In a case with potentially widespread significance, a sharply divided California Supreme Court has upheld the Santa Monica rent control law against an inverse condemnation claim. In concluding that rent control cases are subject to a different level of judicial scrutiny than cases involving exactions and other economic aspects of land-use regulation, the Supreme Court has created the possibility that different types of inverse condemnation cases will be treated differently in court. Especially given the court's divided ruling, property rights advocates can be expected to lobby aggressively for the U.S. Supreme Court to take the case. The plaintiff in the case, a property firm known as Santa Monica Beach Ltd., is represented by James S. Burling and R.S. Radford of the Pacific Legal Foundation in Sacramento. In a 4-3 vote, a majority of the court overturned an appellate court ruling and concluded that the lesser "rational basis" test is appropriate in rent control cases. In an opinion by Justice Stanley Mosk, the lone surviving Democratic appointee on the court, the majority concluded that rent control laws should be considered under a different standard from land-use cases such as those dealing with exactions. The plaintiff, Mosk wrote, "seeks to engage courts in the task of evaluating whether a piece of complex legislation has sufficiently measured up to its objectives to preserve its constitutional validity. Nothing in the United States Supreme Court's recent jurisprudence indicates that it envisions such an activist role for the courts." Five different justices wrote opinions in the case - including three who filed lengthy separate dissents - suggesting an unusually divisive split within the court on the issue of how "takings" law fits together with rent control. The dissenters all argued that the U.S. Supreme Court's recent Nollan-Dolan line of cases requires the court to apply the stricter scrutiny test to rent control cases. "Rent control is not simply a species of price control subject to a due process-type analysis like that undertaken by the majority," wrote Justice Marvin Baxter in perhaps the most blunt-spoken dissent. "....The Santa Monica ordinance takes from the property owner the right to chart market rent for the owner's property and by so doing compels the owner to subsidize the tenant." Santa Monica Beach owns a 12-unit apartment building in Santa Monica. In 1992, the company petitioned the city Rent Control Board for a rent increase, arguing that it was no longer earning a fair return because of rent restrictions. A hearing examiner found the company should be awarded a permanent rent increase of $3 per month and a temporary rent increase of $58 per month per unit. The company appealed to the Rent Control Board, claiming that the hearing officer improperly applied the law and therefore improperly denied the company with three-quarters of its requested rent increase. In filing suit against the Rent Control Board, Santa Monica Beach claimed that its property had been "taken" by regulation and, under the Fifth Amendment of the U.S. Constitution, the company was entitled to just compensation. The crux of Santa Monica Beach's argument was that the rent control ordinance, which was one of the most restrictive in the nation when it was adopted in 1979, had not achieved its stated objectives. The rent control ordinance states that it is meant to "alleviate the hardship" on tenants caused by a lack of affordable housing in the city. It specifically identifies "the poor, minorities, students, young families, and senior citizens" as groups at risk. However, the Pacific Legal Foundation presented considerable evidence in court that gentrification has occurred in Santa Monica at a significant pace even with rent control in place. For example, the Foundation found that the percentage of low-income households and female households with children both declined during the 1980s, while the percentage of very high income households increased. Santa Monica Beach's lawyers argued that the court should apply the "substantially advance" standard of review as it was developed in the U.S. Supreme Court's two recent rulings on exactions, Nollan v. Coastal Commission, 483 U.S. 825 (1987) and Dolan v. City of Tigard, 512 U.S. 374 (1992). In those cases, the Supreme Court reiterated that the abridgment of property rights through the police power must involve a "substantial advancement" of a legitimate state purpose. But in his majority opinion Justice Mosk concluded that both the U.S. Supreme Court and the previous rulings of the California Supreme Court permit judges to apply the "substantially advance" standard differently "depending on the type of government action under consideration". Mosk quoted language from both Nollan and Dolan suggesting that the U.S. Supreme Court was focused specifically on applying the "substantially advance" standard to exaction situations. Furthermore, he quoted the California Supreme Court's own ruling in Ehrlich v. City of Culver City, 12 Cal.4th 854 (1996), in which the court upheld the use of the Nollan-Dolan standard in the case of an individual land-use permit. In that case, the court concluded that a lesser level of judicial scrutiny should be applied when exactions are imposed as the result of a legislative act (such as a General Plan revision) as opposed to a quasi-judicial act (such as a tract map approval). In a legislative situation, the court ruled in Ehrlich, "the heightened risk of the 'extortionate' use of the police power to exact unconstitutional conditions is not present." Mosk went on to argue that rent control can also be considered "a species of price control rather than a land use regulation." Quoting the California Supreme Court's recent decision in Kavanu v. Santa Monica Rent Control Board, 16 Cal.4th 761 (1997), Mosk noted that the standard of judicial scrutiny used in that case was "reasonable relationship to a proper legislative purpose". Concluding that the court did not have to determine whether the "rational relationship" test is appropriate for rent control legislation, the court concluded that the standard "must be at least as deferential as for generally applicable zoning laws and other legislative land use controls" - meaning the Nollan-Dolan standard shouldn't apply. He argued that the U.S. Supreme Court's ruling in Pennell v. City of San Jose, 485 U.S. 1 (1985), and Yee v. City of Escondidio, 503 U.S. 519 (1992) - both issued after Dolan - support his position. Having resolved the standard of review issue, Mosk went on to conclude that the Santa Monica Beach didn't "adquately state a claim for inverse condemnation" because the company focused incorrectly on only one aspect of the legislative intent of the rent control ordinance - its impact on poor, elderly, and young families. He also argued that, even if imperfect, the Santa Monica rent control ordinance may be assisting some poor, elderly, and young families. "In sum," Mosk wrote, "with rent control, as with most other such social and economic legislation, we leave to legislative bodies rather than the courts to evaluate whether legislation has fallen so far short of its goals as to warrant repeal or amendment." Mosk's opinion was signed by a bare majority of four justices, including Chief Justice Ronald George, Justice Kathryn Werdegar, and Justice Joyce Kennard. Kennard also filed a concurring opinion in which she specifically addressed the question of whether "means-end" testing "is an appropriate measure of whether a regulatory taking has occurred" - an issue Mosk's ruling did not address. She traced the history of "means-end" testing for land-use regulation back to Nectow v. Cambridge, 277 U.S. 183 (1928). In Nectow, a followup case to the famous Euclid v. Ambler case (which upheld the constitutionality of zoning), the Supreme Court ruled that land-use regulation "effects a taking if the ordinance does not substantially advance legitimate state interests". Kennard's opinion was essentially a plea for the U.S. Supreme Court to tackle the issue head-on. "Outside the Nollan/Dolan context, should a means-end test be used to determine whether a taking has occurred, or instead should means-end testing remain within due process jurisprudence" she asked. Justices Marvin Baxter, Ming Chin, and Janice Brown all filed separate dissenting opinions. Baxter's dissent was longer than Mosk's majority opinion. In it, he took issue with Mosk's assertion that only the legislative branch, not the courts, can take action if a law does not achieve its intended purpose. Mosk's error, Baxter wrote, "results in part from the mistaken notion that the separation of powers doctrine somehow precludes the plaintiff from introducing evidence in support of its taking clause claim that the stated purposes of the Santa Monica rent control ordinance has not been substantially advanced over time. Among other things, Baxter argued that Mosk had applied judicial standards of review from due process cases (dealing with both price controls and zoning legislation) and applied them in the takings context. While acknowledging that zoning laws have often been subjected to a "deferential, rational basis, level of judicial scrutiny," he argued that this scrutiny applied only in the case of due process challenges. "There is no comparable level of judicial scrutiny when it is claimed that a zoning law takes property for which compensation must be paid however. This is so because determining whether a zoning law brings about a compensable taking can be determined only after a variety of evidentiary factors." Baxter also took issue with Mosk's conclusion that, under settled law, rent control does not create a taking because it is a form of price control. "Rent control differs from and cannot be equated to other forms of price control because it encroaches on property rights in ways that price control does not," he wrote. "The Santa Monica rent control ordinance takes from the property owners the right to charge market rent for the owner's property and by so doing compels the owner to subsidize the tenant. Price control creates no comparable direct transfer of a property interest to a third person." In addition, he noted that the Santa Monica ordinance - unlike price controls - restricts the ability of the landowner to go out of the rental housing business (a section of the ordinance that was heavily litigated in the 1980s). Given this reasoning, Baxter argued that Santa Monica Beach should have been permitted to introduce evidence suggesting that the rent control ordinance has not achieved its stated purpose. He also came to the conclusion in his dissent that the ordinance does in fact create a compensable taking. "The character of the governmental action - controlling rent in order to forestall excessive and exorbitant rent increases - may have a proper governmental purpose insofar as it assists persons unable to afford safe and decent housing, but to achieve that purpose the law requires private property owners to subsidize their tenants. This is a burden that in fairness and justice should be borne by the community as a whole," he wrote." In his dissent, Justice Ming Chin also took Mosk to task for confusing due process and takings law, "thus undoing much of our effort in Kavanu". Noting that demographic changes in Santa Monica may have been caused by factors other than rent control, he said: "I share some of the majority's skepticism about plaintiff's assertions". But, he said, Santa Monica Beach should be permitted to make its case in a trial without being required "to prove what is tantamount to a due process violation when it has brought a takings case." In her dissent, Justice Brown said that Mosk's ruling inappropriately implies that "property merits only an inferior level of protection." Her opinion leveled broad criticism toward rent control as a regulatory system that would not survive the heightened level of judicial scrutiny contained in the Nollan/Dolan cases. Brown argued that a regulatory takings claim such as a challenge to rent control involves "both prongs of the Fifth Amendment" - the substantial advancement of a legitimate state purpose and the requirement that the burdens of the general purpose are not imposed arbitrarily or in a discriminatory fashion. If ordinances such as Santa Monica's system of rent control "are capable of withstanding a Nollan-inspired takings clause analysis, the high court ought to tell us so, preferably sooner rather than later," she concluded. The Case: Santa Monica Beach Ltd. V. Superior Court, No. S052824, 99 C.D.O.S. 95, 99 Daily Journal D.A.R. 131 (filed January 4, 1999). The Lawyers: For Santa Monica Beach: James S. Burling, R.S. Radford, Pacific Legal Foundation, (916) 641-8888. For Santa Monica Rent Control Board: Anthony A. Trendacosta, (310) 312-5536.