AuthorJohnston, Jason Scott

There are two ways of ensuring that one person's use of his or her private property does not infringe upon the rights of others. On the approach taken by the common law, there are few if any ex ante restrictions on property use. One may operate one's factory, or develop one's land, however one wishes, subject to the constraint that if the property right holder's operation or development infringes upon the established rights of other people, then the property right holder may be liable to pay damages for the harm that her activity has caused to others. And in cases where the activity has caused serious harm with little benefit, the right holder's use may actually be enjoined by the court.

In the modern regulatory state that has developed in the United States, property right holders do not have such freedom. Before a landowner can develop her land or operate her factory, she must often obtain a permit or license not just from state and local regulatory authorities but from federal environmental regulators. Such permit requirements are typically justified on the ground that when activities risk irreversible or noncompensable harm, the ex post common-law remedies of damages or an injunction are inadequate. In the modern regulatory state, before a landowner can develop her land or operate her factory, she must meet requirements that regulators have imposed to ensure, they say, that such an activity does not cause such irreversible or noncompensable harm. (1)

Such permit requirements are a fundamental feature of contemporary environmental regulation. Indeed, as Richard Epstein argued in his pathbreaking work a quarter century ago, permit requirements are ubiquitous in the modern American regulatory state. (2) As Epstein argued, because permit requirements give regulatory bureaucrats "absolute power to issue or deny permits," they have effectively "inverted" the distribution of power within the legal system, giving interested regulators vastly more power than that conferred upon neutral judges. (3) Regulators have used this power to coerce private businesses to pay a price for the privilege of doing business. In this way, the regulatory permit power has become an instrument by which regulators take and redistribute private value.

Back in 1995, Professor Epstein famously termed such use of the permit power a "racket," (4) and as observed very recently by Dave Owen, (5) still today many landowners and conservative critics would agree with the Supreme Court's description of the process (in Nollan v. California Coastal Commission) as an "out-and-out plan of extortion." (6) However extortionate such deals may be, regulators with permit power may require landowners to bargain with them before developing their land or else face legal sanctions. This Essay explores in more detail how such bargaining has played out under two of the most important permit regimes in federal environmental regulation: wetlands permits under section 404 of the Clean Water Act and incidental take permits under Section 10 of the Endangered Species Act.

These permit regimes flip the common-law system on its head. With their existence (in the case of species) and scope and extent (in the case of wetlands) the product largely of regulations issued by the agencies themselves rather than any direct statutory authority, the wetlands and habitat modification permit regimes transfer a landowner's common-law development right to federal regulators, creating what are in effect public property rights in private lands. Unlike common-law property rights protection, under which injunctive relief and potential criminal sanctions for violating such an injunction are available only after a court balances the harm caused by the potentially enjoined activity against the social value of that activity, simply by denying a permit, federal regulatory agencies such as the Army Corps of Engineers (for wetlands) and the U.S. Fish and Wildlife Agency (for species) can unilaterally trigger the accrual of fines and risk of imprisonment. These agencies both hold the public property right and can trigger sanctions for its violation. Bargaining in the shadow of such sanctions, private landowners trade away rights, diminishing the value of their lands, in exchange for permission that frees them from the risk of legal sanction. As a legal matter, regulators may value the harm to private land value caused by their interpretation of what permit regimes require at any value they wish. Regulators typically allow landowners some measure of development provided that the landowner pays a sum of money to a private firm that promises to use the money to preserve undeveloped land elsewhere. Thus, in the central paradox of modern environmental permitting, in practice, the system of ex ante permits--justified by the need to prevent irreversible and noncompensable harm--has become one in which government allows private development provided that some private landowners make a wealth transfer to other private landowners.


    1. Wetlands and Endangered Species Permit Requirements and the Deals They Induce

      Many of the most important recent Supreme Court decisions involving federal environmental regulation involve instances where regulators have pushed to extend the scope of private activities that must get a federal permit in order to be undertaken without risk of sanction. The two most economically significant such permit programs are those involving wetlands and endangered species.

      Section 404 of the Clean Water Act prohibits the unpermitted discharge of dredge or fill material into "navigable waters," (7) which in turn is defined by that statute as "the waters of the United States." (8) Since 1977, the U.S. Army Corps of Engineers ("USACE"), the agency with statutory authority to grant dredge and fill permits, has by regulation defined "the waters of the United States" as including some wetlands. (9) The Corps defines wetlands as areas that are saturated with sufficient frequency and duration so as to support vegetation that either prefers or requires such soil conditions. (10)

      Over the decades, the USACE has extended the Clean Water Act's permit requirement to wetlands that are located farther and farther away from any body of water that is navigable in any sense. In 1985, in United States v. Riverside Bayview Homes, Inc., the Court upheld the USACE in requiring a private landowner to obtain a permit before filling and developing eighty acres of marshland near the shore of Lake St. Clair. (11) During the 1980s and 1990s, the USACE extended its wetlands permit requirement far beyond wetlands that were adjacent to navigable water. In Solid Waste Agency v. U.S. Army Corps of Engineers, the Court decided whether the USACE could require a wetland fill permit from a consortium of northern Illinois towns that were seeking to convert into a solid waste landfill a sand and gravel pit mining operation that had been abandoned decades before. (12) The location was nowhere near a navigable waterway, but the pits and depressions left over from the mining operations filled with water, providing habitat for migratory waterfowl. (13) The Court struck down this attempted extension of the federal wetlands permit requirement as likely intruding too far into traditional state and local regulatory authority over land use. (14) Just five years later, in Rapanos v. United States, the Court said that the USACE could not require wetlands permits from Michigan landowners who backfilled sometimes swampy lands connected to navigable waters only through various drains and ditches. (15) Again concerned that extension of the USACE's permitting requirement to such land development activities would intrude into a core area of state and local regulatory authority, thus pushing "the envelope of constitutional validity," Justice Scalia's opinion for the plurality held that the USACE could require permits only for the development of "those wetlands with a continuous surface connection to bodies [of water] that are 'waters of the United States' in their own right," such as rivers and lakes. (16)

      In a concurring opinion in Rapanos, Justice Kennedy set out an alternative definition of a wetland subject to the federal permitting requirement. (17) Under Justice Kennedy's definition, the USACE may require a permit from any landowner whose lands contain wetlands that "either alone or in combination with similarly situated lands in the region, significantly affect the chemical, physical, and biological integrity of other covered waters more readily understood as 'navigable.'" (18) Justice Kennedy's definition of statutory wetlands tracks very closely the USACE's own preferred definition. As there was no majority opinion in Rapanos, the USACE took Justice Kennedy's definition as the controlling law.

      Since that time, individual USACE district engineers have made case-by-case determinations of not only what constitutes a wetland, but when the filling of such wetland, when combined with other "similarly situated lands in the region," would "significantly" impact the chemical and biological integrity of waters that are actually navigable in some sense (or, as Justice Kennedy put it, that are "more readily understood" as navigable). (19) To say that such determinations are unpredictable and uncertain would be a vast understatement. Landowners who have paid consultants to determine that their lands do not contain federally regulated wetlands have often been shocked to discover that the USACE disagrees and that they cannot realize the full value of their lands that they anticipated and must instead turn over a substantial fraction of that value to the public.

      This is vividly, and tragically, displayed by the story of John Duarte and Duarte Nurseries. (20) In 2012, Duarte acquired 445 acres of land located in rural Tehama County in north central California. (21) Since the arrival of the Spanish in California, the...

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