Feature
by Paul F. Utrecht
In February, the U.S. Supreme Court heard arguments in Lingle v. Chevron on the constitutionality of Hawaii’s rent control for gasoline stations. The Supreme Court clearly understood that its decision (expected by June 30) will have serious long-term implications for the constitutionality of San Francisco’s Rent Ordinance. In fact, Justice Ginsberg asked whether a ruling against the State of Hawaii means that all residential rent-control laws would also be unconstitutional under the Takings Clause of the Fifth Amendment.
The Lingle case resulted from the Hawaii Legislature’s decision to impose rent control on gasoline stations in an effort to reduce gasoline prices. In Hawaii, a major oil company often owns the property under a gasoline station, which is then rented to a franchisee that operates the station. The State Legislature believed that gasoline prices would go down if the oil company could not raise the rent charged to the franchises. Chevron challenged the law, and its expert economist persuaded the trial judge that rent control would only shift wealth between the oil company and the franchises. The franchises would continue to charge the market price for gasoline but would make more money because their rent could not be raised.
In the U.S. Supreme Court, the State of Hawaii argued that the courts should not intrude too far into the democratic process by second-guessing the State Legislature. Hawaii made a radical argument that laws like rent control should not be subject to any judicial scrutiny at all under the Takings Clause. Hawaii also made a more moderate argument that any judicial review should be under a very deferential level of scrutiny called the rational basis test.
In constitutional law, there are three levels of judicial scrutiny: strict scrutiny, the rational basis test, and heightened scrutiny. Strict scrutiny is used when the government impinges on the most fundamental constitutional rights, like the right to be free from racial discrimination. (The law-professor view is that strict scrutiny is strict in theory and fatal in fact.) The rational basis test is used when there are no important constitutional rights at stake. If there were any rational basis for the legislature to conclude that there was a problem and that the law might help alleviate that problem, then the law would be constitutional. (The San Francisco City Attorney’s Office has called this the straight-face test.) Heightened scrutiny falls between strict scrutiny and the rational basis test and is used when there are important rights (but not the most fundamental rights) at stake.
In Lingle, the federal Ninth Circuit Court of Appeals held that a heightened level of scrutiny was required because a law like rent control often does nothing more than transfer wealth from landlord to tenant. The Ninth Circuit concluded that Hawaii’s law would not accomplish its purpose of lowering gas prices. The Ninth Circuit used a heightened level of scrutiny because of its concern that the democratic process could be skewed by the fact that more voters benefit from rent control than are harmed by it.
The Ninth Circuit’s ruling in Lingle in April 2004 only applied to the rent-control issue that pertains to gasoline stations. But if that ruling is affirmed by the U.S. Supreme Court, the implications are far-reaching. Judge William Fletcher dissented from the Ninth Circuit’s ruling and stated that one of the consequences of Lingle was that “virtually all rent control laws in the Ninth Circuit are now subject to [heightened scrutiny under the Takings Clause] and many of those laws may well be held unconstitutional under that test.” Judge Fletcher’s prediction was swiftly proven true: three months later, the Ninth Circuit held that mobile-home rent control was unconstitutional in Cashman v. City of Cotati. (That decision is on hold, pending the Supreme Court’s ruling in Lingle.)
The oral argument in Lingle was unusual because both Justices Rehnquist and Stevens were absent. Rehnquist was too ill to attend the argument, and Stevens’ flight from his home in Florida was cancelled. Thus, this was the first time that Sandra Day O’Connor was the presiding Justice in the Supreme Court.
The likely swing votes in the Lingle case are Justices Kennedy and O’Connor. While they did not say much during the argument, they both made comments that were favorable to Chevron’s position. Justice Kennedy suggested that the only purpose of Hawaii’s law was to help the politically powerful gas station operators whose rent was being reduced by the law. Justice O’Connor suggested that the fact that a discrete property right (to collect fair-market rent) was taken by Hawaii could be a justification for a heightened level of scrutiny by the courts.
On the other hand, the questions asked by Justices Ginsberg, Breyer and Souter clearly showed that their sympathies lie with the State of Hawaii’s position. But even Ginsberg and Breyer sounded skeptical of Hawaii’s more radical argument that the Court should abandon the substantial advancement test (that is, there should be no judicial scrutiny of laws like rent control under the Takings Clause of the Constitution). Breyer pointed out that 12 Supreme Court opinions found the substantial advancement test to be the correct test under the Takings Clause. Justice Scalia said that the Supreme Court would have to “eat crow” and repudiate all 12 of those cases in order to adopt Hawaii’s argument. His tone of voice did not suggest that he thinks that crow tastes as good as duck.
The critical importance of Lingle was underscored by the fact that the Attorney General of Hawaii personally appeared in Washington to argue the State’s case. In addition, a Deputy Solicitor General of the United States also argued in favor of Hawaii’s position. (While this Republican administration’s decision to support rent control appears puzzling, it is explained by the fact that the Solicitor General represents the U.S. government, which often adopts laws and regulations that could be challenged as Takings.) The importance of this case to San Francisco is demonstrated by the fact that Andrew Schwartz who, as Deputy City Attorney defended the city’s rent-control ordinance for the past 20 years, was in Washington to attend the argument in Lingle.
The oral argument appeared to favor the State of Hawaii, and some legal commentators have even predicted that the Supreme Court will rule unanimously that Hawaii’s law is constitutional. But based on prior opinions, there seems little doubt that Justices Rehnquist, Scalia and Thomas will conclude that the law is unconstitutional. (Scalia said that Hawaii’s law was an unintelligent form of rent control because it will not accomplish the stated purpose of lowering gas prices.) And it was not at all clear from the arguments what position will be adopted by Justices Kennedy and O’Connor who are the swing votes on this issue (as discussed above, their limited comments indicated some sympathy for Chevron’s arguments). In fact, the outcome of the Lingle case cannot be known until the Supreme Court issues an opinion, which may be as late as the end of June.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. The information contained in this article is general in nature. Consult the advice of an attorney for any specific problem. Paul F. Utrecht attended the oral argument in Lingle and filed an amicus brief in that case on behalf of the San Francisco Apartment Association, San Francisco Association of Realtors, California Apartment Association and Small Property Owners of San Francisco Institute. Utrecht is a shareholder in Zacks Utrecht & Leadbetter, P.C. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.