Raisin' a Raw Deal

Richard Epstein*

Richard Epstein

Richard Epstein

Thanks to the Supreme Court’s decisions on Obamacare and same-sex marriage, public attention has been unfortunately drawn away from Horne v. Department of Agriculture, which deals with the Agricultural Marketing Agreement Act of 1937, under which the government stabilizes crop prices, like those of raisins.

Under the law, a Raisin Administrative Committee, consisting mainly of raisin growers appointed by the Secretary of Agriculture, requires each farmer to give, free of charge, a certain fraction of their crop to the United States government. Once received, the government can sell them in noncompetitive markets, give them away, or dispose of them “by any means consistent with the purpose of the program”—which means keeping prices high by limiting the supply of raisins for sale and destroying those that cannot be otherwise safely disposed. To complete the circle, net profits from the program, less government expenses, are distributed back to the raisin growers.

Stripped of New Deal newspeak, the marketing program institutes a textbook government-run cartel. Like monopolies, cartels raise prices, reduce output, and undermine social welfare, which would normally make them targets under the antitrust laws. Indeed, cartels are even more dangerous than a single-firm monopolist. The monopolist chooses efficient means of production to maximize his profits, even though, socially, the results are inferior to those generated by a competitive market. But a cartel cannot survive unless it offers some accommodation to inefficient producers that would, if left uncompensated, sell their commodities below the cartel price. Hence, like OPEC, the Department of Agriculture lets a central committee set quantity restrictions to keep all players happy. Franklin Roosevelt loved cartels for the votes they brought in, just as he opposed monopolies because they made ideal targets for his populist rhetoric.

The New Deal’s defense of cartels in agriculture exerted a transformative effect on American constitutional law. These cartels could only work on a nation-wide basis, so the Roosevelt administration persuaded the Supreme Court that the Commerce Clause of the Constitution was not limited to cross-border transactions between states, but reached first intrastate sales and, ultimately, the production and consumption of crops on individual farms as enshrined in Wickard v. Filburn.

 For the next seventy-plus years, these cartels worked with clock-like precision, until the Hornes, farmers in California, challenged their operation, first in 20022003 when they refused to turn over 47 percent of their raisin crop over to the government and then again in 20032004 when they refused to turn over 30 percent. The government fined the Hornes $480,000 for the value of the raisins, to which they tacked on an additional penalty of $200,000.

The fine and the penalty were challenged by the Hornes on the ground that the government seizure of their raisins constituted a taking under the Fifth Amendment, which states that “private property [shall not] be taken for public use, without just compensation.”

The most amazing part of this saga is not that the Hornes won, but that no one involved in the litigation used the word “cartel.” The Hornes had to avoid the term whose use would undermine their claim. A cartel arrangement is not just a naked taking. Its offset turns out to be the higher prices that the Hornes and other cartel members can fetch for their remaining stock of raisins in the open market, which should count as a form of in-kind compensation under the Takings Clause. Under traditional antitrust lingo, they are cheaters who work under the cartel umbrella. All power to them!

Nonetheless, the government did not wish to make an open admission that the Marketing Act fortifies cartels, lest they undermine the stabilization myth that helps shield these cartels from public disapproval. And the Supreme Court, which has already blessed these grotesque arrangements, could ill-afford to undermine the legitimacy of its own earlier rulings, including Wickard, which props up the modern welfare state, including Obamacare.

Right off the bat, Chief Justice Roberts’ entire takings discussion has a surreal quality because it ignores the real victims of this program, the public at large. The Court instead focuses only on the Hornes’ claim that the government seized their raisins, which is of course a paradigmatic taking that under current law is unconstitutional.

In its opening salvo, the government claimed that personal property, such as raisins, receive less constitutional protection than real estate. The Chief Justice rightly slapped that claim down, noting that the comprehensive phrase ”private property” includes all forms of wealth in private hands, even patents. The constitutional text offers no warrant for dividing the field into first and second-class forms of property. Once raisins received full protection, the government could not justify its marketing program by saying that the residual cash that came back at the end of each annual cycle removed any constitutional taint from the program. That residual cash from the program cannot possibly meet the standard of full and fair market value (that is, the measure of just compensation), and the Chief Justice rightly rejected Justice Sotomayor’s odd dissent that there is no taking at the front end because some compensation is offered at the end of the day.

From that point on, Justice Roberts entered choppy waters. He is no judicial revolutionary, and thus throughout his opinion he tries to make peace with the tattered constitutional jurisprudence that has long embraced a distinction between physical and regulatory takings. The latter restricts the ability of a property owner to use or sell his property, but leaves him undisturbed in the possession of his land. The Hornes are, of course, on the right side of that distinction given that the government tried to physically seize their raisins.

Yet Justice Roberts was unable to defend the line between physical and regulatory takings. Exhibit A was the Court’s 1980 decision PruneYard Shopping Center v. Robins, which, waving a free speech banner, held that there was no taking of a shopping center when its owner was forced to admit protestors on his property against their will. The right way to treat this case is as a partial physical taking of the property once the owner lost his right to exclude others from his property.

But Justice Roberts wrongly reimagined this deliberate entrance as a regulatory taking by equating partial use by others with a restriction on how one can use one’s own property. He then compounded the error by falsely claiming that the owner’s use of the shopping center was “largely unimpaired,” without ever explaining why PruneYard filed suit in the first place. Hence, he concluded the ersatz regulation did not go “too far.”

That last unfortunate phrase was lifted from Justice Holmes’ famous opinion in Pennsylvania Coal v. Mahon and has bedeviled the field ever since. With physical takings, the rule is that the government pays for whatever it takes, be it large or small. With regulatory takings, the Holmes distinction says that the property owner cannot claim that a taking occurred as a result of regulation so long as he retains some residual value. Yet Justice Roberts never explains why two forms of government action, both susceptible to potential massive abuse, should receive such different constitutional responses.

The point is painfully evident in agricultural markets, because the government could achieve most of its objectives by restricting through regulation the total amount of raisins each farmer could grow on his own land. The unified theory that the Chief Justice recognizes is needed for land and personal property now gives way to the indefensible intellectual distinction between physical and regulatory takings.

Once that distinction is buried, ironically, it turns out that the Hornes are the wrong plaintiffs in this case. The compensation for their physical taking consists not solely in the residual cash payout they receive. It is also the higher price that they can charge for their retained crops that makes them whole: if it did not, the cartel would collapse tomorrow. Accordingly, the proper challengers to the marketing orders are the consumers who should have a typical antitrust–type claim for collusion against the raisin market, which ironically they cannot bring under the misguided 1943 Supreme Court decision in Parker v. Brown that insulates government-sponsored cartels from the antitrust law.

Roberts’ reticence to tackle fundamental issues was equally evident in his unhappy resolution of the third question of whether the government could require a surrender of some portion of a farmer’s crops in order to sell the rest in interstate commerce. His answer—it cannot—is correct, but his analysis is not.

The doctrine of unconstitutional conditions has long made it impossible for the government to condition the granting of one right on the willingness of an individual to surrender a second, and then call the entire transaction “voluntary.” In many cases, this government “choice” given to private parties is tantamount to the choice that the robber gives to his victim: “your money or your life.” The government therefore must justify any condition it imposes by showing that it relates to the protection of a legitimate public interest. By way of example, the government can condition the sale of goods into interstate commerce so that they do not explode on public roads. But it cannot condition them on someone’s agreeing to waive their Fourth Amendment rights against search and seizure, or on payment of tribute to competitors anxious to preserve their monopoly position.

Unfortunately, a wretched 1984 Supreme Court decision, Ruckelshaus v. Monsanto, allowed the government to condition the licensing of a dangerous fungicide for sale on the willingness of its owner to share trade secrets, a constitutionally protected form of property, with his competitors. Justice Harry Blackmun blithely claimed that any firm that rejected the condition could always sell goods in foreign markets. Chief Justice Roberts, however, refused to overrule Monsanto with the glib remark that “raisins are not dangerous pesticides; they are a healthy snack,” without delving into whether Monsanto was wrong, which it was given that its transfer of trade secrets was no more warranted for dangerous products than safe ones

In the end, Horne counts as a partial victory over the government. But its long-term value is undercut by the confused tangle of legal doctrine that Roberts decision left in place. To be sure, the Chief Justice conveniently ignored the offsetting benefits from the marketing, and struck down the fines and penalties in the individual case. It now remains to be seen whether every raisin grower is free to defy the government mandate, or whether the government can switch to acreage restrictions or other devices to achieve the same end.

The public always pays a high price for muddled law. It leads to uncertain outcomes in future cases. And worse, it results in the perpetuation of indefensible constitutional doctrines. The line between physical and regulatory takings is essential to propping up the most destructive government initiatives, both state and federal. And the use of exactions and other unconstitutional conditions leads to massive abuses by government regulators. Chief Justice Roberts had the chance to go beyond incrementalism in the face of massive doctrinal disarray. We are all the poorer that he shunted off to one side the larger issues about New Deal programs that Horne should have brought front and center. 

*Considered one of the most influential thinkers in legal academia, Richard Epstein is known for his research and writings on a broad range of constitutional, economic, historical, and philosophical subjects.