Chevron USA Inc. v. Cayetano

• Decision Date: 13 September 2000
• Docket Number: No. 99-15108,DEFENDANTS-APPELLANTS,V,PLAINTIFF-APPELLE,99-15108
• Citation: 224 F.3d 1030
• Parties: (9th Cir. 2000) CHEVRON USA, INC., A PENNSYLVANIA CORPORATION,BENJAMIN J. CAYETANO, GOVERNOR OF THE STATE OF HAWAII; EARL I. ANZAI, <A HREF="#fr1-*" name="fn1-*">* ATTORNEY GENERAL OF THE STATE OF HAWAII,
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1030

224 F.3d 1030 (9th Cir. 2000)

CHEVRON USA, INC., A PENNSYLVANIA CORPORATION, PLAINTIFF-APPELLEE,

V.

BENJAMIN J. CAYETANO, GOVERNOR OF THE STATE OF HAWAII; EARL I. ANZAI,^* ATTORNEY GENERAL OF THE STATE OF HAWAII, DEFENDANTS-APPELLANTS.

No. 99-15108

U.S. Court of Appeals, Ninth Circuit

Argued and Submitted November 4, 1999

September 13, 2000

[Copyrighted Material Omitted]

Appeal from the United States District Court for the District of Hawaii Alan C. Kay, District Judge, Presiding D.C. No. CV-97-00933-ACK

Jack A. Rosenzweig and Ted Gamble Clause, Deputy Attorneys General, Honolulu, Hawaii, for the defendants-appellants.

Robert C. Phelps and Craig E. Stewart, Pillsbury, Madison & Sutro, San Francisco, California, for the plaintiff-appellee.

Before: Dorothy W. Nelson, Robert R. Beezer, and William A. Fletcher, Circuit Judges.

Opinion by Judge Beezer; Concurrence by Judge W. Fletcher

OPINION

Beezer, Circuit Judge

Hawaii Governor Benjamin J. Cayetano and Attorney General Earl I. Anzai (collectively "the State") appeal the district court's judgment in favor of Chevron U.S.A., Inc. Chevron filed suit for declaratory and injunctive relief against enforcement of Section 3(c) of Act 257 of the 1997 Hawaii State Legislature ("Act 257"). Act 257, inter alia, proscribes the maximum rent that oil companies can collect from dealers who lease company-owned service stations. Both parties moved for summary judgment on whether the maximum permissible regulated rent effects an unconstitutional regulatory taking. After concluding that it does, the district court granted Chevron's motion and denied the State's motion. The State appeals only the grant of summary judgment to Chevron; it does not appeal the denial of its own motion. We have jurisdiction under 28 U.S.C. S 1291. Because genuine issues of material fact exist, we vacate the judgment and remand for further proceedings.

I.

In response to concerns about the highly concentrated gasoline market in Hawaii and the resulting high cost of gasoline to consumers, the Hawaii Legislature enacted Act 257 on June 21, 1997.¹ Act 257, inter alia, regulates the maximum rent an oil company can charge dealers who lease its service stations.

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. Chevron restructured the manner in which it calculated lease rates. This program, which the parties agree would be in effect in Hawaii absent 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. For instance, the rent would be calculated as 18% of the gross margin up to $18,000; 32% of the portion between $18,000 and $28,000; and 38% of the portion over $28,000. In contrast, Act 257 establishes a maximum regulated rent of 15% of gross margin.

The maximum rents Chevron projects it could receive under the statutory scheme imposed by Act 257 totals $6,126,646 for 1998. Chevron's projected expenses total $6,292,855, exceeding Chevron's projected rental income by $166,209. Chevron concedes, however, that it has not fully recovered its expenses relating to dealer stations (including ground lease rents, real property taxes, ordinary maintenance and depreciation) from rent in any state in the last 20 years.

Instead, Chevron relies on 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 of the fuel necessary to satisfy demand at that station for Chevron gasoline. The price under the supply contract is unilaterally set by Chevron. Both the lease agreement and the supply contract permit the 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.

In conjunction with the alienability of the leaseholds, the parties stipulated to the following facts:

34. The existing dealer at the time of the enactment of Act 257 may be able to sell his leasehold at a premium that derives from the value of the dealer's leasehold interest, given the reduced rent imposed by Act 257, assuming Chevron does not object in good faith when the selling dealer seeks Chevron's consent to the assignment.

35. Assuming everything else remains equal, the market value of the lessee-dealer leasehold reasonably could be expected to increase as the amount of the rent payable decreases.

Based largely on these facts, Chevron moved for summary judgment on its takings claim.² Chevron argued that Act 257 effects a regulatory taking because it fails to substantially advance a legitimate state interest. Chevron also maintained that Act 257 prevents the company from receiving a just and reasonable return. Finally, Chevron contended that Act 257 is unconstitutional because it neither provides individualized consideration, nor contains a mechanism for obtaining relief from confiscatory rent cap provisions. Because the district court resolved the first argument in Chevron's favor, it declined to reach the other two.

On appeal, the State challenges both the standard used by the district court to evaluate Chevron's regulatory taking claim and the court's application of that standard in the summary judgment context.

II.

"States have broad power to regulate... the landlordtenant relationship... without paying compensation for all economic injuries that such regulation entails." Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419, 440 (1982). When a landowner decides to rent his land to tenants, the government may place ceilings on the rents the landowner can charge. See, e.g., Pennell v. San Jose, 485 U.S. 1, 11-12 (1988). "[W]hile property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking. " Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 415 (1922).

The question in this case is whether Act 257 goes too far. To analyze that question, the district court concluded that "the appropriate inquiry is whether [Act 257 ] substantially advances a legitimate state interest." In reaching this conclusion, the court explicitly rejected the more deferential standard urged by the State. The State argues that the courts should look only to whether "the Legislature rationally could have believed the Act would substantially advance a legitimate government purpose."³

To support this position, the State relies on a footnote in Chief Justice Rehnquist's dissenting opinion in Keystone Bituminous Coal Association v. DeBenedictis, 480 U.S. 470 (1987):

[O]ur inquiry into legislative purpose is not intended as a license to judge the effectiveness of legislation. When considering the Fifth Amendment issues presented by Hawaii's Land Reform Act, we noted that the Act, "like any other, may not be successful in achieving its intended goals. But `whether in fact the provisions will accomplish the objectives is not the question: the [constitutional requirement ] is satisfied if... the... [State] Legislature rationally could have believed that the [Act] would promote its objective.' " Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 242 (1984).

Keystone, 480 U.S. at 511 n. 3 (alterations in original). The State's reliance on this quote is unsound for two reasons. First, as the district court correctly noted, Midkiff dealt with a physical taking, rather than a regulatory one. In a physical taking, the government exercises its eminent domain power to take private property for "public use." Importantly, the government intends to take the property and is willing to pay compensation to the landowner. We have recognized that a more deferential standard applies in those circumstances. See Richardson v. City and County of Honolulu, 124 F.3d 1150, 1158 (9th Cir. 1997), cert. denied, 119 S. Ct. 168 (1998) ("[W]e see nothing inconsistent in applying heightened scrutiny when the taking is uncompensated, and a more deferential standard when the taking is fully compensated."); see also Hall v. City of Santa Barbara, 833 F.2d 1270, 1280 n.25 (9th Cir. 1986) ("It makes considerable sense to give greater deference to the legislature where it deliberately resorts to its eminent domain power than where it may have stumbled into exercising it through actions that incidentally result in a taking.").

Second, the State's argument is foreclosed by our decision in Richardson. In Richardson, we established that land use regulations, including rent control ordinances like Act 257 that permit the capture of a premium, do not effect a taking if the regulation "substantially furthers a legitimate state interest. " Richardson, 124 F.3d at 1164; see also Keystone, 480 U.S. at 485 ("[L]and use regulation can effect a taking if it `does not substantially advance legitimate state interests,... or denies an owner economically viable use of his land.' ") (quoting Agins v. Tiburon, 447 U.S. 255, 260 (1980)).

III.

While we recognize the concurring opinion's dissatisfaction with our application of the "substantially advances" test, we do not believe that our holding today either expands Richardson or contravenes Supreme Court precedent.

Relying on Pennell v. City of San Jose, 485 U.S. 1 (1988), the concurrence asserts that rent control can ordinarily only be challenged as violative of due process, rather than as a regulatory taking. We read Pennell differently. In that case, a landlord challenged the constitutionality...