Behold the table egg. A popular staple of breakfast and baking, eggs are at the center of a major and lengthy property rights battle in a federal appellate court that could affect all types of federal regulation on behalf of public health and safety.

The U.S. Court of Appeals for the Federal Circuit, an important forum for Fifth Amendment “takings” litigation between the federal government and business and private parties, recently heard the government’s appeal of a lower court ruling that the government must pay nearly $9 million for a “takings” in connection with its effort to stop the spread of salmonella outbreaks almost two decades ago. Rose Acre Farms v. U.S., No. 2007-5169.

The takings decision by the U.S. Court of Federal Claims “raises a disturbing possibility” that government officials, when considering how best to protect public health and safety, will have to take into account a possible takings claim every time they regulate to take unsafe products off the market, said Elizabeth Wydra, chief counsel to the Constitutional Accountability Center, which filed an amicus brief in the Federal Circuit on behalf of eight consumer, public health, safety and science organizations.

“There could arguably be an extrapolation from this case that anytime government regulates to respond to a national disaster or terrorist attack that causes loss to businesses, that could be a takings that taxpayers would have to pay for,” she said, adding, “We are very interested in making sure public health and safety gets predominate weight in balancing business interests and protecting the public.”

But any time someone alleges a takings by the government, the government’s response and — if it involves an environmental or consumer issue — the interest groups’ responses are ” ‘Oh, my gosh, the planet will come to an end,’ ” said property rights litigator Nancie Marzulla, a partner at Washington’s Marzulla Law.

“This case, in particular, is a case that is not well susceptible to that argument,” said Marzulla. “If the application of the regulatory program is overly broad, then the government should be liable for the taking.”

The heart of this particular fight — one that the U.S. Supreme Court has yet to decide clearly, said Marzulla and others — is how to value the economic impact of what the government did in determining whether a taking has occurred.

At the end of the Federal Circuit argument in the case, Chief Judge Paul Michel, a member of the three-judge panel, said, “This is a very interesting and very troublesome case. Guidance from above has not always been crystal clear in the Fifth Amendment takings area, as lawyers have observed before me.”

‘The Good Egg People’

In 1990, with illness caused by salmonella increasing, the U.S. Department of Agriculture (USDA) issued emergency regulations to control the spread of salmonella in poultry flocks. The regulations essentially barred the sale into the interstate raw table-egg market of eggs produced in facilities that tested positive for salmonella until subsequent testing of hens within the facilities tested negative or the facilities were depopulated, cleaned, disinfected and inspected. In the interim, eggs from those facilities could be sold in the breaker-egg market — where the eggs have been broken and pasteurized for incorporation into food products, like cake mixes.

Whole-shell table eggs usually command a much higher price than breaker eggs.

In the fall of 1990, three salmonella illness outbreaks, causing more than 400 people to become ill in three states, were traced to three of nine Rose Acre farms, and the USDA restricted the interstate sale of a portion of the eggs produced at the three farms. Shortly after the USDA imposed the restrictions, Rose Acre filed a federal lawsuit seeking declaratory relief from the regulations. Ultimately, the 7th Circuit upheld all of the regulations against the claim that they were arbitrary or capricious.

Rose Acre filed the current action in the Claims Court in October 1992, alleging that the restrictions constituted a Fifth Amendment taking of its healthy eggs and hens.

During the USDA quarantine period — from October 1990 to October 1992 — 70 of Rose Acre’s houses, home to more than 5 million hens, were restricted, and Rose Acre had to divert almost 700 million table eggs to the breaker market — a devastating economic impact, Rose Acre’s counsel of record, Robert R. Clark of the Indianapolis office of Cincinnati’s Taft, Stettinius & Hollister, said in his Federal Circuit brief. (Clark declined to comment while the case is pending).

The Claims Court held two trials — one on remand from the Federal Circuit — and each time concluded that there had been a compensable takings. Rose Acre says the trial record reflects that the government’s own testing showed the prevalence of salmonella in the farm’s hens was “very low.” Also, between the time of the salmonella breakouts and when the USDA first restricted the sale of its eggs, Rose Acre sold more than 200 million eggs in interstate commerce without a single reported outbreak of salmonella illness.

The Claims Court found that the USDA regulation caused a 219% diminution in profit on Rose Acre eggs during the period of restriction — equivalent to losing all profits during 3 1/2 years.

Tricky takings

As the Claims Court explained, a regulatory taking does not involve a physical invasion or seizure of property. Instead, it concerns an action that affects an owner’s use of property and is based on the general rule “that, ‘while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.’ ”

The question in all of these contests is: How far is too far?, said veteran property rights litigator Jerry Stouck, a shareholder in the Washington office of Greenberg Traurig.

“When you’re talking about real property, you’re talking about land use regulation — how much can you build,” he said. “But because of the variety of personal property — eggs, automobiles, intangible property, trade secrets — you also have a variety of regulations.”

Because of this variety of personal property and regulation, the threat to government regulators of a takings ruling is greater, said Stouck, and that is what concerns the public interest groups supporting the government. 

But courts recognize that, and so these takings cases are much harder to win, he said. 

“There’s a lot of regulation in this world and courts don’t want to unduly tie the hands of regulators,” he said. “So when you get a case like Rose Acre, the anti-taking people see a much more serious threat because a holding that this is a taking potentially ties the hands not just of land-use regulators but environmental, health, safety and other regulators.”

Having said that, Stouck, who disclosed that he had a very early and limited involvement in the case, believes that Rose Acre is the “extreme” case in which the government did go too far.

“The thing that distinguishes it in my mind is the amount of good property destroyed compared to the minuscule amount, if any, of contaminated eggs. That makes it a compensable taking,” he said.

But the USDA restrictions were temporary and reasonable, according to the Constitution Accountability Center’s Wydra and John Echeverria, executive director of Georgetown University Law Center’s Environmental Law & Policy Institute, who filed an amicus brief on behalf of the Sierra Club and the Hoosier Environmental Council.

“There should be no property right to spread disease,” the result of the Claims Court ruling, said Wydra. She, Echeverria and the government argue that the lower court got the analysis for what constitutes a compensable taking wrong.

Need for clarity

Although the Supreme Court has recognized regulatory takings, it has not articulated a formula for determining when governmental regulatory action becomes a compensable taking. However, in Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978), the court identified three key factors for consideration: the economic impact of the regulation on the claimant; the extent to which the regulation has interfered with distinct investment-backed expectations; and the character of the governmental action.

In the Rose Acre case, the Claims Court said that character — to protect public health and safety — weighed in favor of the government, but the other two factors outweighed it and favored the egg producer.

Most at issue in the Federal Circuit appeal is how the Claims Court weighed character and determined economic impact by focusing on lost profits instead of diminution in value. 

In its appeal, the government argues that Penn Central and cases flowing from it recognize “that a temporary restriction such as this, that is to protect public health, and only imposes economic burdens upon Rose Acre that are proportional to its involvement in the harms being addressed, is simply not a taking.”

Even if the appellate court finds a taking, it should still reverse, according to the government, because the trial court assessed the economic impact of a temporary and reasonable restriction in a vacuum, “considering only its impact upon Rose Acre’s business on the three relevant farms during the time the restriction was in effect, rather than upon its business on the three farms over time.”

The trial court also should have considered the fact that Rose Acre’s eggs on the three farms were only reduced in value by 10.6%, a minor reduction, argues the government.

Georgetown’s Echeverria said the takings clause questions the impact on the property interest, not on profitability.

“If you look at profitability, the analysis leads to crazy results,” he said. “If a business is doing very badly and making little profit, a regulatory burden can completely destroy its profits, whereas in a healthy business making a large amount of profit, the regulation could have a small impact. The ruling invites takings claims by badly managed and failing businesses — a nonsensical approach to economic impact.”

But Rose Acre contends that the trial court got it right by focusing on lost profits. The value of a business is determined by its profit.

“It is the change in profits over time — specifically over the duration of USDA’s application of the Regulations to Rose Acre — that has economic (and hence legal) significance here,” contends Clark in his brief.

A case raising similar issues — Ag-Innovations v. U.S., No. 05-776 — is pending in the Claims Court and involves Belgium sheep imported into the United States. Because mad cow disease had been observed in Belgium and there was some evidence that these sheep might be infected, federal officials destroyed the sheep as a prophylactic measure to avoid the potential spread of mad cow disease in the United States. 

“It is an issue that is ripe for judicial intervention,” said Marzulla. “There’ve been a number of cases throughout the circuits in which parties have petitioned the Supreme Court to address this issue, but so far it has not taken the bait.”

Case “raises a disturbing possibility” that U.S. will have to consider takings each time it regulates for safety. — E. Wydra