The Ninth Circuit Rules in Horne: The Plot Thickens

The Supreme Court’s takings decisions last term in Horne and Koontz have each generated considerable debate and consternation.  Now, the Ninth Circuit has issued a new ruling in Horne on remand that relies heavily on the analysis in Koontz to resolve the Hornes’ claim. The Ninth Circuit handed the government a win, ruling that the Hornes failed to demonstrate a taking due to the Secretary of Agriculture’s assessment of penalties against them for declining to “reserve” a portion of their raisin crop in accordance with the Agricultural Marketing Agreement Act of 1937.  Unfortunately, the Ninth Circuit’s legal analysis is an impenetrable tangle, largely because the Supreme Court itself has been so confusing, and the long-term implications of the Ninth Circuit’s decision are both unpredictable and troubling.

The sole issue the Supreme Court decided in Horne in 2013 was that the federal district court in California could proceed to address the merits of the Hornes’ takings argument as a defense to the enforcement action brought against them in their capacity as raisin “handlers.”  Normally the U.S. Court of the Federal Claims has exclusive jurisdiction over takings claims against the federal government. But the Court ruled that the 1937 Act stripped the claims court of authority to hear this type of claim, allowing the district court to resolve the takings issue.  On remand, the Ninth Circuit examined the district court’s takings ruling and affirmed rejection of the takings claim on the merits, based largely on an analysis that focused on the particular facts of the case.

It is possible that neither the Supreme Court nor the Ninth Circuit decision in Horne will have any long-term significance for takings law.  The case arose from the implementation of what Justice Elena Kagan famously dubbed the “world’s most outdated law.”  The case did not directly address the (difficult) question of whether the Act’s reserve requirement resulted in a taking; the Hornes declined to comply with the reserve requirement and sold all their raisins instead, meaning that they obviously suffered no taking of any raisins.  Instead, the case addressed the (more difficult) question of whether the assessment of monetary penalties for not complying with the reserve requirement constituted a taking.    As discussed, the Court resolved that question by issuing a narrow opinion focusing on the specific facts on the case.  Thus, Horne may turn out to be a sui generis, oddball case of no long-term significance.

One thing seems clear about this case: the Ninth Circuit reached the correct result.  In no sane legal universe could it be said that the Hornes suffered the kind of economic injury at the hands of government that would justify a finding of a taking as a matter of “fairness and justice,” to quote the Supreme Court’s lodestar for taking cases.  The Act effectively creates a raisin cartel run by and for the benefit of the raisin industry.  It directs producers to withhold raisins from the market in order to drive up prices and increase their profits at the expense of the benighted consumer; a kind of OPEC for raisin growers, if you will.  The Hornes directly benefited from this cartel, just like every other raisin producer. The Hornes may have a legitimate policy or even some legal argument for challenging the legislation as economically irrational.  But they certainly cannot claim that they have been singled out to bear the kind of economic loss that would constitute a taking.

But what of the Ninth Circuit’s legal analysis?  To my mind, the Ninth Circuit reached the right result, but for the wrong reasons, on multiple grounds.  I will first explain how, in my view, the Court should have justified its decision.  Then I will explain why the Ninth Circuit followed an illogical path and why the Court’s reasoning is so troubling.

The court should have ruled that imposition of the monetary sanctions was not a taking for two independent reasons.  First, under the Supreme Court’s 1998 Eastern Enterprises decision, government assessments of monetary liability do not generally affect “property” within the meaning of the Takings Clause.  The monetary penalty in Horne involves a generalized financial liability and, therefore, did not affect “property” for takings purposes.   Second, even if property were at stake, government seizure of property for a law enforcement purpose cannot result in a taking.  As the Supreme Court said in a 1996 case rejecting a takings challenge to a forfeiture order, “The government may not be required to compensate an owner for property which it has already lawfully acquired under the exercise of governmental authority other than the power of eminent domain.”  In this case, the government imposed the penalty to uphold the rule of law, not to take property through eminent domain.

The Ninth Circuit went wrong, first, by determining that the constitutionality of the penalty for violating the law should be resolved by analyzing whether the reserve requirement itself would result in a taking.  The court justified this approach by reference to Koontz.   In Koontz the Supreme Court relied on the “linkage” between a monetary exaction and specific real estate to justify applying the Nollan/Dolan standards to determine whether the exaction was a taking.  In Horne the Ninth Circuit reasoned that the linkage between the monetary penalty and the raisins justified analyzing the takings challenge to the penalty using the standard that would apply if the takings claim had arisen from implementation of the reserve requirement applicable to raisins.

With due respect to the Ninth Circuit, and recognizing the complexity of the issues the court faced, this conclusion is hard to swallow.  The alleged taking based on the monetary penalty involved different property, if it involved property at all (money), than the property (raisins) that would have been involved in a taking case based on implementation of the reserve requirement.  Further, the penalty served a different purpose, upholding society’s fidelity to the rule of law, than that served by implementation of the raisin marketing order, i.e., regulating the raisin industry.  There is no reason to think that these separate takings claims are fungible.

There is the additional problem that the Hornes were permitted to proceed with their takings argument on remand solely in their capacity as raisin “handlers” whereas they could only have challenged the implementation of the reserve requirement in their capacity as raisin “producers.”  Given the handler-producer distinction, the Hornes should not have been permitted to raise a producer -takings argument in opposition to a penalty being imposed on them solely in their capacity as handlers.

Moreover, the Ninth Circuit’s reliance on Koontz to support this conclusion was nonsensical.  The Court’s holding in Koontz that the Nollan and Dolan standards should extend to monetary exactions is problematic, as Justice Kagan explained in her dissent and as I have explored at length elsewhere.  But the Ninth Circuit’s recent ruling stretches this problematic ruling beyond all reason.  The Court in Koontz justified extending Nollan and Dolan to monetary conditions based on the view that they were “functionally equivalent” to paradigmatic Nollan/Dolan exactions requiring permittees to dedicate interests in property to the public.  Thus, Koontz extended the standards applicable to some development conditions to certain other development conditions.  But nothing in the holding or reasoning in Koontz supports the idea that a takings challenge to a penalty for noncompliance with a law should be resolved by addressing the different takings claim that would have arisen if the regulated party had complied with the law.

The conclusion that the Hornes should have been permitted to defend against the penalty on the ground that compliance with the reserve requirement would have resulted in a taking might possibly be defended on the theory that persons threatened with takings should be permitted to go to court to seek equitable relief to block the taking rather than be left with an after-the-fact suit for compensation.  If that were the case, then perhaps the ruling in Horne could be defended on the ground that the target of a potential taking should be permitted to engage in a kind of self-help by refusing to comply with a government mandate and then seeking to defend against any penalties on the theory that she could have sued to enjoin the taking.  But that is not how the Takings Clause (sometimes called the “Just Compensation” Clause) is normally read and, more importantly, it is not how the Ninth Circuit understands  the Takings Clause.  As the Ninth Circuit said in its recent Horne decision:  “The Takings Clause does not prohibit the government from taking property for public use; rather, it requires the government to pay ‘just compensation’ for any property it takes.”

Having concluded that the takings analysis should focus on the alleged taking of raisins (which of course never happened), the Ninth Circuit then proceeded to determine what takings test should govern that hypothetical claim.  In my view, as I have explained in a prior article on Horne, if and when the courts need to resolve whether the raisin marketing program results in a taking (an issue the Ninth Circuit did not need to resolve), they should reject the claim.  The courts should acknowledge that the reserve requirement is most closely analogous to a direct seizure of private property that normally warrants treatment as a per se taking.  After all, raisin producers lose physical possession and control of their property as a result of the marketing order.  But, in my view, the courts should still ultimately reject the takings claim.  First, the raisins represent personal property held for commercial purposes, not real property, and the Supreme Court has recognized that government has wider latitude to control personal property than real property.  Second, the claim should be rejected because, as discussed above, the Act, far from imposing an economic burden on raisin producers, confers a windfall on them at consumers’ expense, precluding any plausible claim for “just compensation” from the taxpayer.

Instead of pursuing this logical pathway, however, the Ninth Circuit concluded that the takings argument based on the reserve requirement should be analyzed by applying the Nollan/Dolan standards for exactions.  Before arriving at this conclusion, the court rejected, erroneously in my view, the idea that the marketing order is best viewed as involving a direct appropriation, as discussed above.  It also rejected the idea that the per se rule for physical invasions or occupations should apply.  This conclusion was correct, because the marketing order simply does not involve any physical invasion or occupation.  (The Ninth Circuit erroneously relied on the lack of serious economic impact — an irrelevant consideration in a physical takings case — to support the conclusion that the physical takings theory did not apply.)   Finally, the court summarily rejected any potential Penn Central regulatory takings claim because the Hornes had not raised the theory.

Having discarded other alternatives, the Ninth Circuit decided that the constitutionality of the reserve requirement should be analyzed by applying the Nollan/Dolan standards.   In Nollan and Dolan the government granted land development permits, but subject to certain conditions that, independent of the regulatory program, would have constituted per se takings.  The Supreme Court ruled that these exactions did not result in a taking if there were an “essential nexus” and “rough proportionality” between the conditions and the government’s regulatory objectives. In Horne, the Ninth Circuit reasoned that the reserve requirement was analogous to the exactions in Nollan and Dolan because the government imposed the reserve requirement “as a condition on the Hornes’ use of their crops by regulating their sale.”  Then, applying these standards, the Ninth Circuit concluded that they were satisfied because there was an essential nexus and a rough proportionality between the reserve requirements and the government’s objective of stabilizing the market for raisins.  Having reached this conclusion about the reserve requirement, the Ninth Circuit concluded that the takings challenge to the monetary penalties failed.

The problem with this analysis is it suggests there may be no boundaries whatsoever to the Nollan/Dolan analysis.   Nollan and Dolan involved conditions attached to grants of specific government benefits in the form of development permits.   The Ninth Circuit’s Horne decision now suggests that any free-standing regulatory control on the use of property may be subject to Nollan/Dolan analysis.  Apparently aware of the Pandora’s Box it was opening, the court dropped a footnote: “We do not mean to suggest that all use restrictions concerning personal property must comport with Nollan and Dolan. Rather, we hold Nollan and Dolan provide an appropriate framework to decide this case given the significant but not total loss of the Hornes’ possessory and dispositional control over their reserved raisins.”   But what regulations now deserve review under the relatively stringent Nollan and Dolan standards, and which do not, could prove hard to figure out.  At least in the minds of some property rights advocates, many regulations involve “significant” (but not total) loss of “possessory and dispositional control over” private property.

It is not hard to conjure up the kind of extravagant takings argument Koontz and now Horne might generate.  A developer faced with regulatory restrictions on wetlands-filling might choose to simply destroy the wetlands and then respond to any subsequent enforcement proceeding by arguing that implementation of the restrictions would have resulted in a taking and she is entitled to raise the takings issue as a defense to sanctions for violating the law.  Furthermore, following Horne, the developer might contend that the constitutionality of the penalties should be analyzed under the Nollan/Dolan standards because the wetlands rule imposed a “significant loss” of “possessory and dispositional control” over the property.   It seems remarkable to suppose that the Supreme Court and the Ninth Circuit could have so dramatically and so quickly altered the landscape of takings doctrine governing this type of garden-variety takings case.  But, sadly, it is not completely unthinkable.

In sum, the government can claim victory in Horne, but the Ninth Circuit has offered up a ruling that will likely be the source of considerable mischief for government defendants (and others) in future cases.  The Ninth Circuit panel must bear part of the responsibility, but the major responsibility lies with the Supreme Court which has created the shaky, confusing foundation upon which this new precedent sits.