Unfair "Just Compensation": Reforming Eminent Domain Law for Small Business

By Gomes, Glenn M.; Morgan, James F. | Journal of Small Business Management, October 1989 | Go to article overview

Unfair "Just Compensation": Reforming Eminent Domain Law for Small Business


Gomes, Glenn M., Morgan, James F., Journal of Small Business Management


Private property rights are the foundation of a free enterprise economy. A firm's ability to survive and prosper in competitive markets is often determined by how the laws respecting property rights are interpreted by the courts. The Fifth Amendment to the United States Constitution, as well as provisions in most state constitutions, simultaneously protects private property interests while acknowledging government's power to expropriate. This power-the exercise of eminent domain-is available when legitimate public purposes require it, provided that "just compensation" is paid to the owner of the property taken.' Today, however, there is good reason to doubt whether the Fifth Amendment's admonition "[N]or shall private property be taken for public use without just compensation," is interpreted to protect fully the property rightsof the small business owner.

While eminent domain law in the abstract strikes an equitable balance between private rights and public needs, current interpretations and applications of the just compensation clause raise significant legal, ethical, and economic issues. These concerns began to arise as the economic landscape shifted from agrarian to urban. Prior to the mid-1900s, eminent domain was invoked primarily to acquire farm lands in connection with the development of the nation's railroads, highways, and public utilities. Typically, such actions did not disrupt small businesses. Now, however, eminant domain proceedings are associated more commonly with urban redevelopment programs and public works projects. Each year such activities result in the foreed relocation of thousands of businesses.

While the uses of eminent domain have expanded, the definition of what constitutes property for eminent domain purposes has remained virtually unchanged. For nearly a century, federal and state courts have held that the just compensation clause applies only to condemned physical property. As a result, businesses cannot recover for a variety of genuine and substantial losses. These losses include moving expenses, lost profits, inflated costs of equivalent property, and, most importantly for this article, damage to intangible assets such as goodwill.

This restrictive interpretation of property eligible for jsut compensation, coupled with the shift in the use of eminent domain, has had the unfortunate effect of imposing disproportionate losses on the small business community, particularly those businesses that lease their premises and facilities. Such treatment has been denounced as a "vicious injustice" tantamount to "the economic extermination of innocent people."

The literature addressing this issue remains largely confined to the opinions of legal scholars and jurists in law reviews and legal decisions. As a result, these commentaries have not received the attention they deserve from the small business community.In addition to making the relevant literature more accessible to a wider readership, this article will (1) review the precedent of noncompensability of business losses in eminent domain, with particular attention to the loss of business goodwill; (2) use recent eminent domain law reform in California to illustrate the progress that can be made (and the shortcomings that remain to be addressed); and (3) identify the implications for the small business community while suggesting an agenda for legislative reform.

NONCOMPENSABILITY: RATIONALE AND COUNTER-ARGUMENTS

The requirement that just compensation be paid when property is taken under eminent domain seeks to prevent government from forcing private persons to bear public burdens which, in the interests of fairness, should be shouldered by the public as a whole. The guarantee of just compensation addresses the need to redistribute economic costs from the individual to society. It is a way of socializing private losses so that individuals need not bear a disproportionate share of the costs of public improvements. …

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