By Richard A. Epstein
In dealing with Supreme Court decisions it is dangerous to allow the questions that the Court deems worthy of review to set the intellectual agenda. That conclusion is especially true in property rights cases, where the Court is prisoner to its own defective jurisprudence, which all too often turns somersaults in order to steer clear of fundamental questions.
Just that pattern emerged clearly in the oral arguments made before the Supreme Court this past January 15, 2013 in Koontz v. St. John's Water Management District. As my earlier posts on Koontz have noted, the factual pattern in the case raises this fundamental issue: how sound is the doctrine of environmental mitigation? That doctrine, it will be recalled, allows the federal or state government to condition the grant of a development permit on the willingness of the landowner to "mitigate" perceived environmental damage stemming, we are told, from the construction itself, by providing some explicit collateral benefit to the government. That benefit could take the form of setting aside in perpetuity other lands owned by the developer as an environmental sanctuary. It could require a landowner to purchase for the state land that he does not own for exactly the same purpose. It could require that he either make repairs or otherwise pay money for environmental causes to which the government attaches positive value.
The use of these environmental easements is in most instances a no-lose situation for environmentalists. Accept the attached conditions and the government acquired something for nothing. Reject the condition and the status quo of no development takes place. This Hobson's choice should elicit all sorts of concerns on the simple question of whether real estate development should be regarded as a wrong that needs mitigation, or whether that doctrine should be understood as the largest and most unremarked land grab ever, which produces, as most land grabs do, serious social dislocations.
Asking the Wrong Question Nonetheless when the question came before the Supreme Court, it showed an unfortunate instinct to go right to the capillary. It did so by framing the question as whether or not the landowner's duty to mitigate is restricted to mitigation on the particular plot of land for which the building permit is required. The narrowness of that became apparent in oral argument when Justice Ruth Bader Ginsburg quickly extracted from Koontz's lawyer, Paul Beard, this fatal concession, namely that "he recognized, from day one, that there had to be some mitigation for what he was seeking to do in the permit," in the form of a "conservation easement" over the property.
Beard's move was a bad one intellectually. But in his defense, it was forced upon him by the narrow scope of the question on which the Supreme Court agreed to review the case. In my view, Beard should have risen to the challenge by telling Justice Ginsburg that this false notion of an "environmental easement" has turned takings law into intellectual shambles, by giving local, state, and national government an unquestioned veto right over the development of every acre of land in the United States. He could have then stressed that Exhibit A is Koontz itself, where the scope of this mythical environmental easement remains unresolved since 1994. It should not take 20 years to decide a case that has these simple parameters, as I have described in detail elsewhere. Koontz owned 14 acres of prime lands and wanted to put developments on three of those acres. The Water District insisted that this offer in mitigation was insufficient and wanted to add back in offsite improvements on any one of 50 sites located between 4.5 and 7.0 miles within the land.
The one fact that we can be sure of in Koontz is that it is a classic illustration of bargaining breakdown, given the inability of the parties to agree on the price of mitigation needed to allow the new construction to go through. The issue is in fact so pervasive that the breakdown cannot be attributed to the peculiar personalities of these parties. It clearly has to lie in the basic structure of the underlying rights regime once the environmental easement passes unobstructed into the current law.
Ideally, a sound system of property rights is driven by a single imperative: What is the proper initial assignment of rights needed to reduce the bargaining costs that must incur in order to reach the ideal assignment of property? The environmental easement sets up a bilateral monopoly game that becomes costly to unravel. By way of contrast, note that all private easements are formed by voluntary transactions that set out the precise rights of both parties. The larger the easement is, the higher the payments to procure it. Because the process is voluntary it insures the transaction, when completed, should be expected to generate mutual gains. It cannot grow to limitless extent like the so-called conservation easement, which is made out of whole cloth. Never in Roman, English, or American private law has any government commanded an unbounded easement, whether for environmental mitigation or any other purpose, by fiat alone. The problem here is that, under this regime, there is no necessary limit on the demands that the Water District can impose. Under current law, who is to say whether the Water District could demand the landowner set aside one, ten or twenty acres of wetland to get his prized building permit?
In Koontz, the Water District sought to disarm this objection by portraying itself as the paragon of restraint. After all, it offered Koontz all sorts of choices on how to mitigate his supposed environmental harm: he could shrink the project so as to mitigate out of his own acreage; he could repair public ditches and culverts; or he could purchase other lands.
This misuse of the "choice" metaphor misses the key point. A thief could tell his victim, "I just want a thousand dollars worth of stuff. But I am reasonable thief. I take wallets, watches, or cufflinks. You pick. All that I ask for is property worth $1,000, not a penny more." The presence of a choice is not, of course, the issue. After all, the victim is entitled to all his possessions, not just some fraction of it. Similarly, the landowner is entitled to develop his land without paying tribute to the state for public projects better funded out of general tax revenues.
Back to First Principles The better way to handle Koontz was to go back to first principles. That issue first hit the Supreme Court in the 1987 case of Nollan v. California Coastal Commission. There Justice Antonin Scalia sought to capture this sound instinct by holding that the Coastal Commission could not require Nollan to surrender a lateral easement across the front of his property in order to obtain a building permit to expand his own home. Scalia rightly denounced this government tactic as "out-and-out extortion."
That is surely the right instinct. But he justified it for the wrong reasons. Scalia only objected to a lateral easement because it was "unrelated" to the state's desire to preserve a view shed over the Pacific Ocean to drivers on the Pacific Coast Highway. What was missing, he said, was an "essential nexus" between the two. Alas, by that constrained logic, Koontz loses, for Water District only seeks environmental mitigation, either on or off site. Both of these issues fall, as it were, within the same environmental silo. Accordingly, it looks as though the Supreme Court might be prepared to say that this form of mitigation is acceptable on the ground that the Water District is not asking Koontz to pony up for a new sports arena.
Yet the Scalia test misfires in embracing the holy grail of germaneness. The eminent domain law is meant to ensure that the state takes land only when it is worth more in public hands than in private ones. That needn't happen here: if Nollan's right to expand his house is worth $10,000, and the lateral easement costs him only $2,500, Nollan takes the state's deal even if it provides only $1,000 in public benefits, notwithstanding that the easement is worth more in private than public hands. It is a perverse social result, which results in a loss of $1,500 in social benefits. That result is unacceptable, for the extraordinary power of eminent domain should never be unleashed in ways that diminish overall social welfare.
All this mischief is forestalled if environmental mitigation disappears tomorrow. It would no longer matter whether mitigation is sought on or off site. What matters is that the state can still buy whatever easements or wetlands it wants with tax dollars. At that point, the only issue left is valuation, and that surely does not take 20 years to resolve. It is less-likely that a financially-constrained local government would long keep its electoral base by foolishly spending $2,500 to get only $1,000 worth of benefits in return. But it is more likely generally that they pay for that same easement if it is worth more than $2,500 value it has in private hands.
There is, alas, some slippage here if the local government can finance its new projects by special taxes, which is one reason why I think that the correct financing rule always requires flat taxes for general public improvements of the sort here. Put those in place, and the odds increase mightily that standard compensation procedures will lead to the socially correct result in the broad run of cases, quickly, accurately, and at low cost. Scalia's germaneness test is a pointless diversion from the essential question of resource allocation. It gets a tiny fraction of the improper transactions, but lets far too many go by unimpeded.
Second Order Questions Once the mistakes in Scalia's Nollan opinion are understood, it becomes clear that there is no principled resolution of the second order questions that preoccupied the Supreme Court in the Koontz oral argument. For too much of the argument it belabored the silly question of whether a taking could have taken place by a simple denial of the building permit. The answer to that question is that the denial of the permit to develop surely strips a landowner of a key property right. It makes absolutely no sense to say that the owner must accept the permit, build the unwanted structure, and then claim damages for the loss of additional value. In fact, the Nollans built without a permit precisely to put the permit question in issue.
More importantly, there is no principled way to resolve the second-order question on the scope of mitigation within the Court's impoverished conceptual framework. The key issue here has to do with the scope of the bargaining range. One advantage of the position taken by Koontz is that it limits the amount of exploitation open to the Water District. If therefore, it thinks that it is better off with the development and the eleven free acres it will take the deal, rather than keep the status quo.
But we have no idea whether that is indeed the case. Much depends on the size of the bargaining range. Thus if the local government is determined never to grant building permits if they receive only 10 acres of undeveloped land, someone in Koontz's position wants to be able to engage in off-site mitigation, for otherwise the state will just deny the permit without adverse consequences under current law. But if they will in fact take 3 acres, then the limitation that Koontz sought would in fact reduce the risk of expropriation by limiting the Water District to gains on the lower end of its hoped-for distribution. The trouble is that bargaining ranges cannot be observed from without, so that no one knows whether folks like Koontz are helped by his victory or defeat so long as the current law remains in place.
But why should the law be reduced to this unsatisfactory condition? The nonstop and pointless negotiations in Koontz would be a thing of the past if the state could no longer impose its mitigation obligation on Koontz out of thin air. Koontz should win his case cleanly, at least if the Supreme Court returns to constitutional fundamentals, and kisses environmental mitigation, off-site or on, good-bye. But judging from the flailing around in oral argument, the prospects are indeed dim for a principled rationalization of this important corner of environmental law.
Richard A. Epstein is the Laurence A Tisch Professor Law at New York University, the Peter and Kirsten Senior Fellow at The Hoover Institution, and the James Parker Hall Distinguished Service Professor of Law and senior lecturer at the University of Chicago, as well as a visiting scholar with the Manhattan Institute's Center for Legal Policy.