Experience

Supreme Court Clarifies Regulatory Takings Tests

By Andrew Jacobson

In its last session, the United States Supreme Court addressed two significant takings cases exploring the parameters of the government's power of eminent domain. The Kelo case (discussed on the front page of this newsletter) addressed the scope of the “public purpose” component of a traditional takings case (i.e., direct appropriation of private property). In the second case - Lingle v. Chevron U.S.A., Inc. - the court reviewed the proper standard for determining whether a statute had created a “regulatory taking.” Regulatory takings occur when a government regulation becomes so burdensome to a property owner that it is tantamount to a direct appropriation of the owner's property.

In Lingle, a major oil company challenged a Hawaii statute (Act 257) that regulates the relationship between wholesale oil companies and the independent service station operators that sell their products. The Hawaii legislature passed Act 257 to address concerns that concentration in the gasoline market was having an adverse impact on consumer prices. The legislature was particularly concerned that the expansion of wholesale company-owned service stations was driving smaller, independent dealers out of business, thus reducing competition in gasoline sales. Act 257 created protections for independent dealers by: (i) prohibiting oil companies from converting existing independent stations to company-owned stations, (ii) prohibiting oil companies from opening new company-owned stations in close proximity to existing independent stations, and (iii) limiting the rent that oil companies could charge independent service station owners to a set percentage of the gross sales and gross profits from the service station.

Chevron made a number of challenges to Act 257, including a claim that the rent cap component of the statute constituted a taking in violation of the Fifth and Fourteenth Amendments, asserting that the cap provision was constitutionally improper because it did not “substantially advance” any “legitimate state interest.” The key issue examined by the Court in Lingle was which test courts should use to determine when a regulatory taking has occurred. Past regulatory takings cases had set forth several potentially conflicting tests. The Lingle court affirmed the validity of two earlier tests. The first provides that any regulation requiring a permanent physical intrusion on private property (regardless of the scope) constitutes a taking that must be compensated. The second approved test provides that any regulation resulting in the elimination of the economic viability of private property constitutes a taking. The Court rejected a third test, originally proposed in Agins v. City of Tiburon, that a regulation effects a taking if the regulation does not advance a legitimate state interest (i.e., the “substantially advances” test). In this instance, Chevron asserted that the statute passed by the Hawaii legislature would not advance its interest of competitive gasoline prices, since the oil wholesalers could simply offset any reductions in rent with increases in the wholesale price of gasoline, thus assuring that there was no benefit to the end consumer from the statute.

A unanimous Court rejected the “substantially advances” test for regulatory takings cases, reasoning that the test revealed nothing about the “magnitude or character of the burden” on private property rights created by a regulation. From a practical perspective, the Court noted that its endorsement of the “substantially advances” test would result in future courts constantly scrutinizing and second guessing the efficacy of a broad spectrum of regulations, a task for which the courts are ill-suited and one that would require the courts to substitute their predictive judgment for that of elected officials.

Andrew Jacobson is a partner, the head of Maslon's Real Estate Group, a member of both the Minnesota and California bars and is a registered architect. His practice covers a broad range of commercial real estate issues, with particular focus on commercial leasing, development and construction.