Featured Expert Column – Environmental Law and Policy
by Samuel B. Boxerman, Sidley Austin LLP with Ben Tannen, Sidley Austin LLP
Recently, the citizens of Denton, Texas voted to ban hydraulic fracturing within the city limits, becoming the first municipality in the state to do so. One day later, the Texas Oil and Gas Association filed suit, arguing the ordinance was unconstitutional and preempted by state law. N1 In enacting a ban, Denton joined the list of municipalities that have adopted limits on hydraulic fracturing, N2 including a number of outright bans. N3 The bans reflect the ongoing battle between state and local interests over the value and risks of oil and gas development. The legality of local bans is being hotly disputed in the courts, with two common challenges being that the bans are preempted by state law or constitute an unconstitutional taking.
Preemption
Plaintiffs have challenged local bans as expressly preempted by or in direct conflict with a comprehensive state oil and gas statute—quite simply, the argument goes, municipalities and other local governments cannot prohibit what has already been expressly authorized by the state. Moreover, as a policy matter, allowing local governments to restrict or otherwise regulate oil and gas development would create a patchwork of regulation within a state—or even within a single county. To date, several courts have found preemption, but others have deferred to local land use authority. N4
Takings
Plaintiffs have also challenged local bans on constitutional grounds, N5 asserting a range of claims, including a Takings claim under the Fifth Amendment (and state analogs). N6 Although as of yet no courts have ruled on the issue, here are a few of the basics:
Of course a traditional “taking” occurs when the government actually causes a “permanent physical occupation” of an individual’s property. N7 A regulation, however, can be a taking when it affects or limits the use of private property to a sufficient degree. N8 According to the Supreme Court, a “regulatory” taking occurs if the regulation deprives the property holder of all economically beneficial use of their property, Lucas v. South Carolina Coastal Council, 505 U.S. 1003 (1992), or satisfies a three-part balancing test set out by the Court in Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978).
Lucas. To date, the Supreme Court has applied Lucas strictly—refusing, for example, to find a taking when the regulation reduced the property to 6% of its previous value. N9 Also, the relevant property under Lucas is “the parcel as a whole”—a plaintiff cannot “divide a single parcel into discrete segments and attempt to determine whether rights in a particular segment have been entirely abrogated.” N10
These principles suggest a ban may not trigger a taking under Lucas, unless the entire property was left without any value. Still, it is unclear how a court would apply the “parcel as a whole” rule to an owner who does not own the entire property in fee simple, such as when surface and mineral rights are severed. In other contexts, courts have focused on the total bundle of potential rights, as opposed to just the rights being regulated. N11 However, logically, a court should consider that the split estate has long been a part of property ownership in this country and consider separately the effect on each owner’s entire set of rights. Moreover, there is jurisprudence that may support the proposition that a court should look only at the split property interest being regulated. N12
A lessee may actually have a stronger basis to assert a claim based on Lucas than the owner. Lessees of mineral rights can bring takings claims, N13 and some courts have indicated that land use regulation might deny all economic benefit from a lease if the residual uses fail to raise enough revenue. N14 As the lessee’s entire interest is its lease, a ban on developing the leased resource may make it impossible for a lessee to raise any revenue from their lease and thereby deny all economically beneficial use of its property interest.
Penn Central. Second, even if not all use is taken, a ban would be evaluated under the Penn Central balancing test: (1) the “economic impact of the regulation on the claimant,” (2) “the extent to which the regulation has interfered with distinct investment-backed expectations,” and (3) “the character of the governmental action.” N15 The analysis is very fact specific, with the “investment backed expectations” being the primary factor. There must be a “significant” economic impact, N16 but there is no specific numeric threshold. N17 A taking “may more readily be found when the interference with property can be characterized as a physical invasion by government…than when interference arises from some public program adjusting the benefits and burdens of economic life to promote the common good.” N18
These principles suggest a strong claim for an owner or lessor who invested in land or a mineral lease with the expectation of exploring for and producing oil and gas. Such a ban would not only deny a reasonable expectation of profitably extracting minerals, but would impose a significant economic burden on the lessor. Moreover, a plaintiff could argue a complete ban unduly prevents one form of land use (resource development) over others—and without an adequate basis to support an assertion of promoting the public good.
Conclusion
As these challenges to local bans work their way through the courts, it will become clearer whether plaintiffs challenging them will be able to succeed on preemption and constitutional grounds or whether the ordinances will survive to restrict future resource development.
Notes
1. Petition at ¶¶36, 41, Texas Oil & Gas Assoc. v. Denton, No. 14-08933-431 (Denton Cnty. Dist. Ct. Nov. 5, 2014). The State of Texas has also challenged the action as preempted by state law. Jerry Patterson, Commissioner, Texas General Land Office v. City of Denton, No. D-1-GN-14-004628 (Travis Cnty. Dist. Ct. Nov. 5, 2014).
2. http://www.foodandwaterwatch.org/water/fracking/fracking-action-center/local-action-documents/ (last visited Nov. 18, 2014).
3. E.g., Section 5.1, Mora County, N.M., Ordinance 2013-01 (Apr. 29, 2013) (“Mora County Ordinance”).
4. State ex rel. Morrison v. Beck Energy Corp., 2013-Ohio-356, 989 N.E.2d 85 (Ohio Ct. App. 2013), appeal pending, No. 2013-0465 (Ohio June 19, 2013) (local ordinances “in direct conflict with” state statutory scheme); N.E. Natural Energy, LLC v. Morgantown, WV, No. 11-C-411, (Monongalia County Cir. Ct. Aug. 12, 2011) (state legislature preempted local ban on hydraulic fracturing); Voss v. Lundvall Bros, 830 P.2d 1061 (Colo. 1992) (home-rule city could exercise some local land-use control, but state’s interest in efficient development and production of oil and gas preempted total ban); In re Mark S. Wallach, as Chapter 7 Trustee for Norse Energy Corp. USA v. Town of Dryden, 992 N.Y.S. 2d 710, 713 (N.Y. 2014) (upheld ban because state oil and gas law did “not preempt the home rule authority vested in municipalities to regulate land use.”).
5. Plaintiffs have asserted federal and state constitutional claims. E.g., Complaint at ¶38, Colorado Oil & Gas Assoc. v. Longmont, Case No. 2012-cv-960 (Colo. Weld Cnty. Dist. Ct. Dec. 17, 2012) (“de facto drilling ban is a taking of private property for public use by inverse condemnation and violates the Colorado Constitution, Art. II, §15”).
6. See Vermillion v. Mora Cnty., No. 1:13-cv-01095 (D. N.M. 2013) and SWEPI LP v. Mora Cnty., No. 1:14-cv-00035 (D. N.M. 2014), both of which are ongoing.
7. See, e.g., Lingle v. Chevron U.S.A., 544 U.S. 528, 537 (2005).
8. See Pennsylvania Coal Co. v. Mahon, 260 U.S. 393 (1922).
9. Palazzolo v. Rhode Island, 533 U.S. 606, 616, 632 (2001) (no Lucas taking had occurred when a regulation stripped a property of $3,150,000 in value, leaving it worth only $200,000–6% of its original value).
10. Penn Cent., supra at 130-31; Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 535 U.S. 302, 327 (2002) (“the analysis of regulatory takings claims” focuses “on ‘the parcel as a whole’”).
11. See, e.g., Clajon Prod. Corp. v. Petera, 70 F.3d 1566, 1570-71, 1577 (10th Cir. 1995) (limiting landowners to two supplemental hunting licenses was not a taking under Lucas because “the relevant denominator” was “the entire bundle of rights associated with the parcel of land,” not the “right to hunt”).
12. E.g., Keystone Bituminous Coal Assn. v. DeBenedictis, 480 U.S. 470, 500-501 (1987) (holding that eliminating “support estate” was not Lucas taking because estate was “merely a part of the entire bundle of rights possessed by the owner of either the coal or the surface” implied that either coal or surface may be evaluated separately under Lucas) (emphasis added).
13. Bass Enterprises Prod. Co. v. United States, 381 F.3d 1360, 1361, 1362 (Fed. Cir. 2004) (lessee who owned 320 acres of mineral rights brought takings claim which court then analyzed on its merits).
14. Martin Marietta Materials, Inc. v. City of Carmel, 2007 U.S. Dist. LEXIS 88922 at *41 (S.D. Ind. Nov. 28, 2007) (ban on limestone mining rendered it unable to use its property “in any economically viable way”).
15. Penn Central, 438 U.S. at 124.
16. Washington Legal Found. v. Massachusetts Bar Found., 993 F.2d 962 (1st Cir. 1993).
17. Cienega Gardens v. United States, 331 F.3d 1319, 1340 (Fed. Cir. 2003).
18. Penn Central, 438 U.S. at 124.