Economic Liberty Takings

Category: Print Issues

Jeffrey Manns

Volume 29

, Issue 1

29 GEO. MASON L. REV. 73 (2021)

Introduction

The COVID-19 shutdowns highlighted the extraordinary scope of police powers that state governors and local officials can exercise and the lack of incentives to respect private property rights during emergencies. The states’ powers to impose large-scale shutdowns in the name of a public health emergency are well-established.¹ But what state officials and judges broadly forgot in the process is that property rights place limits on the use of police powers to close businesses or strip them of economic viability without just compensation.²

The result has been an unbalanced equation. During the Trump presidency, state governors and local officials (especially in Democratic states and cities) stood to gain politically from exercising police powers in sweeping ways to show that they were leading the effort to slow down the spread of COVID-19.³ At the same time, takings law offered little to no constraint in preventing supposedly “non-essential” business owners from bearing the costs of periodic state government-imposed shutdowns in the name of the greater good.⁴ The disconnect between the exercise of police powers and takings constraints has been even more stark because states and localities have imposed the burden of shutdowns, and largely left to the federal government the role of partly mitigating the impact of shutdowns through Paycheck Protection Program (“PPP”) loans and handouts.⁵

State police powers form part of our forgotten federalism—the sphere of powers that are solely possessed by the states under our federal Constitution.⁶ The power to shut businesses down in the name of a public health emergency is clear.⁷ However, the significance of the takings clause and in particular the just compensation provision is also clear as those clauses provide a check on federal and state encroachments on property rights.⁸ The challenge is determining how these constitutional principles intersect (or ought to intersect) in the context of extraordinary government interventions.

The substantive due process Lochner v. New York⁹198 U.S. 45 (1905). era of courts broadly striking down regulations for encroaching on property rights is a distant memory as the administrative state’s role at both the federal and state level is virtually uncontested.¹⁰ But the fact that federal and state governments have sweeping authority to regulate private property (especially in emergencies) does not mean that federal and state governments should not face takings compensation consequences for implementing regulations that deprive business owners of the use of their property.¹¹ The shutdowns were not as invasive as physical occupations of property by the state. But the economic effect of the prolonged loss of their livelihoods was nearly as sweeping for many businesses directly affected by the pandemic shutdowns and occupancy/operation restrictions.

This Article seeks to make the case for shutdown compensation within the existing framework of temporary, regulatory takings doctrines and raises both judicial and statutory reform proposals to expand the scope of economic liberty takings and other takings protections.¹² Unlike many constitutional constructs that have been sheer creations of judges, takings protections are clearly enshrined in the texts of both federal and state constitutions.¹³ But in practice, the contours of takings law have been almost exclusively crafted (if not stunted) by judges.¹⁴ I argue that the scope of temporary, regulatory takings doctrines lies in historical contexts unrelated to the sweeping economic impact of the COVID-19 shutdowns. The changed circumstances caused by the government-imposed shutdowns justify (1) revisiting these judicially constructed doctrines, and (2) considering both doctrinal reforms and statutory solutions that may shape governors’ use of their police powers.

Part I of this Article details the COVID-19 restrictions that occurred across the country. Part II then shows the limited potential for positioning economic liberty takings within the existing landscape of temporary, regulatory takings doctrines and explains how courts can build off existing doctrines to provide more expansive economic liberty takings protections. This expansion could occur by modifying the seminal Penn Central Transportation Co. v. New York City¹⁵438 U.S. 104 (1978). test for regulatory takings to place greater emphasis on the disruption of the investment-backed expectations of businesses and the economic fallout from regulations; relaxing the high bar Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency¹⁶535 U.S. 302 (2002). has set for temporary takings claims; and lowering the economic impact threshold for Lucas v. South Carolina Coastal Council¹⁷505 U.S. 1003 (1992). categorical takings. Part III shows the significance of these proposed reforms by highlighting the range of unsuccessful takings claims that occurred during the pandemic. Part IV makes the case for a complementary, statutory approach for claims that may not rise to the level of a temporary, regulatory taking by constructing a sliding scale of compensation based on the extent of the impact of regulations on businesses’ profitability. These proposals restore greater balance between the exercise of state police powers and the expectations of businesses, while preserving incentives for businesses to work within temporary, regulatory constraints to maintain their profitability.

Finally, this Article offers a balanced approach to compensating businesses for economic liberty takings by focusing on declines in net profits. Courts have traditionally struggled to translate the logic of real-property-based physical-takings compensation to the temporary, regulatory takings business context.¹⁸ The concern is that using business losses or revenue declines as metrics for takings compensation may fuel moral hazard as these numbers are hard to verify and easy to inflate and may disincentivize mitigating damages.¹⁹ My solution is to offset the expansion of economic liberty takings eligibility with a limited compensation focus on a business’s declines in profits. Federal and state corporate tax filings provide a baseline for a business’s net profits. Using the previous year’s net profits (or a multi-year average) as a baseline for potential takings compensation would facilitate ease of administration, reward the honesty of companies in complying with tax law, and serve as a cap on damages. This approach would also incentivize businesses to mitigate damages as the limited scope of profit-based compensation would induce businesses proactively to take cost-savings measures in the face of potential takings.

I. Framing the Pandemic Shutdown Problem

This Part describes the challenge of managing a government response to the COVID-19 pandemic while respecting takings principles. Section A briefly sets up the nature of the problem. Section B introduces the police power justifications for pandemic restrictions. Section C uses New York, California, and Florida as examples of various approaches state governments used. Lastly, Section D develops a taxonomy of business restrictions based on severity.

A. The Unique Nature of the Pandemic Threat

The COVID-19 pandemic has posed one of the greatest challenges to national and global public health in the past century.²⁰ The high transmission rate of the virus, coupled with the global movement of goods and people, has made this virus particularly difficult to contain as it continues to mutate and spread both regionally and globally.²¹

The uncertain nature and duration of the COVID-19 virus distinguishes it from other emergencies that our country has faced in years past. Emergencies such as terrorist attacks and natural disasters have clear beginnings and ends,²² while the duration of the COVID-19 pandemic is in constant flux as mutations arise. The foreseeable durations of more conventional emergencies help to justify temporary government-mandated interventions that shut down businesses and public life as well as the absence of compensation for this type of short-duration, emergency shutdowns. For example, the length and impact of a hurricane can be measured with relative precision based on experiences with past hurricanes and meteorological data.²³ Temporary government shutdowns to deal with this type of threat of finite duration fall within well-established emergency exemptions from takings and rarely arouse controversy.²⁴ For this reason, most people and businesses voluntarily comply and accept broad, time-limited sacrifices for the public good in the case of conventional emergencies. In contrast, the nature and duration of the COVID-19 pandemic were far from clear.

The extraordinary nature of the COVID-19 pandemic led to similarly extraordinary government action. Starting in March of 2020, state governors and local officials began imposing periodic shutdowns of categories of businesses that bureaucrats deemed “non-essential” in an effort to contain the spread of COVID-19.²⁵ For nearly a year, the scope of this burden remained unclear because of the open-ended duration of the threat. Many of the states that lifted these regulations imposed a “second wave” of partial shutdowns during the summer of 2020 after renewed spikes in COVID-19 numbers that lasted into February 2021.²⁶

The subsequent waves of regulatory shutdowns may be more financially problematic for many businesses than the first wave due to the weakened balance sheets from the initial shutdowns. The danger of mutations leading to further large-scale shutdowns and restrictions raises the need to consider enhanced judicial or statutory frameworks for compensating businesses adversely affected by these extraordinary government interventions.²⁷

As importantly, states and localities had divergent approaches in terms of the scope of shutdowns. This fact left business owners on opposite sides of a county or state line in very different economic circumstances.²⁸ The result was windfalls for “essential” businesses and e-commerce, but financial disaster for “non-essential” small and large brick-and-mortar firms who faced crippling restrictions on their businesses.²⁹ Crafting regulations that give windfalls to one group by shutting down competing businesses appears to fit the classic contours of takings law. But the challenge has been situating takings claims within the broad deference states enjoy in exercising police powers.

B. The Basis and Scope of State Police Powers

An irony of the COVID-19 pandemic is that the spread of the virus poses both a national and international threat, yet the response has been centered at the state (and local) level.³⁰ This fact has triggered a revival of interest in federalism and a focus on police powers vested in states by the Constitution and the Tenth Amendment. For the past century, most times that a crisis has occurred, people have looked to the federal government to “solve” the problem or at least mitigate the fallout through large-scale, short-term interventions or infusions of cash.³¹ But the COVID-19 crisis was different because efforts to contain the spread of the virus had to occur at the state and local level where person-to-person transmission was occurring. The federal government generally does not have the authority to regulate intra-state activity unless the intra-state activity falls within the scope of an implied power of the Constitution or under the Taxing and Spending Clause.³² Therefore, crisis management resulted in state governors (and to a lesser extent local officials) being thrown into the spotlight in crafting virus containment plans as the federal government could not act within its powers. As a result, state and locally crafted plans were often inconsistent with one another and led to businesses of the same type receiving different treatments.

The police powers of the states are derived from the Supremacy Clause of the U.S. Constitution, which permits state governments to regulate and restrict property for the public health, safety, and general welfare of its citizens.³³ The Tenth Amendment to the U.S. Constitution reinforces this provision by granting the states all powers, which are not delegated to the federal government.³⁴ The U.S. Supreme Court has held that police powers granted to the states extend to all matters “affecting the public health or the public morals”³⁵ and that “[t]he states traditionally have had great latitude under their police powers to legislate as ‘to the protection of the lives, limbs, health, comfort, and quiet of all persons.’”³⁶

“When [a] state faces a major public health threat,” such as the COVID-19 pandemic, the state’s police powers “are at a maximum.”³⁷ In Gibbons v. Ogden,³⁸ the Supreme Court described state police powers as the ability to control “[i]nspection laws, quarantine laws, health laws of every description as well as laws for regulating the internal commerce of a State.”³⁹ In Jacobson v. Massachusetts,⁴⁰ the Supreme Court upheld the validity of a state law requiring vaccinations for smallpox.⁴¹ Justice Harlan held that “although this court has refrained from any attempt to define the limits of [police powers], . . . it has distinctly recognized the authority of a State to enact quarantine laws and health laws of every description.”⁴² Courts have framed this holding as a two-pronged test which upholds “emergency public health measure[s] . . . unless (1) there is no real or substantial relation to public health, or (2) the measures are ‘beyond all question’ a ‘plain, palpable invasion of rights secured by fundamental law.’”⁴³

At the same time, Jacobson held that states cannot exercise police powers in “an arbitrary, unreasonable manner.”⁴⁴ Embedded in every exercise of police power is the tension between protecting public welfare and respecting individual rights, and state officials have continuously struggled to balance these interests.⁴⁵ Police power is tempered by the need to respect religious liberty, private property, civil rights, and patient-privacy rights.⁴⁶ However, outside of these basic limitations, states continue to assert broad police powers, especially in the wake of 9/11. Shortly after 9/11, the Center for Law and the Public’s Health at Georgetown and Johns Hopkins Universities drafted the Model State Emergency Health Powers Act (“MSEHPA”),⁴⁷ legislation that seeks to codify and delineate the specific police powers that state governors possess, including the power to appropriate, control, decontaminate, condemn and destroy property in emergencies without compensation, and involuntarily quarantine people without notice.⁴⁸ Forty states have incorporated MSEHPA in whole or part into state law, a point which recognizes most states’ broad embrace of police powers.⁴⁹

C. The Use of Police Powers to Shut Down and Restrict Businesses

States have leveraged emergency police powers to impose sweeping shutdown orders in an effort to contain the transmission of COVID-19. Most states have created different mandates and regulations for businesses that state governors deemed “essential” and “non-essential.” Essential businesses typically include public and private businesses, such as grocery stores, health care providers, utilities, banks, essential manufacturing, and gas stations.⁵⁰ “Non-essential” typically includes businesses and places of public accommodation geared towards recreation and entertainment, like gyms, theaters, salons, dine-in restaurants, sporting/concert venues, and shopping malls.⁵¹ “Essential” businesses have been allowed to remain fully or close to fully operational throughout the periodic shutdowns. “Non-essential” businesses have been affected to various degrees, sometimes having to completely cease operations, and at other times facing limits on occupancy or operations based on the extent of COVID-19 spread or the degree of intensive-care-unit-bed availability in the region.

To highlight the potential range of takings claims, the following discussion lays out the types of shutdown orders issued by state governors in California, New York, and Florida. California and New York are Democratic states that took the lead in championing COVID-19-related restrictions, while Florida serves as an example of the strikingly different approaches that Republican-led states took towards pandemic shutdowns.

1. New York

As the initial U.S. epicenter of COVID-19, New York implemented some of the most draconian executive orders that highlighted the tension between the use of police powers and potential takings. On March 16, 2020, Governor Andrew Cuomo issued Executive Order 202.3,⁵² ordering that gatherings and events of more than 500 people “be cancelled or postponed.”⁵³ Restaurants and bars were to cease dine-in operations and offer take-out and delivery only.⁵⁴ Video and casino gaming centers as well as gyms, fitness centers, and movie theaters were ordered to cease operations.⁵⁵ On March 18, Governor Cuomo required places of “public amusement” to close completely and for shopping malls to close all indoor common areas to the public.⁵⁶ A similar order compelled businesses and organizations designated as “non-essential” to limit their in-person work force to 50% by March 20.⁵⁷ Businesses deemed “essential,” such as supermarkets and big box stores with grocery sections, were exempted from in-person restrictions and benefited from the closure of competitors.⁵⁸ Subsequent executive orders banned in-person work forces for non-essential businesses and expanded the scope of non-essential businesses to include barbershops and nail salons.⁵⁹

New York began easing the COVID restrictions in May 2020. On May 14, New York lifted in-person workforce restrictions for Phase One businesses in construction, agriculture, forestry, fishing, and hunting retail in certain geographic regions.⁶⁰ By May 29, Phase Two industries, like professional services, real estate, retail, and barbershops, were allowed to operate in-person.⁶¹ On June 12, Phase Three industries in eligible sectors, such as food services and personal care, were allowed in-person operations.⁶² On June 26, in-person restrictions were lifted for Phase Four industries like higher education, film and music production, and low-risk arts and entertainment, including professional sports games without fans.⁶³ Gatherings of fifty or fewer people were allowed as well.⁶⁴ On July 10, malls were allowed to open at 25% capacity. When the second surge of COVID-19 began in the fall, New York first initiated “micro-cluster” shutdowns in neighborhoods of New York City, and from November 2020 through January 2021 reinstated many of the more draconian Phase I COVID restrictions, which were phased out in February 2021 as the contagion rate receded.

2. California

On March 19, 2020, California Governor Gavin Newsom issued Executive Order N-33-20 directing all residents to stay home.⁶⁵ The order exempted what the governor deemed to be “essential” critical infrastructure sectors, which encompassed thirteen sectors, ranging from health care to energy to critical manufacturing.⁶⁶ On May 7, Sonia Angell, the State Public Health Officer of the California Department of Public Health, issued SHO Order 5-7-2020,⁶⁷ which outlined Stage 2 reopening procedures, with counties that showed progress being permitted to move through Stage 2 more quickly than the State as a whole.⁶⁸ Stage 2 included the limited capacity reopening of some “lower risk” workplaces such as retail, manufacturing, offices, outdoor museums, childcare, and some personal services with certain modifications and guidance.⁶⁹ Some parts of the state entered into the Stage 3 reopening of “higher risk” workplaces, but this process ground to a halt first in July 2020 and then more comprehensively in November 2020, as California experienced surges in COVID-19 cases. The California Department of Public Health contains a watch list⁷⁰ of counties with coronavirus cases on the rise, and Governor Newsom announced on July 13, 2020, that virtually every major county in California had to close a range of businesses including gyms, movie theaters, salons, family entertainment centers, zoos, card rooms, and museums.⁷¹ Furthermore, all California restaurants and bars had to close indoor dining services.⁷²

These rules were relaxed in the fall of 2020 but in the face of an uptick in cases, Governor Newsom instituted a curfew for most of the populated parts of the state starting on November 21.⁷³ That approach was escalated into a regional stay-at-home order that applied to virtually all of the state from December 5, 2020 through January 25, 2021, which prohibited private gatherings and reinstated widespread shutdowns and occupancy restrictions of businesses except for critical infrastructure and retail.⁷⁴ In February 2021, California began a phased lifting of most of its shutdown restrictions.

3. Florida

Florida’s Governor Ron DeSantis took a different approach to the shutdowns and initiated shutdown measures at a slower pace than other states. Starting on March 17, 2020, the Governor ordered restaurants to operate at 50% dine-in capacity, and bars and nightclubs to suspend the sale of alcoholic beverages within thirty days of the order.⁷⁵ Three days later, Governor DeSantis suspended the sale of alcohol on vendor premises, halted all dine-in operations at restaurants, and closed all gyms and fitness centers.⁷⁶ On April 1, Governor DeSantis issued Executive Order 20-91,⁷⁷ ordering residents to stay home unless to obtain or provide essential services or conduct essential activities, referencing the Cybersecurity and Infrastructure Security Agency (“CISA”) guidance on essential workers.⁷⁸

On May 15, 2020, Executive Order 20-123⁷⁹ initiated Phase 1 of the state recovery plan, permitting restaurants to operate dine-in services at 50% capacity, and allowing in-store retail establishments, museums, libraries, and gyms to operate at up to 50% of building occupancy.⁸⁰ Effective June 5, Governor DeSantis issued Executive Order 20-139,⁸¹ announcing the transition to Phase 2 for all Florida counties except Miami-Dade, Broward, and Palm Beach. Phase 2 allowed for full outdoor dining capacity and 50% indoor dining capacity for restaurants and bars.⁸² Gyms, retail establishments, museums, and libraries could now operate at full capacity, and amusement parks could reopen subject to approval from the county. Organized youth activities and professional sports games could operate with caution as well. Concert venues and theaters were to remain at 50% capacity.⁸³ By mid-summer, Florida lifted virtually all restrictions on the state level, while some localities retained occupancy limits on a range of “non-essential” businesses. In contrast to California and New York, Florida’s governor resisted the reinstatement of shutdowns during subsequent COVID surges during the fall of 2020 and instead relied on businesses implementing safeguards against transmission.⁸⁴

4. Essential v. Non-Essential Businesses

In all three of these states, clear distinctions were made between businesses that governors deemed “essential” and “non-essential.” With the exception of New York—which had its own framework—the other states broadly relied on the CISA guidance document, which delineates sixteen industry sectors that the federal government considers “essential critical infrastructure.”⁸⁵ Combined with the Empire State Development’s guidance on the matter, “essential” businesses generally include:

* health care operations;

* infrastructure (energy, water, waste, transportation, communications);

* infrastructure-related and life-sustaining manufacturing;

* life-sustaining retail (e.g., grocery stories, pharmacies, gas stations);

* financial services;

* defense;

* life-sustaining community services (e.g., homeless shelter, food banks); and

* infrastructure-related construction.⁸⁶

These essential businesses were allowed to operate at close to normal, if not full, capacities throughout the shutdowns.⁸⁷

In contrast, non-essential businesses were forced to close partially or fully and faced significant constraints amidst gradual reopenings.⁸⁸ Looking at each state’s reopening plans reveals the types of businesses that were allowed to reopen first and each state’s stages for reopening (see Figure 1).⁸⁹

Figure 1: State-by-State Comparison of COVID-19 Reopenings

Phase	New York	California	Florida
One	Construction, agriculture, fishing, and hunting retail	Preopening county COVID progress metrics	Restaurants, gyms, museums, barbershops, and retail at 50%
Two	Professional services, real estate, retail, and barbershops	Curbside retail, offices, outdoor museums, childcare, limited dining and personal services	Full outdoor dining and 50% indoor dining; theaters at 50%; and everything else at full capacity
Three	Food services and personal care	Hair & nail salons, gyms, movie theaters, sporting events	Everything at full capacity
Four	Schools, film and music, low-risk arts and entertainment (was partly implemented as of 2/2021 with 10% audiences allowed for entertainment events and partial school reopenings)	Concert venues, sporting events with live audience (was put on hold 2/2021)	N/A

D. The Spectrum of Businesses Affected by the Shutdowns

Businesses faced different treatment from state governments depending on the nature of the business and a range of economic consequences from the shutdowns. The impacts can be categorized across a spectrum based on the extent of shutdown restrictions, the availability of alternatives, and the economic toll. The following categorization in Figure 2 is not exhaustive yet provides examples of the types of business impacts that may fall along a potential takings’ spectrum.

Figure 2: COVID-19 Business Restrictions Based on Economic Impact

Category One businesses include those that have filed for bankruptcy as a result of the shutdowns, which may result in Chapter 11 reorganizations or Chapter 7 liquidations.⁹⁰ Chapter 11 bankruptcy filings increased by 48% in May 2020 compared to May 2019, and from April to May alone, bankruptcy filings increased by 30%.⁹¹ Some of the sectors with the highest number of bankruptcy filings included restaurants, hospitality, entertainment, and retail, all of which faced shutdowns during the initial stages of the state responses.⁹² Examples of companies that have filed for Chapter 11 bankruptcy include: CMX, J.C. Penney, Neiman Marcus, Brooks Brothers, J.Crew, Muji, Apex Parks Group, California Resources, and Chesapeake Energy.⁹³

As businesses deal with the aftermath of periodic shutdowns in response to COVID-19 surges, experts expect the number of bankruptcy filings to continue increasing as economic consequences have lingered long after reopenings.⁹⁴ While bankruptcy may lead to reorganizations rather than wind ups, the economic impact of bankruptcy represent one of the most clear examples of businesses (and their investors and employees) bearing the burden from shutdowns of select segments of the economy for the public good. Some of the affected businesses may have been teetering on the edge of bankruptcy prior to the shutdowns.⁹⁵ Others such as the bankrupt Garden Fresh Restaurants buffet chain may be market victims of COVID-19 as their business models may have foundered due to contagion concerns even in the absence of shutdowns.⁹⁶ But the case for economic liberty takings compensation may be at its peak in the context of bankruptcies induced by regulations.

Category Two businesses were prohibited from operating in-person, and during shutdowns have no alternative means of making revenue. This category includes businesses such as:

* nail salons;

* barbershops;

* tattoo parlors;

* day care centers;

* theaters;

* malls/brick-and-mortar retail;

* casinos;

* smoke/bar lounges & nightclubs;

* zoos & museums;

* gyms;

* live arts;

* non-essential categories of manufacturing;

* recreational sports; and

* places of public amusement.⁹⁷

The nature of the business models for these firms means they are effectively unable to generate any revenue under shutdowns, making them some of the strongest candidates for takings claims. For example, a barbershop or beauty salon could begin selling beauty supplies on the street outside of their business or attempt online sales.⁹⁸ But the nature of their (typically) small scale and cost structure means that it would be difficult for these businesses to make this transition in a profitable way.⁹⁹

In a survey of over 600 beauty professionals, 96% of respondents said they became effectively unemployed for months due to the spring 2020 shutdowns.¹⁰⁰ The top two industries that had the highest rates of government shutdowns in April 2020, when closure rates were the highest across all sectors, were (1) health and beauty, and (2) arts and entertainment, with 89% and 79% closures respectively.¹⁰¹ With the average small business only holding a cash buffer of twenty-seven days, it is no surprise that these business sectors had the highest permanent closure rates during the pandemic.¹⁰²

Category Three businesses include seasonal and regional businesses in which the bulk of revenue is generated in a place or time of year that may be particularly exposed to a multi-month shutdown or occupancy/operations limits. Examples include:

* tourism;

* hotels;

* recreation/amusement parks;

* summer camps & programs; and

* hunting & sport retail.¹⁰³

Because they often have low-margin, high-volume revenue models, businesses like amusement parks, ice cream parlors, restaurants, and tourism-related businesses are in jeopardy, if they are forced to shut down or operate at limited capacities.¹⁰⁴ For these businesses, even being permitted to operate at limited capacity may not necessarily justify the costs of actually opening.¹⁰⁵ For example, many amusement park companies earn the bulk of their income during the summer months due to both climate and school vacations facilitating family travel.¹⁰⁶ States and regions that have major tourism industries experienced the seasonal effects of shutdowns even more.¹⁰⁷ Hawaii’s shutdowns, for instance, are projected to lead to roughly 25% of its businesses closing permanently with impacts on restaurants, hotels, and other related businesses, such as shops and tour operators.¹⁰⁸

Businesses that are regionally based, such as those concentrated in downtown districts, tourism hotspots, and college towns, share parallel shutdown consequences with seasonal businesses.¹⁰⁹ Service sector businesses, such as law and accounting firms located in downtown areas, still flourished throughout the shutdowns because most employees could work from home.¹¹⁰ But businesses that cater to downtown firms, such as restaurants, retail, and sundry shops, lost their customer bases due to the shutdowns and could not easily transplant their businesses elsewhere.¹¹¹ Most American downtowns had foot traffic plunge by 75% during the shutdowns from April 2020 through August 2020, and the hangover effect of shutdowns left downtown businesses facing economic challenges even after they were able to partly reopen.¹¹² For example, hotels in downtown Portland have seen an approximately 75% decline in occupancy after reopening compared to the prior year, and downtown stores faced similar revenue shortfalls because of continued restrictions on adjacent businesses.¹¹³

Category Four businesses include those that were forced to shut down in-person operations yet had alternative ways of making some revenue. Examples of these businesses include:

* restaurants with take-out / fast food restaurants;

* online fitness classes;

* virtual arts and entertainment;

* retail with online business; and

* office-based professional services.¹¹⁴

The most fruitful example for this category would be sit-down restaurants once they were allowed to resume take-out operations. For retail, the types of businesses that would fall under this category would be those that operate both online and in-person. For most retail stores, online sales constitute only a small portion of their overall sales, and as a result, by July 15, 2020, only 69% of retailers had made their rent payment for the month.¹¹⁵ Both the restaurant and retail industries suggest that even though alternative methods of sales are possible, they may not make up for the lost revenue from in-person sales due to the shutdowns.

Category Five includes businesses that were later allowed limited outdoor operations in May and June 2020, like restaurants, youth programs, recreational sports, and fitness classes. Towards the end of May, restaurants, many of which could now offer limited outdoor dining, were experiencing a 24–37% dip in daily revenue when compared to 2019.¹¹⁶ In terms of youth sports programs, an April 2020 poll conducted by the Aspen Institute’s Project Play initiative revealed that 38% of local sports leaders expected to lose up to 50% of their revenue over the next year.¹¹⁷ Two-thirds of youth summer camps closed for the 2020 summer season.¹¹⁸ Around 27% of these closed camps offered some form of virtual camp, generating some revenue, but not enough to make up for normal earnings.¹¹⁹

Category Six businesses include those that were later allowed indoor operations, usually at limited capacities of 25% to 50%. Many businesses like restaurants, barbershops, salons, casinos, and gyms fell into this category as states eased restrictions.¹²⁰ These changes resulted in the reversal of fortune for many businesses. For example, in June 2020, restaurants with outdoor or limited indoor dining experienced a 20% dip in daily revenue from a year earlier—a significant improvement from the 66% decrease back in late March 2020 when restaurants fell into Category Five of take-out and delivery only.¹²¹ Health and beauty businesses that were allowed to reopen earlier in 2020 enjoyed an increase in daily revenue due to pent-up demand.¹²² In contrast, when Maryland reopened its casinos at 50% capacity in June 2020, revenue had declined by 27% from the previous year.¹²³

These are just examples of the kinds of businesses that may fall into each Category in Figure 2.¹²⁴ With each reopening phase, some of these businesses will shift down the spectrum as they are allowed to resume various levels of operations. Some businesses will also fall into multiple Categories based on the extent of restrictions for different parts of their operations.

II. An Overview of Existing Temporary, Regulatory Takings Law

This Part provides an overview of the existing temporary and regulatory takings doctrines. Section A lays out the tension between takings and the police power. Section B discusses the origins of regulatory takings. Section C outlines current takings doctrine, and Section D addresses some limitations of the doctrine when regulatory takings may not apply. Section E notes recognized exceptions to regulatory takings, such as emergency takings. Finally, Section F critiques the reluctance of courts to address the relationship between takings and state police power.

A. The Tension Between Police Powers and Takings Protections

While the efficacy of shutdowns in slowing down the spread of the virus has been a matter of public debate, courts have clearly established the legality of police power-based shutdowns.¹²⁵ The question is whether state governments are obligated to compensate business owners for shutdowns that impose burdens on segments of the business world for the good of the many. The purpose of having shutdowns recognized as temporary, regulatory takings is not to question the exercise of state police powers, but rather to incentivize state governments to internalize some of the economic costs that shutdowns impose.¹²⁶ That way government actors will have reasons to develop a more thoughtful approach to shutdowns (and future exogenous shocks requiring state intervention) that minimizes the economic impact.

State governors have effectively imposed unfunded mandates on businesses.¹²⁷ State legislatures have been largely powerless to temper the shutdowns, and the affected businesses have been left with no substantive legal recourse.¹²⁸ Governors simply face no meaningful oversight or accountability for these exercises of their police powers except for the distant prospect of future elections. The hope is that once shutdowns are recognized as economic liberty takings, states will be forced to internalize the economic consequences of shutdowns. This accountability will foster more carefully tailored uses of police power during the pandemic and future emergency situations that recognize the need for state action but also respect private property rights.

B. The Origins of Regulatory Takings

Under the Takings Clause of the Fifth Amendment, the government may take private property “for public use” through a regulation or through the exercise of eminent domain, so long as it pays “just compensation.”¹²⁹ The just compensation requirement seeks to prevent the government from forcing select groups from bearing burdens for the public good.¹³⁰ Regulatory takings temper state police powers by mandating just compensation if a regulation goes “too far” in restricting property rights.¹³¹ “The basic understanding of the Fifth Amendment makes clear that it is designed not to limit the government interference with property rights per se, but rather to secure compensation in the event of otherwise proper interference amounting to a taking.”¹³² Therefore, properly framed takings claims in response to shutdowns would not allege that a state exceeded police powers, but rather that the state needs to internalize the costs of shutting down economic activity by paying just compensation to affected businesses.

Broad deference to state executive power may be needed in emergencies, but there must be a point at which the exercise of executive power triggers a temporary, regulatory taking and just compensation for affected property owners. Most state governors (and mayors) enjoy four-year terms and in the case of governors, enjoy virtually unfettered authority in exercising police powers.¹³³ This fact means governors are exercising emergency police powers without any accountability from the legislature, and accountability to the people in the form of reelection is often a distant prospect years away.¹³⁴ The takings doctrine is designed to ensure balance occurs in the exercise of police powers for public purposes by incentivizing state governors (and local officials) to factor the costs of their actions into how they structure government interventions.¹³⁵

Courts have often conflated the question of the permissible scope of state police powers with the issue of regulatory takings compensation.¹³⁶ In 1887, the Supreme Court in Mugler v. Kansas,¹³⁷ held that a statute which prohibited the manufacture and sale of alcohol did not constitute a compensable taking because the legislation was a valid exercise of state police power enacted for health and safety purposes.¹³⁸ The court distinguished an exercise of state police power from a taking, explaining that the former seeks to abate a public nuisance, while the latter takes property away completely and involves a physical taking of property.¹³⁹ This distinction was problematic in restricting takings to physical appropriations of property.¹⁴⁰

Pennsylvania Coal Co. v. Mahon¹⁴¹260 U.S. 393 (1922). corrected this problem by introducing the concept of regulatory takings. The Supreme Court recognized a regulatory taking in a case in which a state regulation barred an owner from mining his own mineral claim, the government’s justification being to protect others’ surface-level buildings.¹⁴² “[W]hile property may be regulated to a certain extent [under a valid exercise of state police powers], if regulation goes too far it will be recognized as a taking.”¹⁴³ Two factors should be considered when determining if a regulation goes too far: (1) the extent of the diminution of the property value, and (2) the public interest underpinning the regulation.¹⁴⁴

After Mahon, the focus in regulatory takings has been on whether the extent of property value reduction triggers just compensation.¹⁴⁵ Four years later, the Supreme Court in Village of Euclid v. Ambler Realty Co.¹⁴⁶272 U.S. 365 (1926).signaled how high the bar would be for regulatory takings when the introduction of a zoning ordinance that diminished property values by 75% was not recognized as a taking.¹⁴⁷ The ensuing century of regulatory takings cases have continued to set a high threshold for takings claims, even as the reach of the administrative state has dramatically expanded.¹⁴⁸

C. Current Regulatory Takings Doctrine

Regulatory takings have evolved over time into three judicially constructed categories: permanent physical intrusions, total per se takings, and the catch-all, ad hoc balancing test for partial takings.¹⁴⁹ Most regulatory takings regulations are analyzed under the ad hoc balancing test for partial takings established by Penn Central.¹⁵⁰ But courts first look to see whether the regulation is governed by one of the two categorical takings categories: (1) a forced, permanent, and physical appropriation of property, or (2) a regulation that deprives a property of all economically viable uses.¹⁵¹ Courts have generally not regarded temporary takings as falling within either of these two categorical takings categories and analyzed temporary takings claims under the partial takings Penn Central test.¹⁵²

1. Categorical Takings

The two types of categorical takings are (a) permanent, physical appropriations of property, and (b) regulations that deprive property of all economically viable uses.

a. Permanent, Physical Appropriation or Intrusion

Loretto v. Teleprompter Manhattan CATV Corp.,¹⁵³458 U.S. 419 (1982). established that a forced, permanent, and physical appropriation of property is a categorical taking.¹⁵⁴ In Loretto, the Supreme Court held that a state law that authorized cable companies to install cables on property without the property owner’s consent are takings “without regard to the public interest that it may serve.”¹⁵⁵ A challenge in analyzing this categorical takings category is determining what constitutes a permanent physical intrusion. Following Loretto, “permanent” was framed as meaning continuous as opposed to temporary and limited.¹⁵⁶ However, this definition became muddled after the Supreme Court’s decision in Nollan v. California Coastal Commission,¹⁵⁷ in which the Supreme Court held that a state imposition of a beach access easement on a landowner’s property constituted a permanent physical occupation requiring compensation.¹⁵⁸ Nollan blurred the line between permanent and temporary physical invasions. Nollan also led lower courts to develop inconsistent definitions of “permanent,” with some defining it to mean a “substantial” burden on property and others focusing on the idea of a “fixed” burden on property owners.¹⁵⁹ This “shadow Loretto doctrine” from the lower courts highlights the potential elasticity of the Loretto doctrine in addressing regulatory burdens on property.¹⁶⁰ While Loretto and Nollan raise questions about the scope of regulatory burdens, the Lucas categorical takings test and Penn Central test for partial takings matter far more for understanding temporary, regulatory takings.

b. Deprivation of All Economically Viable Uses

The second category of per se categorical takings consists of regulations that deprive property owners of all economically viable uses of their property. Lucas established that a regulation is a compensable taking if it “denies all economically beneficial or productive use of land.”¹⁶¹ The Court equated a regulation that deprives a property owner of all economically viable uses of their property to a “physical appropriation,” which should be treated like a permanent physical invasion.¹⁶² In Lucas, the purchaser of coastal property lots faced a regulation that barred development on the land, which effectively denied all economically viable uses of the land.¹⁶³ While this categorical taking opens the door to regulatory takings claims, the Supreme Court to date has had a mixed record in how broadly to interpret this categorical taking. On the one hand in Palazzolo v. Rhode Island,¹⁶⁴ the Supreme Court found that a regulation that leads to a 94% reduction in property value does not amount to aLucas categorical taking.¹⁶⁵ But on the other hand, the Court expanded on Lucas in Horne v. Department of Agriculture,¹⁶⁶ by holding that the physical appropriation of personalproperty—in that case, a marketing order requiring raisin growers to give a percentage of their crops to the federal government—constituted a per se taking.¹⁶⁷

Rather than reducing the complexity and volume of litigation, both Lucas and Horne represent bright-line rules that are ill-defined around the edges and have resulted in little success for plaintiffs.¹⁶⁸ The limited applicability of Lucas bright-line rules raises the significance of the third category of regulatory takings, which utilizes a multi-factor balancing test.¹⁶⁹

2. Partial Takings and the Penn Central Balancing Test

If a regulatory takings claim does not meet the criteria for a categorical taking, then it falls under the third category of partial takings, established by Penn Central.¹⁷⁰ In Penn Central, New York City passed a historic preservation ordinance that prohibited Penn Central from building a tower over Grand Central Station.¹⁷¹ Penn Central argued that this ordinance was a taking because it substantially reduced the economic value of their property and unfairly singled them out with a unique burden in the name of the public interest.¹⁷² In rejecting Penn Central’s claims, the Supreme Court applied a multi-factor balancing test for determining whether a government regulation constitutes a taking.¹⁷³ The Penn Central test requires courts to assess: (1) the character of the government action, (2) the regulation’s economic effect on the landowner, and (3) the extent to which the regulation interferes with the landowner’s reasonable investment-backed expectations.¹⁷⁴

a. The Character of the Government Action

The first prong of Penn Central holds that regulations are more likely to be treated as a taking if they constitute a forced and permanent physical invasion of property, the taking of a core property right, or if the property owner in question is unfairly burdened relative to others.¹⁷⁵ In contrast, courts are less likely to find a takings claim if the purpose of the regulation is to protect the community or if there is an average reciprocity of advantage (i.e., the burden in one regulatory context is offset by other burdens facing other parties).¹⁷⁶Penn Central itself serves as a cautionary tale in how far courts will go in deferring to government action. The Supreme Court held that Penn Central was not unfairly singled out because over 200 buildings were also restricted by the ordinance (in a city of one million structures), which weighed in favor of denying a taking.¹⁷⁷

b. The Economic Impact of the Regulation

The second prong of Penn Central holds that regulations are more likely to be takings if they destroy most or all economically viable uses of property that are not justified by a strong public interest.¹⁷⁸ Regulations are likely not a taking if they leave the owner with viable economic use of their property or a reasonable return on their investments.¹⁷⁹ In Penn Central, the Supreme Court found that because the ordinance prohibited additional construction on Penn Central’s property, the regulation did not affect the present value or use of the property as a train station.¹⁸⁰

Courts have often been leery of finding regulatory takings because of the difficulties of quantifying the economic impact of regulations.¹⁸¹ The concern is that non-regulated industries do not have set rates of return on their capital that can serve as benchmarks of economic impact and instead require case by case analysis of the impact of regulation on a given business.¹⁸² Thus, courts traditionally look to evidence of business losses or revenue declines due to regulations.¹⁸³ The challenges of applying these lenses for compensation is that they may fuel moral hazard as these numbers are hard to verify and easy to inflate and may disincentivize business efforts to mitigate damages. While the economic impact of regulations may be clear, courts may be reluctant to open up the doors to a pandora’s box of regulatory takings compensation calculations.

What is clear is that a high degree of economic impact is required in order to establish a regulatory taking. As the Supreme Court in Lingle v. Chevron U.S.A. Inc.¹⁸⁴544 U.S. 528 (2005). framed the issue, the economic impact from regulations must be so severe that it is “functionally equivalent” to a direct appropriation.¹⁸⁵ The U.S. Court of Federal Claims, which handles most takings claims against the federal government and repeatedly utilizes the comparable sales approach, generally looks for a diminution of value “well in excess of 85 percent.”¹⁸⁶

c. The Interference “[W]ith [D]istinct [I]nvestment [B]acked [E]xpectations”

The third prong of the Penn Central test considers the extent of “interfere[nce] with distinct investment-backed expectations.”¹⁸⁷ Government action is more likely to be treated as a taking if the property owner has substantially invested in reasonable reliance on an existing regulatory scheme.¹⁸⁸ If the regulation was foreseeable prior to the property investment, the regulation is less likely to be found a taking. In Penn Central, the court held that because the train station was entitled to continue its present use, the regulation did not interfere with investment-backed expectations enough to weigh in favor of a takings finding.¹⁸⁹ Similarly, in Palazzolo, when the property owner was denied permits to develop his waterfront property, the Rhode Island Supreme Court found that there was no reasonable investment-backed expectation as the law was already in place prior to the acquisition of the land from the previous owner.¹⁹⁰ However, the U.S. Supreme Court found that an awareness of the law prior to purchasing the land does not necessarily immunize the state from a property owner’s investment-backed expectations.¹⁹¹ Therefore, a state’s reliance on existing laws does not create a blanket of immunity when dealing with investment-backed expectations.

The Penn Central test provides the appearance of balancing government interests and private property rights. But in practice, courts have applied this test in ways that are deferential to federal, state, and local governments.¹⁹² Typically, a court will not find a compensable taking under Penn Central if the parcel as a whole retains some degree of economic value.¹⁹³ The ubiquity of government regulations have made expansive regulation “a background principle of property law,” which makes it difficult to satisfy the Penn Central test.¹⁹⁴

D. The Limits Facing Temporary Takings

Temporary takings represent another variant of partial taking. In Kimball Laundry Co. v. United States,¹⁹⁵ the Supreme Court held the federal government’s physical possession of a commercial laundry facility for its use during World War II constituted a compensable temporary taking.¹⁹⁶ However, the Supreme Court did not address the issue of temporary regulatory takings until First English Evangelical Lutheran Church v. County of Los Angeles,¹⁹⁷ which involved an interim county ordinance denying the development of a church’s property after extreme flooding.¹⁹⁸ Although the Court sidestepped the question of whether the ordinance at issue constituted a taking, it recognized that temporary regulatory takings require compensation, because “temporary takings [that] deny a landowner all use of his property[] are not different in kind from permanent takings, for which the Constitution clearly requires compensation.”¹⁹⁹

Fifteen years later, the Supreme Court in Tahoe-Sierra held that a temporary, regulatory taking claim was not to be assessed based on the Lucas per se takings rule, but rather under the Penn Central balancing test.²⁰⁰ The Supreme Court held that a thirty-two-month moratorium on development until a comprehensive zoning plan was in place supported a strong public interest and was not unreasonable.²⁰¹ The Court concluded that the moratorium did not deprive the affected properties of all economic value or disrupt investment-backed expectations, because it assumed that the undeveloped property would “recover [its] value as soon as the prohibition is lifted.”²⁰²

The key aspect of the Tahoe-Sierra decision was the Court’s defining Penn Central’s “parcel as a whole” to include the entire life of the property, rather than the entire scope of the property for a period of time.²⁰³ The Court noted that “[i]n rejecting petitioners’ per se rule, we do not hold that the temporary nature of a land-use restriction precludes finding that it effects a taking; we simply recognize that it should not be given exclusive significance one way or the other.”²⁰⁴ The Supreme Court also expressed concern that allowing temporary deprivations of economic use to constitute a categorical taking would impose unreasonable financial burdens upon governments for delays and lead to hasty decision-making.²⁰⁵ Tahoe-Sierra’s focus on the lifetime value of the property makes it difficult to establish temporary takings claims.²⁰⁶ However, the decision implies that it is possible for litigants to frame temporary regulations as unreasonable burdens which constitute takings.

E. Exceptions to Temporary, Regulatory Takings

Exceptions to takings provide state governments with additional insulation from temporary, regulatory takings claims. These exceptions do not give governments absolute immunity, but they present hurdles to constructing viable temporary, regulatory takings claims.

1. Public Necessity/Emergency Takings Exception

The common law defense of “public necessity” empowers governments to exercise broad decision-making authority during emergencies. The logic is that governments must be free to act swiftly and decisively during times of crisis. This premise forms the basis for the emergency exception defense to takings, which potentially justifies the uncompensated destruction of real and personal property to protect the lives and property of others.²⁰⁷ The assertion of this defense requires the government to show: (1) an actual emergency, (2) imminent danger, and (3) the actual necessity of government action.²⁰⁸ Although this emergency exception is not found in the text of the Constitution, courts have applied the emergency exception doctrine in a range of contexts.²⁰⁹

Under the emergency exception doctrine, the Supreme Court has recognized that “in times of imminent peril—such as when fire threatened a whole community—the sovereign could, with immunity, destroy the property of a few that the property of the many and the lives of many more could be saved.”²¹⁰ This doctrine of public necessity “absolve[s] the State . . . of liability for the destruction of ‘real and personal property, in cases of actual necessity, to prevent . . .’ or to forestall other grave threats to the lives and property of others.”²¹¹

The application of this exception has generally been limited to cases involving the physical destruction of property without compensation during emergencies and has not been applied to cases involving regulations that do not literally destroy property.²¹² Wartime cases illuminate the application of this exception as it applies to physical takings. For example, during World War II the U.S. Army ordered the destruction of numerous U.S. facilities in Manila, Philippines, including a Caltex petroleum depot supplying fuel, so that they would be of no use to the invading Japanese army. ²¹³ Caltex sued after the war for compensation, but the Supreme Court held that this destruction of property during wartime did not constitute a compensable taking.²¹⁴ The holding relied on a similar Civil War case in which the U.S. Army destroyed a bridge to impede the advances of the Confederacy.²¹⁵ The Court in that case held that “[t]he safety of the state in such cases overrides all considerations of private loss” because the destruction was a military necessity.²¹⁶

Outside of wartime exceptions, the federal government’s power to exercise eminent domain in emergencies is tempered by the need for just compensation of affected property owners.²¹⁷ The President’s authority during emergencies is limited by the scope of congressional statutory authorization.²¹⁸ For example, the Public Health Service Act specifically grants the President broad discretion and unilateral authority to declare national health emergencies,²¹⁹ and the Defense Production Act authorizes the President to expedite and expand the supply of materials and services needed to address emergencies with just compensation for the affected owners.²²⁰ Under the Stafford Act, the Federal Emergency Management Agency (“FEMA”) is authorized to exercise eminent domain during emergencies to seize personal and real property such as medicine, food, and equipment with just compensation for the affected owners.²²¹

State governments, on the other hand, enjoy broader emergency powers.²²² A state government may exercise police powers to regulate the use of property to govern the health, welfare, and safety of its citizens without paying just compensation, so long as it is “reasonably necessary for the accomplishment of the [government’s] purpose, and not unduly oppressive upon individuals.”²²³ For example, in Miller v. Schoene²²⁴276 U.S. 272 (1928). the Supreme Court upheld the state’s destruction of an orchard without compensation because it was designed to prevent the spread of a disease to adjacent orchards.²²⁵ The Supreme Court recognized that the destruction of the trees would ordinarily be a taking yet upheld “the destruction of one class of property in order to save another which, in the judgment of the legislature, is of greater value to the public.”²²⁶

The emergency takings doctrine has been extended to cases of stopping crime²²⁷ and stopping the spread of fires.²²⁸ The “conflagration rule,” established in Bowditch v. Boston,²²⁹ gives the government broad immunity from takings liability when it destroys property to save other property from fires.²³⁰ Under this approach, governments have destroyed buildings to prevent the spread of infection,²³¹ burned vegetation that are at risk of carrying airborne pathogens to other crops,²³² and culled healthy livestock to prevent the transmission of diseases.²³³ The key dimension for analyzing these claims is the urgency and necessity of the intervention. The public necessity defense is satisfied if the government can show: (1) an actual emergency, (2) an imminent danger, which is (3) met by a response that is actually necessary.²³⁴ The contours of an “actual necessity” are unclear.²³⁵ In some cases, state courts have determined government destructions of private property to prevent disease outbreaks to be compensable takings.²³⁶

2. Delay Exception to Temporary, Regulatory Takings

Delays in government decisions also fall within an exception to temporary, regulatory takings and are not independent grounds for valid takings claims. The Supreme Court in Agins v. City of Tiburon²³⁷447 U.S. 255 (1980).established that “[m]ere fluctuations in value during the process of governmental decision-making, absent extraordinary delay, are ‘incidents of ownership.’”²³⁸ Tahoe-Sierra made it clear that government delay is a factor for consideration within the Penn Central analysis yet is not dispositive.²³⁹ Tahoe-Sierra held a multiple-year delay in regulatory decision-making did not constitute a taking, and subsequent decisions have held that absent bad faith, government decision-making delays are not takings.²⁴⁰

F. The Shortcomings of Existing Takings Jurisprudence

Regulatory takings doctrines have not lived up to their constitutional aspirations in providing protection for property owners. The muddled frameworks of the Penn Central and Lucas tests, along with courts’ general deference to state police powers, means that property owners face significant difficulties in establishing regulatory takings.²⁴¹ The sweeping use of power by state governors during the pandemic has raised the question of whether takings law is striking the right balance between economic liberty and state action.²⁴²

1. The Denominator, Numerator, and Ripeness Problems.

First, both Lucas total takings and Penn Central partial takings are plagued by what is known as the “denominator problem.” Both categories examine the diminution of value through a fraction: the decrease in value due to a regulation divided by the property value absent the regulation.²⁴³ Property owners have the incentive to define the relevant property (the denominator) narrowly in hopes of invoking the Lucas total takings rule. In contrast, governments seek to define the owner’s property as broadly as possible to include property not affected by the regulation.²⁴⁴

The Penn Central test established the “whole parcel” rule, which defines the denominator in takings cases as the entire, aggregated parcel owned by the landowner over the entire period it was held by the owner—a deferential approach to the state.²⁴⁵ In Murr v. Wisconsin,²⁴⁶ the Supreme Court established a multi-factor test to discern whether the “reasonable expectations about property ownership would lead a landowner to anticipate that his holdings would be treated as one parcel, or, instead, as separate tracts.”²⁴⁷ This approach has made it more difficult for affected owners to have courts focus only on the portion of their holdings affected by a regulation.²⁴⁸

Second, takings claims under the Lucas rule and Penn Central test also face a numerator problem—how to determine the diminution of value of the specific property interest subject to regulation.²⁴⁹ Penn Central noted that courts must consider the extent to which benefits outside the regulated parcel might offset or mitigate the decline in value.²⁵⁰ Similarly, in Murr, the Court held that determining the numerator requires courts to include the property’s potential “synergies with the owner’s other holdings.”²⁵¹

This numerator and denominator problem is particularly salient in the context of business shutdowns as some operations of a business in one part of the country may be completely shut down while others remain open. Think of a hypothetical Disney parks takings challenge. The state of California shuttered Disney Land from March 2020 to April 2021, while Disney World in Florida resumed operations starting in September 2020.²⁵² Analyzing the impact of the Disney Land shutdown separately would lead to different conclusions than analyzing the shutdown in the context of Disney’s world-wide theme parks or overall media operations, which continued throughout the pandemic.

Third, parties face the challenge of determining when a temporary, regulatory taking claim is ripe.²⁵³ Knick v. Township of Scott,²⁵⁴ held that a landowner may bring a takings claim in federal court at the time the government takes his property without paying for it.²⁵⁵ On the one hand, this calculation appears easy as the window for a potential taking is the time between (a) when a regulation shutting down or substantially limiting business operations begins, and (b) when the regulation at issue is lifted. But what is difficult is determining when the regulation blossoms into a taking. That may ultimately require proof of a financial impact, which takes time to accrue and will understandably vary based on the nature of the business. In Williamson County Regional Planning Commission v. Hamilton Bank²⁵⁶473 U.S. 172 (1985).:

[T]he Court explained the requirement that a takings claim must be ripe. The Court held that a takings claim challenging the application of land-use regulations is not ripe unless “the government entity charged with implementing the regulations has reached a final decision regarding the application of the regulations to the property at issue.”²⁵⁷

2. Timing Issues with Temporary Takings

Another set of challenges facing regulatory takings claims are the ambiguities surrounding temporary takings claims. The Supreme Court’s decision in Tahoe-Sierra deviated from conventional understandings of the temporal aspects of property law in a way that make temporary takings claims difficult to establish. Traditionally in real property law, property is conceived as a bundle of sticks with temporal rights forming slices of the property interests that owners can use or sell.²⁵⁸ The classic illustration is a lease, a time-bound interest in a property that vests use rights in the lessee for the duration of the lease.²⁵⁹

In contrast, in Tahoe-Sierra the Supreme Court abandoned this basic premise of property law and refused to separate a parcel’s value into temporal slices to measure whether the property had been deprived of all economic use for the temporary period at issue.²⁶⁰ Instead, the Supreme Court concluded that the “parcel as a whole” analysis²⁶¹ requires an assessment of the “geographic dimensions” and the “temporal aspects of the owner’s interests.²⁶² Cienega Gardens v. United States (Cienega X)²⁶³ captured this holding’s impact by concluding that the relevant parcel in temporary regulatory takings claims is valued over the property’s “entire useful life.”²⁶⁴ In theory, this approach would preclude any temporary takings claim caused by regulations, so long as regulators could claim that the regulation was not permanent.

Tahoe-Sierra’s interpretation of how to analyze the “parcel as a whole”²⁶⁵ leads to odd inconsistencies. For example, a lessee could have a plausible takings claim if the only interest the lessee possesses is the lease, and the regulation at issue interrupted the lessee’s use of the property for the term of the lease. In contrast, a property owner who has fee simple title of a property would not be able to make a temporary, regulatory taking claim because of the focus on the lifetime value. The context of pandemic claims offers courts a chance to revisit this inconsistency and to restore the more conventional property law understanding that a fee simple owner can have multiple, severable interests in a property, some of which may be affected by a temporary regulation.

Another issue surrounding temporary, regulatory takings the Supreme Court has yet to address is the determination of when such a taking begins and ends.²⁶⁶ State courts, which generally rely upon state constitutions, statutes, and case law, provide varying, and thus limited guidance to federal courts regarding this issue.²⁶⁷ This point matters because the economic impact of a temporary regulation may not neatly fit the parameters of the day of implementation of a regulation and the day of its revocation or sunset. For example, businesses that faced shutdown orders may have had revenue from pre-pandemic transactions or accounts receivable coming in for weeks after the shutdown that would create the appearance of continued partial profitability and undercut potential takings claims. But as the shutdown wore on the absence of subsequent transactions would raise the question as to whether takings claims should count the full window of the regulation’s applicability or merely the period in which the regulation stripped or dramatically decreased profitability. For ease of administrative convenience, a takings claim should be treated as covering the time frame of the temporary regulation’s entire application, not merely starting when the business actually experienced the economic effects. Companies could document the extent to which revenues stem from the period prior to the regulation’s implementation to reflect a more accurate picture of lost profits.²⁶⁸

3. The Shortcomings of Takings Law as it Relates to State Police Power

But the most significant shortcoming of takings law is the failure to address the intersection of takings law and police power. The result has been a frequent conflation of police power and takings law which has led to the development of large exceptions to takings compensation in the name of emergencies or public necessity.²⁶⁹ Prior to Penn Central, state police power was analyzed through the lens of the substantive due process doctrine, which was distinct from takings doctrine and had roots back to the Lochner era of judicial skepticism of regulatory burdens on property.²⁷⁰ By integrating Fourteenth Amendment substantive due process and Fifth Amendment Takings Clause precedents to create a unified takings doctrine, Penn Central eliminated due process as a distinctive category of inquiry in takings law and the states’ police power defense.²⁷¹ Instead of first figuring out what the claimant’s property rights actually are based on state law and analyzing those rights in light of the scope of the state’s police powers, courts after Penn Central directly applied takings doctrines to analyze the merits of takings claims.²⁷²

The downside of this approach is that courts have failed to recognize and delineate the overlap of state police powers and the need for just compensation under takings law. The issue is not about imposing limits on the vast state police powers, but rather recognizing that takings law does provide for just compensation when the few take on burdens for the sake of the health, welfare, and safety of the many.

Another way of framing the issue is that the “character of the government action” prong of the Penn Central test says very little about whether a takings occurs. That is an artifact of substantive due process analysis, but the fact that a regulation is part of the state’s police powers does not help to reveal whether (or at what point) the regulatory burden encroaches on private property rights under takings law.²⁷³ The ultimate question is the extent of the economic burden of a regulation on private property,²⁷⁴ and whether that burden rises to the level of being a functional equivalent of a full or partial government seizure of that property to advance a public purpose.²⁷⁵ That is the foundational question at the heart of the pandemic takings cases.

4. The Challenge of Just Compensation Calculations for Businesses

One of the challenges of implementing temporary, regulatory takings is determining which framework would not only be consistent with just compensation but also could be administered cost effectively. Courts typically apply one of three approaches to approximate the market value of a business subjected to a takings: an asset-based approach, a sales comparison approach, or an income approach.²⁷⁶ Each of these frameworks has limitations in the context of comprehensive takings of businesses, but these approaches are particularly difficult to apply in the context of temporary, regulatory takings.

a. The Asset-Based Approach

The asset-based approach to business valuation assesses the pre-takings value of each asset and liability of a business to determine the overall fair market value.²⁷⁷ An appraiser or other court-appointed party analyzes the business’s financial statements to determine the value of the equipment, land, or other assets, while taking into account any depreciation expenses and the business’s liabilities.²⁷⁸ The primary critique of this approach is that it assesses individual parts of a business while ignoring the “going concern value” and human capital that is generating income, which may dramatically undervalue service businesses.²⁷⁹

The challenge of applying an asset-based approach to temporary, regulatory takings is that it would be difficult and administratively expensive to approximate the changes in a business’s assets and liabilities due to government shutdowns. In many cases, the value of assets would be depressed during the government action but would recover quickly once the government action has passed. Think of travel-related businesses whose asset values would have plummeted amidst the pandemic shutdowns, but the asset values of these types of businesses often recovered quickly once restrictions were lifted. Depending on when the snapshot of asset and liabilities changes is taken, courts may over- or under-compensate under this approach. Courts may therefore end up missing the actual economic impact of the government action that cannot be remedied following the lifting of the restrictions.

b. The Sales Comparison Approach

The limitations of the asset-based approach may lead courts to consider applying a sales comparison framework to assess a business’s value.²⁸⁰ Under the sales comparison approach, an appraiser seeks to identify comparable businesses, assess the fair market value of those businesses, and make additions or deductions that reflect differences between the basket of comparable businesses versus the business that has been subjected to takings. This framework mirrors what an appraiser does in valuing real estate property for takings claims (or conventional appraisals for mortgages). The difference is that real estate properties are readily comparable because of the recording system of real property sales, which allows appraisers efficiently to gather and analyze baskets of recent real property sales with similar dimensions in similar areas.²⁸¹

The sales comparison approach may be plausible for publicly traded companies because of transparency requirements concerning recent sales and comparable data points such as price-to-earnings ratios, price-to-book value, and price-to-revenue ratios. In contrast, appraisers may face difficulty in identifying comparable data for private businesses, since there is no comparable, systematic disclosures of recent sales of private companies. Even to the extent data on past sales of private companies is available, the absence of broader private company financial disclosures would create difficulties (and tremendous expense) for appraisers. Any financial or operational data about private companies would be self-reported and selective at best, which would make it challenging for appraisers to identify similarities and differences across companies that may require adjustments to the comparable sales. Because of these problems, comparable sales analyses for private companies would be expensive and time-consuming and would have limited informational value.²⁸²

The shortcomings of the sales comparison approach are even clearer in the context of temporary, regulatory takings. Sales that took place during the pandemic shutdowns would likely entail artificially depressed prices. Using “fire sale” prices as benchmarks for comparable sales data may systematically understate the value of companies that were able to continue as freestanding, going concerns throughout the pandemic and overstate the claims for compensation. The “snapshot problem” would come up again as the value of the businesses would oscillate throughout the pandemic shutdowns. Focusing on temporary declines in value would likely miss the lasting economic impact of the shutdowns which is lost revenue and profits, which in many cases, such as for restaurants or hotels, could not be recovered in the future.

At best, the sales comparison approach would be useful for estimating compensation for businesses that were bankrupted by the pandemic shutdowns. Appraisers could use pre-pandemic sales data for comparable businesses as benchmarks for approximating the economic impact of the shutdowns and then factor in the similarities and differences among these businesses.

c. Income Approach

The asset-based and sales-comparison approaches both have intrinsic limitations in the business context, which makes an income approach a more appealing alternative for business takings claims.²⁸³ Income approach analysis seeks to convert the future predicted economic benefits (i.e., earnings before interest, taxes, depreciation, and amortization) into present value terms. The simple logic is that a business’s value is a function of its stream of earnings adjusted for its present value or capitalization rate. This approach makes sense to the extent that the past is prologue (i.e., that past earnings can be projected into the future), which obviously rests on a set of assumptions about both the affected business and the broader economy.

Courts typically apply one of two lenses for income analysis of an affected business: the discounted cash flow or the capitalization of earnings method. The discounted cash flow method entails an appraiser using historical earnings and expenses to project a business’s estimated future cash flows, typically over a five-year window.²⁸⁴ Then the appraiser adjusts the cash flow estimates to reflect their present value by applying a discount rate based on the risks related to the business (such as market risk and inflation).²⁸⁵ The capitalization of earnings method entails an appraisers’ projecting historical earnings and expenses into expected future cash flows and dividing the projected cash flows by a capitalization rate (which is a function of the estimated rate of return of comparable businesses and the business’s projected long-term growth).²⁸⁶

These approaches are most useful in assessing just compensation for real estate takings, a context in which cash flows are generally predictable and discount and capitalization rates for categories of real estate can be readily estimated. The primary shortcoming of the income approach is the complexity and speculative nature of the assumptions incorporated into the discount and capitalization rates especially in non-real estate contexts in which there may greater subjectivity in identifying risks and rates of return for the industry at issue.²⁸⁷ For example, discount and capitalization rates may end up in battles of experts for the government and affected businesses who each make different subjective assessments of the extent of future market risk, the extent of future inflation, and the rate of return for comparable businesses.²⁸⁸ In the context of temporary, regulatory takings the focus is not on the overall value of a business, but rather on the financial impact from government action that cannot be recovered in the future.

5. The Limited Case Law on Frameworks for Temporary, Regulatory Takings

In spite of the existence of these frameworks for takings compensation, the Supreme Court has focused on market rate rentals or business losses in the limited number of cases in which it has considered temporary takings compensation.²⁸⁹ The Supreme Court has held that “[o]rdinarily fair compensation for a temporary [government] possession of a business enterprise is the reasonable value of the property’s use.”²⁹⁰ “[T]he proper measure of compensation [for a temporary, physical taking] is the rental that probably could have been obtained” for a business,²⁹¹ which is based in part on “the record of its past earnings.”²⁹² In other words, the government owes business or property owners market level rent for physically occupying businesses or property, such as for wartime production.

In contrast, in the handful of cases in which the Supreme Court has considered compensation for temporary, regulatory takings, the Court has applied other lenses for compensation that focus on business losses.²⁹³ For example, in United States v Pewee Coal Co.,²⁹⁴ the Supreme Court analyzed takings compensation in the context of a federal government requirement that coal mines continue operating for five-and-a-half months to prevent a strike from disrupting wartime production.²⁹⁵ Justice Reed, in a concurrence, concluded that “[m]arket value, despite its difficulties, provides a fairly acceptable test for just compensation when the property is taken absolutely. But in the temporary taking of operating properties, market value is too uncertain a measure to have any practical significance.”²⁹⁶ This approach effectively dismissed the relevance of the asset-based and comparable sale lenses for temporary, regulatory takings compensation. Instead, the Court concluded that under the Takings Clause, the government’s mandate for the continued operation of Pewee Coal’s mines “require[d] the United States to bear operating losses incurred during the period the Government operates private property in the name of the public without the owner’s consent.”²⁹⁷

More recently, the Federal Circuit in the Cienega line of cases sought to limit the focus on business losses to physical takings, while focusing on the impairment of net income in temporary, regulatory takings cases.²⁹⁸ The Federal Circuit proposed two ways to assess temporary, regulatory takings:

First, a comparison could be made between the market value of the property with and without the restrictions on the date that the restriction began (the change in value approach). The other approach is to compare the lost net income due to the restriction (discounted to present value at the date the restriction was imposed) with the total net income without the restriction over the entire useful life of the property (again discounted to present value).²⁹⁹

Although the Supreme Court has not officially embraced the Federal Circuit’s lost net income approach, as Part IV argues, a net profits (net income) approach may balance compensation for affected businesses while mitigating the risks of moral hazard that may arise from market rental or loss approaches laid out in earlier Supreme Court cases.

III. The Failures of Pandemic Takings Claims

This Part surveys the takings challenges that occurred during the pandemic. Most of them were unsuccessful, primarily due to the broad deference given by courts to government action during emergencies.

A. The Range of Pandemic Takings Claims

Numerous businesses—from salons,³⁰⁰ to restaurants,³⁰¹ dance studios,³⁰² landlords,³⁰³ gyms,³⁰⁴ day care centers,³⁰⁵ and class action participants³⁰⁶—have sued state governors claiming that the shutdowns constitute a compensable regulatory taking. Along with these allegations, some plaintiffs have specifically pointed to the arbitrariness of the “essential” business designations and the discriminatory nature of the executive orders to raise a range of claims. For example, in Antietam Battlefield KOA v. Hogan,³⁰⁷ Maryland businesses and individuals argued that Governor Hogan’s executive orders not only constituted a compensatory taking under the Fifth Amendment, but also infringed on their First Amendment rights to free speech and peaceful assembly, violated the Equal Protection Clause by arbitrarily treating them differently from other similar kinds of businesses, and violated the Dormant Commerce Clause by disrupting interstate commerce.³⁰⁸

In Schulmerich Bells, LLC v. Wolf,³⁰⁹ Pennsylvania businesses brought a class action challenging their governor’s shutdowns, arguing that the orders violated the Takings Clause, and both substantive and procedural due process rights because the order deprived them of their property rights arbitrarily.³¹⁰ In Gondola Adventures, Inc. v. Newsom,³¹¹ plaintiffs alleged in part that the Governor’s orders amounted to a partial or complete taking in violation of the Takings Clause because the total shutdown of “non-essential” businesses was “an irrational, arbitrary, and capricious law bearing no rational basis to any valid government interest.”³¹²

These secondary claims reflect creative “kitchen sink” lawyering, which is unlikely to gain judicial traction. But the premise of the arguments highlights the appeal of the potential regulatory takings claims, which are rooted in the extent of the economic burden “non-essential” businesses faced during the shutdowns and the glaring lack of uniformity of categorizing businesses as “essential” and “non-essential.” Some businesses were singled out to bear burdens for the public good, while others gained windfalls from being able to remain open and facing artificially reduced competition. The nature of these selective shutdowns and their duration is markedly different than the conventional exercise of police powers during hurricanes or floods, which have finite temporal impact and comprehensive scope for the affected areas.

B. The Challenges Facing Takings Claims

Courts have broadly conflated the legality of the exercise of state police powers with the invalidity of pandemic takings claims and, with few exceptions, have failed to distinguish between these two separate questions.³¹³ Michigan Nursery & Landscape Association v. Whitmer³¹⁴ is a notable exception that found executive orders may have gone too far.³¹⁵ In this case, an association of landscapers and garden suppliers sued Michigan’s governor for prohibiting the operation of businesses that require workers to leave their homes.³¹⁶ The plaintiffs argued that the stay-at-home order violated the Takings Clause and was unreasonable because it placed an undue burden on commerce while offering little benefit, since gardening and landscaping work could be done safely outdoors.³¹⁷ Although the court did not grant the Plaintiffs’ request for a temporary restraining order, it acknowledged that, “[p]laintiffs have a point that lawn care can largely be performed alone or while maintaining an appropriate social distance.”³¹⁸ Two days later, the lawsuit was mooted when Governor Whitmer modified her order to allow landscapers and gardeners to resume business operations.³¹⁹ Other lawsuits alleging unlawful infringements on the right to travel³²⁰ and state officials’ violations of statutory authority³²¹ have seen some limited success.

Takings claims, however, remain largely unsuccessful as courts continue to defer to government actions.³²² In McCarthy v. Cuomo,³²³ the owner of a gentleman’s club that also operated as a restaurant and bar sued Governor Cuomo, alleging that the shutdowns violated the Takings Clause.³²⁴ The court, however, reasoned that the shutdowns did not deny McCarthy all economically beneficial use of his property, because he had the option of operating food and drink take-out or delivery services and therefore could not meet the Lucas total takings test.³²⁵ The court also held the plaintiff would fail the Penn Central test because of the failure to mitigate damages by having street-side food and drink take-out and delivery services.³²⁶

The most significant takings case during the pandemic has been Friends of Danny DeVito v. Wolf,³²⁷ in which businesses challenged the Pennsylvania governor’s mandated shutdowns of all “non-life-sustaining” businesses, alleging that the Order exceeded the governor’s statutory authority, and violated the Takings Clause, procedural due process rights, the Equal Protection Clause, and the right to assembly.³²⁸ The plaintiffs argued that because the Order completely prohibited them from using their property, it constituted a taking of private property for public use.³²⁹ The plaintiffs also pointed out the enormous economic damage created by the shutdowns, argued that the determination of “life-sustaining” and “non-life sustaining” businesses was arbitrary and vague, and asserted their businesses could operate safely within social distancing guidelines.³³⁰

Relying on Tahoe-Sierra, the Pennsylvania Supreme Court held that a regulatory taking had not occurred because the shutdowns only resulted in a temporary loss of the plaintiffs’ business operations and were within the state’s police powers.³³¹ The court concluded that the shutdowns were temporary because even though the duration of the pandemic was unknown, the search for a vaccine was certain, and immunity and testing were present.³³² In terms of due process, the court found that businesses classified as non-life-sustaining could technically petition for reclassification, and therefore their due process rights were not violated by the shutdowns.³³³ The court held that there was no violation of the Equal Protection Clause because the plaintiffs’ businesses were fundamentally different from other businesses that were allowed to stay open.³³⁴ Similarly, the court concluded that the right to assembly was not impeded either, because Plaintiffs could communicate via phone or videoconference.³³⁵

In TJM 64, Inc. v. Harris,³³⁶ the U.S. District Court for the Western District of Tennessee denied the plaintiffs’ request for a temporary restraining order against local shutdown orders.³³⁷ Plaintiffs alleged that the mandated shutdown of licensed restaurants was a violation of their Fourteenth Amendment due process rights and a taking under the Fifth Amendment.³³⁸ The court found no violation of either.³³⁹ The court held that the restaurants were not deprived of all economically beneficial uses of their properties because they voluntarily chose not to pursue alternative means of revenue.³⁴⁰ Second, the court applied the Penn Central test and found that while both the economic impact and investment-backed expectations factors definitely favored the plaintiffs, the character of the government action did not.³⁴¹ The court framed the tension between a public taking and a valid exercise of state police power as a mutually exclusive choice, ultimately finding the shutdown orders were within the broad police powers of the state which invalidated the takings claim.³⁴² The court supported its holding with functional arguments that granting takings compensation would strain judicial and government resources and excessively restrict the broad police powers of the state.³⁴³

C. Common Themes from Pandemic Takings Cases

The rejection of an array of pandemic-related takings cases raises further issues for thinking about how to construct a framework for future economic liberty takings claims. First, courts factor in whether plaintiffs had alternative means of making revenue.³⁴⁴ To the extent that affected businesses chose not to pursue those alternatives, even if the revenue possibilities appear de minimis, courts appear reluctant to find a categorical taking under the Lucas test.³⁴⁵ This approach would make it difficult for any regulatory taking to be recognized as illustrated by the McCarthy court’s farcical recommendation for strippers to sell sodas in front of their shuttered establishment.³⁴⁶ It is akin to asking a landowner facing a prohibition on building a beach house to rent out the landowner’s strip of sand to day beach visitors. Even if it is technically possible for an affected property owner to change the economic aspirations for the property to low revenue uses, holding that this possibility removes a potential claim of deprivation of all economically beneficial uses begs credulity.

Second, courts have routinely focused on the temporary nature of the pandemic and the shutdowns as a conclusory factor in their takings analysis, in spite of the fact that the pandemic’s uncertainties and potential vaccine-resistant mutations make the duration of the crisis open-ended. For example, in Friends of Danny DeVito, the Pennsylvania Supreme Court concluded there was no takings claim due to the temporary nature of the shutdowns and did not even apply the Penn Central test.³⁴⁷ Even when the Penn Central test is applied, courts may find that the emergency character of the shutdown orders outweighs the enormous economic damage and shattered investment-backed expectations imposed onto the plaintiffs.³⁴⁸ By incorporating notions of police power into the “character of the government action” factor, courts seem to put the emergency nature of the pandemic and the broad scope of state police powers above all else.³⁴⁹ In doing so, courts conflate the legality of the exercise of state police powers with takings protections and fail to analyze the substance of state encroachments on the economic liberty of businesses.

These cases demonstrate the reluctance of courts to second-guess government-mandated shutdowns imposed for the sake of public health.³⁵⁰ However, courts continue to analyze and scrutinize cases within constitutional limits.³⁵¹ If state officials exceed their statutory authority³⁵² or force the closure of select businesses unreasonably,³⁵³ plaintiffs may find support for a compensable taking. More importantly, the Supreme Court has not had the opportunity to revisit the ad hoc doctrines that it has constructed around temporary, regulatory takings and to analyze the implications of state and lower court decisions on pandemic-related claims. The extraordinary scope and impact of the shutdowns may cause the Supreme Court or state legislatures to revisit takings doctrines and reconsider the need for state actors to internalize the costs of state action on businesses.

IV. The Contours of Economic Liberty Takings

This Article seeks to reframe existing takings law to provide a more balanced approach towards temporary, regulatory takings claims. Section A will explain how litigants can make the strongest cases for takings under existing law. Section B will propose ways that courts can better approach temporary, regulatory takings to respect economic liberty by broadening both the Penn Central and Tahoe-Sierra frameworks and adopting a categorical framework to address the distinctive challenges posed by economic liberty takings. Section C will lay out a potential statutory framework as a substitute or complement to takings protections. Section D will analyze the merits and tradeoffs of these approaches as applied to the pandemic shutdowns and related restrictions.

A. The Potential for Economic Liberty Takings Claims Within Existing Frameworks

Under current takings frameworks, litigants face challenges based on the manner in which courts define the denominator or “whole parcel” in takings cases.³⁵⁴ Coupled with the general deference courts give to government exercises of emergency police powers and the deference afforded to “temporary” regulations in takings analysis, the regulatory takings landscape may seem very unfavorable.³⁵⁵ However, the most adversely affected businesses may be able to frame their economic liberty claims within the Penn Central and Tahoe-Sierra frameworks.

1. Strongest Case for Businesses Facing Full Shutdowns with No Alternatives

While it is generally difficult for litigants to win regulatory takings clams under Penn Central when regulations address a public emergency,³⁵⁶ some categories of businesses may have a higher chance of success.³⁵⁷ The sweeping nature of the shutdowns suggest that an affected business would have strong claims under Penn Central’s “economic impact” factor, especially if the business can demonstrate it had no or limited alternative means of revenue.³⁵⁸ An affected business would also have a strong case under the “investment-backed expectations” factor of the Penn Central test. Both the pandemic and extraordinary shutdowns (and related occupancy and operations limits) are extremely unforeseeable. While the shutdowns fall within the state police powers, that authority has nothing to do with the reasonable investment-backed expectations of businesses that they could continue their business operations from March 2020 to the present.

The most challenging part of the Penn Central test is “the character of the government action,” since the shutdown regulations are efforts to mitigate a public health emergency. Litigants would best be served framing the shutdowns and related restrictions as unfair burdens because of the government’s selectivity in restricting the operations of some categories of businesses, while allowing similar businesses with a greater range of products or scale to continue operations. Plaintiffs should argue that shutdowns, while a legal exercise of state police powers, go “too far” by constituting the equivalent of a temporary acquisition of private property for public use.³⁵⁹ To the extent that courts frame “the character of the government action” solely in terms of the public health emergency, litigants should argue that this dimension is not a conclusive factor in the Penn Central analysis and emphasize that Penn Central is a balancing test. As such, the significance of the economic impact and investment-backed expectations factors should counsel recognition of the economic liberty takings claims related to the shutdowns.

To put this argument in context, it is worthwhile to refresh the reader’s memory of the spectrum of potential takings claims presented in Figure 2.³⁶⁰ Virtually every type of business listed above could establish that the shutdowns and related restrictions were not remotely in the realm of their investment-based expectations to continue operations. This context is fundamentally different from government delays or denials of regulatory permits as businesses could have no stronger expectation than their ability to engage in their operations (unless a preexisting regulatory threat loomed such as environmental protection or endangered species rules).

The businesses that would have the strongest chance of making successful claims within the existing Penn Centralframework would be those who could demonstrate substantial economic impact with no alternative way of sustaining profitability. Businesses in Categories One to Three in Figure 2 would have the strongest claims because they could show the dramatic impact of the shutdowns in causing bankruptcy, the cut off of revenues in industries without viable alternatives to in-person operations, or the stark economic impact due to seasonal and regional considerations. This part of the test is ultimately an empirical question of businesses being able to show the impact of government disruptions on their bottom lines.

Businesses in Categories Four to Six would have a more difficult time establishing viable takings claims under the existing Penn Central test framework. These categories of businesses could substantiate a similar disruption in investment-backed expectations. However, the economic impact of regulations would likely be lower due to their ability to pursue alternative revenues after closing in-person operations, such as through online sales; the ability to have outdoor operations, such as in restaurants later in the pandemic; or the ability to engage in viable business operations even in the face of percentage limits on personnel or customers. Many of the businesses that fall in these Categories, like restaurants and retail stores, could fall into multiple categories depending on the time frame at issue. For example, restaurants that were completely closed during the first stage of the pandemic from March through May of 2020 (Category Two), were allowed outside operations (Category Four) or occupancy-limited, in-person operations (Category Five) during the summer and faced complete closures in certain states, such as New York and California during the November 2020 to January 2021 surge in the virus’s spread.³⁶¹ Under the existing framework, restaurants would have the strongest claims for the complete shutdowns, but they would have arguments for takings even in the context of outdoor dining or limits on in-person dining if they can document a substantial diminution in value.³⁶² To win takings compensation, affected businesses must try to show that the pandemic shutdowns are “forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.”³⁶³

2. Potential to Distinguish Shutdowns from Other Temporary Takings Contexts

Under the temporary takings framework established by Tahoe-Sierra, courts are unlikely to find the shutdowns to be a temporary taking for most affected companies. The Supreme Court in Tahoe-Sierra compared the economic loss suffered during the regulation period with the value of the property over its entire life, including after the regulation’s termination.³⁶⁴ This lifetime-value approach poses a nearly impossible standard to meet for any business that can resume operations once the temporary regulation ends. The exception to the rule would be companies forced into bankruptcy or otherwise facing complete closure due to the temporary regulation. The remaining lifetime value of these businesses would essentially be zero, making the diminution in value approximate the pre-regulation valuation of the business.³⁶⁵ Other businesses would have difficulty showing severe enough economic impact over the full potential life of the company (as corporations have no set legal end to their existence).

Courts may also be more sympathetic to temporary takings claims if businesses can distinguish disruptions from shutdowns from traditional temporary takings contexts. For example, many unsuccessful temporary takings cases involved physical destructions or emergency appropriations of property during wartime,³⁶⁶ or as part of an effort to contain infectious diseases among crops and animals.³⁶⁷ In contrast, the broad-based pandemic shutdowns involve restrictions on the use of private property for much longer periods of time with the uncertainty of the scope and duration of future shutdowns casting a pall over the affected businesses.

The shutdowns are also distinguishable from the Tahoe-Sierra case itself. Unlike the development moratorium in Tahoe-Sierra, businesses are not seeking to engage in a new use of their property but are seeking a continuation of their existing operations.³⁶⁸ In Tahoe-Sierra the constraints on developing the properties did not eliminate all of the affected owners’ income streams, but simply cut off the revenue they were hoping to generate through one development project.³⁶⁹ In contrast, the broader scope of pandemic shutdowns forced many businesses to lose all means of generating revenue for the duration of the shutdowns by requiring them to suspend their in-person operations.³⁷⁰ This fact, coupled with the distinctions between essential and non-essential businesses, have resulted in some businesses disproportionately taking on society’s burdens to combat the pandemic.

B. Reframing Takings Law to Protect Economic Liberty

This Section proposes three changes to the courts’ takings jurisprudence. First, courts could broaden Penn Central and Tahoe-Sierra to expand the scope of regulatory takings claims. Second, the Supreme Court could consider reversing or limiting Tahoe-Sierra. Finally, courts could adopt a modified categorical test for economic liberty takings.

1. Broadening Penn Central and Tahoe-Sierra to Strengthen Regulatory Takings Claims

One potential solution to the challenges facing economic liberty takings claims would be for courts to embrace a more expansive interpretation of Penn Central and Tahoe-Sierra. Currently, the Penn Central test rarely proves favorable for property owners as it is conventionally known as the “station” where regulatory takings claims go to die.³⁷¹ Part of the problem is that courts routinely give conclusory weight to the character of the government action and fail to consider that takings compensation may be justified even in cases where the state is legitimately exercising its police powers. Courts should give more weight to investment-backed expectations and the economic harm analysis of Penn Central claims and less weight to the character of the government action analysis.

a. Placing Greater Emphasis on the Investment-Backed Expectations Factor

In applying the Penn Central balancing test, courts can place greater emphasis on the investment-backed expectations of affected businesses. The Federal Circuit, in Appolo Fuels, Inc. v. United States,³⁷² decided that investment-backed expectations were to be considered by looking at three factors:

(1) whether the plaintiff operated in a “highly regulated industry;” (2) whether the plaintiff was aware of the problem that spawned the regulation . . . ; and (3) whether the plaintiff could have “reasonably anticipated” the possibility of such regulation in light of the “regulatory environment” at the time of purchase.³⁷³

One could argue that the developers in Tahoe-Sierra were taking on the reasonable risk of new development restrictions given widespread awareness of this type of risk. But it is hard to argue that a mom-and-pop shop or a multi-national corporation could have reasonably anticipated the nature of the COVID-19 crisis or the scope of the shutdowns. The nature of Penn Central as a balancing test can and should give courts flexibility to give more weight to the investment-backed expectations factor.

b. Redefining the Takings Denominator as Pre-Regulation Profitability

The denominator for regulatory takings should be redefined as the profitability of the business prior to the regulation as this reflects the baseline for assessing the regulation’s impact on the return on investment. This approach is consistent with the logic of Penn Central itself as the Court reasoned that the New York historic preservation law did not interfere in any way with the present use of the train terminal and allowed the company to obtain a “reasonable return” on its investment.³⁷⁴ Tahoe-Sierra warped this analysis for temporary takings by defining the whole parcel (i.e., the denominator) as the entire lifetime value of the property, rather than the impact on the property during the time frame of the regulation’s application. The Tahoe-Sierraapproach misses the economic impact of regulations as businesses cannot recoup the earnings from the period that a regulation is in effect.³⁷⁵

The dilemma in framing temporary regulatory takings compensation is determining which metric courts should use in assessing a regulation’s impact on businesses. In the case of physical takings, courts can use the comparable sales lens just like property assessors to accurately gauge a property’s value. Temporary, regulatory takings do not lend themselves to that type of calculation especially when it comes to businesses. Publicly traded companies can provide snapshots of their market capitalization before and after a regulation’s termination based on changes in their stock prices. But most companies affected by regulation are privately held, and it is difficult and time-consuming to assess the market value of a privately held businesses, let alone to calculate the changes in value that are attributable to a regulation.³⁷⁶ More importantly, the issue for most temporary, regulatory takings is the economic impact on the business for the time horizon of the regulation at issue, rather than the long-term change in a company’s valuation.

Courts could choose losses, revenue decreases, or decreases in profitability (i.e., net income). The underlying concerns are moral hazard, ease of administration, and the extent of potential compensation. If courts (or legislators) choose economic losses caused by the regulation as the framework for takings compensation, then affected companies may have incentives to inflate their losses and not attempt to mitigate the damages caused by a regulation. This can be framed as the “restaurant problem,” as restaurants are notorious for creatively generating losses to avoid having to pay income taxes.³⁷⁷

If courts choose revenue decreases as the metric for takings compensation, then a similar danger of businesses’ inflating lost revenue exists. Sales taxes in most states effectively require companies to keep track of their revenues in ways that are confirmable by state governments. Even in the states where there is no sales tax, accounting fraud rules would require that companies document their revenue flows. The dilemma is that using a lost-revenue lens may encourage companies to move transactions off the books and to understate their revenues, a concern that arises in the context of cash-only small businesses. An additional concern is that potential takings compensation would not reflect the varying cost structures of businesses. For example, the cost structure significantly differs from restaurant-to-restaurant as some restaurants will focus on service and the employee-related costs that come with that, while others may offer food in a no-frills environment. Comparing apples to oranges in revenue changes may obscure the deeper impact on shutdowns on their bottom lines. The shortcoming of both the loss and decrease in revenue lenses is that courts would face expensive, time-consuming inquiries to determine the scope of damages and extent of damage mitigation as well as concerns of open-ended liability for governments.

This fact raises the appeal of focusing on the difference in a business’s profitability caused by an exogenous regulatory shock.³⁷⁸ The appeal of this approach is that it would facilitate ease of administration, protect against fraudulent efforts to inflate compensation, and cap compensation to make an expansion of takings feasible. Both federal and state tax returns form an easily confirmable reference point as net profits (i.e., net income) form the basis for tax exposure. If companies understated their profits to avoid past taxation, then they would be penalized because they would have a lower threshold for assessing potential pandemic takings claims. But if companies disclosed their profits, then they would be in a position to establish both the existence and extent of economic liberty takings claims. The virtue of this approach is in potentially rewarding companies for their honesty in reporting profitability in past years (and paying the resulting taxes in normal times) by making the previous year’s profits (or a multi-year average) the baseline for takings compensation.

The downside of using net profits as a proxy for takings compensation is that it may be over-inclusive or under-inclusive. A company’s net profits may significantly vary year-to-year based on business conditions, which is why using an average of reported net profits over a period of years may be a more equitable baseline. As an alternative baseline, net income data could be used to estimate cash flows for the coming years and discount those cash flows to estimate the present value. Nonetheless, a legitimate concern is that a focus on profitability may understate the extent of economic impact. The losses incurred by businesses that were not able to operate during the shutdowns may far eclipse their previous year’s profitability. That is a fair critique as a net profits-compensation lens may be systematically under-inclusive.

The counterpoint is that this cap on takings compensation will partly be offset by a business’s duty to mitigate damages. Affected companies would have every incentive to cut overhead in the face of a temporary, regulatory taking if net profits were the proxy for potential compensation. That would have real-world consequences for dislocated employees, but this Article’s premise is to create a viable framework for temporary, regulatory takings and not to solve every problem related to exogenous regulatory shocks. For example, other parallel support such as the PPP program to incentivize the rehiring of furloughed workers and bolstered unemployment support may still be needed to mitigate the economic fallout from shutdowns.

One positive externality from this approach is that it would reward companies and individuals for their honesty in tax compliance. The higher the level of disclosure of past net income (and the lower the tax fraud), the greater the potential claim for economic liberty takings. This approach would be easy for courts to administer and would provide caps on damages, so that state governors could more easily anticipate the likely takings compensation required for their regulatory actions and shape their decisions accordingly.

c. Deemphasizing the “Character of the Government Action” Factor

Courts should also reconsider the weight placed on the character of the government action under the Penn Centraltest. State governors and courts have frequently framed the shutdowns as an appropriate and reasonable exercise of police powers to promote the public good.³⁷⁹ However, the Supreme Court in Lingle held that the focus of the character inquiry should not be on the purpose, correctness, or “underlying validity” of the government action.³⁸⁰ Instead, the focus should be on the nature and severity of the action, such as whether it targets a select group rather than the public as a whole, and whether it applies retroactively, involves any physical action, or provides any offsetting benefits.³⁸¹

The legality of the exercise of state police powers does not address the merits of the takings claim and should not be regarded as a dispositive factor in the Penn Central test. Courts should treat the Penn Central test as a genuine balancing test and place greater weight on the investment-backed expectations of businesses and the economic impact of regulations, if a select group of businesses are bearing a burden for the good of the public.

Courts should also reconsider the extent to which emergency and public necessity exceptions can justify the denial of regulatory taking claims under the character of the government action prong. The scope and nature of these exceptions are distinguishable from regulatory shutdowns. Emergency and public necessity takings typically involve the physical appropriation or destruction of property, such as during times of war, conflagration, and disease. In contrast, regulatory takings limit owners’ use of their property and disregard the potential for owners to use their properties in ways that address public health concerns. Although shutdown orders are a legitimate exercise of states’ police power to protect the public health, Justice Holmes in Mahon emphasized that such regulations can go too far, so as to constitute a taking.³⁸² The two are not mutually exclusive.

2. Reversing or Limiting Tahoe-Sierra to Apply a Categorical Lens to Temporary Regulatory Takings

Tahoe-Sierra ruled that the Lucas categorical rule does not apply to temporary regulatory takings.³⁸³ However, given the nature and scope of the shutdowns, the opportunity may be ripe for the Supreme Court to revisit the temporary takings doctrine and overrule Tahoe-Sierra.

a. Temporary Takings Should Be Analyzed Under the Categorical Lucas Approach

The Supreme Court in Tahoe-Sierra rejected the application of the Lucas categorical takings framework to temporary takings.³⁸⁴ But more recent cases from the Court of Appeals for the Federal Circuit suggest the potential applicability of a categorical approach to these types of cases. For example, in 2020 the Federal Circuit in Caquelin v. United States³⁸⁵959 F.3d 1360 (Fed. Cir. 2020). held that the issuance of a Notice of Interim Trail Use (“NITU”) that froze a railroad carrier’s abandonment of a rail line constituted a coerced easement against the Plaintiff’s land, making the NITU a temporary taking falling under the Lucas categorical rule.³⁸⁶ This case, although involving a physical taking, reinforced the understanding that temporary physical takings are potentially subject to the categorical rule. Similarly, in Lost Tree Village Corp. v. United States,³⁸⁷ the Federal Circuit held that the Army Corps of Engineers’ denial of a land developer’s wetland fill permit, which covered five out of the developer’s several thousand acres of land, was a Lucas categorical taking requiring just compensation.³⁸⁸ The court did not evaluate the five acres against the other thousands of acres but rather considered the five-acre parcel as a distinct parcel which was stripped of value.³⁸⁹

b. The Merits of the Lucas Categorical Takings Approach

The premise for applying the Lucas categorical takings approach is that a subset of the shutdown orders that prevent business owners and customers from operating are constructively the equivalent of a physical taking for the duration of the regulation. Treating this type of temporary taking as a per se taking under the Lucas rule would better capture the impact on businesses that have no alternative way of operating during shutdowns.

Even though the shutdowns and related restrictions are temporary, Lucas should apply because the context in Tahoe-Sierra is distinguishable from shutdowns. The developers in Tahoe-Sierra could resume plans for an undeveloped parcel once the moratorium was lifted, while during the pandemic, businesses had existing operations disrupted in ways that may have short- and long-run financial effects. The severity and potentially lasting consequences of the “temporary” shutdowns are very different than a temporal delay in development.³⁹⁰ Therefore, the Lucas categorical takings approach would be the more appropriate framework for the affected businesses.

Courts have expressed concerns about the functionality and practicality of takings, when asked to apply a categorical approach to regulatory takings.³⁹¹ However, the disruption of the ability of businesses to function is fundamentally different from conventional land-use regulations and justifies the deterrent effect of potential takings compensation. In Tahoe-Sierra, the Court explained its hesitance to apply the Lucas framework to temporary land use regulations because

[Government regulations] are ubiquitous and most of them impact property values in some tangential way—often in completely unanticipated ways. Treating them all as per se takings would transform government regulation into a luxury few governments could afford.³⁹²

However, shutdowns do not impact businesses tangentially; their impacts on the bottom lines of businesses are specific and directly measurable. Reversing Tahoe-Sierra would not necessarily lead to floodgates of compensation claims. The prospective application of compensation for shutdowns would lead state governments to think carefully about designing less invasive means to achieve policy objectives that sidestep takings compensation. This approach would create greater balance between state police powers and respect for the economic liberty of businesses. Additionally, the reliance on the reduction in net profits would introduce a limiting principle to damages that would contain the damages that governments would face. These considerations should provide courts with strong reasons to re-visit Tahoe-Sierra and to apply a Lucas categorical framework to temporary, regulatory takings.

c. The High Bar for Categorical Takings Under the Lucas Approach

Even if courts embrace the Lucas categorical rule for temporary, regulatory takings, litigants will still have to establish a high level of economic impact. Under existing applications of categorical takings, a regulation must deprive a property owner of over 99% of the economic use of his property.³⁹³ For example, claims of an 87.5%³⁹⁴ and even a 94%³⁹⁵ diminution in value have failed. Less than 1% of Lucas claims succeed, and claimants must establish the regulated property is separate from their other holdings and show that their economic expectations pre-date the regulation.³⁹⁶

With temporary takings cases in particular, the diminution in value clearly relies heavily on the denominator. When assessed under the Tahoe-Sierra whole parcel rule, which defines the denominator as the entire lifetime value of the property, businesses that must permanently close after the pandemic may end up with near comprehensive diminution in values and be the most likely types of firms to win a Lucas claim. However, if courts were to adopt a different denominator by focusing on the decline in a business’s net profits due to the regulation, then it may be possible for a larger group of affected businesses to make viable Lucas takings claims.

3. Applying a Modified Categorical Lens to Temporary, Regulatory Takings

Opening the door to Lucas categorical takings claims would create potential claims for bankrupt businesses, but the high bar for existing categorical takings may frustrate most other claims of infringement of economic liberty. At the same time, the desirability of a categorical approach is that it would facilitate ease of administration, which is important given the volume of potential economic liberty takings claims due to the shutdowns. For this reason, the key to establishing a viable doctrinal or statutory approach to regulatory takings would be to create a more expansive categorical test in the temporary, regulatory takings context.

This Article’s proposed categorical test for economic liberty takings would have four dimensions: (1) is the regulation a deviation from ordinary investment-backed expectation?; (2) is the regulation a complete or partial closure?; (3) has the business faced a loss of 75% or more of net profits during the time frame the regulation was in place?; and (4) is the alleged economic harm causally related to the government mandate or is there an equally compelling inference of market causation?

a. Is the Regulation a Deviation from Ordinary Investment-Backed Expectations?

The ubiquity of the regulatory state means that businesses must anticipate that governments and administrative bodies will routinely issue new regulations.³⁹⁷ This fact means that the overwhelming majority of regulations are not deviations from ordinary investment-backed expectations but rather are possibilities routinely factored into business decision-making. However, regulations that constitute deviations from reasonable expectations of regulations form a baseline for assessing potential economic liberty takings claims. This approach would also prevent companies from opportunistically stepping into a takings claim.

For example, every company must factor environmental regulations into their investment decisions. Companies must consider the risk that protection for the habitat of the spotted owl or other species may limit logging in the Pacific Northwest or how declines in protected trout populations may lead to limits on the operation of hydroelectric dams. But exogenous regulatory shocks are different from regulatory risks that cannot be reasonably anticipated. The pandemic falls in the “black swan” category of very low-probability, high-impact events that are not on the radar screen of the government regulator or business world. The clearest evidence of that is in public company disclosures prior to January 2020. There is no evidence that any American public company identified a pandemic as a principal risk that could affect their financial performance or as a risk at all.³⁹⁸ This regulatory frustration of the ability of businesses to operate during the pandemic undercut the investment expectations of the business community and has laid the groundwork for potential economic liberty takings claims.

b. Did the Regulation Approximate a Full or Partial Closure?

The second part of the modified categorical takings analysis would be to determine whether the business was subject to a closure mandate or an occupancy or operations limit, which approximated a partial closure. Governments regulate virtually every facet of a business’s operations, and few would contest most forms of regulatory authority exercised in the name of public health and safety. For example, fire regulations limit the number of people in a room or building, and these restrictions are displayed in virtually every publicly accessible building. The question is whether the nature of the regulations effectively closed or partly closed the business for a duration beyond ordinary expectations for emergencies and their immediate aftermath. What distinguished the pandemic shutdowns is their duration, extent, and recurring nature.

The economic fallout from the pandemic broadly affected businesses, but state government designations of businesses as “non-essential” subjected them to full or partial closures.³⁹⁹ While some stores had potential alternative revenue sources through online sales, full closure of retail stores often left them with no alternatives. For example, restaurants could plausibly host outdoor dining during warm months, while shoe and clothing stores faced more daunting tasks of attempting to sell products “outside” in front of their shops.⁴⁰⁰ State governments frequently employed oscillating occupancy limits based on the state’s assessments of the extent of positive COVID cases and intensive-care unit hospitalizations.⁴⁰¹ The 25% to 50% occupancy limits allowed businesses to function yet imposed constraints that inflicted significant impacts to the bottom line of profitability.⁴⁰² Restrictions on the operation of businesses have had similar effects to occupancy limits. Some service and manufacturing businesses were allowed to function but faced significant constraints on employees working on the business property or on the number of employees allowed to be in shared spaces.

c. Has the Business Faced a Loss of 75% or More of Net Profits?

The Lucas test traditionally sets the bar for categorical takings compensation at a high level of over a 99% diminution in value.⁴⁰³ If the policy objective is to limit takings claims as much as possible and to give governments unfettered ability to restrict businesses, then this threshold is easy to justify. But if the objective is to strike a better balance between state police powers and the economic liberty of businesses, then courts should apply a lower threshold for assessing the extent of diminution in value.

The challenge is determining what lower threshold of economic harm is required to trigger a taking. Setting this threshold at a 75% reduction in net profits would significantly change the landscape for economic liberty takings and cause state governments to think more carefully about the scope of future emergency restrictions.⁴⁰⁴ The virtue of this approach is that net profits is information that every business must report to the government as part of their federal, state, and local tax filings. This fact means that courts would have an easy frame of reference for understanding the potential impact of government restrictions on business. Focusing on net profits also places a cap on potential takings claims as it would effectively incentivize businesses to mitigate further damages due to an exogenous regulatory shock.

Like virtually every number used by courts or regulators, there is nothing unique about picking a threshold of a 75% decline in net profits. But there is nothing unique about the numerical thresholds that judges have made up on their own. That number could just as easily be 80% or 85%, if courts want to err on the side of caution in terms of opening the potential for economic liberty takings claims. For example, the U.S. Court of Federal Claims has stated that it generally has “relied on diminutions well in excess of 85 percent before finding a regulatory taking” under the Penn Centralregulatory taking test.⁴⁰⁵ There have been examples of claims argued under Penn Central with diminution in values of 75%,⁴⁰⁶ 81%,⁴⁰⁷ and even 95%⁴⁰⁸ that were not enough on their own to constitute a regulatory taking.⁴⁰⁹ On the other hand, there has been a successful Penn Central taking with a diminution in value as low as 71.3%.⁴¹⁰ But the logic is that a 75% impact on net profits would signal the significant impact of the regulation at issue. Lowering the threshold would open the possibility for a broader spectrum of affected businesses to have potential takings claims. At the same time, incorporating limiting principles to these claims would seek to avoid having governments pay compensation, if they can show that economic changes or the failure to mitigate damages led to decreases in profitability.

Having a threshold of a 75% reduction in profitability would give each level of government greater incentives to think through the potential impact of regulations or to scale those regulations back if they end up having a larger impact on economic liberty than anticipated (i.e., to reduce the scope of potential takings claims). This approach has the added value of rewarding corporate honesty. Companies that understated net profits or failed to report profits in the previous year would hamstring their own ability to bring economic liberty takings claims or reduce the amount of potential claims. This approach may seem harsh. But bear in mind these companies would still be potentially eligible for other forms of government relief, such as forgivable PPP loans.

d. Is the Alleged Economic Harm Causally Related to the Regulation? Or Is There an Equally Compelling Inference of Market Causation or a Failure to Mitigate Damages?

Lowering the threshold for categorical takings claims would open the potential for many more businesses to claim potential takings. But courts would need to be able to consider offsetting limiting principles, such as whether the economic harms alleged are causally related to the regulation at issue. Courts have frequently exploited a loophole in current takings law to dismiss takings claims by asserting that there is no causation between pandemic regulations and the alleged harms. For example, recall the decision discussed earlier that a gentleman’s club that was closed by the government did not have a takings claim because its in-house restaurant did not mitigate damages by selling food and drink on the street corner.⁴¹¹ One can only imagine the headlines that a gentleman’s club turned prurient street snack provider would create.

The court in that case misapplied the duty to mitigate damages as a conclusory factor to reject a takings claim. But governments should be able to argue that takings claims should be offset by any amount of loss that reasonably could have been avoided by the affected business.⁴¹² For example, if a retail store that is subject to an occupancy limit refuses to pursue cost-effective online alternatives to bolster sales, that may be a legitimate factor in considering compensation. Retail shops or manufacturing may have that option, while it would be unrealistic for a barbershop or beauty salon whose services are not readily replicable online.

Another limiting principle that courts or legislators should wrestle with is how to distinguish economic fallout from the pandemic as opposed to fallout caused by government-mandated shutdowns. For example, a gentleman’s club could have had a precipitous fall in business due to customers’ reluctance to be in a close-quarters business given the risks of COVID-19 contagion. The challenge is that this requires counter-factual analysis as the shutdowns short-circuited the ability to confirm whether self-initiated changes in consumer activity—rather than government-mandated changes—could have led to similar economic results.

Governments should be able to rebut economic liberty takings claims by pointing to evidence of market causation. For instance, many businesses which failed during pandemic shutdowns may have had underlying economic issues and may have suffered losses either way. Think of outlet stores: destination stores typically located 1 to 1.5 hours outside of cities that typically offer surplus or economy versions of a company’s products. The outlet industry had been under siege for years before the pandemic due to the rise of Amazon and other online retailers and competition from an array of brick-and-mortar discount stores, such as TJ Maxx, which offered discount shopping coupled with greater convenience.⁴¹³ The closure of outlet stores for well-known brands such as Harry & David, Van Heusen, Wilson’s Leather, and Bass Shoes, may have had everything to do with fading business models that the pandemic disrupted rather than the fallout from shutdowns.

The challenge that governments would face in rebutting economic-liberty-takings claims would be to establish an equally compelling inference of market causation compared to that of regulatory causation. The type of evidence that could support this would be the preexisting lack of profitability of the business at issue, difficulties in raising new capital in the run up to the pandemic, or pre-existing bankruptcy restructurings. By placing the burden on the government to establish this inference, this approach would protect against opportunistic efforts by companies to use takings claims as bailouts for businesses that were already in economic trouble before the pandemic. That being said, the contours of the proposed takings compensation offer a limiting principle to potential claims. Using decreases in net profits as the measuring stick for takings compensation means that businesses that were already unprofitable prior to the regulation at issue would not be able to exploit takings claims as backdoor bailouts.

Lastly, businesses may have enjoyed reciprocal benefits from the crisis or the government’s intervention that may mitigate the scope of potential takings compensation. For example, an office supply company may have faced the full shutdown of its brick-and-mortar retail operations or a 50% occupancy limit that constrained sales for months throughout the pandemic. Shutdown restrictions have hurt sales to conventional corporate clients whose in person operations were significantly curtailed. At the same time, the company’s home office sales may have experienced explosive growth due to the similar restrictions forcing employees to work from home. Taking reciprocal benefits into account would force potential economic liberty takings claimants to aggregate their shutdown-related losses and profits. Otherwise, claimants could potentially distort claims by focusing only on the adversely affected parts of the business and obscure offsetting growth to other parts.

C. Statutory Framework for Economic Liberty Takings

While the pandemic provides courts with an opportunity to rethink the contours of temporary, regulatory takings, courts may be reluctant to initiate changes in takings law given the scale of impacted businesses (and potential claims). For this reason, a statutory approach for creating economic liberty takings is an important alternative to consider. This approach can institutionalize the framework for economic liberty takings discussed above yet be designed in ways that streamline the processing of claims through an administrative, rather than judicial process.⁴¹⁴ The legislature would be well-positioned to analyze the incentive effects from establishing a broader conception of takings and to establish administrative procedures for assessing claims.⁴¹⁵ In contrast, judges necessarily have to address takings claims on a case-by-case basis, which is expensive and time-consuming and casts a pall of greater uncertainty on affected property owners.

A statutory framework for economic liberty takings could provide clear expectations for government actors and businesses in terms of takings exposure. Business owners would know prior to making investments the potential recourse for government action that falls outside of the bounds of investment-backed expectations. State officials could use this framework as a guide to understand how to minimize exposure to compensation liability by allowing businesses to function to the greatest extent consistent with the underlying public policy objectives.

This strategy would mitigate the problem of businesses lacking legal recourse and being treated as supplicants with politicians determining handouts in an ad hoc way. The problems with the forgivable PPP loan program highlighted the dangers of this approach. Large franchise companies manipulated the PPP system to jump the queue ahead of small businesses and drained the system of available funds.⁴¹⁶ In a world without economic liberty takings, small businesses who could not secure PPP loans were left to beg politicians for “more, sir” in Dickens-esque fashion rather than having clear expectations of compensation for shutdowns.

An additional advantage of a statutory approach is that it could introduce the potential for partial takings compensation that fall short of temporary, regulatory takings based on the extent of economic impact. The current judicial process creates “all or nothing” stakes that may make courts reluctant to recognize takings claims, especially in the context of temporary, regulatory takings. In contrast, a statutory takings approach could encompass a sliding scale of compensation based on the severity of the impact of the government regulation.

Companies affected by future shutdowns could be eligible for full compensation of their lost profits for the duration of the regulation if it leads to a 75% or greater reduction in their net profits, so long as the government cannot show offsetting economic basis or a failure to mitigate the damages. The advantage of a statutory approach is that it could provide for more modest levels of compensation for companies with partial declines in profits from shutdowns that do not rise to the 75% threshold.

A statutory approach could offer a sliding scale of partial compensation for companies with between a 50% and 75% decline in net profits. For companies just below the 75% threshold the takings compensation could be half of the loss in profits and going proportionately down to one-quarter of the lost profits for companies with 50% declines in net profits. Similarly, companies with between 25% and 50% declines in profits could have eligibility for compensation going proportionately from 25% of the lost profits down to 12.5%—half the loss in profits. The logic of this approach would be to preserve incentives for companies to return to profitability as soon as possible, while providing them with a degree of financial insulation to protect their long-term viability.

The underlying premise for partial takings compensation would be that this approach could replace the endless array of ad hoc giveaways and handouts to businesses. Ad hoc processes are more easily manipulated through political donations, influence peddling, and set asides that benefit large corporations. Having a uniform system for offering a measure of compensation for affected companies could provide greater predictability for government actors to assess the financial costs of their actions and give businesses greater certainty in grappling with future exogenous regulatory shocks.

A statutory framework is not meant to create endless streams of litigation and government payouts. Instead, this approach is meant to incentivize governors to anticipate the economic costs of their regulations, when making decisions during emergencies like a global pandemic. This should diminish the extent of ad hoc rent seeking in the event of future exogenous regulatory shocks by providing metrics in advance for how to approach compensation. In turn, governors will have clearer guidance on how regulation needs to be designed to steer clear of potential takings claims and compensation payouts, thus saving the time and money of property owners, state legislatures, and courts.

The ultimate benefit of a statutory framework is that it can help to broaden the scope of regulatory takings relative to those recognized under Penn Central, Tahoe-Sierra, and Lucas. A statutory framework can recognize the percentage impact of takings rather than the “all or nothing” approach that dominates and marginalizes the significance of existing takings law. It could also serve as a complement in codifying and streamlining the recognition of economic liberty takings by establishing a simpler administrative process and framework for compensation. Given the large scale of pandemic-related takings litigation—in spite of the high odds against success—establishing a clear framework may answer a policy need and can give both states and businesses greater guidance on the scope of temporary, regulatory takings.

D. Application to the Spectrum of Affected Businesses

This Section suggests how the above proposals would operate depending on the severity of a business’s economic impact.

1. Category One: Bankruptcies

While businesses driven into bankruptcy during the pandemic shutdowns represent the most extreme economic impact, bankruptcies would not automatically trigger a taking. In examining causation factors, both under existing takings law and this Article’s proposed reforms, judges will have to weigh the extent to which market forces rather than government action led to the bankruptcies. That may pose a challenge as many bankrupt businesses were already struggling with changes in consumer behavior and markets that are distinct from the pandemic shutdown and could have been in jeopardy just from the pandemic’s economic fallout. However, if shutdowns pushed companies from profitability into bankruptcy restructurings or liquidations, then the firms will have strong arguments both under Penn Central and Tahoe-Sierra and this Article’s proposal for a more expansive economic liberty takings approach.⁴¹⁷

2. Category Two: Businesses with No Alternative Ways of Generating Revenue

Businesses that have no alternative means for revenue have faced severe economic consequences from the shutdowns. Under the Penn Central framework, these types of businesses, such as barbershops and beauty salons, would have both investment-backed expectations of operating and sufficiently severe economic declines in profitability to justify potential takings claims.⁴¹⁸ However, Tahoe-Sierra’s focus on the life-time value of the property at issue, rather than during the period of the regulation, would make it difficult for these types of businesses to establish temporary takings.⁴¹⁹

This stumbling block for takings claims would be overcome by embracing this Article’s proposed reform of treating temporal property interests in a more traditional property-law way as distinct and severable from ownership. By viewing the period of the shutdowns as a distinct part of ownership—akin to a lease period—then it would be easier for courts—or a statute—to focus on the lost profits caused by shutdowns. A business with no revenues during the shutdowns would still have a value once the shutdown is over—if it is still solvent—but it would not be able to recoup the lost profits from the shutdown unless it had access to the proposed economic liberty takings compensation.

3. Category Three: Seasonal and Regional Businesses

Seasonal and regional businesses share similar risk exposure to the businesses, which had no alternative revenue streams during the shutdowns. But the difference is that their risk exposure may vary based on the time of year when periodic shutdowns occur. For example, seasonal businesses in Maine that were forced to shut down during the late spring and summer of 2020 may have lost over 90% of their annual revenues because the shutdowns occurred during peak tourist season.⁴²⁰ Like businesses with no alternative revenue sources, these Maine businesses have strong cases under the current Penn-Central test, but their claims may potentially flounder on Tahoe-Sierra’s focus on the life-time value of the property.⁴²¹ The paradox is that while the businesses may still limp on until next tourist season, the loss of a summer’s profits could impair their viability long after the end of the shutdowns.

This Article’s reform proposal of focusing temporary takings analysis solely on the economic fallout for businesses during the shutdowns would give seasonal and regional businesses potentially valid claims. Some categories of seasonal and regional businesses, such as summer camps or tourist attractions, may be able to show that the shutdowns deprived them of all economically viable use of their property, which would meet the requirements for a Lucas categorical taking. For example, travel to Hawaii fell by an outstanding 98.9% during the shutdowns, cutting off most tourist-related businesses completely from any revenue, let alone hope for profits.⁴²² However, most seasonal and regional businesses would not be able to meet Lucas’s lofty standard. Instead, the economic liberty takings proposal would be appealing in letting businesses have potentially full takings claims for a 75% or more decline in net profits or to be able to frame their losses as falling within the partial takings claims for profit declines of between 25% to 75%.

4. Category Four: Businesses with Alternative Methods of Generating Revenue

Businesses that are able to operate via curbside pick-up, delivery, take-out, e-commerce, and other online methods would be unlikely to have potential takings claims under current law yet would have much stronger claims under this Article’s judicial or statutory reforms. Businesses with alternative revenue streams would not have valid Lucas claims because their diminution in value would not be over 99%, and courts have been skeptical of Penn Central takings claims when losses are not “well in excess of 85%.”⁴²³ Under the economic liberty takings proposal, these businesses could establish takings claims, if they can show that they had investment-backed expectations in operating, had decreases in net profits of over 75%, and there existed no mitigating factor of market causation or a failure to mitigate the damages through cultivating alternative revenue streams. To the extent their alternative means of generating revenue meant that their profits were only reduced 25% to less than 75%, they would be able to make claims for partial takings compensation under this proposal’s statutory framework. Even though businesses are adopting online sales strategies,⁴²⁴ partial takings claims may be needed to help small businesses maintain their financial viability.⁴²⁵ For example, in spite of the ability to operate via take-out and delivery services, restaurants saw an average 66% dip in daily revenue during the spring of 2020 compared to their revenue from 2019.⁴²⁶

5. Categories Five and Six: Businesses with Limited Indoor and Outdoor Operations

The last two categories consist of businesses that can have indoor and/or outdoor operations at limited capacities and would likely fail to establish temporary regulatory takings under either Penn Central, Tahoe-Sierra, or Lucas. Judges may not be as sympathetic because these businesses are typically allowed to operate at limited capacities of 25% to 50%. These businesses would have stronger claims under this Article’s proposed economic liberty takings framework. Depending on the degree of occupancy/operational constraints, these businesses may not be able to meet the test of a 75% or more decrease in profits. But these types of businesses would be prime candidates for the partial-takings statutory framework, if their net profits declined between 25% and 75% due to the occupancy/operational limits. Businesses such as restaurants may end up falling into multiple categories and may have a range of takings claims based on the severity of the restrictions and resulting extent of lost profits during different time periods.

In practice, it would be most effective for a business bringing economic liberty takings claims to approach their arguments in a piece-meal manner. Courts should consider which categories a claimant falls into and for how long. Businesses should demonstrate the length of time they have spent in Categories One (bankruptcy), Two (no alternatives), and Four (some alternatives), with Categories Three (seasonal and regional), Five (limited outdoor operations), and Six (limited indoor operations) as complementary categories to substantiate full or partial takings claims.

E. The Benefits and Tradeoffs of Economic Liberty Takings

Establishing economic liberty takings entails benefits, tradeoffs, and challenges in its implementation and effects. Redefining temporary, regulatory takings through the courts or through a statutory framework will lead to more just and efficient results for key players on each side of the issue—from business owners to governors, legislators, and judges.

1. The Benefits of Establishing Economic Liberty Takings

An underlying goal of economic liberty takings is to create clear expectations for government officials, affected businesses, and property owners.⁴²⁷ The periodic COVID-19 shutdowns highlighted how state governors and local leaders faced no checks on their use of police powers, save for the distant prospect of electoral accountability. Businesses were left with no effective legal recourse in the face of overly broad, severe, and at-times arbitrary shutdown orders, which selectively hamstrung sectors of the economy while giving windfalls to other sectors.⁴²⁸

In an emergency, state and local leaders must be able to exercise discretion in crafting government responses to uphold the public good. But the logic of economic liberty takings is that the need to compensate affected business owners would force governors to internalize the economic costs of their shutdown orders and incentivize them to craft solutions that inflict less economic damage. Prospectively, the potential for economic liberty takings compensation would give governors and other state and local officials incentives to develop better emergency plans that seek to preserve public health needs and factor in the economic impact on businesses. Arguably, the fact that state and local leaders did not have to consider the business impact in crafting shutdown orders led to an overreliance on this blunt tool and less of a focus on how businesses could operate safely at a reduced scale throughout this open-ended crisis.

Another benefit is that establishing clear contours for economic liberty takings should save government resources. The purpose of economic liberty takings is not to increase litigation, but rather to encourage regulatory decisions that anticipate the consequences in order to minimize takings, thus reducing the need for both compensation and the use of judicial resources. This Article’s categorical statutory framework would provide a simpler approach to economic liberty takings by providing more precise guidance concerning the triggers for takings claims.⁴²⁹

From a constitutional and theoretical perspective, recognizing economic liberty takings as an extension of Fifth Amendment takings upholds basic private property rights. The Takings Clause was created to protect a subset of individuals from having to unfairly shoulder the burdens of society when the government takes their property for a public use. In this case, some segments of the business world have had to shoulder the burdens of the COVID-19 pandemic at disproportionate levels, while other businesses across town or online reaped windfalls from competitor shutdowns by the state. The injustice of Costco or Walmart being able to sell every item under the sun—in a socially distanced way)—while competitors who did not sell food faced periodic closures and irreversible damage to their businesses raises the type of justice and fairness concerns that underpin the logic of takings. Expanding the scope of viable regulatory takings claims under Penn Central and redefining the scope of temporary takings under Tahoe-Sierra would not only address some of the deeply conflicting issues within takings law, but also provide a just avenue of relief for affected businesses.

2. The Tradeoffs of Applying a Takings Framework to Pandemic Shutdowns

While the potential benefits of economic liberty takings are substantial, they must be balanced against the tradeoffs. One tradeoff of applying a takings framework to the shutdowns is that it may raise concerns about tilting the balance too far towards upholding private interests over broader policy concerns.⁴³⁰ The sweeping scope of state police powers may be needed in crises, and government actors may understandably want to act first due to public necessity and think later about the consequences for business owners. While that instinct may be understandable, this Article’s premise is that policy makers need to balance their exercise of state police and emergency powers with respect for private property.

Admittedly, some may be concerned that incentivizing restraint in the exercise of state power may lead to greater deregulation out of fear of triggering economic liberty takings compensation. However, much of the deregulation concerns stemming from takings legislation and the expansion of takings law in general falls within the context of land use and environmental issues. For many developers and environmental groups, regulation is indeed a useful tool for advancing their competing interests. In those contexts, property regulation is often expected because public interests need to be protected, and changes that may lead to deregulation may raise legitimate concerns. But pandemic-related regulations had less of an effect on real property parcels and much more on brick-and-mortar businesses that reasonably could not have anticipated the pandemic or the resulting shutdowns.⁴³¹ Concerns that economic liberty takings would lead to broader deregulation appear to be unfounded as this approach is designed to deal with exogenous regulatory shocks and not the full spectrum of regulations that businesses are accustomed to addressing. The goal is not necessarily to encourage the government to regulate less but to regulate more efficiently and thoughtfully in ways that respect the investment-backed expectations of businesses.

Other concerns include a surge in takings litigation and resulting payouts. While a change in the law may lead to an initial increase in takings claims, this is a relatively small price to pay for the overall benefits that economic liberty takings reforms will bring to future emergency situations. In fact, fears of an increase in litigation should encourage lawmakers to consider utilizing a statutory scheme to complement judicial takings claims, which could provide a simpler and efficient administrative process for addressing takings claims. Another concern is that pandemic takings may incentivize people to engage in rent-seeking behavior and run their businesses in fraudulent ways that increase their chances of compensation. Focusing on compensation for decreases in net profits provides an inherent limiting principle to claims, and it makes it far easier to verify past baselines due to corporate tax compliance obligations. It would seem highly unlikely that companies would try to game the system by overstating their profits one year (and paying the resulting higher taxes), only to leverage that the following year with an economic liberty takings claim that uses the past year’s profitability as a baseline for assessing takings claims. To the extent that abuse concerns persist, embracing a statutory approach would give lawmakers the ability to address and refine these concerns.

Another concern about economic liberty takings is that it will strike a blow against states’ ability to exercise their inherent police powers, especially during public emergencies. While governments need police powers to respond to emergencies effectively, it is also important to have checks on those powers. No democratic government (or governor) should have unbridled amounts of power under any circumstances. Treating the pandemic shutdowns as economic liberty takings recognizes the potential excessiveness of some of these exercises of police power—acts that at times have “go[ne] too far” in encroaching on private property rights without compensation.⁴³² Ultimately, these tradeoffs can be overcome when balanced against the benefits of treating shutdown orders as temporary, regulatory takings.

Conclusion

This Article has laid out a vision for economic liberty takings that builds on existing temporary, regulatory takings doctrines and addresses the shortcomings of this framework in the pandemic shutdown context. While takings law is often muddled and contradictory, this Article has shown how the existing doctrinal framework can be applied to businesses affected by the shutdowns, and how temporary, regulatory takings law can be expanded to provide businesses with clearer avenues of relief through the judicial system. The creation of a statutory framework for economic liberty takings can play a complementary role, especially in opening the potential for partial takings claims for businesses that faced lower levels of economic fallout from occupancy and operations restrictions.

While uncertainty continues to surround the pandemic and its aftermath, the shutdown orders clearly created significant and lasting economic damage for many businesses. While the shutdowns constitute valid exercises of state police power, the lack of any check on this authority has led to their overuse. By recognizing the shutdowns and related restrictions as economic liberty takings, the ultimate goal is not just to compensate those who have been unduly burdened, but prospectively to incentivize state governments to develop more thoughtful and balanced approaches to future emergency limits on private enterprise.

Category: Print Issues

Economic Liberty Takings

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