Lingle, Linda (Hawaii Gov.), et al. v. Chevron U.S.A. Inc. (05/23/2005)

Questions presented: (1) Whether the Just Compensation Clause of the Constitution authorizes a court to invalidate state economic legislation on its face and enjoin enforcement of the law on the basis that the law does not substantially advance a legitimate state interest, without regard to whether the challenged law diminishes the economic value or usefulness of the 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 substitite 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?

BY RAFE BARTHOLOMEW & WHITNEY BecKETT, MEDILL NEWS SERVICE

Since 1984, Chevron USA, one of six gasoline wholesalers in Hawaii, operated its retail business by renting company-owned gas stations to independent managers. This practice preserved competition in the state, where a small economy and remote location are a recipe for industry concentration and high prices.

In 1997, Chevron announced a nationwide restructuring of its rental program that would raise individual dealers' rents in Hawaii. Dealers feared that Chevron would continue raising rents to drive them out of business. Then, Chevron could control and raise prices at all 64 of its gas stations in the state.

The Hawaii State Legislature responded by passing Act 257, which imposed rent controls on oil companies in an effort to maintain the rental structure of the gasoline retail market.

Rent control only applied to oil companies leasing gas stations to individual dealers, though. This allowed dealers to sublease the stations at higher rents than the ones they paid to oil companies.

The premium dealers could earn through this arrangement was due to Hawaii's attempted regulation of the fuel industry, and in 1998 Chevron sued the state and its governor at the time, Ben Cayetano, for violating its 5th Amendment rights. It asked a district court in Hawaii to prevent the state from enforcing Act 257.

The Just Compensation or "takings" clause of the U.S. Constitution's 5th Amendment provides: "No person shall be … deprived of life, liberty or property, without due process of law; nor shall private property be taken for public use, without Just Compensation."

In this case, the state enacted rent control laws that took Chevron's property – in money and oil – by creating premiums for Chevron's tenants, Chevron alleged.

At first, the district court in Hawaii granted summary judgment in favor of Chevron. But the 9th Circuit Court of Appeals remanded the case for further fact-finding at trial.

The district court heard testimony from two economists on the merits and likely consequences of Act 257 and again found that the act created an unconstitutional taking because it failed to "substantially advance a legitimate state interest."

Hawaii appealed again, with current Governor Lisa Lingle as the named party, and in April 2004, the 9th Circuit affirmed in a 2-1 decision.

The majority found that a "reasonable relationship" did not exist between Act 257's public purpose and the means to realize it. Because the legislation "will not in fact accomplish its stated purpose," it could not substantially advance Hawaii's interests, wrote Judge Robert Beezer, who was joined by Judge Dorothy Nelson in the opinion.

Citing the testimony given at trial, Beezer wrote that in response to Act 257's rent controls, oil companies would be less likely to invest in gas station rental schemes in the future, and the number of independent dealers in Hawaii would decrease.

In dissent, Judge William Fletcher disputed whether Act 257 constituted an actual taking. "According to Chevron's own expert, there is probably no premium created," he wrote. "The premium is not actual, nor even a mere probability. Rather … the premium does not exist."

Quoting his earlier dissent from this case's first appeal, Fletcher wrote: "Virtually all rent control laws in the Ninth Circuit are now subject to the ‘substantially advances a state interest test,' and many of those laws may well be held unconstitutional under that test."

Finally, Fletcher warned against judicial activism. "Rent control is often inefficient and sometimes unfair," he wrote. "But we should not confuse inefficiency and unfairness with unconstitutionality."

In seeking review from the U.S. Supreme Court, Hawaii cited the Court's "long-settled understanding that the purpose of the Just Compensation Clause is to ensure compensation, … not to act as a substantive check on government action."

Hawaii also argued against the 9th Circuit's "intrusive standard of review of economic legislation." Any legislative review should use a more deferential test like the one commonly applied under the Due Process Clause of the 14th Amendment, the petition said, rather than using the threshold of "substantially advancing" the government interest.

A body of democratically-elected legislators is better at determining the usefulness of economic policy than two unelected judges, Hawaii's petition said, and for this reason judicial review should remain deferential. This will preserve states' rights within the federal system and the unique role states play as laboratories for creative law-making, it argued.

Chevron, in its brief responding to Hawaii's petition, said that using the Just Compensation Clause to review and strike down unconstitutional legislation is rare, but appropriate. "Only where legislation is so arbitrary that it achieves no substantial advancement of any valid interest may [the takings clause] be invoked by a property owner," according to Chevron's brief. Act 257 is one of those cases, Chevron said.

The Court was asked to resolve confusion among the lower courts over proper application of the Just Compensation Clause.

The 5th and 11th federal circuits disagree with the 9th Circuit over whether the takings clause can be used to review economic legislation. A number of state supreme courts have ruled that "challenges to the rationality of government relation must be brought under the Due Process Clause," according to Hawaii's petition.

In a 1999 decision, California State Supreme Court Justice Joyce Kennard directly addressed this confusion: "Should a means-ends test be used to determine whether a taking has occurred, or instead should means-ends testing remain within due process jurisprudence? Only the high court can resolve this question."

But beyond resolving conflicts among the courts, the outcome of Lingle v. Chevron could have a major impact on existing and future legislation throughout the nation.

If the Supreme Court clearly rules that the Just Compensation Clause can be used to determine if legislation substantially advances state interests, then any imperfect law that poses an economic threat to a private citizen or business is open to challenge.

Nineteen states responded to this threat to their legislative authority by filing a joint friend-of-the-court brief in support of Hawaii. The National Conference of State Legislatures, along with numerous other local legislative bodies, also filed an amicus brief in Hawaii's support.

On Oct. 12, 2004, the Supreme Court accepted review in the case.

During oral arguments on Feb. 22, 2005, the justices puzzled over which test to apply, whether compensation could solve the problem, and whether the Court should scrutinize economic legislation at all.

Arguing for Hawaii, the state's Attorney General, Mark Bennett, offered two main arguments in his introductory statements: the "substantially advance test" should not be a stand alone test, and if the Court does decide to have a stand alone test, it "ought to be no more searching than the rational basis test of due process."

Justice Stephen Breyer grilled Bennett on why the Court should use the less stringent "rational basis test" when laws substantially devalue private property. Justice Breyer said, "realistically, you know there's no good reason" for Hawaii's law. "It can't satisfy the stronger test, though it could satisfy the weaker," he offered.

Traditionally the "substantially advance test" applies only in cases in which the government has committed a taking of private property.

Edwin Kneedler, the deputy solicitor general for the U.S., who argued in support of Hawaii, said that justice would be greatly undermined if a plaintiff could "obtain heightened scrutiny of legislation by simply recasting his claim as a takings claim."

Kneedler proposed defining a taking as "whether all economic value had been destroyed." That was not the situation in this case, according to Kneedler.

"What about substantially advances a legitimate State interest, which does sound like it's a higher standard?" Justice Ruth Bader Ginsburg asked Kneedler. She called the substantially advances test "a more toothful standard" than rational basis.

Craig Stewart, representing Chevron, explained that this case qualifies as a regulatory taking "because the government has not physically appropriated the property or condemned it. Instead, by operation of its regulation, it has taken the property interest from Chevron."

Justice Breyer seemed to dismiss the relevance of whether it was a regulatory taking and what the reason for the taking was. "[W]hy should it matter, in respect to paying compensation, whether the reason is a good one or just barely good enough?" Breyer asked. "And that's – that's the puzzle, I think, that the other side is putting to you, and I must say I'm rather moved by [Hawaii's] argument because it seems to me whether it's a very good reason or just a barely adequate reason has nothing to do with whether they should pay compensation."

The current legislation does not authorize payment. Justice David Souter asked Stewart, "if Hawaii modifies its statute and says, we will give you the difference between, you know, whatever the rent would be and – and what our statute requires, you'd be perfectly happy."

Stewart said he would, and Justice Breyer returned to his original question. "I want you to explain to me why the goodness or badness of the reason, once it has passed the minimal point, has anything to do with whether you should have to pay compensation."

Stewart maintained there must be "a basis for imposing the burden on a particular property right" – and the Constitution protects property rights. "It's not simply a matter of how much property has been taken," Stewart said. "The question is the government's basis for taking that property."

"We're not asking whether the government can proceed at all," Stewart continued. "We're simple asking whether the government can proceed without compensation."

Compensation would require the government to figure out how much Chevron was losing in rent because of the legislation. Thus the government would have to "figure out how much higher the rent would have been," which Justice Ginsburg called "a nonsensical thing for the government to engage in."

Seeming to search for a more absolute position, Justice Antonin Scalia reprimanded Stewart for "saying it doesn't make sense, so you got to pay for it. I think it – it's much more reasonable to say it doesn't make sense, so you can't do it."

Representing Hawaii, Bennett rejected that compensation should be the Court's focus. "This case is not about compensation. Indeed, Chevron's discussion of compensation – the first time that that occurred in the entirety of this case was in its brief in this Court," Bennett said. "This case is, indeed, about whether this economic regulation is legitimate."

Bennett also challenged the Court on whether it should be deciding the constitutionality of specific economic regulation. Such action, he said would be "wholly inconsistent… with any reasonable concepts of federalism."

Justice Kennedy, in turn, proposed a hypothetical to Bennett. "Well, suppose it were clear, from what the legislature said, that the only purpose of this legislation was to help out some local dealers who were politically powerful and the gasoline prices would go up. I assume you would be here defending the statute."

Bennett said he would, arguing that such action would effectively make the Court "a super-legislature." The issue is a legislative, not judicial one, Bennett said.

"Your Honor, in our representative democracy, decisions as to the wisdom of economic legislation are for the political branches, not the courts," Bennett said to Kennedy. "The voters of Hawaii have a remedy if their elected officials fail them. It is in that forum that the wisdom of Act 257 should be debated."

On May 23, 2005, the Court held unanimously that Hawaii's gas station rent control law was not an unconstitutional taking of property. In so holding, Justice Sandra Day O'Connor rejected the lower courts' formula that such legislation must "substantially advance" legitimate state's interests.