Eminent domain—It is a term evocative of aristocracy from a bygone era, one that should be written in gilded script that graces an old regal manuscript. This word association is perhaps accurate given what the term represents in legal parlance: the government’s ability to expropriate the territory of its citizens. In the United States, this authority is constrained by the Fifth Amendment of the Constitution, more commonly known as the takings clause, which states that “no private property [shall] be taken for public use, without just compensation.” Yet the amendment otherwise leaves undefined the definitions of “public use” and “just compensation.” As explored in previous pieces, found here and here, ambiguity in these terms has led to an expanding use of government’s taking authority.

The term “just compensation” has been interpreted by the courts to mean “fair market value.”[1] “Fair market value” is, in common parlance, “a price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business.”[2] Yet there are at least two problems with equating just compensation to fair market value: the first involves an error in applying the definition of “fair market value” and the second involves an error in presupposing that the term applies to the government in the same way it applies to your average price taker.

1. A Fair Application of Fair Market Value

“In Theory everything is possible; however, I live in Practice and the road to Theory has been washed out.” —Anonymous

As conventionally applied by the courts, just compensation is intended to compensate the owner for the taking so that the owner is no better or no worse off than before the taking occurred.[3] Yet there is subjectivity inherent in such a determination. Even under an efficient market scenario, the equilibrium price of a good is contingent upon the aggregate subjective valuation that the market places on that good or service. By attempting to determine the “just compensation,” the court is imposing its subjective market valuation of the land—a valuation that the citizen subjected to the taking can reject by appealing the decision, when possible. Consequently, the court is essentially functioning as a market participant when it makes its “offer” of “just compensation” to the property holder. Of course, this begs the question of why the government itself cannot fulfill this function rather than resorting to the courts. This dynamic can be illustrated in a case involving a dirt farmer and a government in the market for his dirt.

Part I: Just Compensation Is Nothing but Dirt

Chad Jarreau is a dirt famer in Lafourche Parish, Louisiana. As a dirt famer, Jarreau extracts and refines dirt, excavating pits of dirt, sometimes as deep as twenty feet before draining and churning those pits.[4] This process produces fine-grained dirt that is later sold through his business.[5] In January 2011, the Louisiana Parish exercised its eminent domain authority and passed a resolution to appropriate the dirt farm for use in upgrading the region’s levees. The land itself was not to be used to site the levees, but the government was after the dirt on the land. The district offered Jarreau $1,326.69 for his acre of land.[6] The court based its estimate of $1,326.69 on “the fair market of the property at the time of the appropriation, based on the current use of the property, before the proposed appropriated use, and without allowing for any change in value caused by levee construction.”[7] The Parish subsequently sent Jarreau a cease and desist letter ordering him to “immediately cease and desist performing any and all activities upon the property as appropriated.” This effectively prevented Jarreau from earning a profit on the land. Jarreau filed suit and the trial court re-valued the property at $11,969.00 and awarded Jarreau $164,705.40 for economic and business losses incurred as a result of the taking. The Parish appealed and the court of appeals re-valued the property at $11,869.00 and reversed the portion of the trial court’s decision awarding damages for loss of business.

Seen in another way, each court, through its ruling, is making an offer on behalf of the government to Jarreau for the dirt on his land, which Jarreau is rejecting by appealing the decision to another court. The court’s monetary ruling reflects its own valuation of the land—the court’s offer to Jarreau for the land. The falsity of the supposition that there is an objective market value is made apparent by the fact that each court came to a different “fair market value” of the land. In a dynamic market, there is no singular objective “fair market value”; rather, there are multiple subjective valuations of a product which, on average, represent the equilibrium price of a good. Consequently, the court’s attempt to determine a “fair market value” is nothing more than a guise in false objectivity. In attaching a value to the land, the court is subjectively determining what it deems to be a “fair” price of the land. The court is responsible for attaching weights on the multiple criteria that go into valuing a particular plot of land including the size of the property, its accessibility, the unique attributes of the property, and any current development on the land. It is then making this valuation an “offer” on the land on behalf of the government. A rejection of this offer in the judicial system is made in the form of an appeal. This begs the question of why a taking is even necessary when the government can simply make an offer without judicial intervention under normal market conditions.

In this case, it is difficult to understand why eminent domain is necessary. Eminent domain is commonly justified by the presence of a market failure, such as the holdout problem, where a rational market participant has an incentive to “hold out” for a better offer, thereby inflating the price of the land beyond its optimal market value. In a negotiation, the government will cap its offer on the land at this societal value, but the problem lies in its inability to determine this value.[8] Because the cap is unknown, the current landowner has an incentive to holdout for some potentially better, but yet unknown, offer. Consequently, eminent domain is a means of overcoming this barrier by subverting this valuation criteria altogether. Its solution to the holdout problem is to render the acceptance of the government’s valuation—equivalent to its “just compensation” determination—mandatory.

In this case, there was no indication that such a holdout problem was present. This is perhaps best revealed by the fact that the government made the taking not for the land, but for the dirt being mined on the land. This raises the question of why the government could not have simply purchased the dirt through normal market means. Given that Jarreau is in the business of selling dirt, the government could have simply purchased dirt as a commodity on the market. In this scenario, a taking was not a necessary solution to a market failure (even assuming that a taking is ever justified).[9] The use of eminent domain takes another turn when one considers that the government is not your average market participant, but that it is both a price taker and a price maker.

2. Price Makers and Price Takers

“There is no ‘slippery slope’ toward loss of liberties, only a long staircase where each step downward must be tolerated by the American people and their leaders.” —Alan K. Simpson

The government is not a market participant like you participate in the market when you walk into your local grocery store. Rather, the government is a market mover with the ability to influence the price of the good on the market through permitting and land use regulations. The impact of this authority manifested itself in the case of the island owner, which illustrates the government’s role as a market mover and the implications this authority has when coupled with its ability to exercise eminent domain.

Part II: No Man Is an Island

In 1970, the Beyers purchased an island off the Florida coast zoned for residential development.[10] Sixteen years later the government adopted a plan by the state which re-designated the Beyers’ land as an “offshore island” that restricted the amount of property development permitted on the territory.[11] The government later re-zoned the property as a bird rookery, at which point the only permissible use of the land became, in the words of Judge Shepherd “primitive camping (provided, incidentally, that no land clearing or alteration of the land occurs).” The Beyers disputed this designation as well as the government’s justification for the re-zoning that “the [Beyers] sat on the investment in the [P]roperty for 30 years watching the environmental restrictions on the use of the [P]roperty become more and more strict” and that the “recreational uses allowed [the Beyers], reasonably met [the Beyers’] investment-based expectations.”[13] The Court therefore refused to grant the Beyers just compensation for their effective loss of use of the property on the presumption that the Beyers did not purchase the property with the intention of developing it.

Simplifying the reasoning here, the court essentially says that the government can enact zoning regulations that inhibit an individual’s use of the property and can deny or reduce the “just compensation” that it offers the property owner by merely reasoning that the new zoning “reasonably met investment-based expectations.”[14] The Court gave no reasoning as to how it determined that the Beyers’ investment-based expectations have been met other than the fact that the land was left undeveloped for thirty years.

Not only does this assume that past investment decisions are an effective indication of future decisions, the court here is effectively holding itself out as a financial expert capable of identifying a reasonable investment decision. It is just as likely that a reasonable investor would have left the property undeveloped for thirty years in anticipation of a riper market. It is also possible that the Beyers did not purchase the property as an investment but rather desired to develop the property in the future for their children or themselves. The point being, it is not for the judicial system to determine what constitutes a reasonable expectation, or that a reasonable expectation is even warranted. The principle of caveat emptor is no justification when the government is the cause of the property’s reduction in value—except for maybe in autocratic regimes where concepts like “due process” are measured by the caprice of the regime rather than objective standards.

More generally, this case signals that the government has the ability to control the fair market value of the land, thereby controlling what “just compensation” entails. Factors considered by the courts in making a just compensation determination include zoning, current and potential uses, and the level of development. These characterizations are contingent upon the government’s own action. Zoning regulations, which determine the permissible level of development on the land, can impact the value of the land. Therefore, it is essentially possible for a government seeking to exercise its eminent domain authority to first instate zoning regulations that would diminish the price of the land as it is currently being used by the landowner, thereby making it cheaper for the government to purchase this land under the court’s current conception of “just compensation” as “fair market value.” Such disingenuous gamesmanship hardly results in an outcome that deserves the label “just.”

To conclude, the current exercise of “eminent domain” authority is as antiquated and inefficient as its name suggests. It grants the government virtually limitless authority to take the land of its citizens under the guise of “just” compensation for the land. In reality, the government has the authority to subjectively determine this “just compensation” and compel its acceptance. It is a process that is a perversion of market principles, based upon a faulty economic justification of some identifiable “fair market value.” In reality, this “market value” is merely the subjective valuation of the courts (what the courts deem “just”), a value which can be contingent upon the government’s imposition of zoning ordinances and other regulations that can undermine the price of the land it seeks to purchase. In short, eminent domain allows the government to force sale of a land for an arbitrarily determined “just” price. To hearken back to the original meaning of the word eminent as “jutting or projecting”- the authority of eminent domain is nothing if not a unwanted extension of a government’s authority or “domain.”

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[1] City of Buffalo v. J.W. Clement Co., Inc., 28 N.Y.2d 241, 258 (1971) (requiring the property owner to be indemnified so that he may be put in the same relative position he would have been in had the taking not occurred).

[2] Fair Market Value, Merriam-Webster, https://www.merriam-webster.com/dictionary/fair%20market%20value (last retrieved Aug. 11, 2017).

[3] Olson v. United States, 292 U.S. 246, 255 (1934); In re City of New York, 11 N.Y.3d 353 (N.Y. 2008) (quoting City of Buffalo, 28 N.Y.2d at 258)); accord Rose v. New York, 24 N.Y.2d 80, 87 (N.Y. 1969).

[4] Nick Sibilla, Should Entrepreneurs Be Compensated if the Government Destroys Their Business? Louisiana Says No, Forbes (Aug. 10, 2017), https://www.forbes.com/sites/instituteforjustice/2017/08/10/louisiana-agency-destroys-mans-business-refuses-to-pay-over-160000-in-compensation/#7c7fdcd1722b.

[5] South LaFourche Levee District v. Jarreau, available at https://www.lasc.org/opinions/2017/16C0788cw16C0904.OPN.pdf.

[6] Id.

[7] Id.

[8] See Ed Nosal, The Taking of Land: Market Value Compensation Should be Paid, J. Public Economics, 431, 432 (2001) (assuming that “government’s expropriation decision is motivated by the maximization of social welfare”).

[9] See my essay series on Eminent Domain entitled “Forcing the Invisible Hand: the ‘Public Use’ Conundrum,” on this blog.

[10] Beyer v. City of Marathon, 37 So.3d 932, 933 (Fla. Ct. App. 2010).

[11] Id.

[12] Id. (Shepherd, J., dissenting).

[13] Id. at 934.

[14] This standard goes back to the seminal case Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978). In that case, the Court adopted a standard to assess when a regulation rises to the level of a taking by considering, among other things, “the extent to which the regulation has interfered with distinct investment-backed expectations.” Id. at 124.