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Cats and Dogs and the Takings Clause

April 3, 2017

CATS AND DOGS AND THE TAKINGS CLAUSE: BALANCING THE REGULATORY TAKINGS DOCTRINE AND INNOVATION IN THE SEVENTH CIRCUIT

By: Austin J. Spillane, Volume 101 Staff Member

We are currently living through an intriguing period of time that is marked by the digitization of many facets of the traditionally non-digital economy—a period dubbed by one commentator as “the Uberization of everything,” an homage to the wildly successful ridesharing application.[1] Uber itself has faced several legal attacks to its existence.[2] The most recent challenge came from players within the traditional taxicab industries in Chicago and Milwaukee, who argued, inter alia, that allowing ridesharing services such as Uber and Lyft to operate under different rules amounted to a regulatory taking of property.[3] In a pair of brief opinions issued the same day, the Seventh Circuit rejected this argument.[4] An attorney for one of the Chicago plaintiffs took exception to Judge Posner’s hypothetical of animal licensing, saying his opinion “refers to cats and dogs,” but failed to actually address the relevant takings clause precedent. [5]

This post argues that, read together, the twin opinions authored by Judge Posner do adequately analyze the takings clause question, and reaches the correct conclusion. Judge Posner’s “cats and dogs” comparison is apropos, if a bit unusual.[6]

I. THE NATURE OF THE REGULATORY TAKINGS DOCTRINE

Early courts interpreted the Fifth Amendment’s language requiring just compensation for taking of private property as applying only to the physical taking of property, but not its regulation or even disruption by public works.[7] As the economy of the United States evolved, a new notion of having a property right in the value of an object gained traction.[8] This culminated in Justice Holmes’ opinion in Pennsylvania Coal Co. v. Mahon.[9] In that case, the Court examined a Pennsylvania law that made it illegal to mine coal if such efforts would cause the subsidence of nearby homes, unless the surface and surrounding area was also owned by the mining company.[10] The Court held this to be an uncompensated taking, as the value of the property and existing contracts, based on a justified belief that the coal could be mined, was effectively destroyed.[11] Holmes stated the analysis in terms of the “extent of the diminution. When it reaches a certain magnitude, in most if not all cases, there must be an exercise of . . . compensation to sustain the act.”[12]

The Court has failed to create a more refined version of the test, and its opinion in Pennsylvania Central Transportation Co. v. City of New York provides the most common summary. In it, the Court observed that “[t]he economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. So, too, is the character of the governmental action. A ‘taking’ may more readily be found when the interference with property can be characterized as a physical invasion by government . . . than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.”[13] The addition of the language about interfering with “distinct investment-backed expectations” has created more doctrinal confusion, and was the heart of the plaintiffs’ claim in this case.[14]

II. ILLINOIS TRANSPORTATION & SANFELLIPPO: A PROPER CONSTRAINT

Both Illinois Transportation and Sanfellippo were challenges to city ordinances brought by the owners of taxicab medallions.[15] By allowing ridesharing services such as Uber to operate in the city under different regulations, the plaintiffs argued, the cities were drastically undermining the value of the medallions, a property right issued by the city and owned by the plaintiffs.[16] There is little doubt that ridesharing services are responsible for a decrease in the value of taxicab medallions, as prices fell and defaults on medallion loans rose after Uber entered the market.[17]

But, as the Seventh Circuit concluded, there can be no takings claim in this case, not simply because the diminution is not sufficient, but because the municipalities’ actions did not “take” a property right. The court expressly concludes that the property right granted by ownership of a medallion is the right to operate a taxi in the municipality.[18] That right has not been diminished by the advent of ridesharing. It is obvious that possession of a medallion does not guarantee a holder any particular level of profitability. Companies over the years have bid up the price of medallions, presumptively because they considered them a business investment.[19] Business is inherently risky. As Justice Holmes, the champion of the regulatory takings doctrine, observed, “we cannot see that the fact that their risk has become a danger warrants the giving to them greater rights than they bought.”[20]

More importantly, the Seventh Circuit’s opinions, and Judge Posner’s “cats and dogs” hypothetical in particular, demonstrate the clear policy dangers of extending the regulatory takings doctrine to cover new competitors to the market. Historically, the regulatory takings doctrine has been applied with the most force when a regulatory change directly affects a business so severely as to render future success impracticable.[21] What was challenged here was the government regulation of a similar but ultimately different industry. Cats and dogs are both domesticated animals that are popular companion pets.[22] But, the Seventh Circuit reasons, they are regulated differently because they have distinct characteristics that suggest dogs may pose more of a public nuisance, ceteris paribus.[23] Requiring similar regulations for a new and innovative service (or compensating the existing industry for a “taking”) that better serves the general interest imposes inefficiencies on consumers.

These cases are the perfect example of this principle, as the elements that make ridesharing innovative are precisely the reasons we have historically rationalized regulating taxicabs. Many cities regulate taxicab numbers on the assumption that it would be difficult for drivers to know how many cabs are needed, and there would thus be over-supply and congestion.[24] Price regulations are based on arguments that there is a high transaction cost for consumers to find the cheapest taxi and that it is thus easy for drivers to engage in price discrimination or charge above an efficient rate.[25] Finally, quality and safety standards are based on the inability of the consumer to judge a vehicle or driver on the spot.[26] Ridesharing platforms go a long way in correcting each of these market failures. Consumers can toggle between services to compare fare estimates. Price-setting algorithms and the app-based hailing feature encourage a more efficient number of drivers to be on the road at any given time.[27] The rating system allows potential riders to get a better sense of the quality of the ride based on past experiences before ever stepping into the car. The logical absurdity is easy to spot: what if traditional horse-drawn cabs had made similar arguments against their motorized replacements? Economic progress would have ground to a halt.

CONCLUSION

The regulatory takings doctrine is one with significant merit. As its proponents argue, in certain cases, government action may so directly affect the reasonable economic expectations of a business as to constitute a taking. This doctrine assures such a property owner that his rights are at least considered.

In these cases, however, the Seventh Circuit rightly saw the absurd policy implications that could arise if the doctrine was expanded to include regulatory changes that permit new competitors into the market. It is simply not cognizable that such a property interest would ever be granted implicitly by the government. Allowing a new industry to operate does not constitute a regulatory taking simply because it may outperform an old industry. If your pet barks, it would be foolish to set out a litterbox.

  1. Sunny Freeman, “Uberization” of Everything is Happening, But Not Every “Uber” Will Succeed, Huffington Post Can. (Apr. 1, 2015), http://www.huffingtonpost.ca/2015/04/01/uberization-uber-of-everything_n_6971752.html. ↑
  2. See, e.g., Kashmir Hill, Meet the Lawyer Taking on Uber and the Rest of the On-Demand Economy, Fusion (Apr. 16, 2015), http://fusion.net/story/118401/meet-the-lawyer-taking-on-uber-and-the-on-demand-economy (describing one attorney’s argument that ridesharing services violate existing employment and wage laws); see also Orly Lobel, The Law of the Platform, 101 Minn. L. Rev. 87, 90 (2016) (acknowledging that innovative platforms pose a problem for regulators). ↑
  3. See Consolidated Brief for Plaintiffs-Appellants at 39, Ill. Transp. Trade Ass’n v. City of Chicago, 839 F.3d 594 (7th Cir. 2016) (Nos. 16-2009, 16-2077); Complaint at ¶¶ 43–48, Joe Sanfellippo Cabs, Inc. v. City of Milwaukee, 839 F.3d 613 (7th Cir. 2016) (No. 14-CV-1036). ↑
  4. Ill. Transp. Trade Ass’n v. City of Chicago, 839 F.3d 594, 599 (7th Cir. 2016) (affirming district court’s dismissal of Fifth Amendment challenge); Joe Sanfellippo Cabs, Inc. v. City of Milwaukee, 839 F.3d 613 (7th Cir. 2016). ↑
  5. Lauraann Wood, 7th Circuit OKs Uber Regulation, Chi. Daily L. Bull. (Oct. 13, 2016), http://www.chicagolawbulletin.com/Archives/2016/10/13/Ride-share-city-regs-10-13-16. ↑
  6. Although not unusual for Judge Posner, who is somewhat famous for his love for his cat, and who has used cat-related hypotheticals in other recent cases. See Kim Janssen, Cat-loving Judge Makes Case That Has Nothing To Do with Cats All About Cats, Chi. Trib. (March 15, 2017), http://www.chicagotribune.com/news/chicagoinc/ct-judge-richard-posner-cats-0315-chicago-inc-20170314-story.html. ↑
  7. William Michael Treaner, The Original Understanding of the Takings Clause and the Political Process, 95 Colum. L. Rev. 782, 792 (1995). ↑
  8. Id. at 800–01. ↑
  9. 260 U.S. 393 (1922). ↑
  10. Id. at 412–13. ↑
  11. Id. at 413. ↑
  12. Id. ↑
  13. Penn. Cent. Transp. Co. v. City of N.Y., 438 U.S. 104, 124 (1978). ↑
  14. See generally R.S. Radford & J. David Breemer, Great Expectations: Will Palazzolo v. Rhode Island Clarify the Murky Doctrine of Investment-Backed Expectations in Regulatory Takings Law?, 9 N.Y.U. Envtl. L. J. 449 (2001) (discussing the inconsistent application of “invest-backed expectations” and potential solutions). Proponents of regulatory takings doctrine, who view it as a check on government power and a safeguard for private property, have lamented the “investment-backed” language as undermining the doctrine. See, e.g., Richard Epstein, Lucas v. South Carolina Coastal Council: A Tangled Web of Expectations, 45 Stan. L. Rev. 1369, 1372 (1993) (suggesting that the investment-backed language has “been used by the Supreme Court to minimize the level of protection given to private property.”). ↑
  15. Ridesharing Services Survive Two Constitutional Challenges, 34 No. 11 McQuillin Mun. L. Rep. (Nov. 2016). ↑
  16. Id. ↑
  17. See Polly Mosendz & Shahien Nasiripour, Taxi Medallion Prices Are Plummeting, Endangering Loans, Bloomberg (Jan. 30, 2017), https://www.bloomberg.com/news/articles/2017-01-30/taxi-medallion-prices-are-plummeting-endangering-loans (observing that New York medallion prices, for instance, have fallen to nearly half their 2014 peak of over $1 million). ↑
  18. Ill. Transp. Trade Ass’n v. City of Chi., 839 F.3d 594, 597 (7th Cir. 2016). ↑
  19. Cf. Ariel Stulberg, This Chart Shows How Uber is Devastating New York’s Taxi Business, Vox (Dec. 26, 2015), http://www.vox.com/2015/12/26/10647418/uber-new-york-taxi-medallions (providing a chart that shows the steady rise in medallion prices before, and shortly after, Uber launched in New York). ↑
  20. Penn. Coal Co. v. Mahon, 260 U.S. 393, 416 (1922) (referring to the homeowners who bought surface rights to land they knew could one day be literally undermined). ↑
  21. See id.; see also Armstrong v. U.S., 364 U.S. 40 (1960) (holding that the government eliminating a lien against property constituted a taking). ↑
  22. U.S. Pet Ownership Statistics, Am. Vet. Med. Ass’n, https://www.avma.org/KB/Resources/Statistics/Pages/Market-research-statistics-US-pet-ownership.aspx (last visited Apr. 3, 2017). ↑
  23. Ill. Transp., 839 F.3d at 597–98 (noting that dogs are more likely to cause injury to a person or bark annoyingly). ↑
  24. See Mark W. Frankena & Paul A. Paulter, An Economic Analysis of Taxicab Regulation 5 (1984), https://www.ftc.gov/sites/default/files/documents/reports/economic-analysis-taxicab-regulation/233832.pdf. ↑
  25. Id. at 3. ↑
  26. Id. at 3–4 ↑
  27. Judd N.L. Cramer & Alan B. Krueger, Disruptive Change in the Taxi Business: The Case of Uber 1 (Nat’l Bureau of Econ. Research Working Paper No. w22083, 2016), https://ssrn.com/abstract=2747203. ↑
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