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Case Summary – Lingle v. Chevron USA

Lingle v. Chevron USA, a regulatory takings case that will be argued on Tuesday, involves a Hawaiian statute limiting the rents that oil companies can charge gasoline retailers for the use of service stations. The Ninth Circuit struck down the statute as effecting an unconstitutional taking.

Hawaii sought cert on two questions. First, it asked the Court to decide “[w]hether the Just Compensation Clause authorizes a court to invalidate and enjoin state economic regulation on the basis that the law effects a ‘taking’ because it does not ‘substantially advance a legitimate state interest’ without regard to whether the challenged legislation diminishes the economic value or usefulness of any property.” Hawaii contends that, by finding a taking based solely on the lack of a state interest, the Ninth Circuit conflated the question of whether a taking is for “public use” with the antecedent question of whether a regulation effects a taking at all.

Second, Hawaii challenged the district court’s standard of review, asking “[w]hether, even if applicable in takings analysis, the ‘substantially advance a legitimate state interest’ inquiry authorizes a court to conduct a de novo trial to determine if challenged legislation will achieve its goals, or whether the court should instead apply a deferential standard of review equivalent to that traditionally applied in reviewing economic legislation under the Due Process and Equal Protection Clauses.” The state maintains instead that the district court (and the Ninth Circuit) should have deferred to the legislature’s evaluation of the efficacy of the rent control statute.

Hawaii’s Act 257 limits the rent oil companies can charge retail gas dealers to whom they lease service stations to 15% of the retailer’s gross margin. Prior to the Act, oil companies were barred from operating retail stations; the Act relaxed that restriction, but attempted to preserve competition by prohibiting them from converting stations currently operated by lessees to owner-operated stations, opening owner-operated stations in close proximity, or raising rents to put the lessees out of business. These regulations were thought necessary because of the relative concentration of the Hawaiian oil industry at the wholesale level – there are only two refiners and six wholesalers in the state.

Chevron, which leases out 64 service stations in Hawaii, challenged Act 257 in the U.S. District Court for the District of Hawaii, alleging that it effected an unconstitutional taking of private property because it failed to “substantially advance a legitimate state interest.” On cross-motions for summary judgment, the district court granted summary judgment to Chevron. On the first appeal, the Ninth Circuit affirmed the use of the “substantially advance” test, which it defined as requiring a “reasonable relationship” between the state action and the public interest. The majority rejected Hawaii’s suggestion that the court instead apply a “reasonableness” test. (Judge Fletcher adopted this view in his concurrence in the judgment, noting the similarity of rent control to price controls, which are acceptable if “reasonable” and “not confiscatory.”) The court reversed the district court’s finding of an absence of material fact on that issue and remanded for a determination of “whether lessee-dealers will capture a premium based on the increased value of their leaseholds and whether oil companies will compensate for Act 257 by increasing wholesale prices.” On remand, the district court evaluated the testimony of expert witnesses. It concluded both that Act 257 increases retail gas prices – because, inter alia, the statute would lead oil companies to increase wholesale prices to make up for the rent reductions, and the lessee-retailers would capture a premium from the lower rents – and that the Act effected an unconstitutional taking.

Hawaii made four arguments in its second appeal. First, it asserted that a challenge to the validity of a government action based upon its failure to advance a legitimate government interest is properly brought under the Due Process Clause, not the Takings Clause. Second, in a twist on its challenge to the standard of review, it argued that the “substantially advance” test itself requires not that the challenged regulation actually bear a “reasonable relationship” to a legitimate state interest but only that the legislature rationally could have believed that it would advance the interest. The court rejected both of these arguments as having been determined in the prior appeal and therefore barred by the law of the case.

Third, the state claimed clear error in the district court’s finding that Act 257 does not lower retail gas prices. The state did not challenge the underlying findings, but asserted that the Act did serve the independent goal of keeping lessee-dealers in business. The court rejected this claim as inconsistent with both the legislative history, which mentioned the preservation of lessee-dealers only as a means to the end of greater competition and lower retail prices, and with the state’s position earlier in the case.

Finally, the court rejected Hawaii’s contention that the “substantially advance” test was inapplicable because, unlike in Yee v. City of Escondido, the lower rents in this case would not be captured by incumbent lessees.

Judge Fletcher dissented, agreeing that the state had failed the “substantially advance” test but reasoning that the court should have applied the reasonableness test generally applied to economic regulation, including rent control ordinances where the tenant is not able to capture a premium. He seized on testimony by Chevron’s expert that both wholesalers and retail dealers would lose from the Act to conclude that, although Act 257 did not lower prices for consumers, neither did it grant a premium to lessee-dealers.

Hawaii now attempts to distinguish between the finding that a taking is for public use, which may depend on whether the regulation advances a public interest, and the initial determination that a taking has occurred, which it believes should depend only on the loss suffered by the plaintiff. It argues that regulatory takings doctrine protects property owners against uncompensated government actions that are “of analogous severity” to physical takings. Regulatory actions that are not sufficiently severe, as determined by the multi-factor Penn Central test, do not, it suggests, implicate the Takings Clause at all. The state also contends that the Takings Clause does not impose substantive limits on states’ regulatory powers but merely requires compensation when regulations do amount to takings.

In response, Chevron notes that the Court has applied the “substantially advance” test to regulations beyond the narrow class of rent control ordinances granting a premium to incumbent lessees, citing a line of cases, beginning with Penn Central, holding that regulations “may constitute a ‘taking’ if not reasonably necessary to the effectuation of a substantial public purpose.” In Chevron’s view, the Court’s takings cases strike a balance between guarding property against expropriation and preserving the state’s police power. For this reason, Penn Central “focuse[d] . . . on the character of the [government] action” as well as the reduction in property value. The state’s interpretation, Chevron argues, would allow regulations that unfairly concentrate their costs on particular classes of property owners as long as they can be related in some way to a public interest and do not completely destroy the property’s economic value.

With regard to the second Question Presented, dealing with the standard of review, Hawaii likened the district court’s de novo review to judicial practice under Lochner and argues that the courts should have accorded the statute the presumption of constitutionality traditionally applied to economic regulation and deferred to the legislature’s determination that the Act promotes a public interest. (The Ninth Circuit characterized the “reasonable relationship” test as in between the rational basis scrutiny applied in due process cases and the “rough proportionality” test used to evaluate exactions.) Rent control statutes, it points out, citing Pennell v. City of San Jose, are typically invalidated only when “arbitrary, discriminatory, or demonstrably irrelevant to the policy the legislature is free to adopt.” Chevron distinguishes takings from economic regulation more generally, arguing that “[t]he vice of Lochner review was that it permitted courts to invalidate laws in the absence of a specific constitutional provision.” In this case, since the Takings Clause specifically regulates state action and provides an explicit standard for evaluating state action, Chevron contends, more active scrutiny is appropriate.

This case generated a slew of amicus briefs. The Acting Solicitor General, Paul Clement, filed a brief emphasizing the imperative for deferential review of economic regulation generally. Twenty-seven states and several territories signed on to a brief filed by New York’s Solicitor General, Caitlin Halligan, attacking the use of the “substantially advance” test in takings cases, arguing that such “means-ends” review properly belongs under the Due Process Clauses. The Cato Institute filed a brief, signed by Richard Epstein, on behalf of Chevron. In its first part, the Cato brief denied the relevance of any distinction between Due Process and Takings analysis, asserting that the absence of any legitimate public interest doomed the law on either count. Second, Epstein argued that the state’s proffered rationality test applies only in complex rate-setting cases and that, in any event, since it cannot articulate any conceivable manner in which the Act might reduce retail prices, the state fails even that lower standard. Finally, the brief urges the court to reject the physical/regulatory takings distinction and recognize rent control as a per se physical taking.

The Ninth Circuit’s decision in Lingle created a conflict with the Fifth and Eleventh Circuits, which have held that such challenges should be brought under the Due Process Clause. A decision upholding the Ninth Circuit’s more stringent standard could have wide implications for economic regulation that imposes economic costs on individuals or businesses and that states cannot defend on public interest grounds. This case is particularly worth watching in conjunction with Kelo v. City of New London, which challenged Connecticut’s exercise of eminent domain on “public use” grounds. Oral argument in Kelo is also scheduled for Tuesday.

The petitioner’s merits brief is here, the respondent’s brief is here, and the Ninth Circuit opinion is here.

Arguing Counsel:

Hawaii Attorney General Mark J. Bennett, for Hawaii.

Deputy U.S. Solicitor General Edwin Kneedler, for the U.S. in support of Hawaii.

Craig Stewart, Jones Day, for Chevron USA.