Monday, December 3, 2007

Epstein and Chicago, Eminent Domain and China

Last year the University of San Diego School of Law founded the Center for the Study of Constitutional Originalism. Regardless of whether one buys into constitutional originalism, the center has served as a powerful draw for well-known and controversial legal scholars such as John Yoo and Justice Antonin Scalia. On November 16-17 the Center played host to Richard Epstein at the Bernard Siegan Memorial Conference on Economic Liberties, Property Rights, and the Original Meaning of the Constitution. Richard Epstein is most well known for directing the Law and Economics program at the University of Chicago School of Law, and for his book Takings: Private Property and the Power of Eminent Domain in which he argues that the government should be treated just like a private entity in a property dispute.

Law and economics is an outcome determinative analysis of legal problems. Laws should be applied and cases should be decided in a way that maximizes the differential between the costs and benefits of the various ways in which the case could be decided striving for the greatest net benefit to society. Judges should be encouraged to look not just at maximizing the net benefit to society on the case before them, but should also look at what sort of precedent they are setting.

One of the greatest examples of the application of Chicago School Law and Economics is ProCD v. Zeidenberg. You might remember this as the case about shrink-wrap licenses, but this is really the case of Judge Easterbrook playing economist. No question, a contract was offered and accepted. Bam, out of the way. ProCD spent $10 million to create their directory, the directory is useful, a property right in the directory was created by contracts, the contract will be enforced and Zeidenberg cannot copy ProCD's directory. A seminal case in copyright, Feist v. RTS would have allowed the copying of ProCD's directory as fair use, but Zeidenberg had accepted a contract saying that he would not copy. Easterbrook holds that the benefits of the flexibility of contracts to create a very expensive and very useful directory outweigh the costs of denying fair use in copyright as a mandatory right that cannot be voided. (Side Note: Where did Mr. Zeidenberg get the idea that he could create and distribute a copy of ProCD? As an undergraduate he read Feist and he read a law review article arguing that this sort of thing would be fair use under Feist. Lesson: hire an attorney if you're wondering whether you are going to infringe somebody's rights.)

What does this have to do with China or eminent domain? To begin with, investing in real estate in a country where I don't even own the land, but own a long term lease in the land that will presumably be automatically renewed upon expiration makes me nervous. However, I can now rest easy for as of a couple of days ago, China made it quite difficult for me to purchase real estate in said country. Steve Dickinson and Stan Abrams each have lengthy posts on this subject at China Law Blog and China Hearsay. What now worries me is that Chinese real estate owned by foreigners may become subject to seizure by eminent domain, or the taking of property by the state for a suspect public use. This fear is probably naive. Even in the United States property is seized by eminent domain and turned over to private groups with connections to the local government.

In the US we have a two-tiered system protecting seizures by eminent domain: the 4th and 5th amendments protect the taking of property by the federal government (and by the state governments through the 14th amendment) from people and persons; and the states cannot deprive the citizens of other states the right to hold property in a state through the Privileges and Immunities clause of Article IV. A taking can be the actual seizure of the property or the attachment of conditions to the property. The question becomes when those conditions deprive the private property of all use.

At the conference, while discussing the paper that Eric Claeys had written, the question turned to whether the government could seize the property of foreigners by eminent domain. Epstein, prone to blurting out whatever is in his mind as soon as it appears in his mind, responded so matter of factly and with such a simple answer that I could not help but hope that his rule would be applied in China. He said that the basic conception of liberty and natural law, governed by positive laws of the Constitution, requires that the government cannot seize by eminent domain the landed property held by foreigners, but that the government is free to restrict everything but the liberty to sell the property.

Under Epstein's theory, the Chinese government would be free to place covenants on the land held by foreigners and place restrictions on the land, but would not be able to take the land itself. If the government began taking foreigners' land or prevented foreigners from selling their land then foreigners would be unable to see a return on the investment in their land which would result in lower land values as the land is sold in a fire sale or auctioned off by the government to buyers who might not place much faith in the title they are purchasing. Land values are an important asset in determining credit risk and depressed land values in China would hurt the credit of many Chinese. Epstein's theory applied in China, where the government likes to have some control, would hope to preserve land value while also allowing the government to retain control over how the land is administered.

Though the Chinese government seems to enjoy its power, it was also founded in economic theory. I hope that they recognize the power of law and economics in finding legal solutions that maximize net benefits within the framework of positive law guided by natural law. Because sometimes it really does boil down to, "It's just not fair." Arguments can be made every which way about the fairness of attaching restrictions to property, but taking property away is simply not fair.

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