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4.3  US jurisprudence

Initial US jurisprudence on takings,[27] focused on whether government action affected the existing contract between citizens and the government under the constitutional provisions prohibiting “ex post facto” laws or laws interfering with existing contracts, both seen as impairing vested rights (see Table 2). This jurisprudence began with the concepts that rights that had vested in individuals under pre-existing positive law could not be removed.[28] This, however, was a juridical dead-end as it ultimately prohibited any new government action (Brauneis, 1996).

The alternative approach adopted was to appeal to the Due Process clause (see Table 2), with a focus on determining solely whether there was a need to prevent injury to the community, in which case action could be justified in terms of the “police power. This approach concluded that laws that aimed at protecting an ideal boundary between owner and community rights were acceptable (Brauneis, 1996).

In this substantive rights or police power tradition, there is no need for compensation when the ideal boundary is being protected as no taking occurs by definition, while if it is not, so that the property use being stopped does not injure the community, then the law is ultra vires and compensation is irrelevant (Brauneis, 1996).

Table 2 - US constitutional provisions relevant to takings
Ex Post Facto Clause and Contracts ClauseSection 10.  No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.
The Takings ClauseAmendment V No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation
The Due Process ClauseAmendment XIV (1868) Section 1.  All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside.  No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws. 

Note: Emphasis not in original.

However, the underlying concept here; ie, “sic utere tuo ut alienum non laedas – use your own property in such a manner as not to injure that of another” was itself deemed to be hollow by Justice Holmes as it was impossible to deduce the structure of existing property rights from the general principle (Brauneis, 1996). The meaning of injury evolves over time and is often case specific.

Justice Holmes then stated in 1922 in Pennsylvania Coal Co v. Mahon[29] that “The general rule at least is, that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking”. This rule, also known as the “diminution of value” test is not, however, very helpful as a general principle other than to suggest that drastic or discontinuous changes in property rights should be avoided. After all, in the same judgement, Justice Holmes also noted that “Government hardly could go on if to some extent values incident to property could not be diminished without paying for every such change in the general law”.

There is an issue here around the treatment of public perceptions in the takings debate, particularly on such basic issues as whether “it is at least as important that they believe their “personal property” is protected from confiscation as that it is in fact protected” (Fisher, 1988). Radical changes in perceived rights may alter the general acceptance of takings law, and thereby have an impact on outcomes in practice, notwithstanding constitutional principles.

A later US Supreme Court case concluded by five votes to four that compensation was due for prohibition of development of two beachfront lots, stating that “…when the owner of real property has been called upon to sacrifice all economically beneficial uses in the name of the common good, that is, to leave his property economically idle, he has suffered a taking”. The Court concluded that title could not be considered to be held “subject to the State’s subsequent decision to eliminate all economically beneficial use” (Lucas v. South Carolina Coastal Council, 1992).

This is similar to Holmes’s predisposition against drastic or discontinuous changes in property rights, and along with permanent physical invasion of property, represents the only types of regulatory action categorically considered a compensable taking by the Supreme Court (unless the regulation prohibits uses “not previously permissible under relevant property and nuisance principles”).[30] In the Lucas case, the Court also noted that the harmful use standard for the police power had evolved to a standard of a policy that provided a widespread public benefit and was generally applied, or substantially advanced legitimate state interests, but that the categorical rule cited above still applied to such takings.

The Court has considered that takings can be compensable when using the police power to stop a public nuisance (depending on the merits of the case) but not if using eminent domain to confer a benefit. It has been suggested as a consequence that if a public nuisance was simply defined as the impedance of a public benefit, no compensation would ever be payable (Wilkinson, 2001).

The above discussion should not be taken to suggest that regulation for the purpose of preventing a nuisance or otherwise protecting public health and safety would always represent a taking. Pennsylvania Coal Co v. Mahon is often cited as an example of a taking. In Plymouth Coal Co. v Pennsylvania (Brauneis, 1996), however, Justice Holmes accepted that requiring coal to be left in place at the edges of a property was directly linked to protecting safety and also provided mine owners with reciprocal advantages offsetting their costs. The action therefore either was not a taking in the first place, or was a taking but contained in-kind compensation so requiring no further redress.

Another recent US case refers an interesting extension of eminent domain, through the instrument of compulsory licensing, suggested in this particular case for electronic publication of newspaper articles to avoid “holes in history” (New York Times v. Tasini, 2001). Compulsory licensing has also been applied in other intellectual property situations; eg, for pharmaceuticals. This specific example of a taking is not examined further here due to limitations of space.

4.4  So when does regulation become a taking?

In the long run, as property rights evolve (by statute, judicial interpretation, or peer pressure), all the above approaches may resolve to the same argument. This is that what constitutes a nuisance or an unacceptable externality created by use of a property right changes over time. These changes can render what was a legal use (for example, a pig farm now surrounded by primarily residential properties) no longer legal.[31]

Who then in effect has stopped that use, and who is liable for the costs of doing so – the affected neighbours or other beneficiaries of the abatement, the courts or the government?

US jurisprudence is of limited use in providing consistent guidance to addressing the New Zealand situation, even setting aside constitutional differences. Is any regulation of property rights acceptable without compensation (in practice if not constitutionally) as long as physical rights of occupation (where applicable) and some economic use remain to the owner? There does not seem to be any sound principle behind such an approach. A recent US Supreme Court ruling has further clouded the boundaries around planning requirements by allowing government agencies to impose overlapping temporary moratoria on land development without paying compensation to landowners.[32] The picture is not clear.

There can be a conflict between the need for certainty when undertaking an investment and the need for a legal system to accommodate change (this is not of course impossible – a system that values the rule of law does not necessarily prohibit change in the law). Regulatory takings “at its worst … requires an arbitrary freezing of social relations at a particular moment in the constant evolution of institutions” (Bromley, 1993).

This is, of course, an extreme view. Realistically, such evolution must occur, but the manner in which it does so is crucial to the ongoing legitimacy of the resulting pattern of property rights at any particular point of time. Changes that are too sudden, too large or too unfair (eg, unnecessary or not compensated) can affect that legitimacy.

In terms of the central question underlying this paper “what protections against takings are appropriate, and specifically what is the role of compensation?” this discussion highlights the inevitable uncertainty around what is a property right, how it becomes vested in an individual or community, and what constitutes taking such a right.

A practical answer must involve neither paralysis of change nor free rein for regulators operating under fiscal illusion. Rather it would need to provide a compromise between flexibility and stability that provides sufficient certainty in property rights to allow investment, and sufficient ability to adjust for changes in society, technology and the environment (Bromley, 1993). Michelman’s approach of compensating when demoralization costs of a taking exceed the settlement costs may fall into this category, if practical or constitutional (Michelman, 1967). This sets aside the issue of who should pay for any compensation, discussed earlier.

In the interim, a rough and ready approach seems to have evolved in many jurisdictions of (1) accepting that appropriation of physical property must be compensated, unless it occurs as part of generic taxation or overarching changes to property rights structures, (2) defining certain other property rights as similar enough to physical property or as sufficiently tied to a specific individual’s ownership, or as so essential for incentive purposes, that equivalent rules should apply, and (3) leaving all other regulation of property rights include land-use rules to go through generic non-compensated regulatory processes generally intended to avoid arbitrary or discriminatory outcomes.

Does this provide adequate protection against takings? Is the role it provides for compensation appropriate? The latter question is addressed below, and is also relevant to the discussion in Section 3.

4.5  Compensation for regulatory takings?

Governments usually compensate for taking part of a piece of property but not for reducing the use to which that property can be put. For example if a strip of land were taken to provide a safety strip beside a road it would generally be expected that market value compensation would be paid for that land, but if a regulation were made to ban any new construction on land within a certain distance of a roadway no compensation would normally be paid.

This problem is directly linked to several issues discussed above, particularly the incentives problem when there is a choice between two means of achieving an objective but only one carries an explicit cost (ie, fiscal illusion applies), and the question of how absolute a property right is vested in the current owner. The latter issue arises most frequently in the application of planning controls on land.

The Lucas decision clearly assumes that the diminution of value threshold had been passed but does not completely resolve the issue of why depriving an owner of 99% of economic use should be treated differently (Epstein, 2000).[33] Partial land use restrictions, which usually occur by regulatory means, are never compensated, regardless of the constitutional or economic merits of doing so (Epstein, 2000). The diminution of value threshold also focuses solely on the costs of a regulatory action, ignoring the benefits, and under fiscal illusion could encourage regulations that impose small private costs and therefore fall under the threshold (Miceli and Segerson, 1998).

Discussions of compensation for regulatory takings usually run very quickly into the question of affordability, given the ubiquity of such activities. Although one could presumably argue that that is primarily an issue of fiscal illusion (Wilkinson, 2001) and that ubiquity would be reduced if compensation was due, the pervasiveness of overlapping property rights in modern society and the difficulties of offsetting costs and benefits are very real issues.

It seems logical that if two forms of taking, physical and regulatory, are economically equivalent then the availability of compensation should also be the same. An alternative argument, however is that this only follows logically if there is a single economically efficient compensation rule, but if there is more than one such rule then it is appropriate to choose the best rule for the situation (Hermalin, 1995). It is unlikely, however, that the current distinction between compensation for physical and regulatory takings is based on such an evaluation.

Judicial review of compensation in eminent domain cases can be seen as an example of a governance mechanism operating to restrain governmental action, both in terms of cost on its own and uncertainty regarding both cost and feasibility of a taking (Eposto, 1996). At an extreme, a requirement to pay compensation for all takings (or none) could therefore be seen as a means to constrain (or not) the size of government overall.

Wilkinson (2001) argues strongly in the New Zealand context, on efficiency and constitutional grounds, that “establishing the principle of compensation for regulatory takings would have a potentially material and beneficial affect (sic) on regulatory behaviour”, imposing greater discipline to design regimes properly up front, and reduce the demand for regulation by those otherwise able to avoid the associated costs.

The vagueness and evolving nature of property rights, however, seems to still be a major conceptual barrier to wholesale adoption of compensation for regulatory takings, even without considering issues such as fiscal or transaction costs.[34]

4.6  The international dimension

An example not discussed above of how property rights can be reduced without any taking being explicitly acknowledged or made known is where a government enters into international agreements. These can become binding on individuals with little or no public or parliamentary consideration (unless ratification is legally required which can vary by country and by type of agreement). A variant of this is where trans-national regulatory bodies are created which may be less subject to domestic constraints on regulatory activities (Guerin 2001 and 2002).

Conversely, cross-border investment may be treated better with regard to takings than purely domestic investment in some circumstances.[35] This is because bilateral and multilateral agreements can deal with circumstances in which the value of an investment is reduced by regulatory action of the host government. Provisions can include defining the type of action involved, setting compensation amounts and providing for third-party arbitration. This could result in some differences in the treatment of a particular taking with regard to the different private parties affected. This would not be the case where an agreement simply specified a national treatment or non-discrimination rule.

Notes

  • [27]The discussion below draws heavily on United States jurisprudence and literature which is extensive on this subject. It is, however, constrained by a focus on the implications of the wording used in the US constitution, rather than wider economic or social analysis. This needs to be taken into account when drawing wider implications from US outcomes.
  • [28]This jurisprudence was not based on the Takings Clause because it was considered to apply to the federal government only. This was under the view that the Fourteenth Amendment, which applied to the state governments, did not incorporate the first eight amendments. This view was later reversed (Brauneis, 1996).
  • [29]This case involved a law which prohibited underground mining that caused subsidence. The mining company had sold surface rights while retaining mining rights and obtaining a waiver of rights to compensation for subsidence It claimed that the Act deprived it of its property (the waiver) without compensation. The Supreme Court agreed (Pennsylvania Coal Co v. Mahon, 1922).
  • [30]This is very similar to the statement by Holmes that “To make it commercially impracticable to mine certain coal has very nearly the same effect for constitutional purposes as appropriating or destroying it”. That judgement did not preclude regulation of mining, however, as it noted that an existing law which required “a pillar of coal to be left along the line of adjoining property secured an average reciprocity of advantage that has been recognized as a justification of various laws” (Pennsylvania Coal Co v. Mahon, 1922).
  • [31]The US Supreme Court in Village of Euclid v Ambler Realty Co in 1962 upheld a zoning change which banned a factory and caused a 75 percent drop in value, basing the decision on suppression of a nuisance (Epstein, 1999).
  • [32]Property owners argued a sequence of development bans lasting 32 months effectively created a government "taking" of the economic benefit they had expected to derive from the land. The majority noted land use regulations "are ubiquitous and most of them impact property values in some tangential way--often in completed unanticipated ways. Treating them all as . . . takings would transform government regulation into a luxury few governments could afford." The minority wrote "as is the case with most governmental action that furthers the public interest, the Constitution requires that the costs and burdens be borne by the public at large, not by a few targeted citizens." (Tahoe-Sierra Preservation v. Tahoe Regional Planning Agency, 2002). Washington Post, 23 April 2002.
  • [33]Justice Scalia noted in Lucas v. South Carolina Coastal Council that this “is no more strange than the gross disparity between the landowner whose premises are taken for a highway (who recovers in full) and the landowner whose property is reduced to 5% of its former value by the highway (who recovers nothing). Takings law is full of these “all-or-nothing” situations”.
  • [34]There may, however, be more scope to undertake procedural changes designed to limit the potential for undesirable takings to occur in the first place; eg by limiting the ability of regulators to attach discretionary conditions to permits (Wilkinson, 2001).
  • [35]An example is NAFTA (1994 North American Free Trade Agreement) where arbitration panels were established under an anti-expropriation clause, which in practice “could end up giving them protections against regulations far beyond those domestic companies enjoy in their own courts” (Magnusson, 2002).
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