Chevron Usa, Inc. v. Bronster

• Decision Date: 01 April 2004
• Docket Number: No. 02-15867.,02-15867.
• Citation: 363 F.3d 846
• Parties: CHEVRON USA, INC., a Pennsylvania Corporation, Plaintiff-Appellee, v. Margery S. BRONSTER, Attorney General of the State of Hawaii, Defendant, and Linda Lingle, Governor of the State of Hawaii; Mark J. Bennett, Attorney General of the State of Hawaii, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

363 F.3d 846

CHEVRON USA, INC., a Pennsylvania Corporation, Plaintiff-Appellee, v. Margery S. BRONSTER, Attorney General of the State of Hawaii, Defendant, and Linda Lingle, Governor of the State of Hawaii; Mark J. Bennett, Attorney General of the State of Hawaii, Defendants-Appellants.

No. 02-15867.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 10, 2003.

Filed April 1, 2004.

As Amended April 15, 2004.

Robert G. Dreher, Special Deputy Attorney General, Troutman Sanders LLP, Washington, D.C., for the defendants-appellants.

Craig E. Stewart, Pillsbury Winthrop LLP, San Francisco, California, for the plaintiff-appellee.

Appeal from the United States District Court for the District of Hawaii Susan Oki Mollway, District Judge, Presiding. D.C. No. CV-97-00933-SOM.

Before: D.W. NELSON, BEEZER, and W. FLETCHER, Circuit Judges.

BEEZER, Circuit Judge:

Hawaii Governor Linda Lingle ("Hawaii") appeals the district court's holding on remand that Section 3(c) of Act 257 of the 1997 Hawaii State Legislature ("Act 257" or "the Act") effects a regulatory taking in violation of the Takings Clause of the Fifth Amendment to the United States Constitution. Chevron USA, Inc. ("Chevron") challenged the Act, which, inter alia, proscribes the maximum rent that oil companies can collect from dealers who lease company-owned service stations.

We have jurisdiction pursuant to 28 U.S.C. § 1331, and we affirm.

I

In response to concerns about the highly concentrated wholesale gasoline market in Hawaii and the resulting high cost of gasoline to consumers, the Hawaii Legislature enacted Act 257 in 1997. Act 257, among other things, regulates the maximum rent an oil company can charge dealers who lease its service stations. More specifically, Act 257 caps the rent that Chevron and other oil companies can collect from lessee-dealers at 15% of the dealer's profit on gasoline sales and 15% of the dealer's gross sales on products other than gasoline, plus a percentage increase equal to any increase the oil company may be required to pay on its ground lease.

Chevron is one of two gasoline refiners and one of six wholesalers in Hawaii. At the retail level, Chevron sells most of its gasoline through company-owned stations, which are leased to independent dealers. Chevron leases 64 service stations to dealers in Hawaii. From 1984 through the end of 1996, Chevron relied on estimated gasoline sales to calculate the rent owed by the lessee-dealers. After determining that the amount of gross rent receipts was not satisfactory, Chevron initiated a new nationwide dealer rental program in January 1997, restructuring the manner in which it calculated lease rates. This program, which the parties agree would be in effect in Hawaii but for Act 257, requires the lessee-dealer to pay a monthly rent, consisting of an escalating percentage of the dealer's gross margin on actual, rather than estimated, gasoline sales. As noted, Act 257, in contrast, establishes a maximum regulated rent of 15% of gross margin.

Although Chevron maintains that Act 257 prevents it, through rental payments alone, from recovering its rental expenses, it concedes that over the past 20 years, Chevron has never fully recovered its expenses relating to dealer stations from rental income alone. Instead, Chevron relies on its supply contracts to earn a profit. Dealers who choose to rent a station from Chevron must as a condition of their lease agree to purchase from Chevron all the product necessary to satisfy demand at the station for Chevron gasoline. The price is unilaterally set by Chevron.

Both the lease agreement and supply contract permit the lessee-dealer to transfer his or her occupancy rights upon obtaining Chevron's written consent and paying a transfer fee set by Chevron. Act 257 does not prohibit such transfers, nor limit the price at which they can occur.

Chevron moved for partial summary judgment on its claim that Act 257 effects an unconstitutional regulatory taking because it fails to "substantially advance a legitimate state interest." Hawaii responded by filing a cross motion for summary judgment on all of Chevron's claims. The district court resolved the motions in Chevron's favor. Chevron USA, Inc. v. Cayetano, 57 F.Supp.2d 1003, 1014 (D.Haw.1998).

Hawaii appealed the district court's decision, challenging the standard used to evaluate Chevron's regulatory takings claim and the court's application of that standard. Chevron USA, Inc. v. Cayetano, 224 F.3d 1030, 1033 (9th Cir.2000), cert. denied, 532 U.S. 942, 121 S.Ct. 1403, 149 L.Ed.2d 346 (2001) ("Chevron I"). We held that the district court applied the proper standard, relying primarily on the Supreme Court's opinion in Yee v. City of Escondido, 503 U.S. 519, 112 S.Ct. 1522, 118 L.Ed.2d 153 (1992), and our opinion in Richardson v. City and County of Honolulu, 124 F.3d 1150 (9th Cir.1997), cert. denied, 525 U.S. 871, 119 S.Ct. 168, 142 L.Ed.2d 137 (1998). Id. These cases teach that application of the "substantially advances" test is appropriate where a rent control ordinance creates the possibility that an incumbent lessee will be able to capture the value of the decreased rent in the form of a premium. We observed that genuine issues of material fact remained as to whether Act 257 failed to substantially advance its purpose of lowering retail gasoline prices, thus effecting a regulatory taking. Id. at 1042 ("[A] challenged regulatory action substantially advances its interest if it bears a reasonable relationship to that interest."). We vacated the district court's decision and remanded for "additional factual development and cross-examination of the parties' witnesses" on issues, including whether lessee-dealers will capture a premium based on the increased value of their leaseholds and whether oil companies will compensate for Act 257 by increasing wholesale prices. Id. at 1039, 1042, 119 S.Ct. 168.

In a petition for rehearing, Hawaii asserted for the first time that Chevron's challenge to Act 257 should be analyzed under the Due Process Clause, not the Takings Clause. We denied Hawaii's petition for rehearing; the Supreme Court subsequently denied Hawaii's petition for certiorari.

On remand, the district court considered the parties' stipulations of fact and the testimony of expert witnesses. The district court held that Act 257 was unconstitutional and issued written findings of fact and conclusions of law. Chevron USA, Inc. v. Cayetano, 198 F.Supp.2d 1182 (D.Haw.2002). The court made a fact finding that rather than decreasing the retail price of gasoline in Hawaii, Act 257 would cause prices to increase. Id. at 1192.

On appeal, Hawaii argues that: (1) the district court should have analyzed Chevron's claim under the Due Process Clause rather than the Takings Clause; (2) the court misapplied the requirement that Act 257 "substantially advance a legitimate state interest"; and (3) even if the district court's application of the law was correct, it clearly erred in finding that Act 257 does not, in fact, substantially advance Hawaii's interest in reducing retail gasoline prices.

II

The first two of Hawaii's arguments are barred as law of the case. The law of the case doctrine provides that "the decision of an appellate court on a legal issue must be followed in all subsequent proceedings in the same case." Bernhardt v. Los Angeles County, 339 F.3d 920, 924(9th Cir.2003) (citation omitted). The doctrine applies to our "explicit decisions as well as those issues decided by necessary implication." Id. It is a discretionary doctrine with three recognized exceptions: (1) the earlier decision is clearly erroneous and its enforcement would work a manifest injustice;¹ (2) intervening controlling authority makes reconsideration appropriate; or (3) substantially different evidence was adduced at a subsequent trial. In re Rainbow Magazine, Inc., 77 F.3d 278, 281 (9th Cir.1996). Only the first two exceptions potentially apply to Hawaii's arguments.

A. Chevron I Bars Hawaii's Argument that Chevron Must Challenge Act 257 Under the Due Process Clause

Hawaii first argues that Chevron's challenge to Hawaii's rent control ordinance properly lies under the Due Process Clause of the Fourteenth Amendment to the United States Constitution, not the Takings Clause of the Fifth Amendment. Hawaii maintains that claims challenging the validity of a government action based on its failure to "substantially advance a legitimate government interest" must be resolved using due process principles.

We explicitly addressed and rejected this argument when it was raised for the first time in Hawaii's petition for rehearing, and implicitly did so in Chevron I when we endorsed the "substantially advances" test over the more deferential test urged by Hawaii. See 224 F.3d at 1033, 1035. In its prior appeal, Hawaii maintained that the appropriate inquiry was whether "the Legislature rationally could have believed the Act would substantially advance a legitimate purpose," the test typically applied to substantive due process challenges to economic legislation. Id. at 1033(emphasis added). Our conclusion that this more deferential, due process standard does not apply to regulatory takings claims challenging land use regulations, including rent control ordinances like Act 257, logically stands as a rejection of Hawaii's current argument that such a challenge must be brought under the Due Process Clause. See id. at 1033, 1034(explaining that in Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 242, 104 S.Ct. 2321, 81 L.Ed.2d 186 (1984), the Court applied the more deferential test only because it involved claims of an actual physical taking). This is also consistent with our opinion's refusal to accept the concurring opinion's argument that the Supreme Court established such a rule in Pennell v. City of San Jose, 485 U.S. 1, 108 S.Ct. 849, 99 L.Ed.2d 1 (1988). Id. at 1034-35, 108 S.Ct. 849 (concluding that P...