Amicus Curiae Brief — Lingle v. Chevron USA Inc.

"eK ED—

esc

No. 04-163 JAN ? ~ 2005

I “Dine a OPE OF Te el HK}

IN THE —

Supreme Court of the United States

LINDA LINGLE, GOVERNOR OF THE STATE OF

HAWAII, ef al..

Petitioners.

Vv.

CHEVRON USA, INC..,

Respondent.

On Writ Of Certiorari

To The United States Court Of Appeals

For The Ninth Circuit

BRIEF OF THE CATO INSTITUTE

AS AMICUS CURTAE IN SUPPORT OF RESPONDENT

MARK K. MOLLER RICHARD A. EPSTEIN

THE CATO INSTITUTE Counsel of Record

1000 Massachusetts Ave.. 1111 E. 60th Street

N.W. Chicago, IL 60637

Washington. D.C. 20001 (773) 702-9563

(202) 218-4600

Counsel for Amicus Curiae

_—_—_————_c_———

.

WiLSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHING'ON,D C 20001

re

QUESTIONS PRESENTED

1. Whether 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 diminishes the

economic value or usefulness of any property.

2. Whether a court, in determining under the Just

Compensation Clause whether state economic legislation

substantially advances a legitimate state interest, should

apply a deferential standard of review equivalent to that

traditionally applied to economic legislation under the Due

Process and Equal Protection Clauses, or may instead

substitute its judgment for that of the legislature by

determining de novo, by a preponderance of the evidence at

trial, whether the legislation will be effective in achieving its

goals.

TABLE OF CONTENTS

— Page

SD cncincscssssnesnssnsscnsceescensscescecees ill

INTEREST OF AMICUS CURITAE. ...........c.scccsseseseeseesseees l

ee I

IEEE TY GEREEEEDEEEEEDSE ccscccccseccccsccseseccsecccoveccssccees 4

a Tae 5

l THE CHOICE BETWEEN THE

TAKINGS AND DUE _ PROCESS

CLAUSES DOES NOT AFFECT

ea 5

Il. UNDER ANY AVAILABLE

STANDARD, HAWAII'S ~~ RENT

CONTROL SCHEME REPRESENTS A

PARADIGMATIC VIOLATION OF

THES TARINGS CLAUSE. .........ccs.cccccssccesscesseee 11

A. Hawaii's Act 257 Fails Even The

Deferential Takings Analysis

Applied In The “Rate Cases”. ..............0000 11

B. Act 257 Violates The Principle That

Public Burdens Must Be Borne By

The Public As A Whole, Making

Heightened Scrutiny Appropriate. ................ 15

C. Hawaii's Act 257 Constitutes A Per

Se Violation Of The Takings Clause

Because It Effects A “Physical”

Ee 20

ET 29

(iii)

Vv

TABLE OF AUTHORITIES

CASES Page(s)

Agins v. City of Tiburon, 447 U.S. 255

(UD D acsnevenssesnssenmmninnennnaiemnemmnmatnieiiee 7

Armstrong v. United States, 364 U.S. 40

FE pc cncnsssssenmescessnnmnanenisiiemantainmpemetianeineass 15

Barron v. Mayor of Baltimore, 32 U.S. 243

GUI cxsnenssnsenremsnnsnnasenntnincesetnmencnentiedetstennenimeaee 10

Block v. Hirsh, 256 U.S. 135 (1921) oo... ccceceeseeeeeeeees 27

Blue Shield of Va. v. McCready, 457 U.S.

ER CF rccsenrensnsisnnessimmnnignsteneenenitemeemnaniainenits 5,8

Brunswick v. Pueblo Bowl-O-Mat, 429 U.S.

kg TET 8

Chevron USA, Inc. v. Cayetano, 198 F.

Supp. 2d 1182 (D. Haw. 2002)................0cccsccscssesssces 4

Chevron USA, Inc. v. Lingle, 363 F.3d 846

Ee 2,4, 19

Chicago, Burlington & Quincy RR. Co. v.

Chicago, 166 U.S. 226 (1897).........ccccccseeceeeeeees 10, 11

Duquesne Light Co. v. Barasch, 488 U.S.

Fe 11,12,13

Eastern Enters. v. Apfel, 524 U.S. 498

ee an 9,10, 11

FCC v. Beach Communications, 508 U.S.

re 12

Federal Power Comm'n v. Hope Natural

Gas Co., S20 US. Dt (IDSA) q...cccececcccccsessccscesses 8, 12

Fertilizing Co. v. Hyde Park, 97 U.S. 659

ee 7

—<— =

Vv

Fitzgerald v. Chrysler Corp., 116 F.3d 225

EERIE, GEE encciennnetaieeiatentstneapniaiinaiecinieeaiaeamailiiad 29

Hall v. City of Santa Barbara, 833 F.2d

ee ee 17

Hawaii Housing Auth. v. Midkiff, 467 U.S.

Be acccricenecanniiamiiaetaialiteietiilinaliasiiaiadinaieeinaieaiial 6

Jersey Central Power & Light Co. v. FERC,

810 F.2d 1168 (D.C. Cir. 1987)....................000....000. 13

Kaiser Aetna v. United States, 444 U.S. 164

UITTTTT cesiellienienictisiainanieeattiiataribiin a indeieiaeamimanatmumeaiil 21, 24, 25

Lochner v. New York, 198 U.S. 45 (1905) ...cscccssesssveseees 9

Loretto v. Teleprompter Manhattan CATV

Can, Ga Gas Ga Cee cee 24

Lucas v. South Carolina Coastal Comm’ n,

Ey HIT cchortnrmnnninnsnnmaimmiiiaieineiaiial 7

Matsushita Electric Indus. Co., Ltd. v.

Zenith Radio Corp., 475 U.S. 574 (1986) .............00+- 2

Penn Central Transportation Co. v. New

York City, 438 U.S. 104 (1978) ...........ccccccseeeeceeeseees 21

Pennell v. City of San Jose, 485 U.S. 1

IIT erinierittientaniectemresienceeniacetineniciatacliasiiaitaieasiniiaiiasieal 17, 18

Permian Basin Area Rate Cases, 390 U.S.

eS . Ki nmnreme eee 13

Preseault v. Interstate Commerce Comm'n,

853 F.2d 145 (2d Cir. 1988) (“Preseault

iittala aaah diedeeaeactateaaasial ad aiaiaiaitieiae 25

Preseault v. Interstate Commerce Comm’ n,

494 U.S. 1 (1990) (“Preseault I9’) .........cccccccceeeeeeeee 26

Preseault v. United States, 100 F.3d 1525

(Fed. Cir. 1996) (“Preseault liT’”’).......... 21, 25, 26, 27

vi

Railroad Retirement Bd. v. Alton R. Co., 295

a SOE COOP cnvenessmtantermmnmsieensinennietiinemenenenensl 9

Smyth v. Ames, 171 U.S. 361 (1898)..........cccccceccrrresseseees 8

United States v. Aluminum Co. of Am., 148

Be Oe Se Gs CED emccnceionemmenenmnen 28

United States v. General Dynamics Corp.,

SE es UU icinieesisinninenntniiniiaaienebiicsiiidsonniinmesinneed 14

United States v. Grinnell Corp., 384 U.S.

563 (1966)... pendessoccescoune ennmmmmunmmsimens tS

Usery v. Turner-Elkhorn m Mining C Co., 428

| OS Ree ae 9

Village of Euclid v. Ambler Realty Co., 272

es ee ED ccrnittntininsinsctiiassiitiiinntciienmnninnaia 7, 15, 16

Yee v. City of Escondido, 503 U.S. 519

Ge ee ccnnensasnnsistinnistniaiaimininmanecnnnencintiion 15, 16

CONSTITUTIONAL PROVISIONS

a ns MII, censinsttinintsctticcntennictninnninissittiiainimnnanis 23

CODES AND STATUTES

ee as Ob Gee OED cnmncinscnicnnenterecessenienitonnnintnnmniusianeds 25

ee ts Ne Oe Pie ciisncnicnnccnsitvictininiinininpiniiiititisiiaatiin 16

Cal. Civ. Code § 798.73.............0+. — eennnnseenntemenes 16

Se re Ge ie Bene i iarcrinnrsttennsccninninccisiecentenninn 16

Coal Industry Retiree Health Benefit Act of

i 9

Rivers and Harbors Appropriation Act of

FS eg | ee 24

OTHER AUTHORITIES

SR CD Gre cxincnrtnccecccreppenncdnsiiniastitediiinnisttimimatedtl passim

vii

Brief of Cato Institute as Amicus Curiae in

Support of Petitioners, Kelo v. City of

Cg eee

Lord Bramwell, Laissez Faire (1884) .........ccccccccccsseeeeeeees

Milton Friedman & George Stigler, Roofs or

Ceilings, the Current Housing Problem,

in Rent Control: Myths and Realities

Cojo) 8 8

Richard A. Epstein, Rent Control and the

Theory of Efficient Regulation, 54

Brooklyn L. Rev. 741 (1988) ...scprvessssssssesssssseeeessee |

Robert Nozick, Anarchy, State and Utopia

Ge ei icnitcenccnsensssensnsnmmecmnsevssememavenininanssnssemeenmnanenises

William Fischel, Regulatory Takings: Law,

Economics, and Politics (Cambridge

7

BRIEF OF THE CATO INSTITUTE

AS AMICUS CURIAE IN SUPPORT OF RESPONDENT _

INTEREST OF AMICUS CURIAE'

The Cato Institute was established in 1977 as a non-

partisan public policy research foundation dedicated to

advancing tine principles of individual liberty, free markets,

and limited government. Cato’s Center for Constitutional

Studies was established in 1989 to help restore the principles

of limited constitutional government, especially the

proposition that the U.S. Constitution establishes a

government of delegated, enumerated, and thus limited

powers. Toward that end, the Institute and the Center

undertake a wide range of publications and programs,

including, notably, the annual Cato Supreme Court Review.

Counsel of Record for this brief is Professor Richard A.

Epstein, a leading constitutional law scholar. The instant

case raises squarely the question of the limits on state

governments’ power under the Takings Clause and is thus of

interest to the Cato Institute and its Center for Constitutional

Studies.

STATEMENT

1. Hawaii Act 257 (“Act 257” or “the Act”) establishes

an elaborate rent control scheme applicable to oil and gas

companies (“landlords”) that lease gas stations to in-state

independent dealers (“tenants”). The Act stipulates that a

landlord may charge its tenants a rent that exceeds the sum of

(1) 15 percent of the tenant’s gasoline profit and (2) 15 aii

percent of the tenant’s gross profits on any products other

than gasoline. Pet. App. 2-3.

Pursuant to this Court’s Rule 37.3(a), letters of consent from all

parties to the filing of this brief have been submitted to the Clerk.

Pursuant to this Court’s Rule 37.6, amicus states that this brief was not

authored in whole or in part by counsel for any party, and that no person

or entity other than amicus or its counsel made a monetary contribution to

the preparation or submission of this brief.

eS

2

2. The Act also interferes with the landlord’s right of

possession. Ordinarily, of course, the right of possession

permanently reverts to the landlord at the expiration of a

lease’s term. The Act, however, bars landlords from

converting a leased gas station, run by a tenant dealer, into a

company-run gas station when an existing lease expires. Pet.

App. 2. It also requires lease renewal terms to be

“construed” to grant incumbent tenants a three-year term, as

of the operative date of the statute. Pet. App. 3. Finally, it

bars the landlord from opening a company-run gas station

within a given geographic proximity to the existing, rent-

controlled tenant-run gas station. Pet. App. 3. As a result,

the Act entrenches incumbent tenants, who are more difficult

to remove from the landlord's distribution system.

3. The Act reduces landlords’ flexibility to price their

goods and services. For example, respondent Chevron

(“respondent™ or “Chevron”) decided to change its general

leasing formula, not only in Hawaii but throughout the

United States, in order to increase financial returns (a

unilateral price change legal under the antitrust laws so long

as Chevron does not act in concert with its rivals.)’ See

Chevron USA, Inc. v. Lingle, 363 F.3d 846, 848 (9th Cir.

2004). Act 257’s rent control provisions, however,

effectively prevent such increases and/or block future rent

increases in excess of those allowable under the statute.”

- The Act grants a limited exception, in cases where the tenant either

has abandoned the property or the lease is not properly renewed, only if

the landlord is not able to immediately replace the tenant with a new local

independent dealer. Pet. App. 2-3. The exception lasts “until a [new]

dealer may be tound” and is capped at 24 months. Pet. App. 2-3.

* Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S.

574, 588 (1986).

* To be sure, the Hawaii statute does allow for some additional rent

increases, which are tied to the increase in the level of ground rents. Pet.

App. 3. But it makes no provision whatsoever for rent increases

attributable to, say, enhanced demand for gas brought about by

3

4. Under the Act, a tenant leasing an oil company’s

property is not required to pass any savings it receives under

the statute to customers; gas station consumers can be

charged the same prices for gasoline and for other goods and

services that they were charged before the passage of the Act.

Nor does the Act impose restrictions on the prices that the

incumbent tenant is able to charge when assigning its

leasehold interest to a third-party (“sub-tenant’). As a result

the tenant can “lease-out” the landlord’s property to sub-

tenants for the same price the landlord could have charged in

Act 257 had not been passed.

5. The Act is not justified by reference to any existing

anticompetitive harm stemming from the structure of the oil

market. Instead, petitioners justify the Act based on the risk

of future “economic harm” that might occur if the “wholesale

market . . . were to become concentrated in the hands of the

few oil companies serving the islands.” Pet. Br. 4 (emphasis

added). See also id. at9 & n4. That risk is wholly

hypothetical, as it has not materialized in the many decades

in which gasoline has been sold in Hawaii.

6. Act 257 effectively transfers the wealth of the

landlord, an out-of-state company, to independent in-state

tenants, who are local citizens and voters. So long as these

tenants remain in possession, they benefit from the rent

reductions that Act 257 mandates. When the tenants, in turn,

assign their property to sub-tenants, the statute permits them

to charge a premium equal to the present discounted value of

the statutory savings under the Act. Put another way, the

sub-tenant pays the same amount for the sub-lease that it

would pay if the rent control statute were not in effect, but a

portion of this payment (the “premium”’) goes to the tenant,

rather than to the landlord. Viewed from a purely financial

perspective, consumers are made neither better nor worse off

population growth. As explained in Part II, such “demand-side” increases

are taken by the statute from the landlord and given to the present tenant

in possession of the property.

4

by Act 257, which merely shifts wealth from landlords to

incumbent tenants.

7. Respondent challenged the statute under the Takings

Clause, alleging that the rent control provisions take

Chevron’s property without just compensation. The district

court and the Ninth Circuit ruled in respondent’s favor.

Chevron USA, Inc. v. Cayetano, 198 F. Supp. 2d 1182 (D.

Haw. 2002), aff d Chevron v. Lingle, 363 F.3d 846 (9th Cir.

2004). On appeal, petitioners contend that the choice

between the Due Process Clause and Takings Clause should

affect the standard of review brought to bear. The Due

Process Clause is said by petitioners to require an extremely

deferential standard of scrutiny.

SUMMARY OF ARGUMENT

The question put to this Court is straightforward: Does

Act 257 serve any conceivable public interest? The answer is

equally clear: Its sole effect is to confiscate a landlord’s

property rights for the benefit of in-state tenants. The

economic analysis is both simple, and stark: The Act

extinguishes the landlord’s right to raise the rent on current

tenants. He therefore cannot capitalize on appreciation of

leasehold property. Existing tenants, by contrast, are granted

the power to sublease the landlord’s property to a third party,

and may do so free from any rent restrictions. As a result,

the tenant is given the power to profit from the rising value of

the landlord’s property. This is confiscation, pure and

simple.

This statute cannot be justified as a land use restriction,

because it does not change the use of the property. Nor is it

plausibly justified as a remedy for monopoiy behavior, since

Hawaii makes no showing that the gas companies violated

antitrust laws. Indeed, Hawaii concedes that the Act will not

lower prices currently charged consumers, the traditional

goal of antitrust policy. See, e.g., Pet. Br. 9 n.4 (the States

“did not contend . . . that Act 257 would have the effect of

reducing current prices”; rather, the goal of the Act is to

prevent a potential price increase that might occur sometime

5

in the future).” From whatever angle this statute is analyzed,

the same conclusion follows: Act 257 accomplishes a naked

transfer of wealth to a discrete class of preferred local

residents who are entrenched not only in their leasehold

interests but, so far as it appears, in their jobs as well. This

entrenchment makes this statute far more intrusive than the

ordinary rent control law. In short, it lacks any sensible

public justification. Whether its decision is analyzed under

the Due Process Clause or the Takings Clause, the court of

appeals should be affirmed.

ARGUMENT

I. THE CHOICE BETWEEN THE TAKINGS

AND DUE PROCESS CLAUSES DOES NOT

CHANGE ANALYSIS.

Both the decision below and petitioners’ briefs before

this Court expend pages arguing that the Due Process Clause

and the Takings Clauses compel different results on the facts

of this case. That debate, however, is wholly irrelevant to the

outcome here. To see why, it is useful to review the array of

harmful private conduct that the state may combat through its

police powers. That inquiry throws the constitutional flaws

of Act 257 into sharp relief, no matter the avenue of analysis

invoked, by underscoring that petitioners have not identified

a public purpose that justifies the Act’s interference with

Chevron’s property interests.

1. As an initial matter, in dealing with human events, it

is generally safe to assume that most individuals understand

their own interests, and thus should be free to act in whatever

fashion they see fit. Nonetheless, that presumption, whether

applied to one’s person or property, has never been absolute,

even in the eyes of the most ardent advocates of laissez faire

principles. See Lord Bramwell, Laissez Faire 8 (1884) (“All

: Compare Blue Shield of Va. v. McCready, 457 U.S. 465, 475 n.11

(1982) (antitrust policy designed to deter “tangible,” rather than

“speculative,” economic harm).

6

that the advocates of laissez faire demand, is that freedom of

contract shall not be interfered with without good reason.”).

As a result, the vast majority of debates over the propriety of

regulatory intervention inevitably collapse into debates about

the state's burden of justification.

It is clear that some scrutiny of state purposes is

constitutionally necessary: This is a clear implication of the

text of the Takings Clause, which contains an explicit set of

substantive requirements: “Nor shall private property be

taken for public use without just compensation.” U.S. Const.

amend. V. The first question posed by the Clause is whether

dispossession of property serves a “public use.” That

restraint prevents the state taking property from A and giving

it to B, and forces courts to closely consider whether a taking

truly serves a general public interest.

Here, the “public” purpose putatively advanced is the

control of oligopoly. See Hawaii Housing Auth. v. Midkiff,

467 U.S. 229 (1984) (suggesting that the control of

oligopoly—the very interest asserted by Hawaii in this

case—may justify transfer of property from landlords to

sitting tenants). In our view, this allegation, and indeed all

assertions of public use, deserves scrutiny. See Brief of Cato

Institute as Amicus Curiae in Support of Petitioners, Kelo v.

City of New London, No. 04-108. Rent control systems

necessarily interfere with the landlord’s power over his

premises. It is therefore fair to require a showing that some

real public interest is advanced in fact by the state’s

constructive transfer of property interests from the landlord

to the tenant.

2. The absence of any public interest at issue in this

case, whether scrutinized under the Due Process or Takings

Clause, is underscored by reference to state police powers.

Consider, first, the least controversial class of abuses that

may be addressed by the police power: nuisances. Everyone

(even those who adopt the most aggressive interpretation of

due process and takings law) concedes that the state, as an

agent of the public at large, may confront and control

7

common law nuisances. See, e.g., Fertilizing Co. v. Hyde

Park, 97 U.S. 659 (1878); Lucas v. South Carolina Coastal

Comm'n, 505 U.S. 1003, 1023-30 (1992) (discussing

nuisance limitations). Moreover, the degree of state power

should be large enough to deal with the full range of

incompatible uses that often arise between neighbors. To be

sure, imposition of zoning restrictions to accomplish the

same end is controversial. But in these cases, too, courts

have generally sustained zoning regulations pursuant to this

Court’s decision in Village of Euclid v. Ambler Realty Co..,

272 U.S. 365 (1926).° Nuisance is not at issue here, because

this case does not raise issues about the nature of the land use

in question. The gasoline stations at issue will be put to the

same uses no matter whether Act 257 survives or is struck

down.’ Any deferential standard appropriate to nuisance or

land use regulations is therefore inapplicable.

The second class of potential abuses that may be

addressed by a state’s police power is monopoly pricing.

The danger here is that any person possessed of exclusive

power to sell a given commodity will charge an

anticompetitive price, generating resource misallocations. A

system of rate regulation is often adopted by states under

these circumstances to prevent that misallocation. Even so,

Agins, which states chat a regulation must “substantially advance|] a

legitimate state interest,” was a land use decision, and the Agins test is,

like Euclid’s, just such a deferential standard of review. See, e.g., Agins

v. City of Tiburon, 447 U.S. 255, 261 (1980) (upholding a five-acre

minimum lot requirement, based on state’s asserted desire to prevent the

“ills of urbanization”). In our view, however, Agins went far beyond the

anti-nuisance rationales that form the appropriate bases for state

intervention, because it failed to show that, on average, the lot

requirement worked to the reciprocal advantage of neighbors.

’ For, example, height restrictions raise externality problems that are

not found in any rent control statute, including Act 257. See Richard A.

Epstein, Rent Control and the Theory of Efficient Regulation, 54

Brooklyn L. Rev. 741, 747 & n.9 (1988).

8

courts have recognized a need for constitutional intervention

to prevent state officials from pushing the rates so low that

the regulated monopolist will not be able to recover its initial

capital investment plus a reasonable rate of return. There are

many different ways in which to calculate the rate base and

the associated rate of return. Contrast Smyth v. Ames, 171

U.S. 361 (1898) (rate base consists of property used or usable

in the business), with Federal Power Comm'n v. Hope

Natural Gas, 320 U.S. 591 (1944) (rate base equal to capital

invested), But no matter which test is used, these “rate

cases” always call for some stricter standard of scrutiny than

the land use cases. They involve simple financial

transactions, in which there is no need to balance neighboring

property interests. The only state interest is guaranteeing

access to, and preventing the mis-pricing of, essential

services supplied by a natural monopolist. In this case,

however, petitioners have not even shown the existence of

monopoly power, much less its abuse. They have made no

showing of any present competitive harm, nor a violation of

antitrust laws. Act 257 is merely designed to prevent the

speculative risk of a hypothesized concentration of retail

market power by oil companies sometime in the future. See

Pet. App. 4 (asserting aim of the Act is to prevent the future

“economic harm” that “would occur if the retail market were

to become concentrated”) (emphasis added)."

* Compare McCready, 457 U.S. at 475 n.11 (antitrust designed to

combat “tangible,” rather than “abstract” or “speculative,” conceptions of

economic harm). Given that the statute expressly protects local

distributors from competition with company-owned stations (see, é.g.,

Pet. App. 3 (limiting company power to open stations in proximity to

leased stations)), Hawaii's putative interest in competition rings

particularly hollow. See, e.g., Brunswick v. Pueblo Bowl-O-Mat, 429

U.S. 477, 488 (1977) (rejecting claims of small competitors premised on

putative injury that resulted from acquisitions of competitor, because

antitrust laws were enacted for “the protection of competition, not

competitors’) (emphasis added).

9

A third possible state regulatory interest is remedying

danger or hardship to workers. The petitioners constantly

refer to this Court's decision in Lochner v. New York, 198

U.S. 45 (1905), as the fountain of all evils. In fact, the

Lochner Cov considered whether a maximum hours statute

was within {ne legislative power of a state, an interest in no

way impliccted here. Nor does this case involve the claims

of retirees who have suffered reversals in the financial

market as the result of retroactive changes to a state-funded

retirement plan. See, e.g., Railroad Retirement Bd. v. Alton

R. Co., 295 U.S. 330 (1935) (striking down retroactive

federal regulation of state pension plans, and holding such

regulation is within the police power of the states).” Like

nuisance laws and monopoly pricing, this is not an interest

implicated by Act 257.

3. Unable to identify a concrete public purpose at stake,

petitioners advocate a switch to due process scrutiny, which

they claim permits extreme deference to any state ends that

might be articulated in the course of litigation. See, e.g., Pet.

Br. 37, 38 & n.13. They seize on Justice Kennedy's partial

dissent in Eastern Enters. v. Apfel, 524 U.S. 498 (1998)

(scrutinizing retroactive regulation of state pension plans), to

justify this analytical switch. See, e.g., Pet. Br. 30. Eastern

Enterprises struck down portions of the Coal Industry

Retiree Health Benefit Act of 1992 (“Coal Act”), 26 U.S.C.

§§ 9701-22, which retroactively imposed a tax on coal

operators to fund pensions for former employees. 524 U.S.

at 510-11. Four justices voted to strike down the Coal Act

based on the Takings Clause. /d. at 529. However, Justice

Kennedy reasoned that the tax in question did not attach to

any discrete piece of property, making due process analysis

more appropriate. /d. at 547 (Kennedy, J., dissenting in part).

It is this divergent analysis that petitioners claim dooms the

takings standard applied below. Pet. Br. 30.

* Alton was subsequently limited in Usery v. Turner-Elkhorn Mining

Co., 428 U.S. 1 (1976) (allowing retroactive impositions for the support

of a black lung disease compensation program for retired coal miners).

10

Petitioners’ reliance on Eastern as a fount for

distinguishing the substance of “takings” and “due process”

scrutiny is misguided. It is useful to compare the due process

analysis in Eastern to the line of cases going back to the first

Justice Harlan’s decision in Chicago, Burlington & Quincy

R.R. Co. v. Chicago, 166 U.S. 226 (1897). Chicago Railroad

involved the condemnation of railroad property for which a

jury awarded only nominal compensation. In attacking that

judgment, Justice Harlan did not rely on the Takings Clause,

which at that time had not been applied to the state (Barron

v. Mayor of Baltimore, 32 U.S. 243, 247 (1833)), but on the

Due Process Clause. As he said:

In our Opinion, a judgment of a state court, even if

it be authorized by statute, whereby private

property is taken for the State or under its direction

for public use, without compensation made or

secured to the owner, is, upon principle and

authority, wanting in the due process of law

required by the Fourteenth Amendment of the

Constitution of the United States.

Id. at 241. Justice Harlan’s opinion mirrors the substance of

takings analysis and illustrates that a choice between the Due

Process and Takings Clauses should not compel different

conclusions. Compare Eastern Enters., 524 U.S. at 542

(Kennedy. J.. dissenting in part) (holding, in the course of

striking down the Coal Act under the Due Process Clause,

that “the burden imposed by the Coal Act may be just as

great if the Government had appropriated one of Eastern’s

plants”). ""

The constant effort to distinguish the various types of

interests and claims furthered by different clauses of the

This should have been a common sense implication of Eastern, even

without reference to Justice Harlan’s opinion in Chicago Railroad, given

that the four-vote plurality and Justice Kennedy came out the same way

in that case: against the federal regulation at issue.

Constitution creates an endless proliferation of unnecessary

interpretive problems. The simple truth is that whether

analyzed under the Due Process or the Takings Clause, the

analysis is the same, and the constellation of relevant state

interests that ground analysis are the same. At a minimum,

petitioners’ failure to identify any legitimate “public”

interest—whether nuisance or abuse of monopoly power—

dooms their case. See, e.g., Chicago Railroad, 166 U.S. at

241; compare Eastern Enters., 524 U.S. at 549-50 (Kennedy,

J., dissenting in part) (due process inquiry, applied to

retroactive legislation, requires inquiry into “purposes” of

legislature, including whether legislation promotes “general

welfare”).

Il. UNDER ANY AVAILABLE STANDARD,

HAWAIVS RENT CONTROL SCHEME

REPRESENTS A PARADIGMATIC

VIOLATION OF THE TAKINGS CLAUSE.

A. Hawaii’s Act 257 Fails Even The Deferential

Takings Analysis Applied In The “Rate

Cases.”

In their plea for deference to Act 257, the petitioners

make no reference to any ratemaking decision of this Court,

even though the Act in practice imposes a form of

ratemaking. These cases are instructive here, for, in the

context of challenges to utility rates, this Court has long

recognized that the Takings Clause requires scrutiny not only

of the purpose of a rate regulation but aiso of ratemaking

methodology. Duquesne Light Co. v. Barasch, 488 U.S. 299,

314 (1989). Review of the rate cases underscores two points:

(1) that the exceedingly deferential “rationality” test

proposed by petitioners is not the universal norm for

“complex” regulatory questions; and (2) that petitioners fail

even the relatively forgiving standard applied in the complex

rate-setting context.

1. Hawaii boldly proclaims that Act 257 must be upheld

“{e]ven if the legislature has not articulated a rationale for

[the] law.” Pet. Br. 38 n.15. Indeed, says Hawaii, “if ‘any

12

state of facts either known or which could reasonably be

assumed affords support for i," the Act must stand. /d. at

1S. See also id. at 39 n.15 (Because we never require a

legislature to articulate its reasons for enacting a statute, it is

entirely irrelevant for constitutional purposes whether the

conceived reason . . . actually motivated the legislature.””)

(quoting FCC v. Beach Communications, 508 U.S. 307, 315

(1993)).

This test suffers in comparison to the deference afforded

“complex” regulatory decision par excellence: rate-orders

set by utility commissions. In Duquesne Light Co. vy.

Barasch, supra, the Court considered whether a state

commission acted properly by refusing to add certain nuclear

power plant expenditures, determined to be wasteful, to the

rate base. The commission sought, and received, deference.

lts argument was two-fold. First, it highlighted its use of a

detailed method for valuation of the utility. Second, in

response to complaints that its rate-setting methodology

involved a number of disputed adjustments, the commission

relied on this Court's statement in Federal Power Comm'n v.

Hope Natural Gas Co., 320 U.S. 591 (1944), which stressed

that a court must look at the effect of the rate on the utility’s

bottom line. /d. at 602.

In Duquesne, this Court agreed that some deference to

the commission was appropriate. It underscored, for

example. that, when the commission applies its rate

methodology. individual errors of calculation do not rise to a

constitutional dimension:

The economic judgments required in rate

proceedings . . . do not admit of a single correct

result. The Constitution is not designed to

arbitrate these economic niceties. Errors to the

detriment of one party may well be canceled out

by countervailing errors or allowances in another

part of the rate proceeding.

488 U.S. at 314. ht did not, however, abdicate scrutiny of the

rate-order, as Hawaii implicitly advocates. First, the Court

13

underscored the importance of an administrative record (id.

at 310-11 (noting that whether a rate order is just depends “to

some extent on” evaluation of the “risks under a particular

rate-setting system, and on the amount of capital which the

investors are entitled to earn”)). Second, the Court

scrutinized the return as a percentage of the utility's equity

and rate base. /d. at 311. Third, the Court took care to stress

that more than one adjustment had been made to the rate. /d.

at 314 (“Inconsistencies in one aspect of the methodology

have no constitutional effect on the utility's property if they

are compensated by countervailing factors in some other

aspect.”) (emphasis added). The rationale for the last

qualification is akin to economic “portfolio theory”: It is

more reasonable to assume that errors in a_ particular

adjustment are harmless when they may be “balanced out” by

other adjustments.

The Court also underscored that judicial oversight, at a

minimum, is necessary to ensure that a rate commission does

not “arbitrarily” “require[] investors to bear the risk of bad

investments at some times while denying them the benefit of

good investments at others.” /d. at 315 (suggesting such an

approach would raise “serious constitutional concerns”).

Implicit in this proviso is that “deference” does not excuse a

legislature’s conclusory, or boilerplate, justification for a

rate-change: As the Court itself emphasized, either the

commission or the state legislature must have “performed”

the requisite “work” necessary to “equitably reconcille]” the

relevant regulatory «.terests at stake before deference is

appropriate. /d. at 314. See also Permian Basin Area Rate

Cases, 390 U.S. 747, 792 (1968) (“Judicial review . . . will

function accurately and efficaciously only if the Commission

indicates fully and carefully the methods by which, and the

purposes for which, it has chosen to act, as well as its

assessment of the consequences of its orders for the character

.. . of the industry”); Jersey Central Power & Light Co. v.

FERC, 810 F.2d 1168, 1177 (D.C. Cir. 1987) (emphasizing

“the necessity for Commission findings, the existence of

which is a necessary predicate to judicial deference”).

14

2. Applied to this case, Duquesne would require, at a

minimum, a showing far greater than Hawaii has made to

date. It would, for example, require a legislative record that

evidences Hawaii's consideration of the valuation of

Chevron’s leasehold property, its capitalization, and its

anticipated rates of return under Act 257. The Hawaii

legislature, of course, made no such showing. Compare Pet.

App. |-2 (legislative findings). It would also require a

showing that multiple adjustments could “balance out.” But,

here, only one adjustment was made: The rents were capped.

There is no basis for a kindly presumption that this single

blunt adjustment, if ill-considered, will harmlessly be

“balanced” away.

Nor, for that matter, has Hawaii demonstrated that it

deliberated about the need for the cap, as Duquesne

implicitly requires. The Hawaii legislature, for example,

adduces only barebones’ incantations of market

“concentration.” Pet. App. 1. That boilerplate is not

accompanied by any concrete factual findings of the sort that

even the most elementary notions of procedural due process

would require. The minimalist findings of Act 257, for

example, offer no concrete evidence that Chevron’s putative

market share is tantamount to monopoly power. Compare

United States v. Grinnell Corp., 384 U.S. 563 (1966). Nor

does the legislative record offer evidence that the Hawaii

legislature considered any of the relevant indicators of

market concentration under federal or state law: including

barriers to entry, price elasticity, and other factors relevant to

definition of the product and/or geographic markets. See,

e.g., United States v. General Dynamics Corp., 415 U.S. 486

(1974) (discussing evidentiary requirements to show

improper market concentration under Section 7 of the

Clayton Act). Indeed, in an ever-shifting attempt to supply

post-hoc justifications for the Act, petitioners now suggest

the Act merely prevents future economic harm that might

occur “if the retail market, like the wholesale market, were to

become concentrated.” Pet. Br. 4 (emphasis added).

1S

The vacuous and shifting nature of the findings offered

in support of Act 257 isn’t surprising: After all, it is unlikely

that a legislature has done the “work” necessary to reach a

fair result if, as Hawaii says, the Takings Clause does not

require a legislature to “articulate[{] a rationale” (Pet. Br. 38

n.15) for regulatory intervention in the first place. Duquesne

underscores that, at a minimum, some record of meaningful

deliberation must exist if Hawaii is to qualify for deference.

Lacking such a record, Act 257 fails even the deferential

review owed rate commissions.

B. Act 257 Violates The Principle That Public

Burdens Must Be Borne By The Public As A

Whole, Making Heightened Scrutiny

Appropriate.

While Hawaii fails the deferential standard articulated in

Duquesne, rational basis should not be considered a ceiling

on scrutiny of Act 257. Utilities are natural monopolies; as

such, they are subject to public oversight, presumptively in

the public interest, even if that oversight is prone to error. By

contrast, rent control statutes carry a special risk: they may

disguise a naked wealth transfer, one that is not in the public

interest but rather in the interest of a narrow voting bloc.

That risk, in turn, goes to the heart of the takings principle,

which holds that “public burdens” must be borne by “the

public as a whole.” Armstrong v. United States, 364 U.S. 40,

49 (1960). It is, in short, a risk that justifies enhanced

scrutiny and, as the Ninth Circuit rightly determined, just

compensation.

The risk that rent-control regulation will disguise naked,

rent-seeking wealth transfers is amply illustrated by Yee v.

City of Escondido, 503 U.3. 519 (1992)."' In Yee, the Court

was presented with the “unusual” economic relationship (id.

at 526) at the heart of the mobile home industry. Most

' Petitioners in Yee did not raise, and the Court did not consider, the

question whether the regulation violated the regulatory taking line of

cases.

16

“mobile home” owners do not hold title to the land on which

their homes are located; rather, they rent land for their homes

(“mobile home pads”) in so-called mobile home parks. /d. at

523. The lease carries a risk of exploitation by the landlord

because, once a home is situated on a “pad,” the cost of

moving it is high relative to its value. /d. It is, in other

words, immobile. Because the renter must typically sell or

abandon the unit upon moving, relocation typically results in

a forced sale to the park owner, the only plausible buyer.

The landiord is therefore situated to acquire the lessee’s

property at a cut-rate price.

The risk of exploitation might, in theory, be countered

by the terms of the initial lease, which could specify a price

formula when the mobile home owner wants to sell. Indeed,

courts might sensibly imply a default rule that reaches this

result where the lease agreement is silent. In Yee, however,

the City of Escondido, took more drastic measures. It passed

two complementary ordinances putatively designed to protect

the renters.’ These ordinances, however, were highly

objectionable because in practice they accomplished a

thorough-going, if disguised, expropriation of the

landowners’ proprietary interests. They extended the

duration of the tenant’s estate by limiting the landowners’

power to evict. See, e.g., Cal. Civ. Code § 798.73. They

allowed the tenant to transfer the leasehold interest to a buyer

that he alone could select. /d. §§ 798.72, 798.74. The

landlord, in turn, was relegated to receiving a fixed rate of

return stipulated by the legislature. 503 U.S. at 524. His

'? ‘The first, the Mobilehome Residency Law (Cal. Civ. Code §§ 798-

799.51 (West 1982 & Supp. 1992)), limited the grounds on which the

renter’s lease could be terminated. Crucially, the law prohibited the

landowner from restricting the ability of the renter to sublease his

property during the life of the rental agreement. Yee, 503 U.S. at 524.

The second ordinance was a local proposition, Proposition K, which

imposed a tight rent control regime and permitted increase only with the

approval of Escondido City Council. /d. at 524-25.

17

position was converted, in effect, from that of an owner to

that of a creditor—at least if the market rose. If the value

went down, the landlord continued to bear the loss.

Moreover, the tenant was entitled to se// his interest in the

property for a price. And, in turn, he received payment from

the incoming tenant that equaled, in discounted present value,

the same amount that the landlord would have received if the

ordinance had never been passed. /d. at 527. In this

situation, Judge Kozinski, assessing parallel mobile home

regulations in Sania Barbara, said “it would be difficuit to

say that the ordinance does not transfer an interest in the

[landowners’] land to others.” Hall v. City of Santa Barbara,

833 F.2d 1270, 1277 (9th Cir. 1986).

This Escondido mobile home ordinance was not only

confiscatory: It was also the undistilled product of raw

political pandering. As William Fischel has demonstrated,

mobile home-owners in Escondido were conservative, white

Republicans, who went to the polls in droves, easily

swamping the feeble opposition of park owners. They

lobbied the city council heavily for the proposed regulations.

And in a Republican locality, their clout carried the day. See,

e.g., William Fischel, Regulatory Takings: Law, Economics,

and Politics 324 (Cambridge 1995) (discussing the political

landscape in Yee). In effect, the renters had, under the

disguise of “rent control,” dispossessed the landowners

through pure majoritarian muscle-flexing.

The disguised wealth transfer that took place in Yee and

Hall is not an isolated problem: It is an inherent by-product

of the political economy of rent control. Rent control

ordinances permit wealth transfer from landlords to lessees to

be achieved “off budget,” immunizing the transfer from

normal democratic oversight. In Pennell v. City of San Jose,

485 U.S. | (1988), for example, the City of San Jose imposed

special limits on the power of landlords to raise the rent of

“hardship tenants” (described as tenants making less than

$32,400 a year). /d. at 23 n. (Scalia, J., dissenting). As

Justice Scalia’s dissent pointedly noted, that subsidy to

leaseholders would have been unlikely to gain political

18

support if it had not been packaged as “rent-control.” It was

clear that the local citizens were not prepared to pay a rent

supplement to these hardship tenants out of their own

pockets. /d. at 22-23 (Scalia, J., dissenting) (noting it was

just not in the cards to think that “citizens of San Jose would

allow funds in the municipal treasury, from wherever

derived, to be distributed to a family of four with income as

high as $32,400 a year”).

Together, Yee and Justice Scalia’s dissection of the

political economy of rent control raise cause for concern

here. An out-of-state landlord, Chevron, has been forced to

submit to a price control scheme that resembles the corrupt

bargain at the heart of Yee. Chevron must acquiesce to

tenants’ possession of its property at a controlled price. The

incumbent tenants are in turn granted the chance to contract

with sub-tenants without the same rent restrictions, thereby

recouping the premium Chevron has been denied. Indeed, in

several respects, the scheme is worse than that analyzed in

Yee, since it restricts Chevron’s ability to take permanent

possession of its property at the expiration of a lease (the

necessary result of both the mandated “three year term”

imposed on existing leases and the parallel prohibition on

landlords’ conversion of leased gas stations into company-

run gas stations.) Pet. App. 2-3. Because this necessarily

limits Chevron’s ability to displace under-performing

tenants, it amounts to a compulsory entrenchment of local

labor, in which service arrangements with local distributors

are effectively forced on a disfavored competitor. Making

matters even worse, the asserted problem addressed by this

regulation (the risk of future anticompetitive conduct

resulting from oil companies’ vertical integration in the retail

market) is both unproven and, indeed, wholly speculative.

The reality on the ground is simple, and troubling: A mere

incantation of unproven “concentrated” market power among

the landlord oil companies papers over the utter lack of

record evidence that might assure accountability and protect

against political pandering.

19

To be sure, there are some differences between the rent-

seeking schemes described above and Act 257. Chief among

them is that the landlord in Yee and Hall had no opportunity

to recoup the losses imposed by the rent regulations. That is

not true in this case because the landlords might recoup some

of their lost rentals by charging higher prices for the goods

and services (such as gas) that they sell to their tenants. As

the Ninth Circuit noted, 363 F.3d at 855-57, the district court

resolved a battle of two economic experis (John Umbeck, for

Chevron, and Keith Leffler, for the state) over the economic

consequences of the statute. Professor Umbeck took the

position that the decrease in the rents would lead the

landlords to increase the price of other products, which

would be passed on to consumers. /d. at 856-57. Professor

Leffler took the position that the prices to consumers would

be lowered in virtue of the fact that the statute maintained an

independent set of dealers. /d. at 857.

We regard this economic debate as largely inconclusive

and wholly beside the point. First, we think it inconceivable

that any restriction on the ability of the landlords to raise

their rents would cause a wholesale price increase that would

not have occurred otherwise. If the landlord oil companies

had freedom to alter their prices, they would have done so

prior to the Act’s passage; otherwise, by leaving money on

the table they would not have acted as profit maximizers.

Professor Umbeck’s testimony therefore is not credible. But

neither is Professor Leffler’s, because, in his desire to show

that consumers will benefit from this situation, he ignores the

obvious fact that the chief beneficiaries of (and chief

lobbyists for) Act 257 are the incumbent tenants (the dealers)

who will continue to charge what the market will bear. He

does not explain, moreover, why entrenching these dealers in

their current position will help consumers; to the contrary,

the opposite inference seems the logical one, since

entrenchment reduces the ability of Chevron to replace

inefficient dealers with company-managed dealers. In the

end, the record suggests, strongly, that the Act introduces a

gratuitous set of complications for no apparent public

20

purpose. It allows the local dealers to hide behind the

ostensible interests of the consumers for whose welfare they

are supremely indifferent.

If, contrary to the dictates of economic theory, the aid

given to the tenants somehow advances the public interest, it

should be treated like a public function and discharged from

general revenues, not inflicted upon landlords sub rosa. Rent

control, after all, is expensive, and public financing would

force those who impose the system to bear its costs. We

might then get an honest revelation of the intensity of public

preferences. In other words, application of the just

compensation principle here would facilitate political

deliberation and make transparent the benefits and costs of

government regulation. If this increased transparency and

political accountability reduces the frequency and extent of a

subsidy—that should count as a benefit, and not a

disadvantage, of judicial review.

C. Hawaii’s Act 257 Constitutes A Per Se

Violation Of The Takings Clause Because It

Effects A “Physical” Taking.

While we think that the analysis offered by the court of

appeals was correct in its result, it is nonetheless defective

for a very fundamental reason. It does not examine how the

distinction between “regulatory” and “physical” takings plays

out in the context of rent control. Examined closely, it is

apparent that this distinction, applied to rent control regimes,

is unsound: Rent control is a paradigmatic physical taking

and must be analyzed as such.

1. The “regulatory’/“physical” distinction, applied to

rent-control, is untenable. A statute that compels transfer of

the possession and the use of the landlord’s property to the

tenant is plainly a physical taking of a property interest in

both an ordinary, and legal, sense of the term “taking”; only

precious rhetorical slight-of-hand allows otherwise.'?

Indeed, as a preliminary matter, all “sticks” within the “bundle” of

property rights should be treated as having equa! dignity. Nonetheless,

21

Under ordinary leases, the property reverts to the

landlord at the end of term. However, most rent control

statutes, including Act 257, prevent that from happening and

thus exclude the landlord from possession. See, e.g., Pet.

App. 3 (providing that “renewal” of all existing francishes

“shall not be scheduled more frequently than once every

three years”); id. at 2-3 (barring landlord from converting

rented, tenant-operated gas stations into company held,

company-operated property at the expiration of the term).

Just that result was viewed as a physical taking in the case of

the holder of a reversionary interest in a determinable fee

simple, see Preseault v. United States, 100 F.3d 1525, 1540

(Fed. Cir. 1996) (discussed infra). There is no reason why

the reversionary interest of a term of years at issue here

should be treated in a different fashion.

Indeed, the conception of property as a bundle of rights

in a discrete thing, familiar to all students of the common law

of property, is wholly disregarded in the rent-control context.

To see why, consider the constituent protected interests of a

fee simple absolute. A lease, like a life estate and a

mortgage, is one of the limited estates that can be carved out

of a fee simple. It is an ordinary property interest—in fact,

one of the older estates in land. The lease differs from the

fee simple in that it is always created by grant or devise, and

never acquired by initial or adverse possession. The

leasehold interest is therefore born of the contract and

conveyance that gives shape to its terms.

For most leases, differences in contract rights are

significant. For example, the contract will specify duration,

renewal options, assignability, and the duties on each side.

In a world without rent control, the parties regulate some of

these questions by express agreement; others are regulated by

for our pu7poses here, we shall assume that any restriction on the use of

property is subject to a lower level of scrutiny than a system in which the

owner of property is required to forfeit his right to exclude. Contrast

Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978), with

Kaiser Aetna v. United States, 444 U.S. 164 (1979).

22

the set of default provisions created by law. The rent, like

the price in a contract of sale, is one term that is almost

always set by agreement, without which an executory

contract for a future lease is too indefinite to be enforced.

Rent control statutes typically operate to take part of the

landlord’s interest in his reversion and transfer it to the

tenant. In the typical case, they do so by compelling the

landlord, usually in the context of a lease renewal, to convey

an additional term of years for the benefit of the tenant, at a

price determined by the state (typically though a specific

administrative board or housing court established for the

purpose.) That renewed term of years is an interest in

property, whether definite or indefinite, just like the original

lease. Its transfer deprives the landlord of the immediate

right to possession that was reserved in the original

conveyance. It is surely a transfer from landlord to tenant.

Thus, there is a “taking of private property” in the sense of its

physical occupation, both for the student of ordinary English

and the expert in law. The tenant sits: the landlord, as noted,

cannot remove him. He is reduced in status, in effect, to a

leasehold creditor of property—even though legally he still

owns that property.

In response, it may be said that rent control statutes

differ from the ordinary taking of property because the state

does not retain possession but directs by ordinance that the

tenant use it for his own enjoyment. This distinction,

however, is spurious; indeed, it renders the state scheme

additionally suspect. As noted earlier, the public use

limitation prevents taking property from A and giving it to B.

Rent control, by contrast, operates as a constructive re-

conveyance of the property from the state to the tenant in

possession. This constructive reconveyance, in turn, makes

the confiscation more politically palatable since a statute

providing for naked transfer of possession could not of

course be passed. In effect, the rent control statute employs

arid legal formalism as a wedge for evasion of the political

checks that the Takings Clause is designed to promote.

23

Here, the property interests at stake in Hawaii's

challenged ordinance are indistinguishable from those in the

ordinary rent control scheme described above. The statute

compels the landlord oi' company to agree to a three year

term for renewal and, in the context of renewal, prescribes

the price of the rent. See Pet. App. 3. It permits the tenants

to sublet without a corresponding price restraint. /d. at 4.

Finally, it bars the landlord from converting a tenant-run

station into a company-run station, limiting (if not

extinguishing) the landlord’s power to take possession at the

end of the lease, and in many cases effectively forcing him to

deal with existing tenants. His reversionary interest

(consisting of his ability to re-possess at the end of the agreed

term and to capitalize on his lease agreement during the term)

is partially extinguished. The expropriation of that interest is

even more explicit under Act 257 than in the typical rent-

control statute, because the Act, by permitting unrestricted

sub-leasing, gives the tenant a statutory interest that

corresponds to the extra money that the landlord, as the

holder of the reversionary interest, would have earned absent

his dispossession.'*

In short, Act 257, like any ordinary rent-control scheme,

confiscates the landlord’s reversionary interests. It is a

“taking” of “property” (U.S. Const. amend. V), pure and

simple.

2. The distinction between “physical” occupation and

“regulatory” takings, applied to rent control, is not only

'4 For this reason, many rent-control statutes ban sub-letting. See, e.g.,

Robert Nozick, Anarchy, State and Utopia 270-71 (1974) (“So why do

people find the subletting-allowed scheme unacceptable? Its defect is

that it makes explicit the partial expropriation of the owner. Why should

the renter of the apartment get the extra money upon the apartment's

being sublet, rather than the owner of the building? It is easer to ignore

the question of why he should get the subsidy given him by the rent-

control law, rather than this value’s going to the owner of the building.”).

24

analytically difficult to sustain; it has eroded outside the

realm of rent-control. The first point of departure is Loretto

v. Teleprompter Manhattan CATV Corp., 458 U.S. 419

(1982). In that case, the petitioner invoked the Takings

Clause to bar the New York City government from installing

telecommunication wires and switchboxes on his property

without his consent. /d. at 423. The invasion was trivial in

the extreme; it hardly constituted a complete “occupation” of

the property. Even so the Supreme Court held that a

permanent physical invasion had been effectuated and that

the city therefore had to compensate the property owner. /d.

at 438.

Rent control is far more invasive, since every rent

control statute effectuates a forced and complete occupation

of the landlord’s premises by an unwanted tenant. Consider,

for example, Section 3(a) of Act 257; it provides that an oil

company cannot convert a rent-controlled dealer station into

a company-run station. Pet. App. 2. That condition—the

limitation on the landlord's ability to take possession of his

property—forces the landlord to permit tenants to occupy the

property against the landlord’s will. That “physical

invasion” is orders of magnitude more severe than the de

minimis invasion struck down in Loretto.

The second point of departure is Kaiser Aetna v. United

States, 444 U.S. 164 (1979), where the Court recognized that

the Takings Clause requires compensation when the state

displaces (1) the landlord’s present right to control entry to

his property and (2) the landlord’s right to future use. /d. at

178. In Kaiser, owners of a Hawaii fishing pond sought

compensation after the Army Corps of Engineers attempted

to limit their ability to develop the pond as a private marina.

The Corp argued that the pond, linked to navigable water by

a small channel, was subject to the Rivers and Harbors

Appropriation Act of 1899, 33 U.S.C. § 403, which regulates

navigable water within U.S. territory and mandates that the

owner allow public entry to the waterway. Kaiser Aetna, 444

U.S. at 168. The Court upheld federal power to regulate

navigation within the pond, since it was connected to a

25

navigable waterway under federal control. /d. at 179. But it

nonetheless held that “the Government must condemn and

pay [compensation] before it takes over the management of

the landowner’s property.” /d.

Kaiser illustrates that the government compromises the

rights of exclusive possession even when the only thing it

does is allow third parties to enter the property of the

landlord. /d. (restrictions resulted in “actual physical

invasion” by third parties). Here, the decision to allow the

independent dealers to remain in possession amounts to the

government's reconveying the taken reversionary interest to

the sitting tenant. Accordingly, it raises serious public use

problems. Yet, even if that taking is sustained under Midkiff,

full compensation, i.e. the fair market value of the property,

is required after the regulation is in place.

Finally, in Preseault v. United States, 100 F.3d 1525

(Fed. Cir. 1996) (“Preseault lil’), the Federal Circuit, relying

in part on the express direction of this Court, forthrightly

recognized that a reversionary interest in a determinable fee

‘is a property right that may be physically taken, for which

just compensation is required. Preseault involved railroad

rights-of-way: turn-of-the century forced easements that had

been imposed by the government during the development of

rail transportation. See Preseault v. Interstate Commerce

Comm'n, 853 F.2d 145, 147 (2d Cir. 1988) (“Preseault I’).

These easements expired when railroad use was abandoned;

in many cases they reverted to adjacent landowners under the

relevant state common law of property. /d. To defeat such

reversions, and preserve railroad rights-of-way for future use,

Congress passed an act that (1) converted these easements

into “biking and hiking trails” and (2) purported to preempt

state property law to the extent it provided for the easements

to revert to adjacent owners. /d. (citing 16 U.S.C. § 1247(d)

(1983)).

Petitioners, who lived next to one of the expired rights-

of-way, filed a takings challenge to enforce their reversionary

rights under Vermont property law. In the first wave of

26

litigation, the case was appealed to this Court, which

remanded for further determination of Vermont law. See

Preseault v. Interstate Commerce Comm'n, 494 U.S. 1, 16

(1990) (“Preseault IT’). In the course of its opinion,

however, the Court acknowledged that the reversionary

interest may constitute a property right protected under the

Takings Clause. See id. at 16 (suggesting that “some rail-to-

trail conversions will amount to takings’). Justice O’Connor,

concurring, put the matter emphatically: “Although the

[government's] actions may pre-empt the operation and

effect of certain state laws, those actions do not displace state

law as the traditional source of the real property interests. . . .

Any other conclusion would .. . pre-empt the rights

guaranteed by state property law, a result incompatible with

the Fifth Amendment.” /d. at 22 (O'Connor, J., concurring).

After further proceedings, the Federal Circuit, sitting en

banc, ruled in favor of the property owners. First, said the

court, the property owners’ reversionary interest is

“uniformly treated at common law as a vested estate in fee”

(Preseault 111, 100 F.3d at 1534). Second, the taking was

“physical” because it ousted the owner of his reversionary

right to possession and transferred that interest to the current

possessor, the government. /d. at 1538 (terming the case one

of “physical occupation”). Third, that physical invasion must

be accompanied by compensation: “[I]f the Preseaults have

interests under state property law that have traditionally been

recognized and protected from governmental expropriation,

and if, over their objection, the Government chooses to

occupy or otherwise acquire those interests, the Fifth

Amendment compels compensation.” /d. at 1550.

The Federal Circuit, notably, rejected the government's

argument that state property rights must be interpreted

against the background “expectation” of regulatory

interference, as the “regulatory taking” line of cases would

require. To the contrary, ruled the court:

[A] physical occupation of one’s property by the

Government, that is, a taking of a recognized

27

property interest, invokes a general expectation of

compensation. The Government’s reading

reverses the sentences, standing the law on its

head. They read it to say that an owner’s

subjective expectations of keeping or losing her

property under various possible [regulatory]

scenarios define for that owner the extent of her

title. Just the reverse is true. It is the law-created

right to own private property, recognized and

enforced by the Constitution, legislation, and

common law, that gives the owner an historically

rooted expectation of compensation.

Id. at 1540 (emphasis added).

As Loretto, Kaiser Aetna, and Preseault underscore, it is

time to put the distinction between “regulatory” rent-control

and “physical” interference with vested property interests to

rest. Attempts to ignore the obvious vested property interests

at stake in rent control regimes are labored and

unconvincing; they sit uneasily with the physical takings

cases; and they are inconsistent with the baseline common

law rights articulated by the states. The distinction is a

doctrinal dead-end. '°

3. Finally, Hawaii should not escape the legal

implication of its physical taking by claiming that rent

payments are themselves a form of “just compensation.”

'S ht is also, incidentally, an anomalous artifact of the “emergency”

World War I-era rent control system, when the federa. government, to

address the “sudden influx of people to Washington caused by the needs

of Government and the war,” imposed rent control to avoid “congestion”

in Washington, D.C. Block v. Hirsh, 256 U.S. 135, 157 (1921). Those

controls were hastily upheld based not only on an immature takings law

but on a poor understanding of the economics of rent regulation. Cf.

Milton Friedman & George Stigler, Roofs or Ceilings, the Current

Housing Problem, in Rent Control: Myths and Realities 87 (The Fraser

Inst. ed. 1981) (discussing the flawed economic reasoning underpinning

World War II-era rent control statutes).

28

This should be obvious: Every rent control statute has only

one raison d'etre—to ensure that the landlord’s rent is kept

below the fair market rental value of the property. While

Hawaii insists its rent control formula is sound, it does so on

the assumption that all the appreciation in the value of the

property is fair game for the state. Indeed, on its deferential

view, the rental rollback need not be limited by this, or any

other, formula. As a result, its constant harping on the

importance of deference invites the state to cut rents more

and more—so long as Chevron has enough money to pay for

its ground lease. The more prudent that Chevron is in its

own affairs, the earlier it acquired its property, and the more

financially sound its operations, then the greater its

vulnerability to political manipulation if the state has its

way.'°

The just compensation requirement has bite only if this

Court requires measurement of the difference between the

market value of the rental prior to, and after, regulation.

Thus, the “just compensation” inquiry asks this pointed

question: has the landlord been supplied with an equivalent

in value to the lost property interesi, se that he or she is

indifferent between retaining the leasehold interest and the

substitute compensation? In other words, if the state evicted

A from a $100,000 house, it could not satisfy its

constitutional obligation merely by paying A $60,000 in

exchange; it would still owe $40,000 for the dispossession.

Similarly, Hawaii cannot survive scrutiny when it forces oil

companies to accept lower rents than the going market rates.

Indeed, the state’s improper delegation to tenants of its own

duty to compensate imposes an additional risk—the lessee’s

insolvency—on the landlord, on top _f the reduction of his

property value. Rent control statutes, quite bluntly, never

provide just compensation to the landlord.

"<6 ompare United States v. Aluminum Co. of Am., 148 F.2d 416, 430

(2d Cir. 1945) (“The successful competitor, having been urged to

compete, must not be turned upon when he wins.”) (Hand, J.).

29

The irony here is that, in the long run, the system of

regulated rents enacted by Hawaii works against the asserted

interest of the statutory scheme: the prevention of the (as yet

unproven) risk of future vertical integration by large out-of-

state leaseholding corporations. If Act 257 is upheld, one

out-of-state landlord—Chevron—who has agreed to allow

tenants in possession now faces the risk (1) that its tenants

cannot be evicted at the end of the lease, and (2) that its

tenants, while in possession, will pay a rent equal to a

fraction of the property’s market value. The fate of Chevron

may well convince other out-of-state corporations that

maintain a similar system of independent franchisees to

invest in Hawaii only through vertically integrated systems

(if they invest at all). If so, the Act may well increase the

concentrated power of out-of-state corporations at the

expense of local residents'’-—rendering, perversely, Hawaii's

flagrant violation of constitutional norms as quixotic as it is

illegal.

CONCLUSION

Once the correct framework is understood, this case is

easy, whether brought under the Due Process or the Takings

Clause. The restrictions on rent unquestionably harm the oil

companies on whom they are imposed. That harm demands

either justification or compensation. Of justification there is

~ fione, for this case involves neither physical externalities

between neighbors nor an abuse of monopoly power. The

most the state can say is that it has decided to confiscate

property today in the off chance that it might protect against

some imagined form of abuse tomorrow. That premature

interaction could be invoked in any conceivable case; it does

not offer a sufficient public reason to deny the oil companies

'” Cf. Fitzgerald v. Chrysler Corp., 116 F.3d 225, 228 (7th Cir. 1997)

(Posner, J.) (noting that if the RICO “enterprise” requirement were

interpreted in a way that exposed corporations to greater liability when

using a system of independent distributors, RICO would perversely

encourage vertical integration).

30

compensation for the property interests that have been

forcibly taken from them.

For the foregoing reasons, the decision of the U.S. Court

of Appeals for the Ninth Circuit should be affirmed.

Respectfully submitted.

MARK K. MOLLER RICHARD A. L.PSTEIN

THE CATO INSTITUTE Counsel of Record

1000 Massachusetts Ave., 1111 E. 60th Street

N.W. Chicago, IL 60637

Washington, D.C. 20001 (773) 702-9563

(202) 218-4600

Counsel for Amicus Curiae

January 2005.