Taking Back the Fifth

As government expands "takings" to intellectual property and other intangibles, will business start to care about property rights?

James V. DeLong from the June 1999 issue

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Another psychological barrier keeps business executives, and their lawyers especially, from joining the property rights movement. Since the 1930s, legal education has imbued students with contempt for the Supreme Court justices of the early 20th century, who are depicted as mossbacks resisting the progress represented by New Deal legislation. The political, social, and legal story of that era is much more nuanced then this, of course, but victors write history, and the New Dealers won. The result, after half a century, is that most business lawyers feel uncomfortable supporting the right to property. It is like being seen by your neighbor in the X-rated section of the video store.

This discomfort is reinforced by the lawyers' corporate clients, who have been told for 20 years that defending the right to proper-ty makes one "anti-environment." Nancy Marzulla runs Defenders of Property Rights and, like anyone in such a position, is always looking for potential supporters. She reports that corporate representatives keep calling, but it is awfully hard to convince them that this is the side they should be on because it's the right side and because it's in their interest.

But the prospect of losing his firm's core assets tends to focus the mind of a corporate executive. So consciousness is indeed being raised, as business realizes there is something new and ominous in the current tide of regulatory proposals. In the past, regulation mostly involved control at the margins. It could be a nuisance, it could raise costs, it could be pointless, but it was an irritant rather than a threat to the essence of the enterprise. Now business as a class is realizing that legislators and regulators are losing their inhibitions, that governments are become more boldly appropriative, not just adding costs but asserting dominion over key assets. As recently as a decade ago, a proposal such as the one put forward by the state attorneys general for Microsoft would have been dismissed as nonsense. Today, industry had better take it seriously. Gates' next meeting with the think tanks may have a different tone.

This spillover of property rights issues into the boardrooms of corporate America is creating an interesting political situation. To date, the property rights movement has not been doing very well. It is the ragged relation of conservatism, invited to dinner on major holidays but relegated to the children's table, where its advocates can be patted on the head occasionally while not interfering with the serious conversation.

The reasons for this situation can be understood by considering the economic interests at stake. Because the property rights issue is associated primarily with real estate, the core of the movement is landowners, mostly rural, allied with some natural resource companies, trying to defend against a complex array of regulatory innovations concerning wetlands, endangered species, land use, coastal zones, public lands, rails to trails, heritage rivers, and other causes.

Once upon a time in America, the combination of natural resource companies and rural landowners could make the political system quake. But the technological revolutions of the 20th century have shifted the nation's economic center of gravity, and what counts now is money, machinery, information technology, and brain power. Even agriculture and natural resource industries are as automated as manufacturing plants, no longer relying on the huge base of skilled workers that leads to political power.

In any event, the natural resource companies' interest in property rights is a bit academic. They get burned occasionally on site-specific issues, but they have learned to cut deals, giving up some of their property in exchange for the right to exploit the rest. The payoff demand spurned by John Taylor, the D.C. retiree trying to build a new house, would be a routine transaction to any large company. Besides, if a company cannot operate in the United States, well, it's a big world. As long as Americans need the fruits of the earth to support their consumption, a timber, mining, or oil company can find more welcoming climes and ship its products home.

Even real estate developers, who cannot move offshore, are not vitally concerned with property rights. They have learned not to inventory land. They buy options, get all the permits nailed down, and only then take title. The nation wants homes, workplaces, and malls, so the developers will be allowed to build somewhere, and the exact site matters little to them. In fact, the tighter the restrictions, the higher the rewards to those who can navigate the environmental and permitting maze, and the higher the roadblocks against less savvy or well-wired competitors.

The outcry from the general public is muted as well. Most people use land to live or recreate on, not to make a living. The offending rules are not directed at the homeowners of suburbia, for whom property is a consumption item. Restrictions do affect some members of this class, and the files of the advocacy groups are full of dire tales from individual homeowners like John Taylor. Restrictions may also raise housing prices and impose other indirect costs, such as longer commutes and more unattractive sprawl, but these are pretty well hidden. Governments are not assaulting suburbanites as a class in an obvious way, and any nascent resistance has been mild.

The West, in particular, is split on property rights. It is the most urbanized part of the country, judged by the percentage of the populace in metropolitan areas. Urban Westerners are inclined to applaud restrictions on rural land use, by reason of both environmentalist ideology and perceived self-interest. The less that grazers, loggers, miners, or farmers get to use land, they think, the more will be available for the urbanites. They are not always right in their judgment of self-interest. Obliterating the old logging roads in the national forests, for example, as the Clinton administration is trying to do, turns these into de facto wilderness--accessible only to hardy backpackers, as remote as the moon from the married-with-children set or the geriatric brigade--but that truth has not yet come home to the residents of Denver and Portland.

For the property rights movement, the upshot of these factors is political weakness. Legislation gets introduced in Congress, but it never goes anywhere. States have passed some property protection laws, but these are for the most part Band-Aids. Now that government has expanded its assault on property rights beyond land-based interests to include the bastions of contemporary economic power, the property rights movement may be on the verge of a revival.

When business executives actually examine the body of Fifth Amendment doctrine, they are going to be surprised. While they were looking the other way, thinking it was not their problem, historic protections were being diluted. According to the Supreme Court, regulation (as distinguished from a physical occupation) does not constitute a "taking" unless it deprives the owner of virtually all use of the property, which means 90 percent of the value can disappear with no redress. Nor is there any limitation on the use to which the government puts appropriated property. A "public use" is anything the executive branch says it is, and it can include taking property from one citizen and giving to another. Under existing law, the Taylors have no legal protection from the Fish & Wildlife Service, which can turn their lot into a wildlife refuge even though no wildlife actually live on it. Meanwhile, the Supreme Court has for the most part let stand a host of procedural obstacles designed to block the few claims that are valid under the precedents.

The legal situation is not uniformly bleak, however. Several of the cases won by landowners in recent years erect principles upon which judges can build. Under Dolan v. City of Tigard (1994), for example, a locality does not have boundless authority to condition a construction permit on a landowner's willingness to dedicate part of his property to public use. Any requirement must bear a reasonable relationship to problems created by the construction. And under Lucas v. South Carolina Coastal Council (1991), a state may not summarily define as a "nuisance" a particular use of land--such as erecting a house on a beachfront lot amid existing beach houses--and then prohibit it. The definition of nuisance has to be grounded in the state's established property law.

Furthermore, two recent Supreme Court decisions may be signs of growing judicial uneasiness over the rising tide of legislative and regulatory threats to property rights in the business context. Last year, in Eastern Enterprises v. Apfel, the Supreme Court found that Congress had violated the Takings Clause with a law that funds health benefits for former coal miners by imposing a retroactive tax on almost all firms that have ever been in the coal business.

And in the 1996 case United States v. Winstar, the Court upheld the contract rights of savings and loan investors who had been promised regulatory relief by the Federal Deposit Insurance Corporation. The gist of the matter was that the FDIC induced sound institutions to ride to the rescue of failing S&Ls by promising that some dubious "goodwill" could be claimed as an asset for purposes of meeting capital requirements. The deal was a bad one for the public, motivated mostly by the government's desire to cover up the magnitude of the S&L disaster by avoiding closure of busted S&Ls, but it was a deal, and the rescuers relied on it. Then Congress outlawed this accounting method, which put the rescuers in violation of capital requirements, and the FDIC closed them down, imposing severe losses on their shareholders. The Court ruled that government could not enter a contract as a party, then turn around, put on a regulatory hat, and repudiate it. It could not rely on its status as a sovereign to summarily snuff out a contract right it had created without paying for the harm caused by the repudiation.

In addition to the possibilities opened up by such rulings, protective legislation, long stalled in Congress, may be viable if political support for property rights spreads beyond the current limited circle. So if corporate officers and directors start carrying around copies of the Constitution and proclaiming, "They can't do that to me," it could turn out that in fact they can't. It would be nice if businesses started doing this as a matter of principle, but principle is not really necessary. It is more important that companies realize this is where their long-term interest lies. Business cannot thrive if its energies are diverted from the economic market into the political market, into continual jockeying for favoritism in a war of all against all. What is really needed for the security of property is intelligent selfishness.