defendant

and Respondent.

Best Best & Krieger, Joshua Nelson, Lutfi Kharuf and Joanna Gin for

League of California Cities and the California State Association of

Counties as Amici Curiae on behalf of Defendant and Respondent.

Olson Remcho, Robin B. Johansen, Thomas A. Willis and Margaret R.

Prinzing for Legislature of the State of California as Amicus Curiae on

behalf of Defendant and Respondent.

Orrick, Herrington & Sutcliffe, Brian P. Goldman, Devin Brennan,

Monica Haymond, Ethan P. Fallon; Kathleen A. Kane and Adrienne D.

Weil for Bay Area Toll Authority and Metropolitan Transportation

Commission as Amici Curiae on behalf of Defendant and Respondent.

Kabateck, Brian S. Kabateck and Mike Arias for Consumer Attorneys

of California as Amicus Curiae.

Counsel who argued in Supreme Court (not intended for

publication with opinion):

Paul J. Katz

Katz Appellate Law PC

484 Lake Park Avenue, #603

Oakland, CA 94610

(510) 920-0543

Cedric C. Chao

Chao ADR, PC

50 California Street, Suite 1500

San Francisco, CA 94111

(415) 293-8088