New York Law Review

Tag: Intangible Assets

  • Rochester Telephone Corp. v. Public Service Commission, 87 N.Y.2d 96 (1995): Upholding PSC’s Authority to Impute Royalties for Intangible Asset Transfers

    87 N.Y.2d 96 (1995)

    The Public Service Commission (PSC) has broad authority to determine just and reasonable utility rates, including the power to impute a royalty to a utility for the uncompensated use of its intangible assets by its subsidiaries and affiliates, provided such imputation is rationally based and supported by the record.

    Summary

    Rochester Telephone Corporation (RTC) challenged the PSC’s decision to reduce its permissible utility rate by imputing a 2% royalty due to improper cost-shifting and uncompensated transfers of intangible assets. The New York Court of Appeals affirmed the Appellate Division’s confirmation of the PSC’s actions, holding that the royalty and the rebuttable presumption of a 2% royalty for other regulated utilities were rational means for achieving just and reasonable utility rates. The court emphasized the PSC’s broad regulatory authority and the need to protect ratepayers from imprudent utility practices. The court found the royalty was rationally based given the utility’s failure to seek compensation for the use of the its brand by subsidiary companies.

    Facts

    The PSC initiated hearings regarding the propriety of imposing a royalty on RTC based on its dealings with subsidiaries and affiliates. The hearings revealed that RTC allowed its affiliates to use its intangible assets (name, reputation) without compensation and engaged in improper cost-shifting. In 1993, the PSC imposed a 2% royalty on RTC and created a rebuttable presumption of a 2% royalty for ratemaking purposes whenever a utility invests in competitive enterprises. The royalty included a regulated value assurance mechanism (RVAM) and a positive benefits element. The RVAM compensated ratepayers for the uncompensated use of RTC’s intangible assets, while the positive benefits aspect addressed improper cost shifting.

    Procedural History

    RTC filed a CPLR article 78 proceeding challenging the PSC’s authority. The Supreme Court transferred the case to the Appellate Division, which confirmed the PSC’s determinations and dismissed RTC’s petition. RTC appealed to the New York Court of Appeals. The Court of Appeals retained the appeal after initially considering a motion to dismiss due to a Joint Stipulation and Agreement (Joint Stipulation) between RTC and the Department of Public Service. Ultimately, the Court of Appeals addressed the merits of the case.

    Issue(s)

    1. Whether the PSC has the authority to order payment of a royalty based upon a utility’s relationship with its subsidiaries and affiliates.

    2. Whether the PSC’s exercise of discretion in setting the royalty level at 2% lacked a rational basis.

    3. Whether the royalty presumption constitutes an unconstitutional taking under the Federal and New York State Constitutions.

    4. Whether the royalty presumption violates the Commerce Clause.

    Holding

    1. Yes, because the PSC has broad regulatory authority to ensure just and reasonable utility rates, and imputing a royalty for the uncompensated use of intangible assets is a rational exercise of that authority.

    2. No, because ratemaking is a highly technical field within the special expertise of the PSC, and the 2% royalty was designed to compensate ratepayers without imposing a penalty on RTC. Utilities retain the flexibility to rebut the 2% figure.

    3. The takings issue is not justiciable because the impact of the rebuttable presumption cannot be evaluated separate and apart from its actual application to a particular utility.

    4. No, because the royalty is applied evenhandedly, has a negligible financial impact on interstate commerce, and the State has a legitimate interest in setting just and reasonable utility rates.

    Court’s Reasoning

    The Court emphasized the broad regulatory authority granted to the PSC by the Legislature to set just and reasonable utility rates (Public Service Law § 65, 79, 89-b, 91). The court found that the PSC’s determinations are entitled to deference and should not be set aside unless they lack a rational basis or reasonable support in the record (Matter of Abrams v Public Serv. Commn., 67 NY2d 205, 211-212). The court reasoned that the PSC could allocate costs to shareholders where ratepayers bore the cost for creating value in RTC’s name and reputation, and RTC allowed its subsidiaries to exploit those intangible assets for free. The court stated, “[N]othing in the Constitution requires that the shareholders get a free ride on the backs of the ratepayers” (66 NY2d, at 372). The court also found that the PSC rationally determined a parent utility has an incentive to support its subsidiaries by not entering into transactions at arm’s length, and pass off any additional expense which may result to the parent’s ratepayers. The court also rejected arguments that the royalty was an unconstitutional taking, noting that the issue was not justiciable because the impact of the rebuttable presumption cannot be evaluated apart from its specific application. The court also rejected the Commerce Clause challenge, finding that the royalty was applied evenhandedly and that any financial impact on interstate commerce was negligible.

  • In re City of New York (Fifth Ave. Coach Lines), 22 N.Y.2d 618 (1968): Valuation of Intangible Assets in Public Transit Condemnation

    In re City of New York (Fifth Ave. Coach Lines), 22 N.Y.2d 618 (1968)

    In a condemnation proceeding involving a public transit system, intangible assets such as coach routes, operating systems, and trained personnel must be valued based on reproduction cost less depreciation, considering their contribution to the ongoing operation, irrespective of whether the condemnee was operating at a profit.

    Summary

    This case concerns the valuation of intangible assets of Fifth Avenue Coach Lines and Surface Transit, Inc., condemned by the City of New York. The Court of Appeals reviewed a lower court decision that assigned minimal value to several intangible assets, including coach routes, operating systems, and trained personnel. The Court of Appeals held that these intangible assets, essential for the continued operation of the transit system, must be valued based on the cost of reproducing them, less depreciation, considering their contribution to the system’s functionality, even if the original operator wasn’t profitable due to external factors like restrictive rates.

    Facts

    The City of New York condemned the Fifth Avenue Coach Lines and Surface Transit, Inc., in 1962 to continue public transit operations. The tangible assets were valued at $30,353,542. The valuation of intangible assets, including coach routes, operating schedules, operating systems, trained personnel, and franchises, became a point of contention. The transit companies were operating at a loss due to restrictive rate structures, despite having competent personnel and an efficient system.

    Procedural History

    Special Term initially denied a separate valuation for going concern value but later denied an award for intangible assets because the companies weren’t operating at a profit, which was affirmed by the Appellate Division. The Court of Appeals reversed, holding that the potential for profitable operation entitled the companies to an award for intangible assets, and remanded the case to Special Term. Special Term then assigned a value of $2,577,500 to the intangible assets, which was affirmed by the Appellate Division. This appeal followed, challenging the valuation of specific intangible assets.

    Issue(s)

    1. Whether the coach routes should have been assigned a value, considering the complexity of route layout and development.

    2. Whether the operating systems, records, and procedures should have been assigned a value, specifically regarding accounting records, maintenance records, and personnel records.

    3. Whether the operating rights, permits, and perpetual franchises should have been assigned a value, considering the City’s condemnation of these franchises.

    4. Whether certain classes of trained personnel should have been assigned a value.

    Holding

    1. No, because the lower courts’ findings that coach routes had no value were at variance with the proof and contrary to it.

    2. No, because the lower courts’ findings that operating systems, records, and procedures had no value were at variance with the proof and contrary to it.

    3. No, because the denial of any value for the franchises was in contravention of established law.

    4. No, because the finding of no value for some trained personnel was illogical.

    Court’s Reasoning

    The Court found that the lower court erred in assigning no value to coach routes, emphasizing the complexity of route layout and development, particularly in areas like The Bronx, where the street layout isn’t a simple grid. The court also pointed to the expense involved in adjusting routes to population shifts and commercial changes, stating, “That such advancements, designed to retain customers as well as to attract additional patrons were successful is best evidenced by the fact that, in the year preceding condemnation, claimants served a half billion riders. Clearly, such efforts were not undertaken without considerable expenditures—expenditures for which an award must be made.”

    Regarding operating systems, records, and procedures, the Court held that the lower court improperly relied on a single answer from an expert witness to deny the entire claim for accounting records. The Court cited McCardle v. Indianapolis Water Co., 272 U.S. 400, 417-418, emphasizing that the existing system should be evaluated without considering modern alternatives. The Court also rejected the finding of no value for maintenance records and personnel records, stating that the extensive documentation and essential nature of the information warranted an award. The court emphasized that these records were essential in evaluating and classifying each of the nearly 6,000 active employees.

    Concerning operating rights, permits, and perpetual franchises, the Court cited City of Los Angeles v. Los Angeles Gas & Elec. Corp., 251 U.S. 32, stating that a franchise is a form of property protected by the Constitution, requiring fair compensation for its destruction or curtailment. The court stated that the lower court erred in stating that “The City did not need to acquire these franchises in order to operate the buses over the routes theretofore used by claimants, since the City always had the right to do so.”

    The Court affirmed the award for operating schedules and the portion of the award for trained personnel that attributed value to specific employee classes but rejected the finding of no value for other trained personnel based on unsupported speculation.

    The Court concluded by rejecting the lower court’s use of a percentage relationship between the award and the tangible assets, citing Matter of Port Auth. Trans-Hudson Corp. [Hudson Rapid Tubes Corp.], 20 N.Y.2d 457, stating, “There is no basis or warrant in law for any such rule of thumb.”

  • In re City of New York, 21 N.Y.2d 219 (1967): Just Compensation Requires Valuation of Intangible Assets in Condemnation

    In re City of New York, 21 N.Y.2d 219 (1967)

    When a municipality condemns a viable, operating transit system, just compensation requires not only appraisal of the tangible property but also separate valuation and compensation for the intangible going concern assets.

    Summary

    The City of New York condemned two privately-owned transit systems. The trial court determined the award based on reproduction cost new less depreciation of the tangible assets but rejected evidence of the value of the intangible assets, such as coach routes, operating schedules, and trained personnel. The Court of Appeals held that the city must compensate the owners for the value of both the tangible and intangible assets. The court reasoned that the city took the transit systems as going concerns and utilized the intangible assets, therefore, just compensation requires that these assets be valued and paid for in addition to the tangible assets. The court highlighted that the failure to allow fare increases suppressed earning power for political reasons and did not negate going concern value.

    Facts

    Claimants operated the nation’s two largest privately owned transit systems: Fifth Avenue Coach Lines, Inc. and Surface Transit, Inc.
    Fifth Avenue operated 28 routes in Manhattan, totaling 22,000,000 revenue bus miles annually.
    Surface operated 49 routes in Manhattan and The Bronx, totaling over 24,000,000 revenue bus miles annually.
    The City of New York condemned these transit systems.
    The city continued to operate the system after condemnation, utilizing the same routes, personnel, and operating procedures.
    Claimants were denied reasonable fare increases for political reasons, suppressing their earning power.

    Procedural History

    The trial court fixed the award based on reproduction cost new less depreciation, rejecting evidence of the value of intangible assets.
    The Appellate Division affirmed, stating that the trial court had considered going concern items in reaching its conclusion. Justice Rabin dissented in the Appellate Division.
    The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether just compensation in a condemnation proceeding involving a transit system requires valuation and compensation for intangible going concern assets, in addition to the tangible assets, when the city continues to operate the system utilizing those assets.

    Holding

    Yes, because when a municipality condemns a viable, operating transit system and continues to operate it using its intangible assets, just compensation requires separate valuation and compensation for those intangible assets, in addition to the tangible property. “These assets, without which the city would not have operated the system, can no more be taken without compensation than can its tangible corporate property.”

    Court’s Reasoning

    The court stated that the right to a reasonable fare is part of all franchise contracts. Claimants were capable of profitable operations under reasonable rates, entitling them to going concern value. The court relied on cases such as Kimball Laundry Co. v. United States, emphasizing that the claimants’ capability for profitable operations under reasonable rates entitled them to going concern value.
    The court found that the trial court erred in not accounting for the going concern items in its award, noting that the Appellate Division erred in concluding that the trial court considered these items.
    The court emphasized that the city took the transit systems as going concerns and used their intangible assets, such as coach routes, operating schedules, operating records, systems of procedures, and trained personnel. These assets enabled the city to operate the system immediately after condemnation. The court stated that, in condemnation cases, it is necessary to appraise the physical property and the going value separately, citing People ex rel. Kings County Light. Co. v. Willcox.
    The court rejected the argument that going concern value should not be allowed due to inadequate plant, dwindling profits, and poor future prospects, citing Matter of City of New York [New York Water Serv. Corp.].
    The court stated that the measure of value is the cost of putting the entire transit systems together new plus all improvements, tangible and intangible, less depreciation.