Practical Insights

Posted: April 17, 2020 / Categories Client Q & A, Civil Rights, COVID-19

Do State Shut-Down Orders Effect A Taking For Which The State Must Pay Just Compensation?

By Elizabeth Wolstein

Governors across the country have issued executive orders mandating the closure of businesses they deem non-essential in an effort to slow the spread of COVID-19. Slowing the spread of COVID-19, in turn, benefits all the state’s residents. Thus, the owner of the closed business is made to sacrifice the use of his or her property for the good of the general public. Has the state thereby effected a taking under the Fifth and Fourteenth Amendments for which it must compensate the business owner?

There are good arguments for getting to yes. Because the orders would be characterized to effect an alleged regulatory (rather than physical) taking, a fact-intensive, multi-factor analysis applies. While public health and safety justifications would be given substantial weight by the courts, the unprecedented nature of the crisis and sweeping closure orders leave room to develop arguments that the orders effect a taking by barring a select group of property owners from using their property for the good of everyone in the state.

The Takings Clause

The Fifth Amendment’s Takings Clause, made applicable to the states through the Fourteenth Amendment, states: "nor shall private property be taken for public use, without just compensation." "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." Ark. Game & Fish Comm’n v. United States, 568 U.S. 23, 31 (2012) (internal quotation marks omitted).

Framework For Analyzing Regulatory Takings

The U.S. Supreme Court has long recognized that a taking may be effected not only by the government’s physical occupation or appropriation of private property, but also by regulation that "'goes too far.'" Tahoe-Sierra Pres. Council v. Tahoe Reg'l Planning Agency, 535 U.S. 302, 326 (2002) (quoting Justice Holmes' opinion in Penn. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922)). Since the COVID-19 shut-down orders do not involve the states in physically occupying or appropriating property, the question of whether the orders effect a taking is analyzed under the Court's regulatory takings jurisprudence.

Regulatory takings, in turn, come in two varieties. First, there are categorical takings such as "where regulation denies all economically beneficial or productive use of land." Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1015 (1992). The Court has cautioned that this kind of regulatory taking is likely to be "rare," id. at 1018, because it requires a complete and permanent elimination of value. See also Tahoe Sierra Pres. Council, 535 U.S. at 332 ("Lucas was carved out for the 'extraordinary case' in which a regulation permanently deprives property of all value."). Enactments that fall outside this limited category are analyzed under the fact-specific standard established in Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1978), a case that arose from New York City's denial of a permit to build an office tower above Grand Central Terminal based on the train station's designation as a historic landmark.

While there is no "'set formula' for evaluating regulatory takings claims," Penn Central is understood to have identified "several factors that have particular significance," namely "'the economic impact of the regulation on the claimant;'" "'the extent to which the regulation has interfered with distinct investment-backed expectations;'" and "the 'character of the governmental action--for instance whether it amounts to a physical invasion or instead merely affects property interests through 'some public program adjusting the benefits and burdens of economic life to promote the common good.'" Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 538-39 (2005) (quoting Penn Central, additional internal quotations omitted). (Applying this analysis the Penn Central Court rejected the plaintiffs' contention that a taking resulted from application of the New York City landmarks law to forbid the building of the office tower, see 438 U.S. at 138.).

Business owners shut down by COVID-19 closure orders will have strong arguments on the first two Penn Central factors, given the severe economic impact and lack of foreseeability of the global pandemic. Courts, however, can be expected to give significant weight to the public health and safety justifications for the closure orders in examining the character of the government's action (third factor), potentially tilting the Penn Central analysis in the government's favor. See, e.g., Nat'l Amusements, Inc. v. Borough of Palmyra, 716 F.3d 57, 63 (3d Cir. 2013) (no taking in temporary closure of flea market to allow for identification of unexploded munitions under parking lot due to safety threat of munitions); Rose Acre Farms, Inc. v. United States, 559 F.3d 1260, 1283 (Fed. Cir. 2009) (no taking in USDA regulation barring sale of eggs from salmonella-infected chickens that prohibited plaintiff from selling eggs from certain facilities for 25 months even if chickens were not infected; "potential for physical harm to the public is significant," as "infected eggs could have caused serious illness and possibly even death"); Brakke v. Iowa Dep't of Natural Resources, 897 N.W.2d 522 , 526, 550 (Iowa 2017) (no taking in emergency state agency order mandating quarantine of hunting preserve "for five years after whitetail deer harvested on the property tested positive for chronic wasting disease;" although order rendered land unusable as hunting preserve, purpose of order was "to protect wildlife in Iowa from a potentially contagious disease").

Nonetheless, the court's objective in weighing the Penn Central factors is to determine whether "it is unfair to force the property owner to bear the cost of the regulatory action." Rose Acre Farms, Inc. v. United States, 559 F.3d at 1282. The unprecedented nature of the COVID-19 crisis and breadth of the individual closure orders leave room for novel arguments. Should the states' differential treatment of businesses deemed essential versus non-essential be a factor in the analysis? Should public health missteps that arguably gave rise to the need for sweeping action--such as a lack of testing and initial advice against wearing masks--be a factor? Can the court look behind the public health and safety justification to ask whether similar safety effects could have been achieved through a more narrowly tailored order that would have been less devastating to the property owner? Does the absence of traditional scientific evidence underlying the closure orders diminish the public health justification? We should hope that any court hearing a COVID-19 takings claim takes to heart the Supreme Court's repeated reminders that the analysis requires "essentially ad hoc, factual inquiries" that are "designed to allow careful examination and weighing of all the relevant circumstances." Tahoe-Sierra Pres. Council, 535 322 (internal quotation marks omitted).

Who Can Bring A Takings Claim?

The Takings Clause itself defines who may bring a claim: the remedy extends only to persons possessing "property" that has been taken. The plaintiff must point to an existing property interest as the subject of the taking, one rooted in "existing rules or understandings that stem from an independent source such as state law." Phillips v. Wash. Legal Found., 524 U.S. 156, 164 (1998) (internal quotation marks omitted). All manner of real property interests qualify, as do interests in personal property. See, e.g., Horne v. Dep't of Agric., 135 S. Ct. 2419, 2426 (2015) ("The Government has a categorical duty to pay just compensation when it takes your car, just as when it takes your home."). Contracts and intangible property rights can also be the subject of a takings claim. See, e.g., Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1003 (1984).

While "valid contracts are property" for purposes of the Takings Clause, Lynch v. United States, 292 U.S. 571, 579 (1934), the appropriation must be direct to qualify as a taking. Thus, for example, if the government requisitions all the steel produced by a steel manufacturer, the buyer who had a contract to buy some of the steel has had "the subject matter" of its contract taken, but has not suffered a taking of its contract. Rather, the government takes a contract when it makes "an 'acquisition of the [contractual] obligation or the right to enforce it'" so as to put itself in the shoes of the contracting party--i.e., when the government steps in to assume the contract. Palmyra Pac. Seafoods, L.L.C. v. United States, 561 F.3d 1361, 1365-66 (Fed. Cir. 2009) (quoting Omnia Commercial Co. v. United States, 261 U.S. 502, 511 (1923)). The more usual case--when the government's "regulatory activity renders [ ] contract rights valueless"--is not considered a taking. Huntleigh USA Corp. v. United States, 525 F.3d 1370, 1379 (Fed. Cir. 2008); see also American Economy Ins. Co. v State of New York, 30 N.Y.3d 136, 155-56 (2017) (diminution in value of insurance companies' contracts with insured as result of amendment to Workers Compensation law not a taking because value of contracts was not "vested property interest"). Thus, although state closure orders are impacting all manner of contracts, the orders are unlikely to be deemed to effect a taking since they do not divert performance of the contracts to the state. The plaintiff most likely to succeed in challenging a closure order will be one who can point to a real or personal property interest as the subject of the claim.

Procedural Considerations

Finally, any would-be takings plaintiff must consider whether to bring the action in federal or state court. A takings claim may be brought in federal district court pursuant to 42 U.S.C. § 1983. See, e.g., Knick v. Twp. of Scott, 139 S. Ct. 2162, 2168 (2019). This would be an individual capacity claim for damages against the state officer who caused the harm, presumably whoever issued the closure order as well as any official that has enforced the order against the plaintiff.

The statute of limitations for a claim under section 1983 is supplied by state law; in New York the limitations period is three years, for example, while in New Jersey it is two years. The claim would not be mooted, or remedied, by the lifting of the closure order. That is because temporary takings are compensable, and if the state’s order effects a taking, compensation is constitutionally required for the period of the taking. See First English Evangelical Lutheran Church v. County of Los Angeles, 482 U.S. 304, 321 (1987) ("[W]here the government's activities have already worked a taking of all use of property, no subsequent action by the government can relieve it of the duty to provide compensation for the period during which the taking was effective."); see also Knick v. Twp. of Scott, 139 S. Ct. at 2175 ("a property owner acquires a constitutional right to compensation at the time of the taking").

As an alternative to federal court, the property owner may bring an inverse condemnation claim in state court contending that the state effected a taking without providing just compensation. Inverse condemnation claims are grounded in the Takings Clause "as a result of the self-executing character of the constitutional provision with respect to compensation," First English Evangelical Lutheran Church, 482 U.S. at 315 (internal quotation marks omitted), though state procedural requirements will of course vary.

A major benefit of suing under section 1983 is that a prevailing plaintiff may recover attorneys' fees under 42 U.S.C. § 1988. The downside is that the defendant official will have not only his defense on the merits--as would the state on an inverse condemnation clam--but also the additional defense of qualified immunity. Qualified immunity provides state officials with immunity from lawsuits where their conduct "does not violate clearly established statutory or constitutional rights of which a reasonable person would have known." Kisela v. Hughes, 138 S. Ct. 1148, 1152 (2018). In other words, if the governor is not committing an obvious violation of takings law in ordering the business closures, he or she will likely be entitled to qualified immunity. Qualified immunity is a powerful doctrine for the state official, so much so that it would be worthwhile for anyone considering bringing a takings claim to seriously consider the inverse condemnation route.