Issues
Courts are currently divided as to which of two tests should be used to analyze a regulatory takings challenge to a rent control statute. One test analyzes the challenge under theTakings Clause, inquiring whether the statute substantially advances a legitimate state interest. The other test analyzes the challenge under the Due Process Clause, inquiring merely whether the legislature could have rationally believed that the statute would substantially advance a legitimate state interest -- a less stringent test. The Supreme Court will resolve the issue of which test is to be applied.
Questions as Framed for the Court by the Parties
Facts
In 1997, the Hawaii Legislature enacted Act 257 in reaction to the high gasoline prices in the state. The act, an attempt to curb gas prices for consumers in Hawaii, controls the maximum rent that oil companies operating in the state can receive from dealers who lease company-owned service stations. The aim of the legislature was to have the lessee-dealers ultimately pass their lower operating costs on to consumers. Soon after the enactment of this legislation, Chevron, one of the two gasoline refiners and one of the six wholesalers in Hawaii, challenged the act on the basis that it effected an unconstitutional regulatory taking under the Takings Clause of the Constitution. A regulatory taking occurs when the government either advertently or inadvertently takes rights away from a property owner through legislative enactment. (Although the government is entitled to take property rights away from an owner, it may not do so without compensating him as per the Just Compensation Clause, which is why a taking without due process is unconstitutional.) Chevron USA, Inc. v. Cayetano, 224 F.3d 1030, 1032 (9th Cir. 2000).
Chevron's two main sources of profit are gasoline sales and the collection of rent from the Chevron dealers who lease its service stations. Chevron USA, Inc., 224 F.3d at 1032. Shortly before the enactment of Act 257, Chevron had restructured the method by which it calculated its lease rates. Under the new arrangement, lessee-dealers would pay a monthly rent which would be calculated as a proportion of the service station's gross profit. There were three increasing percentage levels of rent: 18% of the gross profit up to $18,000; 32% of the profit between $18,000 and $28,000; and 38% of the profit over $28,000. Id. However, Act 257 capped the rental percentage that Chevron and other oil companies could collect at a maximum of 15%. Chevron argues that under the legislature's plan, it will not be able to recover its projected expenses (although it admitted that it has not recouped its dealer expenses from any rent in any state in the past 20 years). Chevron USA, Inc. v. Cayetano, 198 F.Supp.2d 1182, 1186 (D. Hawai'i 2002).
More cogently, Chevron argues that the legislation that Hawaii enacted in order to lower gasoline prices for consumers will not have that intended effect. Chevron USA, Inc., 224 F.3d at 1038. Chevron's expert witness, economist Dr. John Umbeck, predicted that the rent cap will simply cause a premium in rent prices, which current lessee-dealers will then capture for themselves by selling their property at proportionately higher prices to future lessee-dealers. Id.. In other words, any lower prices that would otherwise be passed on to consumers would disappear into the pockets of the current lessee-dealers, and gasoline prices will, at best, remain the same. See Chevron USA, Inc., 198 F.Supp.2d at 1187. However, the state's expert witness, economist Dr. Keith Leffler, argued that, due to the presence of many unpredictable economic variables, it would be impossible for lessee-dealers to accurately measure the worth of and take advantage of a premium. See id. at 1190. Under this hypothesis, Act 257 will likely achieve its intended effect of lowering consumer gas prices.
The Ninth Circuit established in Richardson v. City and County of Honolulu, 124 F.3d 1150, 1164 (9th Cir. 1997) that a regulatory taking occurs in the context of a rent control ordinance (such as Act 257) if that ordinance does not substantially advance a legitimate state interest. The trial court therefore analyzed the parties' arguments on the basis of this "substantially advances" test. The court ultimately issued injunctive relief against the enforcement of Act 257 on the basis that it did not substantially advance the legislature's interests and was therefore a regulatory taking; it also granted Chevron's motion for summary judgment. Id. at 1166. On appeal, however, the Ninth Circuit reversed and remanded the trial court's decision because issues of material fact remained on the record regarding the two expert witnesses' testimonies. See Chevron USA, Inc., 224 F.3d at 1042. On remand, the court resolved the issues of fact in favor of Chevron and upheld its issue of injunction against the enforcement of Act 257.
The state appealed the decision on the basis that Act 257 should not have been analyzed under the Takings Clause and the "substantially advances" test, but instead under the less strict test of the Due Process Clause, which would simply ask whether the legislature could have rationally believed that the act would substantially advance a legitimate state interest. If the court could answer yes to this question, then the act would not be found to effect a regulatory taking. However, the Ninth Circuit affirmed the district court's analysis and decision in Chevron USA, Inc. v. Linda Lingle, Governor of the State of Hawaii, et al., 363 F.3d 846, 848 (9th Cir. 2004). The state subsequently applied for writ of certiorari to the United States Supreme Court to resolve the question of whether Act 257 should be analyzed under the Due Process Clause or the Takings Clause. The Supreme Court is scheduled to hear the argument on February 22, 2005.
The District Court of Hawaii originally found that Act 257 constituted a facial unconstitutional taking and granted summary judgment in favor of Chevron. Chevron USA Inc., 57 F.Supp.2d at 1004. The court reasoned that the act, which limits the rent an oil company may charge its lessee dealers, failed to substantially further the legitimate state interest of lowering gasoline prices in Hawaii because incumbent dealers could capture the value of reduced rent by selling the leaseholds to incoming lessees at a premium, and oil companies may offset rent reductions by increasing wholesale gasoline prices. Id. The state appealed.
The Ninth Circuit Court of Appeals found that there remained genuine issues of material fact as to whether the act failed to substantially advance its purpose; it vacated the summary judgment, remanding the case back to the district court. Chevron USA, Inc., 224 F.3d at 1038. The Ninth Circuit explained that because the two experts hired by the state and Chevron strongly disagreed with each other and it was impossible to tell from the affidavits submitted by both experts whose theory was more correct, the district court must conduct more factual inquiries before delivering judgment. Id.. Upon remand, the District Court of Hawaii again found for Chevron. Chevron USA, Inc., 198 F.Supp.2d at 1193.
Upon appeal, the Ninth Circuit Court of Appeals affirmed the holding of the district court. Chevron USA, Inc., 363 F.3d at 848. Rejecting the state of Hawaii's argument that the act should be examined under the more deferential Due Process standard, the court held that the act should be examined under the Takings Clause instead. Id. The Takings Clause, the court pointed out, requires the use of a "substantially advances" test which requires a "reasonable relationship" between a legitimate public purpose and the means used to achieve that particular purpose. Id.. at 850-53. The Ninth Circuit found that there was no clear error in the district court's decision of the case, since the case was based upon objective evaluation of expert testimony and independent court research into wholesale gasoline prices in Hawaii. Id.. at 856-57.
Analysis
The first question, whether the Just Compensation Clause authorizes a court to invalidate state economic legislation on its face and enjoin enforcement of the law, is significant because it deals with the constitutional right to private property. The Just Compensation Clause dictates that individuals should not be forced to bear public burdens which should be born by the public as a whole, and thus no regulation may take away personal property without proper compensation. If a court can overturn the decision of a legislature before actual harm results, the judicial system would gain more power as a branch of government. In evaluating a regulation that has not resulted in any actual harm, the court must rely on expert testimony and questions of predictive fact, not historical fact, forcing the court to become more entangled in the decision-making process of the legislature.
Similarly, the importance of the second question, whether a court should apply a deferential standard of review for economic legislation considered under the Just Compensation Clause, potentially affects the delicate balance of power between the judicial and the legislative branches of the government. Courts are designed to be a check upon legislatures and to void legislation that harms the interest of the public or conflicts with a higher law. If courts were to employ a more deferential standard of review for challenged legislation, they would operate under the presumption that the legislation is valid, and the challenger would have to carry a heavy burden in proving the contrary. On the other hand, if courts use the "substantially advance" test, substituting their own judgment for that of the legislature, the legislature would not get the benefit of the doubt and would have to defend its own decisions by presenting to the court all of its reasons for adopting the legislation under attack. Essentially, the court would be in danger of taking over the role of the legislature. Thus, a deferential standard would be used unless the legislation under challenge involves very important constitutional rights, such as the unreasonable taking of private property without just compensation.
Conclusion
The Supreme Court will most likely hold that the Just Compensation Clause authorizes a court to invalidate state economic legislation on its face and enjoin enforcement of the law on the basis that the legislation does not substantially advance a legitimate state interest, without regard to whether the challenged law has actually caused any harm. The Court had previously ruled upon facial challenges to regulations, and generally considered the challenges ripe enough for deliberation without actual proof of loss or harm. In Yee v. City of Escondido, 503 U.S. 519 (1992), the Supreme Court held that one may challenge an economic legislation, similar to the one at issue in Lingle, on its face for constituting regulatory taking. See id. at 534. The Court also granted certiorari to a case involving a facial challenge against a zoning ordinance and ruled upon the merits of the case. See Agins v. City of Tiburon, 447 U.S. 255, 260 (1980). Neither of these cases mentioned that actual harm must come from the regulations before courts are allowed to deliberate upon the validity of these regulations.
The Supreme Court would be unlikely to use a deferential standard in considering whether the economic legislation violated the Just Compensation Clause. The Court has used a deferential standard toward economic legislation in the past, but only when it concerns a physical taking rather than a regulatory one. See Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 242 (1984). In fact, in cases similar to Lingle, the Supreme Court rejected a regulatory taking based on the theory that the regulations in question do not substantially advance a legitimate government interest. See City of Monterey v. Del Monte Dunes, 526 U.S. 687, 700-01 (1999); Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302, 334 (2002). Given the Supreme Court's history of using the "substantially advance" test for constitutional questions it would be unlikely to hold otherwise in this context.