Benefit or Blackmail?

If contracts and leases cannot protect the investments made by the public sector what tool remains? For more than two centuries, the legal principle of eminent domain has allowed governments in the United States to lawfully take privately owned property for public purposes. The concept was not new when it was included in the United States Constitution; in fact, it has existed since biblical times, when King Ahab of Samaria offered Naboth compensation for his vineyard. In 1789, France recognized a property owner’s right to compensation for appropriated property in the Declaration of the Rights of Man and of the Citizen (West, 1997). The Fifth Amendment to the U.S. Constitution provides for the taking of private property upon payment of just compensation. As Michael Alan Wolfe has noted, "From the first decades after the American Revolution there was an understanding that individuals could not stand in the way of the greater good" (as quoted in Anthony, 1998: 1). Case law clearly has established that a valid public purpose will justify taking private property; indeed there is no fundamental right to retain private property. What does exist is a right to be compensated if private property is taken by government (Anthony, 1998).

While some states employ language restricting the use of eminent domain to real property and its incidents (Bond, 1998), there is no fixed meaning of "property" in this context. Personal as well as real property can be subject to eminent domain (Eagle, 1995). Private property subject to governmental taking has been held to include fixtures, leases, options, stocks, and even the rifle that killed President John F. Kennedy (West, 1997). In essence, for purposes of eminent domain, property refers not simply to the underlying estate but to all of the uses that may be made of that estate. The only limitations on the state are the requirements that a public purpose exist and that just compensation be paid. As Pilon has noted (1995: 5):

The Takings Clause was a brilliant stroke. When they wrote it, the Framers realized that there would be times when the public would have to achieve public ends by taking property from private parties. That ‘despotic power’ of eminent domain had to be accompanied, however, by just compensation, for only if the victim was made whole would the power have any semblance of justification. To do otherwise would be to make the individual bear the full burden of the public’s appetite.

While individual property rights are strongly protected by both federal and state constitutions, beginning in the early nineteenth century, the definition of what constitutes a public purpose sufficient to justify a taking has been steadily expanded (Hegyi, 1979; Anthony, 1998). The needs of the railroads gave impetus to this movement as early as the late 1800s. There was, predictably, great public outcry over the acquisition by government of railroad rights-of-way, particularly since the railroads were privately owned, for-profit enterprises. State and federal governments regarded railroad expansion as public transport for the public’s good, and the courts agreed (Anthony, 1998; Smith v. Cleveland CC & LR, 81 NE 501, 1907). Another major expansion of the use of eminent domain occurred during the 1950s in the context of efforts to redevelop declining areas of America’s cities (Anthony, 1998). In 1954 (Berman v. Parker, 348 U.S. 26), the United States Supreme Court ruled that slums could be cleared using eminent domain. The Court also held that it was within legislative power to determine whether property might be condemned solely to beautify a community (Berman v. Parker, op. cit.; West, 1997). These cases confirmed that the central issue in determining the propriety of a taking by eminent domain is the adequacy of the public purpose at the time of the forced sale. That public purpose can be served by subsequent conveyance of the property to a private party, as in the railroad and shopping center examples, or by retention of ownership by an agency of government, as in condemnation for a highway extension. Many urban redevelopment projects involve takings with a subsequent conveyance to a private-sector redeveloper. In 1984, the U.S. Supreme Court held that courts should defer to legislative declarations of specific public purposes (Hawaii Housing Authority v. Midkiff, 467 U.S. 229, 1984).

There also is general agreement that eminent domain is not limited to tangible property. In Baltimore’s unsuccessful effort to acquire the Colts before their move to Indianapolis the U.S. District Court for Maryland held, "that it is now beyond dispute that intangible property is properly the subject of condemnation proceedings" (Indianapolis Colts v. Mayor and City Council of Baltimore, 624 F.Supp. 278, D.Md., 1985). Eminent domain has even become an instrument to protect public investment for economic development. Recently, some states have granted cities the right to use the power of eminent domain to gain "public ownership of an industrial plant or other enterprise attempting to close or move its operations (Eisinger, 1988; Hornack and Lynd, 1987; Weinberg, 1984). As a result several local governments have begun to make efforts to employ eminent domain …to gain public ownership of a variety of businesses" (Imbroscio, 1998: 238).

To review how eminent domain could be used to protect sports fans, the application of this law in one state is reviewed. In Indiana, as in virtually all jurisdictions, courts long have upheld the taking of property for a public purpose (Hegyi, 1979). The earliest cases dealing with eminent domain confirmed the right of the state to enact legislation subordinating private property rights to "the public good," by acquiring private property with or without the owner’s consent. Eminent domain was judicially declared to be "an attribute of sovereignty [that] inures in every independent state, is superior to all property rights, and extends to all property within the state" (State v. Flammer, 26 NE 2^nd 917-919, 1940).

?Like the constitutions of many states, Indiana’s constitution gives the state authority to acquire property at a fair market price to further the public interest. Article 1, Section 21 of Indiana’s constitution provides that "No man’s property shall be taken by law without just compensation; nor, except in case of the State, without such compensation first assessed and tendered." Governments in Indiana are prohibited from taking private property for public use without just compensation, but the taking itself is permitted so long as the public’s interest is being served. Indiana’s state legislature has passed laws authorizing use of eminent domain for gas storage facilities (Indiana Code, 32-11-4), flour mills (Indiana Code, 32-11-5), parks and recreation facilities (Indiana Code, 17-2-26-1), airports (Indiana Code, 19-6-1-11), and the elimination of blight" (Indiana Code, 36-7-14-12.2).

Indiana courts, sustaining the logic of the arguments in the Berman case and in concert with the opinions of courts of other states, have authorized an expansive definition of "public purpose." The courts have held that "a presumption exists in favor of the public character of a use declared by the legislature" (Sexauer v. Star Milling Company, 90 NE 474, 1910; Westport Storm Company v. Thomas, 94 NE 406, 1911).

?Use of the power of eminent domain to retain a team has been attempted in at least two instances. In 1980, Oakland (California) tried to prevent the Raiders of the NFL from moving to Los Angeles. Initially an appellate court ruled that California eminent domain laws were limited to actions involving real estate. The California Supreme Court reversed the decision concluding that the only limits on the city’s power are those imposed by the federal constitution. Since intangible property can be valued in the same way as physical property, both were held to be subject to condemnation. The case was then remanded for trial, but the City of Oakland failed to prove its claim that the condemnation was necessary for public use. Oakland’s case had focused on keeping the Raiders to promote public recreation, social welfare, and related economic benefits. The trial court ruled that retention of these benefits was not sufficient to justify interference with interstate commerce (City of Oakland v. Oakland Raiders, 123 Cal. App. 3d, 442, 1981; City of Oakland v. Oakland Raiders, 174 Cal. App. 414 1986).

It is necessary that any governmental entity seeking to use its powers of eminent domain prove that the injury to the public’s welfare outweighs any incidental burden upon interstate commerce. Oakland’s failure to demonstrate the magnitude of the intangible benefits of the team to the community and for the public’s welfare may have represented a critical error. The trial court concluded that the proposed use of eminent domain was not appropriate for three reasons. First, the City of Oakland had failed to establish the public purpose for its action. Second, the City of Oakland’s claim was illegal under federal anti-trust law. Third, Oakland’s action interfered with interstate commerce and the local interests being protected were insufficient to justify the burden on interstate commerce.

Fearing the loss of the Colts, Maryland legislators introduced a bill authorizing Baltimore to condemn professional sports teams under the state’s eminent domain procedures. However, before the bill could be enacted and eminent domain used, the Colts’ owner moved the physical assets of the team to Indianapolis. The measure was passed and Baltimore went forward with its claim of eminent domain, but a state trial court ruled that the law could apply only to businesses located in the state. Since by the time the court action was filed the team’s physical assets no longer were in Maryland, the City of Baltimore could not exercise its power of eminent domain (City Council of Baltimore v. Baltimore Football Club, Inc., 624 F. Supp. 278, 1985).

If contractual arrangements cannot secure the tangible and intangible benefits taxpayers and public officials seek when they invest funds to attract and retain a team, an appropriate eminent domain process for insuring a team’s presence must be developed. What steps need to be followed?

First, the enabling legislation that is passed must identify the public purpose that is served by the presence of a professional sports team. In the absence of an adequately articulated and defined public purpose a taking cannot be justified. Furthermore, some challenges to eminent domain laws have raised the issue of interference with interstate commerce; the public purpose served by a team’s presence must be sufficient to outweigh any incidental burden on interstate commerce (Pike v. Bruce Church, 397,U.S.137; NCAA v. Miller 10 F3d 633, 1993). The legislation developed must clearly specify the tangible and intangible benefits anticipated from the team’s presence and the investment of public funds in a sports facility or for an incentive package that attracts or retains a franchise.

In terms of the tangible benefits from teams and the facilities they use, very little economic activity is added to a region or city’s economy (Baade, 1996; Rosentraub, 1997). However, teams can and do redirect recreational spending and the movement of recreational spending between cities or to inner city areas can meet important public policy goals. As a result, a team’s presence can have a major impact on the public’s welfare relative to the goals established by the legislature or a city council. With regard to intangible benefits, surveys clearly illustrate how much teams mean to community residents (Swindell and Rosentraub, 1998), and many writers and scholars have discussed the importance of sports for all societies across more than 4,000 years of human history (Michener, 1976; Wilson, 1994; Rosentraub, 1997). As such, insuring that a team remains in a community can be considered fulfilling an important public purpose.

Second, an eminent domain law developed for the purpose of insuring that a team remains in an area must be capable of application to intangible or personal property. Existing eminent domain laws in some states may limit seizures to real property. As a result, a change in a state’s laws may be required.

Third, states may need to pass an enabling law making it possible to condemn a team. In Indiana, for example, extension of eminent domain laws to specific activities has required specific statutory language. In most states specific authority is necessary to empower a municipality to take a sports franchise.

Fourth, to avoid the problem that Baltimore encountered when it attempted to secure the Colts, the legislation permitting condemnation of a team should be enacted at the same time that a public subsidy is approved. In addition, the legislation should require that any team seeking to leave the state or city must provide six-months notice of its intent to leave. Such a provision would allow a state or city sufficient time to explore its options should it choose to use its power of eminent domain. Baltimore’s effort to secure the Colts was thwarted by the failure of the Maryland to have an appropriate law in-place before the team could move its assets out of the state. If an owner must provide six months notice of his or her intent to move a franchise and the law to condemn a sports team exists, then a community will have the time required to evaluate all of its options.

The fifth matter that must be considered is a way to evaluate and determine what is the fair or just compensation that should be offered for a professional sports team? Frequently the value of a team is greater in a larger market or in a community that will provide the largest subsidy. If eminent domain is used to insure that a team remains in a state, the value of the team should be established by its value in the other markets that want the franchise. In this manner the state or city that condemns a teams can insure that the financial interests of a team owner are completely protected while the interests of the public sector are served.

Eminent domain is not the only tool available to protect taxpayers and sports fans. Cities and states could be permitted to purchase teams if owners wanted to leave an area. At the current time, however, the four major sports leagues do not permit a city or state to own a team. That can be changed. A community could be given the right to establish a franchise if it had an investor who met a league’s requirements. Implementing either of these provisions would create a "level the playing field" between teams and cities in their negotiations. However, at the current time, no league has expressed any interest in accepting either of these limitations on their power, and the U.S. Congress has been similarly reluctant to require any changes in league operations.

If these changes are not made, then state and local governments have no option but to rely upon their power of eminent domain to protect taxpayers’ investments in the facilities that produce substantial profits for teams and income for players. With increasing and alarming regularity, state and local governments have been asked to improve the revenue potential of virtually every team. If a community refuses to provide a sufficient level of subsidies for a new facility, teams invariably move to other locations. Furthermore, the U.S. Congress has refused to require the four professional sports leagues to protect taxpayers’ investments despite providing the leagues with important protections from market forces.

The playing field for the negotiations between teams and communities can be leveled only if the community has the right to claim the team for taxpayers and sports fans under its powers of eminent domain. If team owners and the four professional sports leagues understood that the failure to bargain in good faith relative to income potential and market size could lead to the forced sale of the team (for just compensation), negotiations would proceed in a far more even-handed manner.

Having the right to use eminent domain and using it should be options open to any community. To be sure, there will be instances in which a community will not be interested in keeping a team. Market conditions in professional sports, including the low levels of revenue sharing, might convince a particular community to let a team leave. In addition, if there was no potential for finding a private owner for a team after acquiring a team through eminent domain, a community also might decide to let a team leave. However, given the very real and substantial nature of the intangible benefits created by teams, and the escalating costs borne by taxpayers for those teams, these are decisions that each community should be empowered to make.

When taxpayers are asked to subsidize a privately owned enterprise, government officials must consider the costs to be incurred and the benefits to be reaped. A decision to proceed, and to invest public dollars, is made in reliance upon the representations made and expectations created by the private entity. Government officials making a decision to spend tax dollars on sports venues have a fiduciary obligation to protect that investment, just as the franchise owners have an obligation to fulfill the obligations they assume in return for public money. The relationship between the public sector and the franchise owners is essentially contractual; in a contract, both parties are entitled to receive the benefits of their bargain.

For the public sector, most of the benefits received from a team are intangible. As a result, the payment of dollars is inadequate to make the public sector whole in the event a team leaves. For owners, the benefits are primarily financial, although many owners may derive intangible benefits as well. Owners of sports teams can be "made whole" by the payment of money, in the same manner as the owner of the family farm can be made whole. Certainly, the price to be paid should be calculated to insure that the owner receives fair value for the property in return for being divested of it. The intent is not to deprive a business person of the benefits of ownership, but to insure that the public sector gets what it has paid for.

Anthony, Ted, 1998, "Eminent Domain Under the Republic: Individuals Not Allowed to Stand in the Way of Progress" Los Angeles Times, February 1, p. 1

Austrian, Ziona and Mark S. Rosentraub, 1997, "Cleveland’s Gateway To The Future," in Roger G. Noll and Andrew Zimbalist’s Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, Washington, D. C.: The Brookings Institution, pp. 355-384.

Baade, Robert, 1996, "Professional Sports As Catalysts for Metropolitan Economic Development," Journal of Urban Affairs, 18: 1, pp. 1-18.

Bond, Joshua, 1998. "Eminent Domain in Georgia."

Butler, Henry N., 1993 "Regulatory Takings After Lucas," Regulation, the Review

?Of Business and Government

Eagle, Steven J., 1995, Review of William A Fischel’s Regulatory Takings: Law, Economics and Politics, Cambridge: Harvard University Press.

Eisenger, Peter, 1988, The Rise of the Entrepreneurial State, Madison: University of Wisconsin Press.

Hegyi, Louis J, 1979, "Eminent Domain in Indiana: 1816-1865," 54 Indiana Law Journal, p. 427.

Hornack, J. S. and Lynd S., 1987, The Steel Valley Authority, Review of Law and Social Change, 15, pp. 113-125.

Imbroscio, David L., 1998, "Reformulating Urban Regime Theory: The Division of Labor Between State and Market Reconsidered," Journal of Urban Affairs, 20: 3, pp. 233-248.

Indiana Code Provisions Authorizing Eminent Domain:

a)?I.C.32-11-4, (Gas storage).

b)?I.C.32-11-5, (Flour mills).

c)?I.C.17-2-26-1, (Parks, Recreation).

d)?I.C.19-6-1-11, (Airports).

e)?I.C.36-7-14-12.2, (Elimination of Blight).

Indiana Code procedure on eminent domain, I.C.32-11-1-1, et.seq.

Indiana Code, Professional Sports Development Areas, 36-7-31.3-1. et. seq.

Indiana Constitution, Article 1, Section 21.

Lipsyte, Robert, 1995, "Why Sports Doesn’t Matter Any More," New York Times Magazine, April 2, pp. 51-57.

Minnesota Twins Partnership v. State of Minnesota, 1998, C9-98-890, Respondent’s Brief and Appendix, Supreme Court State of Minnesota.

Mitchener, James, 1976, Sport In America, New York: Random House.

Morgan, Jon, 1997, Glory for Sale: Fans, Dollars, and the New NFL, Baltimore: Bancroft Press.

Mullen, Liz, 1998, "NFL’s Next New Team May Pay Lower Entry Fee," Street and Smith’s Sports Business Journal, 1: 20, September 7-13, p. 7.

Noll, Roger and Andrew Zimbalist, editors, 1997, Sports, Jobs, and Taxes: The Economic Impact of Sports Teams and Stadiums, Washington, D. C: Brookings Institution.

Pilon, Roger, 1995. Testimony before the Subcommittee on Constitution,

Committee on Judiciary, United States House of Representatives

Piraino, Jr., Thomas A., "The Antitrust Rationale for the Expansion of Professional Sports Leagues, Ohio State Law Journal, 57: 5, pp. 1677-1729, 1996.

Rosentraub, Mark S., 1997, Major League Losers: The Real Costs of Sports and Who’s Paying for It, New York: Basic Books.

Rosentraub, Mark S., 1998, "Why Baseball Needs New York To Just Say No," The Nation, 267: 5, August 10/17, pp. 20-26.

Swindell, David and Mark S. Rosentraub, 1998, "Who Benefits from the Presence of Professional Sports Teams? The Implications for Public Funding of Stadiums and Arenas," Public Administration Review, 58: 1, pp. 11-20.

Tucker, William Michael, "The Original Understanding of the Takings Clause, " 95 Columbia Law Review 782 (1995)

Weinberg, R., 1984, "The Use of Eminent Domain To Prevent An Industrial Plant Shutdown", Albany Law Review, 49, pp. 95-130.

West’s Legal Directory, 1997. Eminent Domain.

Wilson, John, 1994, Playing By The Rules: Sport, Society, and the State, Detroit: Wayne State University Press.

Zimbalist, Andrew, 1998, "A Scary Thought: Jones May Be Right About Browns," Street and Smith’s Sports Business Journal, 1: 20, September 7-13, p. 7.