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Second Private-Property Case Accepted by Supreme Court

New York Times
October 13, 2004
Linda Greenhouse

(Note to readers from CRC: the fourth paragraph of the article mentions briefs that were filed by the National Conference of State Legislatures and the United States Conference of Mayors, as well as other bodies; CRC filed a brief on behalf of the two aforementioned bodies, along with others. Read the brief here).

WASHINGTON, Oct. 12 - With an important eminent domain case already on the docket, the Supreme Court expanded its examination of private-property rights on Tuesday by accepting a new case on how courts should decide when an economic regulation goes so far as to amount to an unconstitutional "taking" of private property.

The case is an appeal by the state government of Hawaii, where a federal court ruled unconstitutional a law limiting the rent that oil companies can charge to independent dealers who lease its service stations. The district court in Honolulu, in a decision upheld by the United States Court of Appeals for the Ninth Circuit, in San Francisco, held that expert testimony on the economic effect of the regulation had failed to prove that it would "substantially advance a legitimate state interest."

This was the wrong standard, the state argued vigorously in its Supreme Court appeal. The state said the Ninth Circuit had established an "intrusive" legal test that invited judges to substitute their own views of the "efficacy or wisdom of the government action" for the views of elected officials. Courts should limit themselves to deciding whether a government economic regulation has a rational basis, a much more deferential standard, the state argued.

The importance of this issue to government officials was underscored in briefs filed on Hawaii's behalf by New York, California, Connecticut and 16 other states as well as by the National Conference of State Legislatures, the United States Conference of Mayors and other government bodies. It has implications not only for rent-control laws like Hawaii's, but for environmental, health and safety rules as well as for the zoning and land-use regulations that have been the focus of the courts' concerns about the Fifth Amendment's "takings" clause.

The Fifth Amendment provides that private property shall not be "taken for public use without just compensation." In the case the Supreme Court accepted late last month, Kelo v. City of New London, No. 04-108, the question is whether private economic development that will add to the city's tax base is an appropriate "public use" for which a city can exercise its power of eminent domain to condemn property of lower economic value.

The new case, Lingle v. Chevron U.S.A. Inc., No. 04-163, presents a related but distinct question: whether the challenged rent regulation is a taking in the first place. The Supreme Court's precedents make clear that the government does not have to physically acquire property in order to "take" it and incur the obligation to pay for it. A regulation can be a taking if it strips the property of much of its economic use.

In a zoning case from 1980, Agins v. City of Tiburon, the court went further and said that a regulation can amount to a taking if it "does not substantially advance legitimate state interests." But the court has never explained exactly what it meant. The Hawaii Legislature passed the rent law in 1997 in response to what it saw as a lack of competition in the retail gasoline market in the state, which is served by only two refiners. The Legislature wanted to protect independent dealers, who lease their stations from oil companies and had to pass rent increases on to consumers. The law capped the dealers' rent at 15 percent of their profits plus certain increases that the oil companies were permitted to pass on.

Chevron, Hawaii's biggest gasoline refiner and marketer, brought a lawsuit arguing that the rent cap violated due process, equal protection and amounted to an unconstitutional taking. After the district court accepted Chevron's takings argument, the company voluntarily dismissed the other claims.

The district court conducted a one-day hearing at which the company and the state each presented an economic expert to testify about the likely impact of the regulation on the retail gasoline market. When the experts disagreed, the court found that Chevron's expert was "more persuasive" in predicting that the rent cap would discourage investment and lead to fewer independent dealers. Therefore, the court held and the appeals court agreed, the regulation did not "substantially advance a legitimate state interest."

Eliot L. Spitzer, the state attorney general of New York, said in a brief filed in support of Hawaii's Supreme Court appeal that this test "threatens to establish the federal courts as overseers of state laws, routinely inquiring whether the state has made the 'correct' policy choice to respond to a particular problem."


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