State governors rediscovered the sweeping contours of their police powers in imposing recurring waves of COVID-19 pandemic shutdowns. However necessary shutdowns have been to slow down the spread of COVID-19, state governors’ actions have exposed how takings law has become all but toothless in compensating business owners from state-imposed shutdowns. The result has been state governors picking economic winners and losers. Stores and sectors that state governors designated as “essential” have remained continuously open and received windfalls of pandemic profits. In contrast, businesses that state governors deemed “non-essential” have been stripped of their ability to function for months at a time or faced debilitating restrictions.
Both federal and state constitutions enshrine protection from takings without just compensation as a foundational principle for property rights. But courts have narrowed temporary, regulatory takings doctrines over time to make takings protections all but meaningless in the face of unprecedented economic disruptions from state action. This approach has left business owners without any effective legal recourse and forced them to wait for handouts from the federal government to mitigate the impact of state shutdowns.
This Article proposes creating economic liberty takings to institutionalize the compensation of business owners from temporary shutdowns or substantially similar regulatory burdens that strip businesses of profitability. The case for reviving temporary, regulatory takings is that states and localities should be forced to internalize the costs of decisions that strip business owners of their ability to function. The logic is not to make shutdowns economically infeasible for state budgets, but rather to incentivize state governors and legislatures to strike a better balance between protecting public health and respecting the economic liberty of business owners. Governors dealing future crises would have incentives to give businesses scope to function in economically sustainable ways to sidestep potential takings compensation.
This Article first makes the limited case for positioning economic liberty takings within the existing landscape of temporary, regulatory takings doctrines. Then it shows how courts can modify the seminal Penn Central test for regulatory takings, the Tahoe- Sierra approach to temporary takings, and the Lucas lens for categorical takings to establish economic-liberty-takings protections for businesses. Lastly, the Article makes the case for a complementary, statutory approach that can implement a sliding scale of compensation for regulatory burdens that do not rise to the level of a temporary, regulatory taking. These proposals restore greater balance between the exercise of state police powers and the investment-backed expectations of businesses, while preserving incentives of affected businesses to work within temporary, regulatory constraints to maintain their profitability.
This Article then 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. 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. The solution is to offset the expansion of economic liberty takings eligibility with a limited compensation focus on businesses’ declines in net profits. Every company must disclose net profits for federal and state taxation, which means that their previous years of net profits would be easy to verify. 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 to proactively take cost-savings measures in the face of potential takings.
GW Paper Series
George Mason Law Review, Vol. 29, No. 1, 2021