In this month’s Supreme Court roundup, we take a look at the arguments in Koontz v. St. Johns River Water Management District and Standard Fire Insurance Co. v. Knowles, both of which the court heard in January. 

In Koontz, the key question at hand is, when do a permitting authority’s demands for offsite environmental mitigation constitute a taking? It is commonplace that when a proposed development project is perceived to cause environmental harm, a permit will be issued only if the landowner agrees to “mitigate” the harm. In Nollan v. California Coastal Comm’n (1987) and Dolan v. City of Tigard (1994), the Supreme Court addressed permit conditions generally, holding that they do not constitute unconstitutional government takings provided the conditions have an “essential nexus” to the development project and are “roughly proportional” to the harm it causes. In Koontz, the Supreme Court will address whether the takings analysis set forth in Nollan and Dolan applies to a permitting authority’s demands for offsite mitigation in the form of payments for government environmental projects.

Koontz sought a permit to fill three acres of wetlands on his 14-acre parcel, and he offered to dedicate the remaining 11 acres as protected wetlands in mitigation. The Water District insisted that Koontz also pay for repairs to about 50 acres of Water District-owned wetlands within a few miles of his property. Koontz sued, alleging that the demand for offsite mitigation did not meet the Nollan/Dolan tests and therefore inversely condemned his property.

The Florida Supreme Court held that the Nollan/Dolan test does not apply to monetary exactions. It ruled, and the U.S. in an amicus brief supporting the Water District agrees, that the test for regulatory takings set forth in Penn Central v. New York City (1978) should apply. That test, which balances the impact of regulation on the property owner’s investment-backed expectations against the government interest involved, very rarely produces a taking and thus is preferred by the U.S., which likes to require Clean Water Act permit applicants to mitigate by purchasing credits from “mitigation banks” or “in-lieu fee programs” that perform offsite mitigation.

Koontz argues that the Nollan/Dolan nexus and proportionality tests apply to all permit exactions and are a necessary check on government imposition of unconstitutional conditions on land use. If those tests do apply, they may be harder for permitting authorities to satisfy than the Penn Central test and less easily satisfied when the condition imposed is the financing of an entirely unrelated offsite government project. At oral argument on Jan. 15, however, Koontz’s lawyer met with skepticism from an unexpected quarter when Justice Antonin Scalia appeared doubtful that there could be a Nollan/Dolan taking because Koontz had not obtained a permit and therefore had not accepted any condition: “There was no approval with conditions,” so “nothing’s been taken.” Chief Justice John Roberts and Justice Samuel Alito, by contrast, were concerned that the government’s position means that there is no constitutional limit on what an agency can demand as a condition for issuing a permit, beyond the uncertain limits of due process and equal protection. And Justice Ruth Bader Ginsburg thought it “entirely reasonable” that a permit condition must have “some rough proportionate relationship to then harm, that is being done by the permit.” A decision is expected by late June.

If the court were to take this opportunity to put some teeth into the essential nexus and rough proportionality standards, and thereby curtail the use of permit requirements to fund favored government projects, landowners would surely benefit.

Standard Fire Insurance Co. v. Knowles, argued earlier this month, focused on whether plaintiffs may stipulate out of removal under the Class Action Fairness Act. It is the first major case in which the court will address the provisions of the Class Action Fairness Act of 2005 (CAFA).  

The issue, in short, is whether a named plaintiff may avoid removal to federal court of a putative class action that would otherwise satisfy CAFA’s $5 million amount-in-controversy requirement, by stipulating that he or she does not seek to recover more than $5 million. If this tactic were permissible, plaintiffs lawyers could easily avoid removal of class actions to federal court. That is contrary to the intent of CAFA, which Congress enacted chiefly in response to abusive class actions filed in state courts that are hostile to out-of-state defendants. 

What will the Supreme Court say? From attending the oral argument, I saw two major points of disagreement. 

First, does CAFA’s text answer how to calculate the amount in controversy? CAFA states that “courts shall aggregate the claims of the individual class members” to determine the amount in controversy. But Justice Elena Kagan—who emerged as the chief opponent of removal in this context—made it clear that in her view, CAFA “didn’t eliminate” the rule that the plaintiff is “the … master of [his or her] complaint.” By contrast, Roberts identified the type of mischief that could occur, asking: “What if you had a case where a lawyer … says: I want to represent the class of people with these claims and these claims, whose names begin with A to K. It turns out that’s $4 million. And in the next county, at the same time, he files a case saying, I’d like to represent these people whose names begin L to Z. In each of those cases, it’s $4 million.” That example caused Justice Stephen Breyer to wonder whether, in response to such a “mechanical method of avoiding the purpose of the statute,” the Court should adopt a reading of CAFA that “you should aggregate the real value” of the claims that the class is likely to have.”

Second, can a named plaintiff and his counsel stipulate away the amount of damages potentially available to absent class members in order to remain in state court? According to the plaintiffs’ counsel, state courts can resolve whether such a trade-off is proper at the class-certification stage. But Alito expressed skepticism: “I don’t understand how absent class members would ever be able … to determine whether by failing to opt out, they had compromised part of their claim.” True, as Kagan pointed out, “usually, we assume that State court judges will do their jobs, will pay attention to the Constitution, will apply adequacy of representation standards that come from the due process clause.” But when Congress enacted CAFA, it found that “[s]tate and local courts are … sometimes acting in ways that demonstrate bias against out-of-State defendants.” Moreover, as Ginsburg pointed out, “a named plaintiff, unless and until he is—he is certified to represent the class—doesn’t represent [absent class members].” 

After viewing the arguments, my best guess—and it’s only a guess—is that a majority of the court likely will hold that when determining whether a putative class action satisfies CAFA’s amount-in-controversy requirement, federal courts should disregard stipulations by named plaintiffs asserting that they are seeking less than $5 million.