The First Amendment Right To 'Greenmail' Developers

Plus: The Montana Supreme Court rescues zoning reform, and a new challenge to inclusionary zoning.

Happy Tuesday and welcome to another edition of Rent Free. This week, the newsletter goes to housing court for a look at a few recent, consequential court decisions and lawsuits. It includes:

• The Montana Supreme Court overruled a district judge's blocking of new laws that allow duplexes and granny flats in single-family neighborhoods.
• A new lawsuit from a California homeowner challenging her city's inclusionary zoning fees.

But first! Our lead story is a look at a new federal appeals court opinion finding that developers have a First Amendment right to file endless environmental lawsuits against a competitor's projects.

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The First Amendment Right to 'Greenmail' Developers

California's Environmental Quality Act (CEQA) requires that government agencies study the environmental impacts of "projects" they undertake, which includes the approval of private developments that they have some discretion over.

The law also gives the general public the right to sue government agencies for allegedly approving projects without conducting a thorough enough study of those environmental impacts.

The idea was that concerned citizens with easy access to the courts would be the ultimate check on bureaucrats casually greenlighting environmentally ruinous projects.

An unintended consequence of CEQA is that anyone can file a lawsuit to wring concessions out of project sponsors, including concessions that have nothing to do with protecting the environment.

Because California's strict zoning laws frequently require developers to seek some sort of discretionary government approval, this opens up a lot of opportunities for cynical actors to use CEQA to shake down builders.

Indeed, this practice is common enough to have a nickname: "greenmailing." Everyone from labor unions to "equity" groups, and even developers themselves, have used it to pressure project sponsors into providing some sort of payout.

In recent years, developers who've been hit with greenmailing suits have responded with lawsuits of their own. In federal countersuits, they've alleged that they're the victim of illegal extortion efforts that violate the Racketeer Influenced and Corrupt Organizations (RICO) Act.

But on Thursday, the U.S. Court of Appeals for the 9th Circuit dealt a blow to anyone who might hope RICO would save them from CEQA, when it held that a seemingly very obvious case of greenmailing was protected by the First Amendment's Petition Clause.

'It's Going To Take a Check To Make This Go Away'

For the past decade, the developer Relevant Group has been building hotels in the Hollywood neighborhood of Los Angeles. Time and again, after the city approved the company's projects, another neighborhood developer filed petitions arguing that the city's approval violated CEQA by not studying traffic, noise, and other impacts enough.

The litigious developer in this case is Stephan Nourmand, principal of Sunset Landmark Development, which owns and operates the Hollywood Athletic Club near Relevant's projects.

Nourmand's company dropped its lawsuits challenging the approval of two of Relevant's hotel projects after the developer agreed to pay $5.5 million.

When Nourmand sued over the approval of another of Relevant's hotel projects in 2018, Relevant's lawyer met with him to try and convince him to drop the lawsuit. According to court filings, Nourmand told the lawyer "You know the drill. It's going to take a check to make this go away."

Frustrated with what they describe as demands for ransom payments, Relevant sued Nourmand and his company in 2019, arguing that his "sham lawsuits" violated RICO.

In an opinion issued last Thursday, the 9th Circuit upheld a lower court's dismissal of the case, citing a judicial doctrine that requires courts to construe statutes to "avoid burdening conduct that implicates the Petition Clause of the First Amendment." The petitioning conduct in this case would be filing CEQA lawsuits.

In order to overcome that bar, Relevant needed to show that Nourmand's lawsuits were "objectively baseless." The 9th Circuit reasoned that they weren't, in part because Relevant elected to settle several of these lawsuits.

In effect, by giving into Nourmand's demand for cash payments, Relevant undercut their own RICO claim that they were being illegally extorted. The success of the alleged shakedown became evidence against it ever having happened.

The 9th Circuit did concede that "Relevant raises several facts suggesting that Defendants had an improper purpose in bringing their actions"—citing Nourmand's comment about how a check would make his lawsuit go away.

It nevertheless said that it couldn't consider Nourmand's motives so long as the initial lawsuit cleared that low "objectively baseless" bar.

The CEQA Trap

The 9th Circuit's opinion would seem to foreclose using RICO as a means of guarding against extortionary CEQA suits for a couple reasons.

Firstly, because banks and investors will typically refuse to finance a project that's the subject of CEQA litigation, and because these lawsuits can also go on for years, a developer's incentive to settle a CEQA lawsuit against their project is immense. And if they do settle a case, per the 9th Circuit's opinion, this can be seen as evidence that the CEQA lawsuit wasn't baseless and is therefore First Amendment-protected petition activity.

Secondly, even if a settlement weren't evidence against a lawsuit being objectively baseless, it's just incredibly hard to file an "objectively baseless" CEQA lawsuit in the first place.

The 9th Circuit notes in their opinion that a lawsuit is objectively baseless when "no reasonable litigant could realistically expect success on the merits." But CEQA has been interpreted so broadly, and with such deference to people bringing challenges to projects, that one could almost always realistically expect to win on the merits.

Readers might recall the successful CEQA challenge by Berkeley neighborhood groups to the University of California, Berkeley's decision to expand student enrollment on the grounds that the university had failed to study the noise impacts new students would make on surrounding neighborhoods.

If one can win a CEQA suit claiming a project sponsor failed to study the noise of new residents (including already illegal nuisance noise), the list of CEQA claims that have a "realistic" chance of success is long indeed.

And that means that, per the 9th Circuit's ruling, almost every CEQA suit can clear the "objectively baseless" bar. Thus, a court will never get to the part where they consider whether someone's explicit statement that they'll drop their suit once they're paid off counts as illegal extortion.

What Is to Be Done?

In response to the aforementioned Berkeley case, the California Legislature passed one bill that explicitly excludes human-generated noise impacts from being considered a significant environmental impact in need of CEQA analysis. Another bill excludes some university housing projects entirely from CEQA's requirements.

It's the latest in a string of new laws that attempt to put some limits on when people can use CEQA to slow down development.

These legislative efforts have a mixed record of success. Frequently CEQA reform bills come with so many carve-outs and exceptions that they still functionally leave plenty of room for project critics to file lawsuits.

The Legislature has also avoided limiting who has standing to file CEQA lawsuits in the first place. Its status as a law that's enforced by litigation from the general public (and cynical actors claiming to speak for the public) remains intact.

So long as that's the case, there will still be plenty of opportunities for cynical greenmailing lawsuits. Thanks to the 9th Circuit opinion, there's one less opportunity to fight against them in court.

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A Court Victory for Zoning Reform in Montana

In happier news last week, the Montana Supreme Court reversed a lower court's decision blocking the implementation of two laws that respectively legalized duplexes and accessory dwelling units (ADUs) on almost all residential land in the state.

The two laws were part of the so-called "Montana Miracle" of 2023, when the Legislature passed a suite of bills that removed regulations on new homebuilding.

In response, activists from Montanans Against Irresponsible Densification (MAID)—a group formed to fight Montana's zoning reform bills—sued the state to block the two laws.

MAID made the eyebrow-raising argument that because the new laws overrode local zoning restrictions on ADUs and duplexes, but not private restrictive covenants blocking ADUs and duplexes, they violated the equal protection guarantees of the U.S. Constitution.

In December 2023, a Gallatin County judge sided with MAID and issued a preliminary injunction against the two laws, writing that "the result of the new laws is that two different sets of people, one protected by restrictive covenants, the other not, results in an arbitrary application of Montana law which is unrelated to any legitimate governmental purpose."

The Montana Supreme Court's opinion found that MAID had not met the standards for a preliminary injunction, which requires the likelihood of irreparable harm. But MAID had only provided "generalized fears and supposition" about the potential for new multifamily development.

The Supreme Court's decision was not a total loss for MAID. It found that the group did have standing to sue, something the state of Montana had argued against in their response to the lawsuit.

That means the lawsuit against the duplex and ADU laws is ongoing, even though the two laws can now go into effect.

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A Post-Sheetz Challenge to Inclusionary Zoning

In 2021, the California Legislature passed Senate Bill (S.B.) 9, which gives homeowners the ability to subdivide single-family properties and build multiple units on each of the new lots.

In 2022, Healdsburg, California, homeowner Jessica Pilling and her husband attempted to take advantage of the new law by subdividing their property and building a single-family home and ADU on the new lot.

As a condition of approving Pilling's new home and ADU, the city of Healdsburg demanded that Pilling pay a $20,000 "inclusionary zoning" fee, with that money earmarked for affordable housing.

Last Thursday, Pilling sued the City of Healdsburg in the U.S. District Court for the Northern District of California. She's arguing that the inclusionary zoning fee is an "unconstitutional condition" on her property. She's being represented by the Pacific Legal Foundation.

Past challenges to inclusionary zoning policies have had little success. But the U.S. Supreme Court's recent decision in Sheetz v. County of El Dorado gives Pilling's lawsuit a better chance, says David Deerson, an attorney with the Pacific Legal Foundation.

In Sheetz, the Supreme Court made clear there's no legislative exception to the "unconstitutional conditions" doctrine—which requires that the conditions local governments place on the approval of new development have some sort of reasonable nexus to the impacts of that development.

Previously, it was unclear whether the doctrine applied only to conditions applied by local bureaucrats, or whether it included conditions established by local legislatures like city councils and county boards.

"After Sheetz made clear there is no such exception, that just removes one of the barriers that has been in place," says Deerson.

And because building housing doesn't make housing less affordable, there's no nexus that justifies slapping inclusionary zoning fees on new housing, he argues.

Research has found that inclusionary zoning laws act as a tax on new housing—lowering production and raising costs. Should Pilling's lawsuit end up limiting local governments' ability to enforce inclusionary zoning policies, it could potentially pave the way for a lot more housing development.

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Quick Hits

• Rent control-loving St. Paul, Minnesota, is experiencing a major slowdown in new construction projects.

St. Paul on pace for worst residential construction season in more than a decade.#RentControl https://t.co/KcfKj0gIUd

— Nick Erickson (@nserickson) September 8, 2024

• Back in March, Reason covered the case of Craig and Marylin Milum, who wanted to demolish and redevelop their shuttered, aging commercial laundry building into new housing. The city had argued they couldn't because the laundry's lamella ceiling made it a historic resource. But this past week, the Phoenix City Council voted against rezoning the property to add historic protections to it. The couple can now demolish it and proceed with its redevelopment. "The Milums' nest egg is more secure than it was and they're free to sell the property" and build housing on it, says Paul Avelar, an attorney with the Insitute for Justice who represented the Milums.
• Harvard economics professor Ed Glaeser has a new essay in The New York Times on how to fix the housing crisis.
• The City of Elk Grove, California, has agreed to settle a lawsuit with the state of California over its denial of a 66-unit supportive housing development. At a press conference announcing the settlement, Gov. Gavin Newsom said that he would turn back the past 50 years of California housing policy if he could.
• Matthew Yglesias suggests Congress use its powers over Washington, D.C., to turn it into a YIMBY paradise of housing abundance. I argued for the same thing last year.