Is Nollan Just an Exactions Case? Reflections on Nollan and Horne (Guest Post by Stanford Law Professor Mark Kelman)

by Mark Kelman 

In the canonical case of Nollan v. California Coastal Commission, the Supreme Court held that the California Coastal Commission was obliged to compensate parcel owners who had surrendered a lateral easement across the dry sand adjacent to the sea wall between their home and the ocean only because the Commission conditioned the grant of a building permit to expand their home on the surrender of the easement. The case limits state power in two important, widely recognized ways.  In Takings law terms, a state cannot argue that it has not taken but been granted property when it exploits its power to provide desired but gratuitous benefits to extort “voluntary” transfers; property is taken, not truly granted, unless the permit condition serves the same legitimate policy purpose as a refusal to issue the permit would have served. Read as a case on unconstitutional conditions, Nollan helps fortify the important point that greater powers need not entail lesser powers.  The government cannot make a party forfeit a constitutional right to in order to receive a gratuitous benefit.  Just because State U needn’t grant Professor P tenure, it cannot condition a tenure grant on a free speech restrictive agreement to desist from criticizing the governor; just because the state need not grant a building permit, it cannot condition a permit grant on surrendering ther right to be compensated for a taking.

What we seem to have forgotten, though, is that Nollan did not just limit state power. Properly understood, the Nollan case should be read to protect the state’s flexibility when it is choosing between multiple policy instruments designed to meet the same ends.  What Nollan teaches us is that the state should not choose some particular policy instrument  simply because it will be free from the obligation to compensate if it uses one straightforward regulatory method but not some alterantive method that involves a traditional taking, at least so long as the second policy instrument is Pareto-superior to the first, (not worsening the position of the parcel owner. In Horne v. Department of Agriculture, the Court reads Nollan quite narrowly, as it has generally come to be read, as a case solely about developer exactions, and loses sight of the fact that the case is in significant part about maintaining Takings-law neutrality among Pareto-superior policy instruments that meet the same goals.  The narrow result of the Horne litigation, effectively ending a program of dubious merit, is hardly tragic, but the misunderstanding of the true import of Nollan may be.

Only one aspect of the Horne case matters in trying to clarify the most critical point I want to make about Nollan. Assume (as I do) that (stripped of all the constitutionally irrelevant detail) some of Horne’s raisins were physically appropriated to diminish raisin supply and thereby bolster prices.  The Court treats that as the full stop the end of the story – physical appropriations are per se Takings. But that is simply wrong: while the court in Nollan holds that the parcel owners in that case were entitled to compensation, the Court gives a clear example of a situation in which the Nollans would not be entitled to compensation, notwithstanding the fact that the government would have plainly seized their property.

Justice Scalia, writing for the Nollan majority, invalidates the particular lateral easement exaction demanded by the California Coastal Commission in exchange for a permit to develop a bigger home on beachfront property because permitting lateral access to the public would not serve the same purpose as taking the regulatory step that would be reviewed under a Penn Central balancing test, denying the permit to expand the home altogether in order to preserve public access to ocean views. But Justice Scalia could not be clearer that had the Coastal Commission demanded that the owners surrender property in order to meet the same purpose as denying the permit would have met, it would have been reviewed under the Penn Central standard (and sustained). Here is the language from the opinion:
The Commission argues that a permit condition that serves the same legitimate police-power purpose as a refusal to issue the permit should not be found to be a taking if the refusal to issue the permit would not constitute a taking. We agree. Thus, if the Commission attached to the permit some condition that would have protected the public's ability to see the beach notwithstanding construction of the new house – for example, a height limitation, a width restriction, or a ban on fences – so long as the Commission could have exercised its police power (as we have assumed it could) to forbid construction of the house altogether, imposition of the condition would also be constitutional. Moreover (and here we come closer to the facts of the present case), the condition would be constitutional even if it consisted of the requirement that the Nollans provide a viewing spot on their property for passersby with whose sighting of the ocean their new house would interfere. (emphasis added.)  
The parties and justices agree that had the growers surrendered the raisins in exchange for receiving a discrete permit, and that surrendering the raisins would meet the same governmental purpose as denying such a  permit would have met, then Nollan would preclude the need to compensate.  In so doing, they are affirming what I would call the narrow view of Nollan, the view that it is simply an exactions case. In this narrow view, the Supreme Court recognizes four distinct classes of takings cases: physical seizures (Loretto) and regulations that deprive an owner of all the economic value of the property though they do not abate a nuisance (Lucas) are per se takings; regulations that diminish value are subject to a balancing test (Penn Central) and, finally, exactions – property rights surrendered by developers in exchange for development permits – are not compensable if exacting the property meets the same end as denying the permit would have met but are compensable if it does not. Put another way, an uncompensated exaction is fine if and only if the developer’s property concession solves the sort of problem that permitting his development would otherwise cause. (Nollan requires only that the exaction meets the same sort of end as development bans would meet; Dolan refines the Nollan test by adding that the state cannot exact substantially more from the developer than it needs to solve the problem that permitting development would create.)

Viewed in this narrow way, the question in Horne is whether the growers gave up the raisins in exchange for a, and viewed this narrowly, the majority is right that the government’s claims – that the growers gave up the raisins in exchange for permission to engage in commerce or to sell raisins – are unfounded. This is true not only because as a matter of fact, the government does not explicitly issue permits to engage in commerce or to sell raisins, but because the government would almost surely lack the constitutional authority to forbid the growers from engaging in commerce or from selling any raisins. In Nollan, of course, the state does in fact require permits to construct new buildings on ocean front land and clearly has the authority to deny such permits (without compensation) to meet its police power ends.

The dissent stumbles, by sticking to a great extent to the narrow exactions framework in responsding– the Hornes got something they are not entitled to (the right to participate in a government regulated market at prices supported by government intervention) and therefore may be asked to give something up (a portion of their crop) to get that benefit. The government is not establishing anything like a permit program here: the government does not in fact meet its supply-squelching ends here by refusing to allow some set of growers to participate in the market, so if we are constitutionally required to look for a negotiated concession here to put this case in the exactions bucket – I will give you the raisins if you let me participate in the market – we will not find one.

The proper argument the dissent is fumbling towards – that the state has the constitutional authority to grant only conditional permits, without compensating for the losses the condition entails, even if it cannot deny permits simpliciter – ultimately depends on taking what I take to be the broader view of Nollan, one in which the fact that Nollan is an exaction case at all is secondary.

In this broader view, what Nollan teaches us is the following: When the government can meet the same goal through one of two methods, one of which involves what would otherwise be a taking and one of which does not, the method that involves the taking will in certain circumstances be reviewed under the same standard that the method that does not involve the taking would be reviewed. In Nollan, the California Coastal Commission faces two broad choices when it seeks to protect the public’s ability to view the ocean: it can insure that no view-blocking building is built (this can occur either because the owner applies for no permit or, to focus on the explicit step the state could take, because the government denies the permit) or it can seize a viewing spot if the building is built. Since government-based technique #1 – forbidding the building – would be reviewed under the Penn Central standard, so should the close substitute program #2 (permitting the building and seizing the viewing spot.) In Horne, the government’s goal is to bolster farm incomes by restricting raisin supply: it can do this by an ex ante production quota (#1), an ex post restriction on sales volume (#2), or (technique #3) by seizing raisins ex post.  Since #1 and #2 receive Penn Central review, so should #3.

The California Coastal Commission might conclude that permitting buildings while seizing viewing spots is more sensible from their vantage than forbidding building; the Department of Agriculture may determine it is more sensible to use ex post seizures than ex ante quotas (since they will have more information on crop levels and prices once the growing season is done) and more sensible to seize the raisins rather than try to administer sales limits (which could readily be sidestepped by handlers operating in black markets). What Nollan, read broadly, says is that in the first instance, the government should not be deterred by a compensation requirement that applies to only one regulatory method from using a more efficacious method of meeting its goals. This is a very sensible holding.

Now, obviously, the fact that the government might, in Nollan, prefer to gain a viewing spot alongside a bigger ocean side home to a smaller ocean side home, does not mean that it can take the viewing spot and then mandate that the owner build the structure that would justify the seizure or that the government can seize property whenever doing so meets the same end as it might have met through a non-compensable regulation. (A mandate that a developer set aside a huge portion of its rental unit for low-income housing might be a Penn Central taking even though it meets the same broad end as a rent control statute that does not constitute a taking.)  Taking the viewing spot without compensation is permissible only when the owner chooses to build, when not just the state but the owner prefers the outcome that occurs if the state follows regulatory strategy #2 (building + seized viewing spot) to #1 (no building.) But the fact that the viewing spot is surrendered in exchange for a permit – that it is exacted rather than simply seized – is important only for that one limited reason. The fact that the parcel owner must assent (and consent) to the property surrender in any exactions case – the owner can keep his property by forgoing the permit – is  simply the most obvious way of guaranteeing that the chosen regulatory outcome is in the interests of both the state and the private party. (Assent to a taking/surrender of a property right is plainly a necessary but insufficient condition to permitting the taking without compensation. We can see that it is not sufficient because the Nollans assent to the taking of the lateral easement too, but it does not count as consent because it is coerced by the state exploiting its permit-granting authority to get the Nollans to surrender a constitutional right.)

But what should we do, in cases like Horne, where the state does not give the owners the explicit option between seizure and either ex ante quotas or ex post sales limits? Need we worry that the owner of the property is being forced to embrace a regulatory solution that is worse for her than the options that are plainly more deferentially reviewed under the Penn Central standard? Here, I think, the fact that the Hornes are given a contingent interest in the profits on the sale of seized raisins means that the existing program unquestionably dominates constitutionally permissible sales-restricting program from the growers’ vantage, in which the raisins that could not be sold at all would plainly be less valuable than seized raisins that might yield profit.

This broader view of Nollan has important implications outside the Horne case. Think about the cases (Hodel v. Irving and Babbitt v. Youpee) in which Congress sought to abolish the right to devise or pass through descent highly fractionated interests in property held by Native Americans, which would instead escheat to the tribe on death, and assume that it is properly thought of as a quasi-per se taking to abolish the rights to pass on property at death. Assume, too, as the facts in Hodel v. Irving clearly indicate, that were the Bureau of Indian Affairs to charge actuarially fair user fees to holders of highly fractionated land to account for the costs of managing the property and assigning them their income shares, holders of the fractionated shares would all abandon them, because the fees would far exceed the income generated by the fractionated shares. The Hodel v. Irving Court notes that the administrative costs of handling one of the typical fractionated tracts at issue in the litigation is $17,560 annually, sixteen times higher than the income the tract produces. If the owners had to pay the administrative costs of managing the tract – and the Bureau of Indian Affairs plainly has the constitutional authority to charge such user fees rather than fund administrative costs out of general revenues – all of the owners of the fractionated land would plainly not just fail to pass these claims to descendants, but would give up their claims. If one believes that (a) the aim of the federal government, to get rid of fractionated interests, can be met, without constitutional impediment, through imposing user fees and (b) that the escheat provisions meet these same ends and that (c) the government would prefer not to impose user fees on all holders of Native property, then (d) it need not offer a choice between user fees and surrendering the right to devise highly fractionated property or have it pass through descent (since giving up the right to pass the property along at death unambiguously dominates paying user fees – no one holding highly fractionated interests would choose to hold the property and pay the user fees.) The escheat provisions should be reviewed in the same fashion as the user fees would be reviewed (and thereby sustained) because they are (from the vantage of the federal government) simply a more efficacious method of meeting the same acceptable goal (they get rid of fractionated interest without imposing unwanted costs on holders of less fractionated property) and, from the vantage of those surrendering a property interest, unambiguously preferable to selecting the putative option (pay user fees) that the government never explicitly offers.

Properly understood, Nollan squashes the unwarranted pressure to choose a regulatory option to meet an acceptable goal that is better for both the state and the party from whom a conventional property interest is seized simply because the state need not compensate if it employs one option yet must if it uses the other. The fact that Nollan happens to be an exaction case is of secondary relevance in interpreting what the case is really about; the fact that it is an exactions case merely is one simple way of assuring that the owner as well as the state prefers the regulatory option that results in the loss of a conventional property interest.

[For a far fuller discussion of Horne itself,  including a discussion of how Dolan issues might be present in the case and a fuller discussion of Nollas as well, you might want to look at Mark Kelman, Untangling Horne, Resuscitating Nollan, 104 Cornell Law Review Online 50 (2018)]