Federal Circuit: Eggonomic Impact Not Eggregious Enough To Require Feds To Shell Out Compensation

Okay, we've decided to surrender to temptation and let fly with bad (and obvious) egg puns. But at least they're out of our system in the beginning. After that, no more yolks. We promise.

In Rose Acre Farms, Inc. v. United States, No. 2007-5169 (Mar. 12, 2009), the U.S. Court of Appeals for the Federal Circuit held that a regulation restricting the sale of eggs was not a taking under Penn Central Transp. Co. v. City of New York, 438 U.S. 104 (1978), because the economic impact of the regulation "was not severe" and the character of the government action "strongly favored" the government.

Rose Acre Farms owns egg-laying chickens.  A lot of them: "eight layer-hen farms with millions of hens." The USDA first promulgated temporary, then final regulations that restricted the interstate sale and transportation of eggs determined to be contaminated with salmonella. After illness outbreaks were traced to three of Rose Acre's farms, the company was forced to sell its eggs from these farms as "breaker eggs" (pasteurized eggs used in products such as cake mixes), instead of table eggs. Breaker eggs have about a 10% lower value. Approximately 43% of Rose Acre's table eggs were used as breaker eggs.

After its legal challenge to the validity of the regulations was upheld by the Seventh Circuit, Rose Acre sought just compensation in the Court of Federal Claims. The first trial resulted in an award of $6.1 million for a categorical taking plus $2.5 million in attorneys fees and costs, but the Federal Circuit disagreed with the applicable legal standard, and sent the case back for further consideration of the Penn Central factors.  The Penn Central test applies three factors:

The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. See Goldblatt v. Hempstead, supra, at 594. So, too, is the character of the governmental action.

Penn Central, 438 U.S. at 124.  After a second trial in which the testimony mostly consisted of expert witnesses (or should that be eggsperts? - sorry, couldn't resist), regarding economic impact, the CFC determined that Rose Acre would suffer a diminution in profit of 219%, held the character of the government action favored the USDA, and did not reconsider its earlier decision on Rose Acre's investment-backed expectations.  Weighing these factors anew, the CFC awarded $5.4 million in compensation, plus attorneys fees and costs.

The Federal Circuit held that "there was, and still is, little dispute about the underlying economic data to be used in assessing the economic impact," but that the disagreement arose over how to analyze the data, slip op at. 13, because "the same data appear to provide vastly differing depiction as to the severity of the economic damage incurred by Rose Acre, depending on whether one looks as lost profits or lost values." Id. at 15. After identifying the relevant property as the 135 million dozen eggs Rose Farms produced on the three affected farms overall (and not the value of the farms as going concerns), the court chose diminution in value.  The court explained:

The trial court’s analysis suffers as a result of limited guidance on the profits-based measure, as the court did not compare the 219% diminution in return to anything, such as some benchmark standard. Instead, the court simply viewed the number as indicative of a severe economic impact. This examination is flawed because it does not set any baseline or standard to which to compare an inherently relative number. And, as Dr. Reiff [a testifying expert] explained, comparing diminution in return in one case to diminution in value in another case "doesn't mean much." The dearth of comparable diminution-in-return numbers in the case law may have been the root of the trial court’s cursory analysis, but comparable numbers seem necessary to assess whether the lost profits represent a severe impact.

Slip op. at 15-16. The court continued:

Because the parcel of property is now clearly defined as the diverted eggs themselves, we are convinced that it was clear error to place sole reliance on the diminution in return metric. The eggs are a discrete asset, the market value of which is readily ascertainable. Indeed, as mentioned above, the parties do not materially dispute the average market value of the eggs in the table market versus the breaker during the regulated period. These data provide a clear picture of the decrease in value of the eggs.

Instead, when we consider all three offered metrics of economic impact, with the primary weight given to the diminution in value, we conclude the trial court clearly erred in determining that Rose Acre suffered a severe economic impact due to the SE regulations. Rose Acre points to no case in which a court has found a diminution in value of 10% as being severe or as favoring a taking. Additionally, the infirmities in the diminution in return metric, as discussed above, warrant against placing much, if any, weight on that calculation on the facts of this case. We hold therefore that, although the monetary loss to Rose Acre was not insignificant, it did not even approach the level of severe economic harm and thus does not strongly favor Rose Acre.

Slip op. at 27-28 (footnote omitted).

On the "character of the government action" Penn Central factor, the court held that Lingle v. Chevron U.S.A. Inc., 544 U.S. 528 (2005) "changed the takings landscape" and that a court can "no longer ask whether the means chosen by the government advance the ends or whether the regulation chosen is effective in curing the alleged ill."  Slip op. at 33. Those questions are reserved for a due process inquiry, which Rose Acre had litigated and lost in the Seventh Circuit. The court held that under the character prong, a court may only look at "'the actual burden imposed on property rights, or how that burden is allocated.'" Slip op. at 34 (quoting Lingle, 544 U.S. at 543).  Because the USDA rules applied to most egg producers nationwide and did not single out Rose Acre, and because the purpose of the regulations was to protect food safety, the character factor tipped in the government's favor.

The court concluded no taking occurred:

When we review all the factual findings above, we conclude that they require a holding of no compensable taking. First, Rose Acre’s economic impact is not severe. Second, although the reasonable investment-backed expectations favor Rose Acre, they are not strong enough to be dispositive. Third, the character of the government’s regulations strongly favors a non-taking.

. . . .

Although Rose Acre may feel otherwise, the law of regulatory takings does not generally compensate property owners when a regulation’s economic impact is slight and temporary but the potential for physical harm to the public is significant. Here, infected eggs could have caused serious illness and possibly even death.

Slip op. at 43-44. Rose Farms' litigation with the federal government started in 1990 which resulted today 19 years, two federal trials, and three appeals later, with a finding of no liability. We hope that Rose Farm didn't and spend the millions in compensation and attorneys fees it was awarded by the CFC. That would have been counting its chickens before they were hatched.  One last bad pun to see if you read this long post to the end.