Government-Mandated Closures: Who is Liable If Businesses Fail?

Introduction

As U.S. companies struggle with government-mandated closures—including re-openings followed by rollbacks in states like Texas, Florida, and California—a growing number of businesses, especially in the hospitality and entertainment sectors, are closing their doors for good. In this grim scenario, business owners may be wondering if litigation is possible when government-enforced suspensions cause their businesses to fail.

This article will consider, on a high level, the implications of such a lawsuit. It is intended solely as an introduction to the subject as the constitutional implications are both novel and complicated.

Generally speaking, there is no question that federal, state, and municipal governments have the power to regulate business. The so-called police power is exercised in a multitude of forms and is essential in maintaining the societal order that allows businesses to operate in the first place. Thus, the issue is not so much whether or not the government can restrict businesses—they can—but whether there are limits to such restrictions—there are.

At the state level, police power—and its ability to be used to promote the public good—was first recognized by the Supreme Court in 1824, when Chief Justice Marshall described it as an “immense mass of legislation, which embraces every thing within the territory of a State, not surrendered to the general government.”[1] (Interestingly, this statement spoke directly to the individual state’s, rather than the federal government’s, ability to use this power to combat diseases which may affect the public.[2])

However, the question thrown into the spotlight by the current crisis is not just whether states have the power to shutter businesses in order to slow the spread of disease, but rather whether it is constitutional for the state to take actions that directly cause these businesses to fail. And while scholars are in agreement on the first point, they do not address the constitutionality of the second.[3]

The Fifth and Fourteenth Amendment’s regulatory takings jurisprudence provides the tools needed to analyze the implications of state orders shutting businesses down. Both the Fifth and Fourteenth Amendments contain due process protections that prevent the federal and state governments from taking private property for public use without “just compensation.” So, the legal question facing many businesses is: does a state order requiring a business to shut down constitute a taking under the Fifth and Fourteenth Amendments? Notably, at least one class action lawsuit is asking a Pennsylvania Federal Court to answer this question.[4]

The Texas Supreme Court notes that whether a governmental restriction is a regulatory taking “depends largely upon the...