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In the unprecedented public health and economic crisis arising from the COVID-19 outbreak, there are likely to be significant legislation and executive decrees from federal, state, and local authorities aimed at providing relief to persons and businesses who suffer economic hardship and restricting activities, including economic activities, in response to the crisis. Many of the social and economic relief efforts will be necessary and salutary, but there are also risks that some authorities will inadvertently overstep constitutional bounds. In particular, authorities under pressure to act quickly and to protect constituents, and sometimes unaware of or indifferent to constitutional constraints, may enact legislation or issue decrees that unduly trench upon protected constitutional interests (including contracts and property). Governments have fairly wide latitude to address economic crises, including the power to curtail private contract rights, but that power is not unlimited. As businesses, trade associations, and consumers consider what relief they may need or what emergency regulations may harm them, they should be aware of federal or state authority to enact emergency measures as well as the constitutional limitations on the exercise of that authority. Paul Hastings LLP has substantial experience in this area, and stands ready to provide assistance in advising clients on shaping legislative strategy and identifying the constitutional questions in proposed or enacted legislation or decrees.
Because the crisis is unfolding rapidly and in unpredictable ways, and conditions will vary across the country, it is difficult to anticipate all the types of legislation and executive decrees that may ensue. Real estate companies, for example, are already confronting legislation, bills, or decrees that would suspend rent payments, impose moratoria on detainer actions, and suspend late fees. More legislation and decrees will surely occur as the crisis deepens. Every legislation or decree will require independent analysis, but here are the most important constitutional constraints to consider.
Contract Clause. As the COVID-19 crisis continues, both businesses and customers may face difficulty in meeting contractual obligations. As consumers look for relief, and as businesses look to impacts on revenue and worry about their ability to fulfill existing contracts, it seems inevitable both that state legislatures will seek to address impacted commercial relationships and that others will challenge that legislation.
One of the principal constraints is imposed by the Contract Clause of the United States Constitution, which provides that “No State shall . . . pass any . . . Law impairing the Obligation of Contracts . . . .” U.S. Const. art. I, § 10, cl. 1. The Contract Clause applies only to legislation enacted by states or municipalities exercising delegated power (not federal legislation). New Orleans Waterworks Co. v. La. Sugar–Refining Co., 125 U.S. 18, 30-31 (1888); City of Pontiac Retired Emps. Ass’n v. Schimmel, 751 F.3d 427, 431 (6th Cir. 2014). Despite the broad language of the constitutional text, current Contract Clause jurisprudence reflects a balance. The Contract Clause’s “prohibition must be accommodated to the inherent police power of the State ‘to safeguard the vital interests of its people.’” Energy Reserves Grp., Inc. v. Kan. Power & Light Co., 459 U.S. 400, 410 (1983) (citation omitted).
The leading Supreme Court case dealing with contract impairments during emergencies is Home Building & Loan Association v. Blaisdell, 290 U.S. 398 (1934). Blaisdell concerned a Great Depression-era Minnesota law that placed a moratorium on mortgage foreclosures with the provision that the mortgagee would pay either property income or rental value during the moratorium. The Supreme Court emphasized that (1) the prohibition on impairment of contract obligations did not extend to contract remedies, so long as remedial limitations did not destroy essential contract obligations; (2) an implied term of every contract is subordination to the police power; (3) the police power may be exercised to impair contracts where necessary to protect the economic order of society; (4) those impairments must be reasonably limited to the period of emergency; and (5) the provisions must be reasonable and “addressed to a legitimate end; that is . . . not for the mere advantage of particular individuals but for the protection of a basic interest of society.” Id. at 444-48. “Undoubtedly, whatever is reserved of state power must be consistent with the fair intent of the constitutional limitation of that power. The reserved power cannot be construed so as to destroy the limitation, nor is the limitation to be construed to destroy the reserved power in its essential aspects. They must be construed in harmony with each other.” Id. at 439. Blaisdell suggests that provisions directed at contract remedies or penalties are likely to be upheld if limited in duration and reasonably justified by the emergency at hand; not all provisions that alter the basic contractual bargain are foreclosed, but those that unreasonably shift the burden to one party (e.g., permanent abrogation of rent obligations in a lease for a period of time) are subject to constitutional attack.
Thus, all proposed or enacted state or municipal legislation that affects contract obligations requires careful analysis. “[T]he Contract Clause limits otherwise legitimate exercises of state legislative authority, and the existence of an important public interest is not always sufficient to overcome that limitation.” U.S. Tr. Co. of New York v. New Jersey, 431 U.S. 1, 21 (1977).
Takings Clause. The Takings Clause (applicable to federal, state, and local governments) provides that private property shall not “be taken for public use, without just compensation.” U.S. Const. amend. V; Penn Central Transp. Co. v. City of New York, 438 U.S. 104, 123 (1978). A contract right is a form of vested property right that may be protected by the Takings Clause. Lynch v. United States, 292 U.S. 571, 577 (1934) (“war risk [insurance] policies, being contracts, are property and create vested rights.”); Omnia Com. Co. v. United States, 261 U.S. 502, 508 (1923) (“The contract in question was property within the meaning of the Fifth Amendment.”); United States v. Petty Motor Co., 327 U.S. 372, 381 (1946) (holding that plaintiff was entitled to just compensation for government's taking of leasehold, including option to renew a lease). Thus, in Lynch, the Supreme Court held that the Economy Act, enacted to maintain the credit of the United States in the Depression by cancelling insurance liability, was a taking; Congress may reduce gratuities, but “was without power to reduce expenditures by abrogating contractual obligations of the United States.” 292 U.S. at 580.
To be sure, “the fact that legislation disregards or destroys existing contractual rights does not always transform the regulation into an illegal taking.” Connolly v. Pension Benefit Guar. Corp., 475 U.S. 211, 224 (1986) (finding no taking in statute requiring an employer withdrawing from a multiemployer pension plan to pay a share of unvested plan benefits because the Government did not take the contract for its own use); Omnia, 261 U.S. at 509. Nonetheless, a regulatory “taking” may occur if the regulation essentially destroys all beneficial use of the property. See Penn. Coal Co. v. Mahon, 260 U.S. 393, 415 (1922); Lingle v. Chevron U.S.A. Inc., 544 U.S. 528, 537 (2005) (same). If regulations “fall short of eliminating all economically beneficial use, a taking nonetheless may have occurred, depending on a complex of factors including the regulation’s economic effect on the [owner], the extent to which the regulation interferes with reasonable investment-backed expectations, and the character of the government action. These inquiries are informed by the purpose of the Takings Clause, which is to prevent the government from forcing some people alone to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.” Palazzolo v. Rhode Island, 533 U.S. 606, 617-18 (2001) (internal quotation marks and citations omitted). Thus, “[i]f, under any power, a contract or other property is taken for public use, the government is liable; but, if injured or destroyed by lawful action, without a taking, the government is not liable.” Omnia, 261 U.S. at 510. Just compensation may be owed even if the taking is temporary and not permanent. First Eng. Evangelical Lutheran Church of Glendale v. County of Los Angeles, 482 U.S. 304, 318 (1987) (“‘[T]emporary” takings which, as here, deny a landowner all use of his property, are not different in kind from permanent takings, for which the Constitution clearly requires compensation.”).
Although regulations of contract performance, and some adjustments of economic burdens among contracting parties, will generally be upheld, regulations that are unfairly confiscatory may cross the line, either under the Takings or Due Process Clauses, and warrant either injunctive relief or just compensation. See Eastern Enterprises v. Apfel, 524 U.S. 498 (1998) (plurality) (holding that statute that retroactively imposed coal miner benefit funding obligations constituted a taking and could be enjoined); id. at 547-50 (Kennedy, J., concurring in the judgment in part and dissenting in part) (finding the retroactive legislation to be arbitrary and in violation of the Due Process Clause). If the economic crisis deepens, and authorities take emergency actions that impact property rights, an understanding of the Takings and Due Process Clauses will be vital to both companies and consumers alike in understanding whether legislation or executive decrees entitles them to just compensation.
Commerce Clause. The Commerce Clause empowers Congress “[t]o regulate Commerce ... among the several States.” U.S. Const. art. I, § 8, cl. 3. Although by its terms the clause does not expressly restrain the states, courts have interpreted the Commerce Clause to impose two limitations on states’ regulatory activity. First, the Supreme Court reads the clause to contain a negative implication—what has become known as “the dormant Commerce Clause” doctrine. Dep’t of Revenue of Ky. v. Davis, 553 U.S. 328, 337-38 (2008). This doctrine prohibits states from enacting regulatory measures designed to benefit in-state economic interests that either “discriminat[e] against or impos[e] excessive burdens on interstate commerce without congressional approval.” Comptroller of Treas. of Maryland v. Wynne, 575 U.S. 542, 135 S. Ct. 1787, 1794 (2015).
This inquiry first asks whether a challenged state law discriminates against interstate commerce. A discriminatory law is “virtually per se invalid,” and will survive only if it “advances a legitimate local purpose that cannot be adequately served by reasonable nondiscriminatory alternatives.” Or. Waste Sys., Inc. v. Dep’t of Envtl. Quality of Or., 511 U.S. 93, 94, 99, 101 (1994) (internal quotation marks omitted). Absent discrimination, the law will be upheld unless the burden imposed on interstate commerce is “clearly excessive in relation to the putative local benefits.” Davis, 553 U.S. at 338-39 (internal quotation marks and citations omitted). For instance, a State may not impose a tax that discriminates against interstate commerce either by providing a direct commercial advantage to local business, or by subjecting interstate commerce to the burden of multiple taxation. Wynne, 135 S. Ct. at 1794.
Although state laws frequently survive dormant Commerce Clause review, courts have used it to strike down laws and regulations. That result follows “when a law favors in-state business over out-of-state competition … because the law is often the product of “simple economic protectionism.” United Haulers Ass’n, Inc. v. Oneida-Herkimer Solid Waste Mgmt. Auth., 550 U.S. 330, 343 (2007) (internal quotation marks and citation omitted). “[W]hen a State shifts the costs of regulation to other States,” courts view themselves as authorized to intervene and invalidate state and local legislation. Id. at 345.
Second, the Commerce Clause imposes limitations on state and local laws and regulations by virtue of another constitutional provision, the Supremacy Clause. The Supremacy Clause provides that federal law—if within Congress’ constitutional authority to enact—“shall be the supreme Law of the Land.” U.S. Const. art.VI, cl. 2. Under this principle, Congress has the power to preempt state law. Crosby v. Nat’l Foreign Trade Council, 530 U.S. 363, 372 (2000). Congress may do so by enacting a statute containing an express preemption provision. Arizona v. United States, 567 U.S. 387, 399 (2012).
But Congress can also preempt state law in two other circumstances, which are often subject to judicial interpretation. First, under the concept of “conflict preemption,” state laws are preempted when they conflict with federal law. Id.; Crosby, 530 U.S. at 372. In undertaking this inquiry, courts ask whether “compliance with both federal and state regulations is a physical impossibility,” Fla. Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132, 142-43 (1963), or whether the challenged state law “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress,” Hines v. Davidowitz, 312 U.S. 52, 67 (1941). This inquiry, however, is substantially deferential to states; “[i]n preemption analysis, courts should assume that the historic police powers of the States are not superseded unless that was the clear and manifest purpose of Congress.” Arizona, 567 U.S. at 400 (internal quotation marks and citation omitted).
Second, states “are precluded from regulating conduct in a field that Congress, acting within its proper authority, has determined must be regulated by its exclusive governance.” Id. at 399 (internal quotation marks and citation omitted). Courts find field preemption more rarely, and typically only when the federal framework of regulation is “so pervasive ... that Congress left no room for the States to supplement it” or where there is a “federal interest ... so dominant that the federal system will be assumed to preclude enforcement of state laws on the same subject.” Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947); see also Arizona, 567 U.S. at 399. Either of these preemption concepts could impose further constraints on state and local legislation enacted to alleviate the economic disruption caused by COVID-19.
State Constitutions. Company counsel and government affairs departments should also keep in mind state constitutions during this ongoing social and economic disruption. State constitutions generally have their own versions of the federal constitutional provisions discussed above. California’s constitution, for example, contains a due process and privileges and immunities clause (Art. 1, § 7), a contracts clause (Art. 1, § 9), a takings clause (Art. 1, § 19), a provision limiting the state’s ability to appropriate funds to benefit private corporations (Art. 16, § 3), and a provision granting the state “plenary power” to administer laws relieving “hardship and destitution” (Art. 16, § 11). State constitutions can and sometimes do go beyond the federal Constitution, in which case state courts’ constructions of the relevant provisions will prove as important as the federal courts’ constructions of the federal Constitution. States may be more protective than the federal government of the rights of natural or legal persons against the enactments of state legislatures; conversely, they may allow for more centralized state power over cities, counties, and municipalities than the federal Constitution allows the federal government to exercise over the states. Given the potentially unprecedented nature of the financial disruption caused by COVID-19, it is likely that states or political subdivisions will attempt to use their police powers in novel ways and that even state constitutional provisions with little case law behind them will be invoked and invite interpretation or reinterpretation.
In short, times of economic and political tumult will prompt extensive legislative and executive action to manage the crisis and either distribute or reallocate economic benefits and burdens. Be they lenders or borrowers, landlords or tenants, companies or individuals, we all are facing this crisis. All must be vigilant to understand both the constitutional ability of government to respond to that emergency and the constitutional restraints on the same, and that vigilance is just as critical in the shaping of government action as in judicial challenges once the challenged laws are in effect.
Paul Hastings has a team of constitutional lawyers (listed on the right) who are ready to assist clients address state and municipal executive and legislative actions as this crisis continues.
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