Amicus Curiae Brief — Palazzolo v. Rhode Island

" s Supreme Court, 1.5 ~T

4, FILED

JAN 3 2001

Supreme Court of the United States

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ANTHONY PALAZZOLO,

Petitioner,

THE STATE OF RHODE ISLAND EX REL.

PAUL J. TAVARES, GENERAL TREASURER, AND

COASTAL RESOURCES MANAGEMENT COUNCIL,

Respondents.

S

On Writ Of Certiorari To The

Supreme Court Of Rhode Island

S

BRIEF AMICUS CURIAE OF DANIEL W. BROMLEY,

DAVID E. ERVIN, BARRY GOODWIN,

RAY HUFFAKER, AND C. FORD RUNGE

IN SUPPORT OF RESPONDENTS

STATE OF RHODE ISLAND ET AL.

S

JoHn D. ECHEVERRIA

ENVIRONMENTAL Po.icy Project

GEORGETOWN University LAw CENTER

600 New Jersey 4 enue, N.W.

Washington, D.C. 20001

(202) 662-9850

Counsel of Record for Amici Curiae

January 3, 2001

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

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~ BEST AVAILABLE COPY

TABLE OF CONTENTS

Page

SUMMARY OF ARGUMENT...............0000000s 2

FEE, SaaNeuecdenctdondenseecsescqncveesesss 4

I. The “Notice Rule” Prevents Unfair Windfalls

Il.

Ill.

at Taxpayer Expense, Avoids Wasteful Strate-

gic Behavior By Investors, and Properly Facili-

tates Economically Beneficial Change in

PUGATEY TOCTUID. oc ccsccscccccccccscccceccess

A Comprehensive Understanding of How

Government Action Affects Property Values

Supports the Basic Fairness of the Require-

ment That a Taking Claimant Demonstrate the

Elimination of All Economically Beneficial Use

Expansive Liability Under the Takings Clause

Could Well Lead To Economically Inefficient

Government Decision-Making and Encourage

Inefficient Investor Behavior.................

A. The Governmental Deterrence Rationale ...

B. Other Efficiency Rationales ..............

CP UIEEEES co vvccvceccccccecccsencceonceesccecs

PES once veccovescccscccccsvsscccccccseses App. 1

12

TABLE OF AUTHORITIES

Page

Cases

Andrus v. Allard, 444 U.S. 51 (1979) .........00055 6, 15

Armstrong v. United States, 360 U.S. 40 (1960)...... 19

Eastern Enterprises v. Apfel, 524 U.S. 498 (1998) ...6, 7

| Keystone Bituminous Coal Assn. v. DeBenedictis,

480 U.S. 470 (1967)... cccccccccccccccccscscces 14, 15

Loretto v. Teleprom 1" Manhattan CATV Corp.,

GBB US. GBS. CIGEE) .. wc ccccvccccsecccscvcvcccssssss 9

Loveladies Harbor, Inc. v. United States, 28 F.3d

127] Gred.Cle. 19D4). ...ccccccccecccccsvecessccesese 4

Lucas v. South Carolina Coastal Council, 505 U.S.

BOGS (DOT)... ccccccssvcccesecscovecesueasn 4, 8, 10, 15

Monell v. Department of Social Services, 436 U.S.

GBB (RODE). oc cccccccccccccccusscessesseseauenneen 26

Nollan v. California Coastal Commission, 483 U.S.

GBB CROGF).. oc ccccccccccccccccsvecseseuueneeeenee 9, 10

Penn Central Transp. Co. v. City of New York, 438

US. 106 (IOVS)... .cccccccesseccecccccsnscnseeneneee 8

San Diego Gas & Electric v. San Diego, 450 U.S.

GBI (TDGR)... cccccccccccccccccssesssceneseeeneeeee 26

Scheuer v. Rhodes, 416 U.S. 232 (1974).............. 26

United States v. Riverside Bayview Homes, Inc.

474 UG. 121 (19GB)... ccvccccccccccscessessseneens 13

iii

TABLE OF AUTHORITIES - Continued

SECONDARY SOURCES

Louise K. Ahern, “Novi Mey Rethink Future,” The

Detroit News (May 23, 2000) ..................

Vicki Been, “ ‘Exit’ as a Constraint on Land Use

Exactions: Rethinking the Unconstitutional

Conditions Doctrine,” 91 Colum. L. Rev. 473

DP PSIPERSESENGOECROSESeCeeSecoecooceceeeces

Lawrence Berger, “A Policy Analysis of the Taking

Problem,” 49 New York Univ. L. Rev. 165 (1984) ....

Lawrence Blume & Daniel L. Rubinfeld, “Com-

“yoo for Takings: An Economic Analysis, ”

Ca

lifornia L. ioe ii. cndeseeteeee

Robin Boadway & Neil Bruce, Welfare Economics

REELS EPCOT ETT ETT TTETT ETL TTTTee

Robert Bork, The Tempting of America: The Politi-

cal Seduction of the Law (1990) ...............

Daniel A. Farber, “Public Choice and Just Com-

pensation,” 9 Const. Comment 279 (1992)......

William A. Fischel & Perry Shapiro, “Takings,

Insurance, and Michelman: Comments on the

Economic Interpretations of ‘Just Gomeanes-

tion’ Law,” 7p

Louis Kaplow “An Economic Analysis of Legal

Transitions,” 99 Harv. L. Rev. 509 (1986).......

Saul Levmore, “Changes, Anticipations, and Rep-

arations,” 99 Colum. L. Rev. 1657 (1999).......

Daryl J. Levinson, “Making Government Pay:

Markets, Politics, and the Allocation of Consti-

tutional Costs,” 67 U.Chi. L. Rev. 345 (2000) ..

of Legal Studies 26 (1992)....

Page

.23, 28

CO

iv 1

TABLE OF AUTHORITIES - Continued The economists listed in the appendix, all of whom

Page | teach and conduct research in the field of economics and

related disciplines, submit this brief amicus curiae in

Mancur Olson, The Logic of Collective Action:

support of the respondent State of Rhode Island.!

Public Goods and the Theory of Groups (1971

GED « cocoscecévecocecocesqunsseansonsessnbesnneses 25

Richard A. Posner, Economic Analysis of the Law

ES ea

The first purpose of this brief is to use standard

SB GGiis OB. BOUED 2c ccccccccccccccccccccccccccssces 21 economic theory and principles to analyze the two issues

C. Ford Runge, “The Congressional Budget of substantive takings law raised by this case, the validity

Office’s Regulatory Takings and Pro ls for of the “notice rule” and the scope of the regulatory tak-

Change: One Sided and Uniformed,” 7 Envtl. L. ings doctrine. This analysis points to several persuasive

Ge Prac. § (1999)... nn ccccccccccecccceccccccess 16, 18 seasons for the Court to reaffirm the notice rule and for

Timothy Searchinger, “Some Key Questions the Court to rely on that rule in this case to deny the

Raised by the Recent Focus in Takings Cases on petitioner the taxpayer-funded recovery he seeks. This

‘Reduction in Value’ ” paper presented at Geor- tate at o> Gat. Gem Gen ‘

getown CLE Conference on Regulatory Takings GREED GSS CUQHISS amt, Wem ie parapecuve 6f eee

ED cvccccecessovedssedeessdesseusccuecussueece 17 nomic theory, the petitioner’s entitlement to financial

compensation cannot reasonably be assessed without

considering the full range of positive and negative effects

on the property’s value due to different government reg-

ulations and other actions. This approach provides a use-

ful framework for assessing the ultimate “fairness” of the

Court's traditional view that a claimant must demon-

strate denial of all economically beneficial use to establish

a taking.

~~ me

) The second purpose of this brief is to respond to the

proposition, articulated by some advocates of a broad

reading of the Takings Clause, that an expansive rule of

takings liability would tend to maximize social welfare in

1 Counsel for the parties have consented to the filing of this

brief. No counsel for a party in this case authored this brief in

whole or in part, and no person or entity, other than amici or

their counsel, made a monetary contribution to the brief’s

preparation or submission. See Rule 37.

economic terms. This proposition is based on incomplete

and unpersuasive reasoning. In fact, as we demonstrate

below, an expansive reading of the Takings Clause might

well reduce social welfare in economic terms.

¢

SUMMARY OF ARGUMENT

Under the “notice rule,” an investor who purchases

property with actual advance notice of a regulatory

restriction is barred from subsequently seekiz.g compen-

sation under the Takings Clause based on the restriction’s

application. This rule bars an investor who may have

purchased property at a discounted price based on the

effect of the regulation from obtaining a windfall at tax-

payer expense. The rule also prevents investors from

engaging in strategic rearrangements of property inter-

ests in order to maximize their chances of receiving a

financial recovery under the Takings Clause; this strategic

behavior would produce deadweight economic losses and

permit investors to eviscerate the current limitations on

the scope of regulatory takings doctrine. In addition, the

notice rule achieves a reasonable and necessary balance

between protecting the security of private investments

and maintaining a property rights system that reflects

society's contemporary values and needs.

Second, the standard for a regulatory taking based on

a regulation’s economic impact cannot properly be deter-

mined without an accurate accounting of how govern-

ment action actually affects property value. A seemingly

large “drop” in value based on a comparison of the value

of property subject to regulation and in an unregulated

_ State gives an inaccurate and misleading picture from an

economic standpoint. Market prices are an inappropriate

benchmark for takings analysis when those prices do not

fully capture the true costs and benefits of property being

regulated, such as any flood control and water quality

filtering functions of wetlands. In addition, a full and fair

accounting of the effects of government on property

values requires consideration of governmental “givings”

as well as regulation’s reciprocal burdens and benefits.

Third, some advocates of a broad interpretation of

the Takings Clause contend that expansive government

liability for regulatory actions under the Takings Clause

would tend to maximize social welfare in economic

terms. Upon analysis, this argument is unpersuasive. In

fact, expansive takings liability may well reduce social

welfare in economic terms. Government does not func-

tion in the same fashion as a private firm and therefore

extensive assessments of financial liability would not

influence behavior of government in the same fashion as

it would that of a private firm. In addition, to the extent

broad internalization of regulatory “costs” would affect

government behavior, it would probably encourage offi-

cials to discount the benefits of government action rela-

tive to its costs. This, in turn, could lead to government

decision-making that fails to maximize total social wel-

fare. Also, a broad interpretation of the Takings Clause

would likely increase the transaction costs of land use

management programs and deter or delay program

actions with net benefits for society due to new fiscal

demands. Finally, the broad availability of financial

compensation would create a form of “moral hazard”

a ee Le ae

encouraging investors to make overly risky and wasteful

investments.

ARGUMENT

I. The “Notice Rule” Prevents Unfair Windfalls at Tax-

payer Expense, Avoids Wasteful Strategic Behavior

By Investors, and Properly Facilitates Economically

Beneficial Change in Property Norms.

One issue in this case is whether an investor who

buys with knowledge of the existence of a regulatory

program can recover compensation under the Takings

Clause if the investor is subsequently subjected to the

regulatory restriction. Economic theory points to several

independent grounds for upholding the “notice” rule

barring recovery in this circumstance.

The first and most basic justification for the notice

rule is that the investor may have paid a discounted price

for the property based on the existence of the restrictions.

See Loveladies Harbor, Inc. v. United States, 28 F.3d 1171,

1177 (Fed.Cir. 1994). (“In economic terms, it could be said

that the market had already discounted for the restraint,

so that a purchaser could not show a loss in his invest-

ment attributable to it.”) If a purchaser with notice did

pay a discounted price, granting compensation based on

the property’s unrestricted value would, everything else

being equal, result in a windfall to the investor at tax-

payer expense.

—"

The point can be illustrated using an example based

on the case of Lucas v. South Carolina Coastal Council, 505

U.S. 1003 (1992). Mr. Lucas purchased two lots for devel-

opment with the understanding that there were no

restrictions prohibiting development. He paid approxi-

mately $1,000,000 for the property. A few years later, the

State of South Carolina enacted a law prohibiting devel-

opment of the lots. In that situation, the Court indicated,

a taking almost certainly occurred. Consider, however, if

the sequence of events were reversed and Mr. Lucas had

acquired the property after the regulatory regime was in

place. The price Mr. Lucas would have paid for the prop-

erty would have depended on various factors, such as

whether he might have combined the lots with other

nearby property and his assessment of the possibility that

the regulatory regime might change in the future. But it is

fair to assume that Mr. Lucas would have paid signifi-

cantly less than $1,000,000 for the property. Under this

hypothetical scenario, if he then sued for a taking

demanding “just compensation” should the law compel

the taxpayers to pay him $1,000,000? Just as Mr. Lucas,

based on the facts of the actual case, presented a compel-

ling case of economic injury, so too Mr. Lucas, in this

hypothetical example, would be seeking a simple wind-

fall.?

2 More generally, a decision by this Court to reject the

“notice rule” would result in a massive, one-time transfer of

wealth from the general public to property owners. Given that,

according to our understanding, the majority of jurisdictions

follows the notice rule, investors have undoubtedly factored

their lack of investment-backed expectations into their

estimates of their financial standing. Repudiation of the notice

rule would confer a windfall on those investors who acquired

hazardous and environmentally sensitive lands and who

harbored little or no expectation of being able to make

The primary counter-argument, as articulated by sev-

eral of petitioner’s amici, is that the notice rule should be

rejected, not to protect any legitimate entitlement of the

purchaser herself, but to protect the expectations of the

seller. According to this view, as a result of the notice

rule, the owner of property subject to a new regulatory

restriction would lose value because any prospective pur-

chaser would be barred from pursuing a taking claim

and, therefore, would only be willing to pay the seller a

discounted price. As a result, a seller who acquired the

property without advance notice of the regulatory restric-

tions would suffer an unanticipated (and unfair) financial

loss. The notice rule should be rejected, the argument

proceeds, in order to support the value of the property in

the hands of the seller and thereby protect him from this

loss.

This counter-argument cannot carry the day. Even if

the property’s value for sale is reduced, the owner can

continue the property in its current use or seek to

develop it herself. See Andrus v. Allard, 444 U.S. 51 (1979)

(holding that complete abrogation of the right to sell did

not effect a taking, given the other potential uses avail-

able to the owner). Moreover, it is debatable whether this

type of loss in value upon sale is even the kind of effect

on property covered by the Takings Clause. In Eastern

Enterprises v. Apfel, 524 U.S. 498 (1998), Justice Kennedy,

concurring in the judgment and dissenting in part,

maximum development use of the property. Repudiation of the

notice rule also would encourage owners to advance large,

potentially hazardous or environmentally destructive projects

in order to prompt payments from the government.

observed that a regulation which causes financial loss,

but which does “not operate upon or alter an identified

property interest,” cannot effect a taking of property with

the meaning of the Takings Clause. See also Id. at 554

(Brever, J., dissenting). A reduction in a property’s sales

price seems more akin to the financial liability at issue in

Fastern Enterprises than to an actual restriction on the use

of property.

In addition, the seller’s ostensible “loss” upon sale of

the property following new regulatory restrictions would

likely be highly speculative and difficult to quantify. If

the alleged loss were based on the possibility that a

development permit would be denied, but there also

were the possibility that development approval would be

granted, the impact of the adoption of the new restriction

on the property’s sales price might be modest.

The second economic argument for why a purchaser

with notice of regulation should be barred from recovery

under the Takings Clause is that this rule prevents strate-

gic behavior by owners who, in the absence of the notice

rule, would have a strong incentive to rearrange their

property interests in order to maximize the chances of a

financial recovery from the public. In practice, it would

be impossible for the courts to differentiate between bona

fide takings claims and those which are the result of

strategic behavior. This strategic behavior would seri-

ously undermine if not demolish existing limitations on

the scope of recovery under the Takings Clause.

Again, the problem can be illustrated by an example.

If a hypothetical Mr. Lucas owned a 200 acre parcel in

South Carolina, and two acres of the property were sub-

ject to the new prohibitions on coastal development,

Lucas could, in the absence of the notice rule, manufac-

ture a taking claim simply by selling off the restricted two

acres. The purchaser, armed with the precedent of Lucas

itself, and not impeded by his actual notice of the restric-

tions on development, would presumably have a mer-

itorious takings claim. Thus, despite the fact that the

hypothetical Mr. Lucas would lack a meritorious taking

claim himself, he could easily manufacture one — and

receive the economic benefit of such a claim — by rear-

ranging his property interests in light of the new restric-

tion.

Similarly, this Court’s ruling in Penn Central Transp.

Co. v. City of New York, 438 U.S. 104 (1978), could easily be

eviscerated if the Court did not continue to uphold the

notice rule. In that case, the Court ruled that a prohibition

against the development of the air space atop historic

Grand Central terminal did not effect a taking given the

company’s opportunity to continue to use the site as a

terminal. However, in the absence of the notice rule, the

company could simply bypass the Court's ruling by sell-

ing the air rights to some newly established corporation

which could then sue on the ground that the law elimi-

nates all of the air rights’ economically beneficial use.

The point, which could be supported by innumerable

examples, is simply that the opportunity to reconfigure

property interests knowing how regulatory restrictions

affect a particular property would create essentially

unlimited opportunities to manufacture takings claims

that otherwise would not exist.

The strategic behavior that would be encouraged by

elimination of the notice rule would have no economi-

cally productive value. Thus, the significant transaction

costs entailed in these strategic rearrangements of prop-

erty interests would produce a so-called “dead weight”

economic loss. See Robin Boadway & Neil Bruce, Welfare

Economics 240-41, 208-09 (1984).

Significantly, an owner’s advance knowledge of a

regulation that effects a physical occupation of property

does not create the same incentive to engage in strategic

behavior as does advance notice of a regulatory use

restriction. This important consideration distinguishes

Nollan v. California Coastal Commission, 483 U.S. 825 (1987),

which involved an alleged physical occupation, from this

case, which involves a restriction on use. In Nollan, of

course, the Court indicated that a purchaser’s advance

notice that the government would impose a physical tak-

ing should not bar a taking challenge to this type of

imposition.

Under the Court’s decision in Loretto v. Teleprompter

Manhattan CATV Corp., 458 U.S. 419 (1982), a regulation

either effects a physical occupation or it does not based

on the character of the regulation, regardless of the eco-

nomic impact of the regulation or the proportion of the

property affected by the physical intrusion. As a result, in

a case involving an alleged physical occupation, in con-

trast to a case involving a use restriction, advance notice

does not create an incentive to engage in strategic behav-

ior in order to manufacture a takings claim. This distinc-

tion provides a logical basis for treating the fact that a

purchaser had notice of a regulation differently depend-

ing upon whether the regulation involves a physical

10

occupation or a use restriction. Contrary to the views of

petitioner and his amici, the Court’s ruling in Nollan

cannot automatically be extended to a case involving a

use restriction.*

Finally, the notice rule is based on the law’s logical

use of the event of a sale to achieve a rough balance

between, on the one hand, the social value of a property

regime that conforms to contemporary circumstances and

values and, on the other, the social value of stable expec-

tations about the permitted uses. of property. Change is,

of course, endemic to property law. As the Court recently

affirmed, “the property owner necessarily expects the

uses of his property to be restricted, from time to time, by

various measures newly enacted by the State in legitimate

exercise of its police powers.” Lucas, 505 U.S. at 1027.

Social welfare would suffer if the Takings Clause were

interpreted as impeding necessary evolution in property

norms by requiring the public to indemnify any owner

3 To be sure, this incentive for strategic behavior could also

be dealt with by equating regulatory use restrictions with

physical takings and requiring the taxpayers to pay for every

regulatory burden no matter how minute, as suggested in the

brief of petitioner’s amicus Institute for Justice, authored by

Professor Richard Epstein. Suffice it to say that this radical

reinterpretation of the Takings Clause has no support in either

the original understanding of the Takings Clause or any of the

decisions of this Court. Cf. Robert Bork, The Tempting of America:

The Political Seduction of the Law 230 (1990) (“My difficulty is not

that Epstein’s constitution would repeal much of the New Deal

and the modern welfare-regulatory state but rather that these

conclusions are not plausibly related to the original

understanding of the takings clause.”)

11

burdened by social change. On the other hand, depend-

able expectations about the permitted uses of property,

and hence the value of particular investments, fosters

more investment and provides a benefit to society as a

whole. From an economist’s standpoint, the issue is how

to balance these competing considerations.

Providing a significant degree of protection to

owners’ established investment expectations, but requir-

ing purchasers with notice to conform to new property

norms, achieves an appropriate economic balance

between necessary legal change and stable incentives for

investment. The notice rule ensures that an owner’s origi-

nal investment expectations are entitled to attention and

respect. On the other hand, the notice rule facilitates

useful social change by imposing the responsibility for

dealing with new legal norms upon owners who pur-

chased their properties with conscious understanding of

the restrictions created by these new norms.

The issue of when compensation should be available

under the Takings Clause during a period of legal change

is related to what law and economics scholars refer to as

the problem of legal “transition” policy. See, e.g., Louis

Kaplow, “An Economic Analysis of Legal Transitions,” 99

Harv. L. Rev. 509 (1986). This scholarship poses the ques-

tion of whether the risk of change in public policy should

be treated the same as or differently from other kinds of

risks that can affect the value of private investments.

Economic efficiency will generally be maximized if risk

management is left to the operation of the market, which

includes adequate opportunities for private insurance

programs to develop and creates useful incentives for

investors to anticipate potential changes in legal rules

12

and adjust their plans accordingly. Because the risks of

changes in the law are fundamentaily the same as other

kinds of business risks, the argument continues, these

risks too should generally be left to the marketplace. “To

the extent that a given transition policy mitigates the

impact of a future reform on preexisting investment,

those currently making investments will not have the

proper incentive to take into account the prospects of

future reform.” Id. at 615. Accordingly, “government com-

pensation or other transitional relief usually is ineffi-

cient.” Id. at 615-16. See also Saul Levmore, “Changes,

Anticipations, and Reparations,” 99 Colum. L. Rev. 1657,

1677 (1999) (arguing that an anticipation-oriented theory

of takings law provides an “elegant” explanation for the

Court’s differing treatment of physical occupations,

which are generally difficult for owners to anticipate, and

changes in regulations, which owners generally can

usefully anticipate).

Il. A Comprehensive Understanding of How Govern-

ment Action Affects Property Values Supports the

Basic Fairness of the Requirement That a Taking

Claimant Demonstrate the Elimination of All Eco-

nomically Beneficial Use.

A second issue raised in this case is whether compen-

sation ought to be available under the Takings Clause

when a regulatory restriction eliminates less than all of

the economically beneficial use of the property. This issue

undoubtedly raises a host of purely legal questions. But

economic analysis can provide some insight into why the

13

courts have generally confined regulatory takings doc-

trine to “extreme circumstances.” United States v. Riverside

Bayview Homes, Inc., 474 U.S. 121, 126 (1985).

This suit frames the takings claim by pointing to the

value the property would have if the government's regu-

latory policies were lifted as to this property and compar-

ing that value to the value the property presently has

subject to the restrictions. According to petitioner, in the

absence of the regulation the property would have a

value of over $3,000,000, but in its restricted state the

property has a market value of approximately $200,000,

yielding a “loss” in value of over 90%. This significant

apparent decline in value, according to petitioner and his

amici, provides powerful support, standing alone, for this

takings claim. However, from an economist’s perspective,

— even assuming the “before” and “after” market values

were accurately calculated (an assumption that appears

to be false in this case)* - this approach to calculating a

regulation’s economic impact is seriously flawed. Insofar

as the size of such a “drop” in value is treated as direct

evidence of an owner's entitlement to relief under the

Takings Clause, this approach is completely inappropri-

ate.

* In calculating the $3,000,000 figure, petitioner made a

variety of optimistic assumptions about the effects of other

applicable regulations and the engineering costs of conducting

construction work in a coastal marsh. See Testimony of Thomas

S. Andolfo, Tr. at 678-79. The Rhode Island Supreme Court

termed the $3,000,000 figure “speculative” and “unrealistically

optimistic.” See 746 A.2d at 715 & n. 7.

14

A threshold problem with relying on estimated

changes in market value of property to identify compens-

able takings is that the basic justification for any regula-

tory program is that prices set by the marketplace do not

reflect the true economic value of certain goods and

services not effectively supplied or priced by the market.

Regulation is a response to the “market failures” that

occur in the absence of government regulation. Market

failure occurs, according to the standard economic

account, because private economic activity generates

“externalities” that are not captured by market prices.

The very purpose of regulation is to alter the prices that

various goods and services would otherwise command in

the market. Hence, relying on the market price of prop-

erty in a hypothetically unregulated state in order to

appraise losses due to regulatory action is caught up in a

contradiction; the reason for the regulation itself is the

failure of the market and the resulting inaccuracy of price

signals.

As the Court has stated, “Under our system of gov-

ernment, one of the state’s primary ways of preserving

the public weal is restricting the uses individuals can

make of their property.” Keystone Bituminous Coal Assn. v.

DeBenedictis, 480 U.S. 470, 491 (1987). The Takings Clause

presumably cannot be interpreted to constrain every

effort by the political branches of government to regulate

externalities in order to promote general economic wel-

fare. Accordingly, a simple examination of change in a

property’s market value as a result of regulation cannot

have determinative significance in the takings inquiry.

Furthermore, an examination of the impact of a regu-

lation on one piece of property in isolation ignores the

—

15

significantly positive effects that the same regulation can

have when it is enforced against neighboring owners. The

Court has relied upon this phenomenon of “reciprocity of

advantage” to justify rejecting regulatory takings claims

in many cases. Zoning laws provide one example of how

reciprocity of advantage operates. As the Supreme Court

said in Agins:

[land owners subject to a comprehensive zoning

scheme] share with other owners the benefits

and burdens of the city’s exercise of its police

power. In assessing the fairness of the zoning

ordinances, these benefits must be considered

along with any diminution in market value that

the [owners] might suffer.

Id. at 262.

The Court also has invoked the concept of “reciproc-

ity” to explain more generally how all property owners

benefit from different kinds of regulations. Some regula-

tions may impose economic burdens on some property

owners, and other regulations may confer economic bene-

fits on others, but over the long-term a rough “reciprocity

of advantage” is secured for all. For example, in Andrus v.

Allard, 444 U.S. 51 (1979), the takings claim failed in part

because the restriction was “a burden borne to secure the

advantage of living and doing business in a civilized

society.” 444 U.S. at 67. See also Keystone Bituminous Coal,

480 U.S. at 491 (“While each of us is burdened somewhat

by . .. [the] restrictions [on the uses individuals can make

of their property], we, in turn, benefit greatly from the

restrictions that are placed on others.”); cf. Lucas, 505 U.S.

at 1017-18 (when a regulation eliminates “all economi-

cally beneficial use,” “it is less realistic to indulge our

16

usual assumption that the legislature is simply adjusting

the benefits and burdens of economic life in a manner

that secures an average reciprocity of advantage to every-

one concerned.”) (internal quotations omitted) (emphasis

added).

In economic terms, a regulated property owner can

benefit from the application of regulations to his neigh-

bors in several different ways. First, restrictions on the

use of neighboring properties can protect the regulated

property from neighboring uses that would detract from

the value of his property, for example, by causing pollu-

tion or flooding, or by undermining the amenity values in

the community as a whole. Second, regulatory restric-

tions can limit the available development opportunities

and thereby increase the scarcity, and hence the value, of

remaining development opportunities. See generally, C.

Ford Runge, The Congressional Budget Office’s Regula-

tory Takings and Proposals for Change: One Sided and

Uninformed, 7 Envtl. L. & Prac. 5 (1999).

From the perspective of economic theory, it would be

nonsensical to assess the impact of a regulation on a

single property in isolation without considering how the

property’s value is affected by the application of the

regulation to neighboring properties. However, that is

precisely what occurs if one attempts to estimate the

value of the property simply by asking what the claim-

ant’s property, considered in isolation, would be worth if

it were not subject to the regulatory restrictions. This

estimate gives the owner credit for the value to him of his

neighbors’ compliance with the regulation and simul-

taneously gives him the unique benefit of lifting the

regulation from his property. This mistaken approach

* a

So a eee OO

17

exaggerates the actual economic impact of a regulation on

a claimant’s property. As one commentator has put it,

“the correct question is not how much the property

would be worth if it and it alone were not subject to

restrictions; it is how much the property would be worth

if the restrictions did not exist and did not apply to

anyone.” Timothy Searchinger, “Some Key Questions

Raised by the Recent Focus in Takings Cases on ‘Reduc-

tion in Value’ ” paper presented at Georgetown CLE Con-

ference on Regulatory Takings (1998).

From the record, it is apparent that the reciprocal

advantages established by the Rhode Island coastal regu-

latory program have helped support and enhance the

value of petitioner’s property. The Coastal Council’s con-

sistent, stringent policy against the filling of coastal

marshes has succeeded in preserving the environmental

values of Winnipaug Pond and other areas along the

Rhode Island coast, making them highly desirable areas

to live and vacation. As a result, even though petitioner

may not destroy wetlands in order to create buildable

parcels of land, he can charge high prices for the several

lots for which he can apparently receive regulatory

approval. Taking into account as well the dozen lots his

corporation initially sold off for development, petitioner

will earn a highly favorable return on his initial $13,000

investment in this property under any circumstances.

Petitioner’s financial success is due, at least in significant

part, to Rhode Island’s coastal program. In demanding

yet more income from Rhode Island’s taxpayers through

a taking claim, petitioner is seeking to unfairly reap both

the economic benefits conferred by government regula-

tion and public indemnification for regulation’s burdens.

18

Tellingly, in his original complaint, the petitioner

simultaneously complained about both the regulatory

restrictions on his use of his property and the govern-

ment’s failure to enforce other regulatory restrictions

against his neighbors. For example, he alleged that the

Town of Westerly caused him economic loss by “its fail-

ure to properly regulate the dumping and discharge of

sewerage into Winnipaug Pond,” and by its “continu[ing]

to issue building permits to other abutters along the pond

causing more sewerage to be dumped into the pond.”

Complaint, Paras, 8, 9, dated June 20, 1988. Nothing

could more clearly demonstrate, in the context of this

very case and with respect to this very location, how

government regulations simultaneously benefit and bur-

den a property owner. The petitioner subsequently filed

an amended complaint omitting his objections to insuffi-

ciently vigorous regulation, choosing instead to focus

exclusively on how regulatory restrictions allegedly harm

him. The Court should hold petitioner to his first, more

balanced description of how different regulations affect

his property interests.

In addition to the phenomenon of reciprocity of

advantage, governmental “givings” also should be fac-

tored into the equation. Public funding of construction ~f

roads, sewers, and other public facilities, agricultural and

other subsidies, and other government tax and spending

programs contribute significantly to the value of land. A

large number of empirical studies have documented the

enormous size of tlese givings; some of these studies are

summarized in C. Ford Runge, “The Congressional Bud-

get Office’s Regulatory Takings and Proposals for

Change: One Sided and Uninformed,” 7 Envtl. L. & Prac.

19

5 (1999). In this case, the Court can take judicial notice of

the fact that public investments in the interstate highway

system, nearby airports, and numerous other public facil-

ities and programs have contributed to the value of this

property. Many givings are, of course, paid for by general

tax revenues and provide benefits to society as a whole. It

is also true, however, that luck and skillful political activ-

ity routinely result in the benefits of givings being con-

centrated on a small number of land owners. There is no

reason to believe that land owners are any more likely to

be singled out to bear the burdens of regulatory action

than they are to be singled out to be the beneficiaries of

governmental givings. If anything, as the country’s agri-

cultural policies and flood insurance programs suggest,

the opposite is more likely to be accurate. The economic

fairness of the burdens allegedly imposed by government

cannot be accurately appraised without taking into

account the givings.

In Armstrong v. United States, 360 U.S. 40, 49 (1960),

the Court observed that the Takings Clause is designed

“to bar Government from forcing some people alone to

bear public burdens which, in all fairness and justice,

should be borne by the public as a whole.” On the one

hand, the Armstrong “principle” has seemingly undenia-

ble force. On the other hand, it can also be read as a

simple tautology which adds little meaning to the lan-

guage of the Takings Clause itself. Most critically, it begs

the question of what, in fact, do “fairness and justice”

require? For the reasons discussed, at least from the per-

spective of economic theory, “fairness and justice”

require a full and accurate accounting of how various

20

public actions actually affect the value of a particular

parcel of property.

III. Expansive Liability Under the Takings Clause

Could Well Lead To Economically Inefficient Gov-

ernment Decision-Making and Encourage Ineffi-

cient Investor Behavior.

Finally, the amici wish to address the argument that

some have advanced that an expansive theory of regula-

tory takings liability would promote economic efficiency.

For the reasons described below, the amici submit that

this argument is unpersuasive. Indeed, just the opposite

result may occur.

A. The Government Deterrence Rationale.

The principal efficiency-based argument for subject-

ing government to expansive liability under the Takings

Clause relies on an analogy to the incentives created for

private firms by the tort law system. A private factory

may discharge pollutants into a river resulting in harm,

for example, to public health or to other businesses such

as commercial fisheries. In a competitive economy, a

profit-maximizing firm will have little or no incentive to

consider these external costs in its internal business

accounting. Absent some legal constraint, the factory will

continue to pollute despite the fact that this result is not

economically optimal for society as a whole. However,

according to standard economic theory, if the firm is

required to pay monetary damages to those adversely

affected by its operations, the firm will be compelled to

internalize the external costs. In that event, the firm will

——

21

continue to operate its polluting factory only if the bene-

fits of operating the factory exceed the total costs, and the

firm’s decision will not only serve the firm’s financial

interest but also maximize total social welfare as well.

According to some, these ideas about cost internaliz-

ation can be transferred directly to the realm of govern-

ment decision-making and used as a justification for

expansive takings liability. The argument starts from the

premise that government “operates with an incentive

structure similar to that of a similarly situated private

enterprise.” Richard A. Posner, Economic Analysis of the

Law 58 (4th ed. 1992). The argument also posits that

government regulatory actions create costs by imposing

economic burdens on certain property owners. Liability

under the Takings Clause, the argument continues, would

“prevent[ ] the government from overusing . . . [its regu-

latory] power.” Id. In just the same way that a polluting

firm’s business decisions will tend to be economically

efficient if the firm internalizes the external costs of its

operations, so too, according to this argument, govern-

ment decisions would be economically efficient if the

government were forced to internalize the costs of its

regulatory activities through takings compensation

awards. See also William A. Fischel & Perry Shapiro,

“Takings, Insurance, and Michelman: Comments on the

Economic Interpretations of ‘Just Compensation’ Law,” 17

]. of Legal Studies 269, 270 (1992) (arguing that expansive

takings liability would serve to “disciplin[e] the power of

the state, which would otherwise overexpand unless

made to pay for the resources that it consumes”).

22

Contrary to this viewpoint, and as a number of

scholars have demonstrated, extensive assessments of

financial liability against the government under the Tak-

ings Clause will not necessarily increase total social wel-

fare. In fact, expansive takings liability could well lead to

net declines in total social welfare.

First, as a threshold matter, government functions

very differently from a private firm and therefore cannot

be expected to internalize “costs” in the same way. At the

most basic level, when the government is sued for a

taking it is not government’s own money that is at stake,

it is the taxpayers’ money. A taking award ultimately

involves a transfer payment from taxpayers to con-

demnees. Because the government’s own money is not at

risk, it is implausible that government would respond to

financial liability in the same fashion as a private firm.

Taxpayer liabilities surely have consequences for

government-decision-makers, but the influence of such

liabilities is largely indeterminate. Unlike shareholders in

a private firm who share a uniform pecuniary interest in

the firm’s affairs, the interests of citizens within a partic-

ular governmental jurisdiction are far more hetero-

geneous. Government officials do not automatically

reflect the interests of their constituents, and in fact the

interests of government officials may diverge signifi-

cantly from those of their constituents. Given the rela-

tively modest stake that most citizens have in the

outcome of most government decisions, constituents face

major obstacles in accurately monitoring their representa-

tives’ actions. For all these reasons, the likely effects of

liability depend upon its visibility, the impact of the

liability on different interest groups, the other issues on

23

the voters’ agendas, and so on. See generally Daryl J.

Levinson, “Making Government Pay: Markets, Politics,

and the Allocation of Constitutional Costs,” 67 U.Chi. L.

Rev. 345, 355-57 (2000).

For example, if a takings judgment were paid in a

low visibility fashion, without any direct repercussions

for the responsible official’s budget or status, the conse-

quences of cost internalization might be modest. On the

other hand, if the judgment required an official to lay off

staff or created a major budget shortfall,5 cost internaliza-

tion could force government officials to err radically in

the direction of avoiding takings liability.

Second, and most importantly for present purposes,

the argument for extensive takings liability based on cost-

internalization suffers from a fatal asymmetry. As dis-

cussed, the cost internalization argument proceeds on the

assumption that the costs of government action have to

be monetized and internalized in order to influence gov-

ernment decision-making. But the benefits of government

action represent the other side of the economic equation.

Government produces a variety of benefits through regu-

lation, from a safe food supply, to non-polluted air and

water, to public safety. If the costs of regulatory programs

have to be internalized through monetary payments, as

the advocates of an expansive reading of the Takings

Clause assert, then the benefits of regulatory programs

would have to be internalized in monetary terms as well

5 See, e.g., Louise K. Ahern, “Novi May Rethink Future,”

The Detroit News (May 23, 2000) (describing how a $27 million

takings judgment against a municipality forced cancellation of

plans to build a new town library).

24

in order to create balanced incentives. Otherwise, the

government calculus would be consistently skewed in

favor of minimizing costs and government decision-mak-

ing would tend to produce inefficient outcomes.

The reality, of course, is that the benefits of govern-

ment regulatory action generally are not internalized by

government. Furthermore, it is difficult as a practical

matter to see how internalization could be accomplished

on a broad scale. Thus, a broad takings liability rule

would inevitably result only in internalization of costs

and would tend to foster government decision-making

that does not maximize total social welfare.

The relevance of this analysis in this case is straight-

forward. One may assume for the sake of argument that

prohibiting development of coastal marshes maximizes

total social welfare in Rhode Island by, among other

things, avoiding harms to economically valuable commer-

cial fisheries and by avoiding pollution that would cause

harm to tourism, real estate, and other businesses. If the

Takings Clause were interpreted to require compensation

in these circumstances, the State would obviously incur a

financial penalty for not issuing a permit allowing

destruction of this environmentally sensitive site. On the

other hand, the State cannot realize the benefits of

restricting development in the same fashion. Thus,

assuming the Rhode Island Coastal Council functioned

like a private firm (a heroic assumption for all the reasons

explained above), the asymmetry inherent in an expan-

sive theory of regulatory takings would encourage the

State to authorize the destruction of coastal wetlands

despite the fact that that decision would not be optimal

from an economic standpoint.

25

One potential response is that the political benefits to

government officials of rejecting a development proposal

may counter-balance the potential chilling effects of tak-

ings liability. In some cases, of course, that may be true.

But if pro-regulatory political forces can exert political

pressure on government officials from one side, it is

equally true that opponents of regulation can exert politi-

cal pressure in the opposite direction. Elected representa-

tives are routinely called upon to weigh the costs and

benefits of different decisions, both in political terms and

in broader social and economic terms.

If anything, property owners are likely to be a better-

organized and more vocal political force than the general

public when it comes to regulatory policies. The

numerous members of the general public that share in the

benefits of regulatory protections are likely to be difficult

to organize into an effective political force. See generally

Mancur Olson, The Logic of Collective Action: Public Goods

and the Theory of Groups (1971 ed.). By contrast, regulated

property owners with relatively large financial stakes in

regulatory policies can generally be organized to exert

effective political pressure with relative ease. Even if they

are outnumbered in political terms or are political out-

siders, property owners have other opportunities and

significant incentives to influence the outcome of political

debates affecting their interests. See Vicki Been, “ ‘Exit’ as

a Constraint on Land Use Exactions: Rethinking the

Unconstitutional Conditions Doctrine,” 91 Colum. L. Rev.

473 (1991). Accordingly, internalization of regulatory

costs while regulatory benefits remain external cannot be

26

justified on the theory that this asymmetry is counter-

balanced by the relative political strength of the benefici-

aries of regulation. The opposite is as likely, if not more

likely, to be true.®

Finally, the government deterrence argument ignores

the significant transaction and other costs of administer-

ing an expansive regulatory takings scheme. Broad gov-

ernment takings liability would greatly complicate and

increase the cost of existing administrative processes,

require significant new investments in calculating

© In San Diego Gas & Electric v. San Diego, 450 U.S. 621, 661 n.

26 (1981), Justice Brennan posed the rhetorical question, “If a

policeman must know Constitution, why not a planner?” This

statement indicates some sympathy for the government-

deterrence rationale. However, Justice Brennan’s remark

appeared in a case alleging that a regulation eliminated the

“entire beneficial use of the property.” Id. at 626. Thus, it cannot

be interpreted as necessarily supportive of compensation for

regulatory takings under a more expansive theory. In addition,

the comparison to a police officer actually tends to support a

narrow reading of the Takings Clause. When a municipality, for

example, is sued for alleged police misconduct, the government

is liable only if the misconduct represents “the government's

policy or custom,” Monell v. Department of Social Services, 436

U.S. 658, 694 (1978). This defense accords municipal officials

significant latitude in carrying out their duties and allows them

to continue to do their jobs effectively. Cf. Scheuer v. Rhodes, 416

U.S. 232, 240 (1974). By contrast, in a takings suit against a

municipality the official “policy or custom” requirement will

provide little protection because there generally will be no

question that the regulatory decision at issue represents

government policy. Thus, in contrast to the example of a

constitutional tort suit based on alleged police misconduct,

judicial interpretation of the Takings Clause has to do all of the

work of preserving government officials’ ability to govern

effectively.

27

compensation amounts, and require new governmental

efforts to increase revenues or to reallocate existing bud-

get resources to meet the compensation requirements,

especially if the full benefits of regulation cannot be

internalized for the reasons stated above. Expansive tak-

ings liability would also exact other costs by requiring the

public to drop or defer other socially beneficial actions

that available public funding could no longer support.

B. Other Efficiency, Rationales.

Aside from the questionable and quite possibly coun-

ter-productive government-deterrence argument for tak-

ings liability, takings advocates have advanced two other

efficiency arguments based on the incentives that com-

pensation would create for individual firms. Neither

argument is persuasive. Furthermore, upon careful anal-

ysis, these arguments suggest that expansive compensa-

tion for regulatory takings could create incentives for

firms to take economically inefficient actions.

The first argument is that the absence of compensa-

tion would cause inefficient under-investment in econom-

ically productive resources. See, e.g., Lawrence Berger, “A

Policy Analysis of the Taking Problem,” 49 New York

Univ. L. Rev. .05, 195-206 (1984). According to this view,

property owners would rationally discount the value of

an investment by the risk of an uncompensated taking

and therefore would invest at a sub-optimal level. This

reduction in investment, the argument proceeds, would

reduce total social welfare.

This argument is not convincing because it ignores

the fact that this reduced investment is not necessarily

sub-optimal and therefore should not necessarily be

28

counted as an efficiency cost. One may reasonably

assume, at a minimum, that many new regulations are

adopted for good and valuable purposes. If owners lack

an incentive to invest in property uses that may in the

future be determined to be sub-optimal, that result is

arguably beneficial.

Furthermore, extensive taxpayer-funded takings

awards would likely lead to overinvestment because they

would cause owners to disregard the risk that govern-

ment regulations might be enacted to shift property to a

higher economic use. Instead of solving an under invest-

ment problem, the availability of compensation would

tend to create what economists call a “moral hazard” of

overinvestment. As stated by Professor Darryl Levinson,

“just as the generous disaster relief for flood victims

encourages over-building on flood plains, and Interna-

tional Monetary Fund bailouts encourage too much bor-

rowing and fiscal irresponsibility by debtor nations, full

indemnification for takings condemnees encourages over-

investment in property.” Daryl J. Levinson, “Making Gov-

ernment Pay: Markets, Politics, and the Allocation of

Constitutional Costs,” 67 U.Chi. L. Rev. 345, 390 (2000).

Another, related argument in favor of extensive tak-

ings liability is that compensation under the Takings

Clause would be analogous to and would serve the same

economically beneficial function as private insurance. See,

e.g., Lawrence Blume & Daniel L. Rubinfeld, “Compensa-

tion for Takings: An Economic Analysis,” 72 California L.

Rev. 569 (1984). According to this view, the insured risk is

the risk that the government may enact a regulation that

would adversely affect a property owner. The insurance

29

payment is the award of compensation from the govern-

ment. According to standard economic analysis, private

insurance promotes economically valuable activity by

allowing risk-averse firms to spread the risks of their

investments. Similarly, according to this argument,

expansive takings compensation should promote eco-

nomically efficient behavior by causing risk-averse inves-

tors to make productive investments they would

otherwise shy away from making. The opportunity to

spread risk created by the availability of compensation

from the government, according to this view, increases

total social welfare.

This theory begs the question why the insurance

cannot be supplied by the private market. Taxpayer-

funded compensation would, in effect, relieve the bene-

ficiaries of the insurance, i.e., owners potentially subject

to regulation, of the obligation to pay for it and would

transfer the burden of paying for the insurance to tax-

payers generally, many of whom would not logically

participate in this kind of insurance program voluntarily.

Compelling non-property owners to subsidize an insur-

ance program for property owners would undoubtedly

effect an arbitrary and regressive wealth transfer to

owners. Furthermore, it is doubtful that an across-the-

board compensation scheme makes economic sense.

Insurance provides economic benefits when it is made

available to risk-averse investors, but not all investors are

risk averse and some investors, particularly large corpo-

rations, are capable of minimizing the impact of risk by

acquiring a portfolio of investments. See generally Daniel

A. Farber, “Public Choice and Just Compensation,” 9

Const. Comment 279 (1992).

30

In sum, neither of these alternative efficiency argu-

ments for an expansive theory of regulatory takings is

persuasive.

°

CONCLUSION

For the foregoing reasons, the Court should affirm

the judgment of the Rhode Island Supreme Court.

Respectfully submitted,

Joun D. EcHEVERRIA

ENVIRONMENTAL Pouicy Project

GEORGETOWN UNrversiry Law CENTER

600 New Jersey Avenue, N.W.

Washington, D.C. 20001

(202) 662-9850

Counsel of Record for Amici Curiae

January 3, 2001

App. 1

APPENDIX

BRIEF BIOGRAPHIES OF AMICI

Daniel W. Bromley is Anderson-Bascom Professor of

Applied Economics at the University of Wisconsin-Mad-

ison. His research and teaching concern the legal founda-

tions of a market economy. He has published extensively

on legal-economic institutions, including: Environment

and Economy: Property Rights and Public Policy (Oxford:

Basil Blackwell, 1991); Economic Interests and Institu-

tions: The Conceptual Foundations of Public Policy

(Oxford: Basil Blackwell, 1989); and “Constitutional Polit-

ical Economy: Property Claims in a Dynamic World,” 15

Contemporary Economic Policy 43 (1997).

David E. Ervin is Research Professor, Environmental

Sciences and Resources, at Portland State University. Pre-

viously, he was Professor of Agricultural Economics at

the University of Missouri-Columbia and Professor and

Head of Agricultural and Resource Economics at Oregon

State University. He is the lead author of Land Use Con-

trol: Evaluating Economic and Political Effects (Ballinger,

1977) and has written numerous journal articles on land

use management. He has received several awards for

research and was selected for a sabbatical leave at Cam-

bridge University, UK in a University of Missouri compe-

tition. Dr. Ervin consults regularly on environmental

issues with the Organization for Economic Cooperation

and Development.

Barry Goodwin is a professor in the Department of

Agricultural and Resource Economics at North Carolina

State University. He specializes in the economic analysis

of policy. Prior to joining the faculty of North Carolina

App. 2

State University, he was on the faculty of Kansas State

University. Professor Goodwin has published widely on

domestic agricultural policy, trade issues, and the influ-

ence of risk on investment decision-making.

Ray Huffaker is a professor in the Department of

Agricultural Economics and an adjunct professor in the

Department of Natural Resource Sciences at Washington

State University. He is a joint-degree graduate in law and

agricultural economics from the University of California,

Davis. His special areas of focus include natural resource

economics, law, and policy. Professor Huffaker has writ-

ten extensively on a wide range of topics, with a special

emphasis on water resource management issues.

C. Ford Runge is Distinguished McKnight University

Professor of Applied Economics and Law at the Univer-

sity of Minnesota, where he also holds appointments in

the Hubert H. Humphrey Institute of Public Affairs and

the Department of Forest Resources. He received his

Ph.D. in agricultural economics:at the University of Wis-

consin, his M.A. in economics as a Rhodes Scholar at

Oxford University, and his B.A. at North Carolina-Chapel

Hill. He has served on the staff on the House Committee

on Agriculture and as a fellow of the American Associa-

tion for the Advancement of Science. He also served as

Chairman of the Governor’s Farm Crisis Commission in

his home state of Minnesota. He is the author of four

books and numerous articles concentrating on trade, agri-

culture and natural resources policy.