What are a government’s risks when they deem a business not “essential” and require it to cease operations? Are such Emergency Orders effectively a “taking” of the business? And if so, will the governmental authority be required to provide compensation to the business owner? Interestingly, depending on the circumstances, the answer to these last two questions may be the same: No.

As legislative and executive officials combat the novel coronavirus (COVID-19), judicial officials may soon have their own novel issues to address regarding possible governmental taking claims and the applicability of the public necessity doctrine. In response to the rapid and unprecedented spread of COVID-19, national, state and local government officials are implementing new public measures to (hopefully) slow the spread of the disease. Some of these new measures include the mandatory closure of businesses. But as government officials work to address COVID-19, the current solution may be creating a new problem: are these mandatory closure measures a taking by the government? Furthermore, if the closures are a taking by the government, are the business owners entitled to just compensation, or are the closures non-compensable as a public necessity?

Orders from both the Governor and many County Judges mandate the closure of certain businesses within the state and county, respectively. Some orders are presently set to terminate but can be extended indefinitely. While the orders are in effect, the applicable businesses are prohibited from operating, with a notable exception for restaurants. If a restaurant has the ability to deliver food or prepare to-go orders, the restaurant may continue operating in this limited capacity for the duration of the order. The mandatory closures implemented by government orders effectively restrict the use of the property by the property owner. As a result, the question becomes whether these orders are takings by the respective governmental authority, and if so, is the business owner entitled to compensation, or does a legal defense apply barring compensation for the business owner.

This issue appears to be as novel as the disease creating it; however, a review of federal and state case law provides some guidance on how the courts may analyze and ultimately decide these issues should a business owner file a regulatory taking claim resulting from the COVID-19 emergency orders.

Regulatory taking

The first hurdle for impacted businesses is showing that the closure orders are a regulatory taking. The takings clauses of the U.S. and Texas constitutions prohibit the government from taking land for a public use without paying just compensation (see U.S. Const. amend. V; Tex. Const. art. I § 17); however, the Supreme Court has also recognized that while the Constitution specifically addresses the government taking a landowner’s property, “the Constitution contains no comparable reference to regulations that prohibit a property owner from making certain uses of her private property.” Tahoe-Sierra Preservation Council, Inc. v. Tahoe Regional Planning Agency, 535 U.S. 302, 322 (2002).

Under this latter scenario, termed a “regulatory taking,” the U.S. Supreme Court has held “that ‘the general rule at least is, that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.’” First English Evangelical Lutheran Church of Glendale v. Los Angeles, Cal., 482 U.S. 304, 316 (1987) (citing Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922)). The Court has “recognized that [the Fifth Amendment’s bar against the taking of private property for public use without just compensation] is ‘designed to bar Government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.’” Tahoe-Sierra, 535 U.S. at 336 (citing Penn Cent. Transp. Co. v. City of New York, 438 U.S. 104, 123-124 (1978) (additional citation omitted)).

In evaluating “when ‘justice and fairness’ require that economic injuries caused by public action be compensated by the government,” the Supreme Court ultimately determined that “the outcome instead depends largely upon the particular circumstances in that case.” Id. (quotation citations omitted). Though the Supreme Court has so far declined to create a categorical rule for when a regulatory taking occurs, the Court has offered several factors for consideration, including the “economic impact of the regulation on the [property owner]” and that “the duration of the restriction is one of the important factors that a court must consider in the appraisal of a regulatory takings claim.” Penn., 438 U.S. at 124; Tahoe, 535 U.S. at 342. Additionally, “the character of the governmental action—for instance whether it amounts to a physical invasion or instead merely affects property interests through some public program adjusting the benefits and burdens of economic life to promote the common good—may be relevant in discerning whether a taking has occurred.” Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 539 (2005) (citations omitted)).

Texas courts have similarly addressed governmental restrictions and whether a restriction constitutes a compensable taking. See Sheffield Development Co., Inc. v. City of Glenn Heights, 140 S.W.3d 660 (Tex. 2004) (explaining that “a restriction in the permissible uses of property or a diminution in its value, resulting from regulatory action within the government’s police power, may or may not be a compensable taking.”). There are three ways for a governmental authority to effectuate a taking:

• a total restriction of access for either a temporary or a permanent period of time;
• a partial restriction of access for a temporary period of time; and
• the activity causing the restriction of access was illegal, unreasonable or unnecessary.

City of Austin v. Avenue Corp., 704 S.W.2d 11,12 (Tex. 1986); see also State v. Whataburger, Inc., 60 S.W.3d 256, 260 (Tex.App.—Houston [14th] 2001, pet. denied].

The Texas Supreme Court has held that “whether regulation has gone ‘too far’ and becomes too much like a physical taking for which the constitution requires compensation requires a careful analysis of how the regulation affects the balance between the public’s interest and that of private landowners.” Sheffield., 140 S.W.3d at 671-72.

Said differently, Texas courts will conduct a “circumstantial analysis” and “consider all of the surrounding circumstances in applying a fact-sensitive test of reasonable” to determine if there has been a regulatory taking. Id.

Public necessity

Even if a business does show that a COVID-19 emergency ordinance is a regulatory taking, the next consideration for the court is whether the governmental authority can assert a possible defense against awarding compensation, such as public necessity.

The U.S. Supreme Court has “recognized that in times of imminent peril…the sovereign could, with immunity, destroy the property of a few that the property of many and the lives of many more could be saved.” U.S. v. Caltex, 344 U.S. 149, 154 (1952). “The principle, ‘absolving the State…of liability for the destruction of real and person property in cases of actual necessity, to prevent…or forestall…grave threats to the lives and property of others,’ is commonly referred to as the ‘doctrine of necessity’ or the ‘necessity defense.’” TrinCo Inv. Co. v. U.S., 722 F.3d 1375, 1377 (Fed. Cir. 2013) (citing Lucas v. S.C. Coastal Council, 505 U.S. 1003, 1029 n.16 (1992)). “The Supreme Court has consistently held that the doctrine of necessity may be applied only when there is an imminent danger and an actual emergency giving rise to actual necessity.” Id. at 1378.

The State of Texas has similarly acknowledged a defense against compensation for a regulatory taking “by proof of a great public necessity.” See Steele v. City of Houston, 603 S.W.2d 786 (1980). Noting that the “uncompensated destruction of property has been occasionally justified by reason of war, riot, pestilence or other great public calamity,” the Supreme Court of Texas has recognized that “where the danger affects the entire community, or so many people that the public interest is involved, that interest serves as a complete justification to the [governmental entity] who acts to avert the peril to all.” Id. at 792.

Whether a business owner chooses to file a claim in federal or state court may impact whether the respective COVID-19 emergency order requiring a business’ closure is considered a compensable regulatory taking. If the emergency order is found to be a regulatory taking, however, the next question is whether the issuing governmental authority will be protected under the public necessity defense.