When Congressional Legislation Interferes
with Existing Contracts: Legal Issues
Robert Meltz
Legislative Attorney
May 31, 2012
Congressional Research Service
7-5700
www.crs.gov
R42635
CRS Report for Congress
Pr
epared for Members and Committees of Congress
When Congressional Legislation Interferes with Existing Contracts: Legal Issues
Summary
Laws enacted by Congress on occasion interfere with contracts entered into before enactment,
prompting suits against the United States by disappointed contract parties. In a few of them,
courts have awarded billions of dollars to the United States’ contracting partners. This report
surveys the legal theories invoked in such suits. Note that litigation on the grounds covered herein
can be avoided entirely if the congressional enactment is construed to apply only to future
contracts.
Two competing interests underlie this report’s topic. On the one hand, protection of settled
expectations, at least to some degree, is essential to ordered society. Contract law has this goal for
expectations embodied in contracts. On the other hand, government needs latitude to address new
problems, so contracts generally are said to confer no immunity against future legislation. The
balance struck by the case law is that while Congress legitimately can thwart performance under
existing contracts, the United States may in some instances have to pay compensation.
The United States cannot be sued unless it waives sovereign immunity and vests jurisdiction to
hear claims against it in a court. This the United States has done with regard to the legal theories
at issue here. Once past these procedural thresholds, courts accord different treatment to
legislative interference with existing contracts depending on whether the interference is with a
“public contract,” defined as one where the United States is a party, or with a private contract,
defined as one between two non-federal parties. Broadly speaking, challenges to the former are
more likely to win.
For public contracts, breach of contract is the main theory on which challenges to congressional
interference with existing contracts are litigated. The United States is as bound by its contracts as
are individuals, so the same breach rules apply. Some special situations that have occupied the
courts in recent years have been (1) breaches of the implied covenant of good faith and fair
dealing; (2) the addition by Congress of new hurdles for the private party to a contract with the
United States; and (3) breach by congressional inaction.
In addition to sovereign immunity, which as noted has been waived, there are other “sovereign
defenses” that the United States can invoke when sued for breach. One is the sovereign acts
doctrine, which holds that the United States is not liable for its “public and general” acts as
sovereign. This defense seeks to ensure that the United States is no worse off than a private
contracting party when acts of the United States as sovereign impede contract performance.
Another sovereign defense flows from the unmistakability doctrine, which states that a federal
agency may not contract away Congress’s sovereign power to regulate unless Congress has
unmistakably empowered the agency to do so.
For private contracts, the main legal theory is the Fifth Amendment Takings Clause. Plaintiffs
argue that since contract rights generally are deemed “property” under the Takings Clause, a
congressional enactment that thwarts performance under a contract in essence takes property,
requiring compensation. The government’s defense is often the Omnia rule, a Supreme Court
holding under which government actions that only incidentally interfere with performance of
private contracts are deemed to constitute but a frustration, not a taking, of contract rights. Per
this definition, the Omnia rule does not apply when the congressional action expressly “targets”
an existing contract right, though even here the taking claim usually is rejected.
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When Congressional Legislation Interferes with Existing Contracts: Legal Issues
Contents
Introduction...................................................................................................................................... 1
The Competing Interests in Protecting Contract Rights .................................................................. 2
Waiver of Sovereign Immunity and Vesting of Jurisdiction ............................................................ 3
Federal Actions Interfering with Public Contract Rights ................................................................ 5
Breach of Contract..................................................................................................................... 5
Special Cases....................................................................................................................... 6
Breach Defenses Unique to the Sovereign.......................................................................... 7
Takings ...................................................................................................................................... 9
Reservation of Power to Amend........................................................................................ 10
Preference for Breach of Contract Claims ........................................................................ 10
Substantive Due Process and Borrowing Clause..................................................................... 11
Federal Actions Interfering with Private Contract Rights ............................................................. 12
Introduction ............................................................................................................................. 12
Takings .................................................................................................................................... 13
Omnia Rule for Incidental Interference............................................................................. 13
Omnia Limits .................................................................................................................... 14
Substantive Due Process.......................................................................................................... 16
Contacts
Author Contact Information........................................................................................................... 17
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When Congressional Legislation Interferes with Existing Contracts: Legal Issues
Introduction
Congress, when it enacts a new law, generally does not operate on an empty slate. The new law
likely affects relationships, expectations, rights, investments, and other arrangements that already
exist. In particular, the statute may interfere—either as its express purpose or incidental
byproduct—with contracts entered into prior to its enactment. Such contracts may be between the
United States and a private party (“public contracts”) or solely between private parties (“private
contracts”).
The range of factual settings in which legislative interference with existing contracts may arise is
unbounded, and the recompense sought by disappointed contract parties from the United States
can be quite large. Perhaps the most high-profile such interference arose under the 1989 “savings
and loan bailout statute.”1 In that law, Congress forbade thrift institutions from counting
“supervisory good will” toward minimum capital requirements, after such thrifts had acquired
failing thrifts on the federal contractual promise that supervisory good will could be so used. This
federal reversal resulted in numerous thrifts falling below minimum capital requirements and
being liquidated. Thus far, the United States has paid out $2.28 billion on the roughly 125 claims
filed by acquiring thrifts, out of $34.34 billion sought (two cases remain to be resolved).2
Separately but also related to the savings and loan crisis, a 1993 congressional enactment
undercut agreements premised on acquiring thrift institutions being able to take tax deductions for
certain losses, by eliminating those deductions.3
Other illustrations abound. A bill now in Congress would demand renegotiation of existing
collective bargaining agreements between the Postal Service and its employees if such
agreements contain a specified provision.4 Under the Troubled Asset Relief Program,5 the United
States required Chrysler and General Motors to terminate certain dealership contracts as a
condition of obtaining financial assistance.6 Following 9/11, Congress enacted the Aviation and
Transportation Security Act under which security screening at U.S. airports was transferred from
private to federal hands, indirectly negating security services contracts between private security
services and airlines.7 In 1988 and 1990, Congress statutorily blocked prepayment of certain
mortgage contracts on low-income housing, which prepayment had been expressly allowed in
1 More formally, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, P.L. 101-73.
2 These claims are known as “Winstar cases” after the Supreme Court decision addressing certain sovereign defenses
raised by the United States in them. United States v. Winstar Corp., 518 U.S. 839 (1996). For detailed statistics on the
status of the Winstar cases, see Jeanne E. Davidson, Director, Commercial Litigation Branch, Dep’t of Justice, Lessons
Learned from the Winstar and Spent Nuclear Fuel Cases: What Do the Available Data Suggest? (May 17, 2012)
(prepared for United States Court of Appeals for the Federal Circuit Judicial Conference).
3 Omnibus Budget Reconciliation Act §13224 (“Guarini amendment”), P.L. 103-66. See Centex Corp. v. United States,
395 F.3d 1283 (Fed. Cir. 2005).
4 H.R. 2309 (Postal Reform Act of 2011) §304.
5 12 U.S.C. §5211.
6 The two lawsuits resulting from these terminated dealer contracts are now pending: Colonial Chevrolet Co., Inc. v.
United States, No. 10-647C (Fed. Cl. filed February 27, 2012), and Alley’s of Kingsport, Inc. v. United States, No. 11-
100C (Fed. Cl. filed February 27, 2012). Plaintiffs seek a total of between $400 million and $1 billion.
7 P.L. 107-171 (codified in scattered sections of 5 U.S.C. and 49 U.S.C.). See Huntleigh USA Corp. v. United States,
525 F.3d 1370 (Fed. Cir. 2008).
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When Congressional Legislation Interferes with Existing Contracts: Legal Issues
those contracts.8 And in 2008 amendments to the Medicare statutes, Congress terminated a
number of equipment and supply contracts previously entered into by the United States.9
This report surveys the legal theories that may be invoked by aggrieved contract parties to obtain
redress in these situations—that is, when new federal statutes interfere with contracts entered into
pre-enactment. The effort is to give Congress some advance warning as to when such
interferences, in bills before Congress, may result in legal challenge. For public contracts, the
usual legal challenge is via a breach of contract claim, though claims that contract rights have
been “taken,” requiring compensation under the Fifth Amendment Takings Clause,10 are often
joined. For private contracts, the breach theory is not available since by definition the United
States is not a party to the contract. Here, takings claims predominate.
One point warrants spotlighting. Breach, takings, and similar claims have no place if the federal
statute applies only to contracts entered into after enactment. In the case of a statute whose
application becomes clear only after regulations construing it are issued, claims based on contract
interference have no place when the contract is entered into after the regulations take effect. In
either case—post-enactment or post-regulation—the decisive principle is that parties are
presumed to contract with knowledge of the law existing at the time.11 Congressional drafters can
ensure a prospective-only interpretation of a statute by explicitly so stating in bill text. Absent an
explicit statement, a prospective-only reading of a statute may be adopted, but is not guaranteed,
under the general presumption that, lacking clear indication otherwise, statutes should be read to
apply prospectively only.12
The Competing Interests in Protecting
Contract Rights
Protection of settled expectations is essential to ordered society, certainly to the conduct of
business.13 Thus, contract law protects the settled expectations of parties to contracts. At the same
time, government must have latitude to address new problems, even if that means interfering with
settled expectations in existing contracts. Thus contracts generally are said to confer no immunity
against future legislation. Stated the Supreme Court: “Contracts, however express, cannot fetter
the constitutional authority of Congress.”14 Or as the Court also noted: “[P]arties by entering into
contracts may not estop the legislature from enacting laws intended for the public good.”15
8 Emergency Low Income Housing Preservation Act, P.L. 100-242 (1988); Low-Income Housing Preservation and
Resident Homeownership Act, P.L. 101-625 (1990). Roughly a dozen suits challenging the blocking of these
prepayments by the statutes were filed. See, e.g., CCA Assocs. v. United States, 667 F.3d 1239 (Fed. Cir. 2011),
petition for cert. filed.
9 Medicare Improvements for Patients and Providers Act of 2008, 42 U.S.C. §1395w-3. See Cardiosom, L.L.C. v.
United States, 656 F.3d 1322 (Fed. Cir. 2011) (remanding for trial on the merits).
10 U.S. Const. amend V: “[N]or shall private property be taken for public use, without just compensation.”
11 See, e.g., In re Doctors Hospital of Hyde Park, Inc., 337 F.3d 951, 959 (7th Cir. 2003).
12 See, e.g., Landgraf v. USI Film Products, 511 U.S. 244, 272-273 (1994).
13 See, e.g., id. at 265 (“Elementary considerations of fairness dictate that individuals should have an opportunity to
know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted.”);
Alliance of American Insurers v. Chu, 571 N.E.2d 672, 678 (N.Y. 1991).
14 Concrete Pipe & Prods. of California, Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 642 (1993).
15 Manigault v. Springs, 199 U.S. 473, 480 (1905). For still further authority, see Norman v. Baltimore & Ohio Rd. Co.,
(continued...)
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However, the fact that Congress can legitimately thwart performance under existing contracts
does not alter the fact that disappointed parties to those contracts may be able to obtain monetary
relief under the breach and takings theories mentioned earlier.
The need for balance between protecting settled expectations and allowing the government future
legislative latitude also applies to contracts to which the government is a party. The right of the
government to enter into contracts is not only an essential attribute of sovereignty, but also a
practical necessity. The ability of the government to contract with private parties would be
hindered if it were able to ignore its contractual commitments or seek to avoid contractual
remedies simply because it is the sovereign. Thus, the Supreme Court admonishes, “[t]he United
States are as much bound by their contracts as are individuals.”16 At the same time, this report
notes certain defenses to breach of contract that the United States has, but private parties do not.
These defenses—chiefly, the sovereign acts defense and impossibility doctrine—are well known
and arguably form part of the expectations of a private party who contracts with the government.
Courts are generally reluctant to expand these defenses or otherwise allow the government to
escape its contractual obligations simply because it is the sovereign.17 Conversely, when the
government enters into a contract it is entitled to the same contractual protections as a private
party.
The protection of settled expectations in the takings arena also invokes this distinction between
the government acting in a sovereign versus proprietary capacity. When acting in a sovereign
capacity, government may be held to have taken property, requiring compensation. When entering
into contracts, however, government is often seen as acting in a proprietary capacity, in which
capacity the application of a takings theory in the event of contract breach is disfavored.18
Waiver of Sovereign Immunity and Vesting of
Jurisdiction
To sue the United States for congressional interference with a contract right (public or private),
the United States must have waived its sovereign immunity: the United States is immune from
suit except as it consents to be sued.19 This waiver/consent precondition applies to both breach of
contract claims and takings claims.20 The consent to suit has been given, in both cases, in the
form of the Tucker Act21 and Little Tucker Act.22 Actually, these acts do two interconnected
(...continued)
294 U.S. 240, 307-308 (1935) (“Contracts may create rights of property, but when contracts deal with a subject matter
that lies within the control of Congress, they have a congenital infirmity. Parties cannot remove their transactions from
the reach of dominant constitutional power by making contracts about them.”).
16 Perry v. United States, 294 U.S. 330, 351 (1935); Lynch v. United States, 292 U.S. 571, 579 (1934). Accord, Mobil
Oil Exploration & Producing Southeast, Inc. v. United States, 530 U.S. 604, 607 (2000); United States v. Winstar
Corp., 518 U.S. 839, 895 (1996) (plurality opinion).
17 See, e.g., United States v. Winstar Corp., 518 U.S. 839, 883 (1996) (declining to expand the unmistakability doctrine
in a manner that would place it “at odds with the Government’s own long-run interest as a reliable contracting partner
….”).
18 See the discussion infra under “Preference for Breach of Contract Claims.”
19 Library of Congress v. Shaw, 478 U.S. 310, 315 (1986); United States v. Mitchell, 463 U.S. 206, 211 (1983).
20 See, e.g., Perry v. United States, 294 U.S. 330, 352 (1935) (breach of contract claims).
21 28 U.S.C. §1491(a)(1).
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things: they waive the sovereign immunity of the United States against suits based on breach and
takings, and they vest jurisdiction over such claims in a particular court.23
The Tucker Act gives the U.S. Court of Federal Claims jurisdiction over “claims” against the
United States “founded either upon the Constitution, … or upon any express or implied contract
with the United States ….” The phrase “upon the Constitution” plainly includes takings claims
against the United States—important not only for jurisdictional reasons, but because the Takings
Clause of the Fifth Amendment is not construed to contain its own waiver of sovereign immunity.
The waiver comes only from the Tucker Act. As for breach of contract actions, the phrase “upon
any express or implied contract” states the Tucker Act’s coverage of such actions explicitly.
However, the phrase “implied contract” has been limited by case law to contracts implied in fact,
excluding contracts in law.24
The Little Tucker Act gives federal district courts the same jurisdiction over breach and takings
claims against the United States as the “big” Tucker Act gives to the Court of Federal Claims—
with one difference. In Little Tucker Act suits, the amount in controversy may be no more than
$10,000. Reading the two statutes together, those wishing to sue the United States over a
legislative interference with contract must, if pursuing a breach or takings theory, sue in the Court
of Federal Claims if seeking more than $10,000, but may sue in either district court or Court of
Federal Claims if seeking $10,000 or less.
Under either statute, the remedy available to the plaintiff is exclusively money. The “claims”
referred to in the Tucker Act and Little Tucker Act are universally construed to mean monetary
claims.25 Thus, in the case of public contracts, the plaintiff cannot compel the United States to
perform its end of the contract (“specific performance”) through a declaratory, injunctive, or
mandamus remedy; it can only seek money (“damages”) for breach.26 In the case of either public
or private contracts, suits under a takings theory can only ask for the constitutionally promised
“just compensation,” not injunctive relief ordering the federal agency to rescind its allegedly
contract-taking action. Also under either statute, any appeal taken, whether from the U.S. Court of
Federal Claims or a federal district court, is to the U.S. Court of Appeals for the Federal Circuit.27
Due process claims cannot be heard in the Court of Federal Claims under the Tucker Act,28 or in
federal district courts under the Little Tucker Act, but must instead go to a federal district court
under federal question jurisdiction.29 Thus, appeal is to the appropriate regional circuit rather than
the Federal Circuit.
(...continued)
22 28 U.S.C. §1346(a)(2).
23 United States v. Mitchell, 463 U.S. 206, 212 (1983).
24 See, e.g., Hatzlachh Supply Co. v. United States, 444 U.S. 460, 465 n.5 (1980).
25 See, e.g., Bowen v. Massachusetts, 487 U.S. 879, 914 (1988) (Tucker Act “has long been construed as authorizing
only actions for money judgments and not suits for equitable relief against the United States”).
26 Nor does the waiver of sovereign immunity in the Administrative Procedure Act extend to actions seeking
declaratory relief or specific performance in breach of contract actions against the United States. Sharp v. Weinberger,
798 F.2d 1521, 1523-1524 (D.C. Cir. 1986).
27 28 U.S.C. §§1295(a)(2)-(3).
28 Crocker v. United States, 125 F.3d 1475, 1476 (Fed. Cir. 1997).
29 28 U.S.C. §1331.
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Federal Actions Interfering with
Public Contract Rights
A “public contract,” as noted, is a contract to which the United States is a party. These are
contracts “where the sovereign steps off the throne and engages in purchase and sale of goods,
lands, and services, transactions such as private parties, individuals, or corporations also engage
in among themselves.”30 However, the federal government’s dual roles as sovereign and as
contracting party often give rise to contracts that differ from traditional contracts between private
parties. Types of public contracts include those that provide for (1) the purchase or sale of goods
or services;31 (2) government conferring a benefit;32 (3) implementation of a statutory program;33
and (4) the lease or sale of resources on public lands.34
Breach of Contract
The concept of breach of contract defies simple definition, though reduced to its essence it
constitutes the failure of one party to a contract to perform a promised action so as to give rise to
a right to relief (often in damages) from the other party.35 Breach of contract is the main theory on
which challenges to congressional interference with pre-existing public contracts are litigated. As
earlier noted, the United States is as bound by its contracts as are individuals, save for the special
“sovereign defenses” discussed below.36 That is, the same breach rules apply to the United States
as a contract party as to a nonfederal party.
Of course, the first step in determining if a federal enactment has effected a breach is to scrutinize
the terms of the contract. If the United States can show that a later congressional enactment was
contemplated by express or implied terms in the contract, there is obviously no breach. In Mobil
Oil and Producing Southeast, Inc. v. United States, for example, the Supreme Court could not
determine whether a federal statute was an anticipatory breach of pre-existing federal lease
contracts with oil and gas producers until it determined whether a lease provision subjected the
leases to only those laws existing when the lease was entered into, or later-enacted laws as well.37
30 Kania v. United States, 650 F.2d 264, 268 (Ct. Cl. 1981).
31 See, e.g., Freedman v. United States, 320 F.2d 359 (Ct. Cl. 1963) (involving government contract to sell surplus
Army tanks).
32 See, e.g., Bowen v. POSSE, 477 U.S. 41 (1986) (describing agreements between the states and federal government
pursuant to Social Security Act under which states could obtain Social Security coverage for their employees).
33 See, e.g., United States v. Winstar Corp., 518 U.S. 839 (1996) (involving contracts under which the United States
encouraged healthy thrifts to take over failing thrifts by promising the former they would be able to count “supervisory
good will” toward meeting federal minimum capital requirements).
34 See, e.g., Mobil Oil and Producing Southeast, Inc. v. United States, 530 U.S. 604 (2000) (involving oil and gas leases
entered into between oil companies and the United States under the Outer Continental Shelf Lands Act).
35 This report is not a treatise on contract law. For that, the reader is referred to WILLISTON ON CONTRACTS (4th ed.
1999) and the RESTATEMENT (SECOND) ON CONTRACTS (1981).
36 See note 16 supra and accompanying text.
37 Mobil Oil and Producing Southeast, 530 U.S. 604 (reading lease terms to subject leaseholder only to laws existing
when lease was signed and accordingly finding repudiation of lease by later enactment).
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Special Cases
There are several breach of public contract situations worth special mention:
Implied Covenant of Good Faith and Fair Dealing
In a set of related cases, the United States was found liable for contract breach even though the
congressional enactment did not run afoul of any express term in the affected contracts. During
the savings and loan crisis of the 1980s, financial institutions had acquired failing thrifts in part
based on a particular tax advantage: the deductibility of losses on the sale of certain assets of the
acquired institution. Indeed, government agencies had actively promoted the availability of such
deductions to encourage such acquisitions and thereby reduce the government’s reimbursement
obligation to depositors of the failed thrifts. In 1993, however, Congress enacted the “Guarini
amendment,” which abolished the loss deduction retroactive to 1991. This eliminated a major part
of the benefit to acquiring institutions under the agreements they had entered into with the United
States as receiver of the failing thrifts.
The leading decision is Centex Corp. v. United States.38 There, the Guarini amendment was held
to have breached the implied covenant of good faith and fair dealing in the federal agreements
with the acquiring institutions. This covenant imposes a duty “not to interfere with the other
party’s performance and not to act so as to destroy the reasonable expectations of the other party
regarding the fruits of the contract.”39 The court found that Congress had been “keenly aware” of
the deductibility benefit and had eliminated it retroactively to reduce what it regarded as the
excessive costs of the acquisition transactions.40 Moreover, the court noted, the Guarini
amendment had not been aimed at taxpayers generally, which would have mitigated its
unfairness. Rather, the amendment “had its sole impact on particular contracts that Congress
regarded as being unduly favorable to the acquiring institutions ….”41
Additional Requirements
The Supreme Court has held that Congress’s imposition of additional requirements on an entity
that has previously contracted with the United States may be regarded as tantamount to a breach.
In Mobil Oil Exploration & Producing Southeast, Inc. v. United States,42 two oil companies paid
the Department of the Interior $156 million in “up front bonus payments” for lease contracts
allowing them to explore for and produce oil and gas off the North Carolina coast. The companies
then submitted an exploration plan and certification of the plan’s consistency with the state’s
coastal zone management plan. These submissions met the requirements of the Outer Continental
Shelf Lands Act, which normally would have meant that under that statute, the Secretary had to
approve the plan within 30 days. But a few days prior to the submissions, Congress enacted the
Outer Banks Protection Act, which added significant new preconditions to the Secretary’s
approval of the exploration plan.
38 395 F.3d 1283 (Fed. Cir. 2005).
39 Id. at 1304. See also RESTATEMENT (SECOND) OF CONTRACTS §205 (1981).
40 395 F.3d at 1305.
41 Id. at 1306.
42 530 U.S. 604 (2000).
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The oil companies claimed that the new act constituted a repudiation of their lease contracts,43
entitling them to restitution of the $156 million in up-front payments. The Supreme Court agreed.
The delays imposed by the new act, it held, violated the lease contracts, which made the lessees
subject only to the requirements in those leases and, by incorporation, other law existing when the
leases were entered into.
Congressional Inaction
In at least one circumstance, the courts have found the United States to have breached contracts as
the result not of Congress’s action, but of its failure to act. Under the Nuclear Waste Policy Act of
1982,44 the Department of Energy has entered into contracts with nuclear power providers to
gather and dispose of their spent nuclear fuel beginning in 1998 in return for regular payments by
the power providers into a Nuclear Waste Fund.45 The providers have made the payments, but to
this day the United States has not begun the removal and disposal of the spent fuel because
Congress has yet to authorize a permanent repository for it.
This congressional inaction has spawned 78 breach of contract claims against the Department of
Energy since 1998, resulting in $2.1 billion in damage awards and settlements thus far out of $8.6
billion sought. As of April 26, 2012, 31 cases are still pending, including some on appeal to the
Federal Circuit.46
Breach Defenses Unique to the Sovereign
One defense to breach claims that may be asserted only by the sovereign was described earlier.
This defense, that the sovereign has not waived its immunity from suit, cannot be asserted by the
United States in breach cases in light of the broad waivers of sovereign immunity in the Tucker
Acts. Three other defenses unique to the sovereign are described here.
The sovereign act defense holds that the United States is not contractually liable for its “public
and general” acts as sovereign. Stated the Supreme Court in its seminal decision on the defense:
“Whatever acts the government may do … so long as they be public and general, cannot be
deemed specially to alter, modify, obstruct, or violate the particular contracts into which it enters
with private persons ….”47 The doctrine “thus balances the Government’s need for freedom to
legislate with its obligation to honor its contracts.”48 Otherwise put, the doctrine levels the
contractual playing field by ensuring that government contractors and private contractors are
43 A “repudiation” of a contract obligation is a “statement by the obligor to the obligee indicating that the obligor will
commit a breach that would of itself give the oblige a claim for damages for total breach.” RESTATEMENT (SECOND) OF
CONTRACTS §250 (1981).
44 42 U.S.C. §§10101-10270.
45 NWPA §302(a)(5), 42 U.S.C. §10222(a)(5).
46 For detailed statistics on the status of the Nuclear Waste Policy Act cases, see Jeanne E. Davidson, Director,
Commercial Litigation Branch, Dep’t of Justice, Lessons Learned from the Winstar and Spent Nuclear Fuel Cases:
What Do the Available Data Suggest? (May 17, 2012) (prepared for United States Court of Appeals for the Federal
Circuit Judicial Conference). For an overview of the legal issues, see CRS Report R40996, Contract Liability Arising
from the Nuclear Waste Policy Act (NWPA) of 1982, by Todd Garvey.
47 Horowitz v. United States, 267 U.S. 458, 461 (1925).
48 United States v. Winstar Corp., 518 U.S. 839, 896 (1996).
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affected the same way when the government, acting in its sovereign capacity through a “public
and general” enactment, affects existing contract rights.
For example, in Yankee Atomic Electric Co. v. United States,49 a nuclear utility claimed that
congressional legislation requiring it to pay money into a fund created to clean up contaminated
uranium enrichment facilities violated the government’s pre-existing contractual agreement to
supply enriched uranium to the utility at a specified price. The court rejected the breach claim,
reasoning that the legislation was not enacted to retroactively increase the earlier contract price—
that is, was not enacted for the benefit of the government as contractor. Rather, it was enacted to
address contamination at enrichment facilities, and the need to decommission them—that is, for
the benefit of the public. Hence, the government could assert a sovereign act defense.
Because of the “public and general” requirement, federal legislation found to specifically target
existing contracts does not qualify for the sovereign acts defense. One example is found in
Winstar Corp. v. United States,50 where an accounting device placed in federal contracts to
encourage thrift institutions to acquire failing thrifts was, after such acquisitions, specifically
withdrawn by Congress. The United States, said the Supreme Court, could not invoke the
sovereign acts defense. The fact that a substantial part of the impact of Congress’s action fell on
the government’s own contractual obligations, not to mention the government’s financial self-
interest in the legislation, made the defense inappropriate.51
The unmistakability defense asserts that “sovereign power governs all contracts subject to the
sovereign jurisdiction, and will remain intact unless surrendered in unmistakable terms.”52 Thus, a
federal agency “cannot contract away Congress’ sovereign power to regulate unless Congress has
clearly and unmistakably empowered the agency to do so.”53 But although the unmistakability
doctrine is easy enough to state, it is harder to apply, raising a number of questions. There is no
doubt that the sovereign acts doctrine and the unmistakability doctrine overlap in that the
application of both requires an examination of the nature and purpose of the governmental action
alleged to have breached an existing contract. But the doctrines “proceed from independent lines
of authority ….”54 Also, there is dispute as to whether, if the enactment of legislation affecting
existing public contracts does not fall within the scope of the sovereign acts doctrine, the
unmistakability doctrine still may apply. Most courts answer no,55 but there is contrary
authority.56
49 112 F.3d 1569 (Fed. Cir. 1997).
50 518 U.S. 839 (1996).
51 Id. at 899 (“a governmental act will not be public and general it has the substantial effect of releasing the government
from its contractual obligations”). See also Stockton East Water Dist. v. United States, 583 F.3d 1344, 1367 (Fed. Cir.
2009) (sovereign acts defense unavailable “where the governmental action is specifically directed at nullifying contract
rights”). Another example of a legislative act being held not sufficiently public and general is Centex Corp. v. United
States, 395 F.3d 1283, 1306 (Fed. Cir. 2005), discussed earlier in the report. There, however, the “targeted” aspect of
the legislation was used by the court to support a holding that the implied covenant of good faith and fair dealing had
been violated, not to reject a sovereign acts defense.
52 Winstar, 518 U.S. at 872.
53 Transohio Savings Bank v. Director, Office of Thrifty Supervision, 967 F.2d 598, 622 (D.C. Cir. 1992).
54 Cuyahoga Metro. Housing Auth. v. United States, 57 Fed. Cl. 751 (2003).
55 See, e.g., Allegre Villa v. United States, 60 Fed. Cl. 11, 17 (2004).
56 See, e.g., Adams v. United States, 42 Fed. Cl. 463, 484 (1998) (applying unmistakability doctrine despite finding
sovereign acts doctrine not applicable).
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An example of the majority rule—that legislation outside the sovereign acts doctrine is outside
the unmistakability doctrine—is Cuyahoga Metropolitan Housing Authority v. United States.57
The case involved whether the United States breached certain Housing Assistance Payment
contracts with the owners of low-income housing, entered into under the Housing Act of 1937,
when it enacted legislation that changed the way rent subsidies were to be determined under that
act and the existing contracts. The court found that the new law breached existing contracts
because it was not protected by the unmistakability doctrine. In passing the law, the court noted,
“Congress did not act to protect public safety, morals, or the economy through the exercise, for
example, of its police powers. Rather, in an appropriations measure, it deliberately targeted, at
HUD’s behest, that agency’s contractual obligations … in an effort to reduce outlays ….”58
Adjusting the price to be paid under existing contracts, concluded the court, “fails to invoke any
of the sovereign powers implicated by the unmistakability doctrine and thus remains
actionable.”59
Termination for convenience of the government. Breach claims based on contract termination by
the United States are precluded, on the ground that the government’s contracts are “entered into
subject to the power of Congress to enact legislation authorizing the government to … cancel
them ….”60 This is a specialized sovereign defense, applicable to contract termination by the
United States rather than, as the defenses above, contract abrogation. It generally arises in
connection with federal procurement contracts. The private contract party, following termination
by the United States, is obviously entitled to compensation for work already done; the party
simply cannot insist on continuing to perform under the contract and receiving payment therefor.
Congressional termination of contracts often comes in the form of an appropriations bill
instructing that federal funds not be spent on future purchases under a particular procurement
contract.
Being inherent in federal sovereignty, this defense is not dependent on being expressly stated in
government contracts. Nonetheless, “termination for convenience of the government” clauses
often are used in contracts under which the United States receives goods or services. Such clauses
serve to notify the unwary government contracting partner of the inherent federal termination
power, and to define the damages owed upon termination. The clauses assert the federal
government’s “broad right to terminate without cause and limit[] the contractor’s recovery to
costs incurred, profit on work done, and costs of preparing the termination settlement proposal.”61
Takings
As mentioned, plaintiffs filing breach of contract complaints against the United States often add a
takings claim under the Fifth Amendment Takings Clause. The Takings Clause is relevant because
57 57 Fed. Cl. 751 (2003).
58 Id. at 777.
59 Id. at 779.
60 De Laval Co. v. United States, 284 U.S. 61, 73 (1931). What the Court actually said was that the contracts were
entered into subject to the power of Congress to cancel them “as required by the necessities of war.” Id. This apparent
qualifier was left out in the text quote because commentators ignore it, reading the sentence more broadly. See, e.g., 4A
C. McBride, T.J. Touhey & W.A.I. Wilson, GOVERNMENT CONTRACTS: CYCLOPEDIC GUIDE TO LAW, ADMINISTRATION,
AND PROCEDURE §30.20[2] (2012).
61 John Cibinic, Jr., Ralph C. Nash, Jr., and James F. Nagle, ADMINISTRATION OF GOVERNMENT CONTRACTS 1049 (Geo.
Wash. Univ. 2006).
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contract rights generally are deemed to constitute “property” as that term is used in the Takings
Clause.62 A breach by the United States, therefore, can be argued to constitute a taking of one’s
property in a contract right.
Reservation of Power to Amend
When Congress expressly reserves the power to amend a statute and agreements entered into
thereunder, the contract rights arising under the statute will not be deemed property for takings
purposes.63 That being so, the exercise of the reserved power to amend cannot be deemed a taking
of those rights. Even when only a power to amend the statute is stated, authority to amend
agreements under the statute will be implied and thus no property rights will accrue.64 Yet again,
contract rights may be held to lack property status where reservation of a power to amend is
contained solely in regulations and the agreements, not in the statute itself.65 But although a
reservation of a right to amend may need to be found somewhere to prevent a contract right from
gaining Takings Clause protection, the reservation need not always be express but may be implied
from prior actions of the government.66
Preference for Breach of Contract Claims
While breach of contract and takings claims against the United States are often brought in the
same action, the Court of Federal Claims and Federal Circuit display a marked preference for
litigating such actions under a breach theory—often ignoring the taking claim entirely. As
seminally stated decades ago, takings theory “has limited application to the relative rights of party
litigants when those rights have been voluntarily created by contract. In such instances,
interference with such contractual rights generally gives rise to a breach claim, not a taking
claim.”67 For example, all of the roughly 125 cases filed on account of Congress’s withdrawal of
an accounting technique in the S&L bailout statute (see page one) included both breach and
takings claims, and all of them, except the two cases remaining, have been decided solely on
breach grounds.
The explanations put forward by the Court of Federal Claims and Federal Circuit for this tilt
toward breach adjudication have been several. One is that when the United States enters into a
contract, it does so in its proprietary rather than sovereign capacity. Thus, remedies must arise
62 See, e.g., United States Trust Co. v. New Jersey, 431 U.S. 1, 19 n.16 (1977) (“Contract rights are a form of property
and as such may be taken … provided that just compensation is paid.”), and Lynch v. United States, 292 U.S. 571, 579
(1934) (“Valid contracts are property, whether the obligor be a private individual, a municipality, a State, or the United
States.”). There are exceptions to the general rule of property status, however. Thus, Bowen v. POSSE, 477 U.S. 41
(1986), held that minor provisions in public contracts that simply embody the private party’s acceptance of a regulatory
program “as is” are not property.
63 See, e.g., Democratic Central Comm. v. WMATC, 38 F.3d 603, 606 (D.C. Cir. 1994) (when government “acts to
create property rights yet retains the power to alter those rights, the property right is not considered ‘private property,’
and the exercise of the retained power is not considered a taking ….”).
64 Bowen, 477 U.S. at 55.
65 See, e.g., South Carolina v. Cavazos, 897 F.2d 1272, 1275-1276 (4th Cir. 1990).
66 Democratic Central Comm., 38 F.3d at 607.
67 Sun Oil Co. v. United States, 572 F.2d 786, 818 (Ct. Cl. 1978). Accord, Hughes Communications Galaxy, Inc. v.
United States, 271 F.3d 1060, 1070 (Fed. Cir. 2001).
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from the contracts themselves.68 Nor is there a taking when the government’s action in abrogating
its contract is viewed as proprietary.69 Another explanation is that nothing has been taken where,
as is typical, the plaintiff retains the full range of breach remedies.70 And if there is no breach of
the contract right, nothing was taken. Finally, courts tend to avoid constitutional questions when
there are non-constitutional grounds for resolving a case.71
The preference in the Court of Federal Claims and Federal Circuit for resolution on breach
grounds takes two inconsistent forms. Under one view, the taking claim must be dismissed at the
outset.72 If a breach claim is made, the taking claim simply has no role to play. Under a second
view, both theories may be pleaded, but the taking claim is held in abeyance until such time as the
breach claim is resolved. The implication is that if breach is found, the taking claim is dismissed;
if not, the taking claim may be litigated.73 While the second view has been expressly rejected in
some decisions,74 a few recent decisions endorse it.75 Research reveals no decisions in which the
second view has yielded a no-breach ruling followed by a finding of a taking. Under either view,
of course, “a party can obtain only one recovery for a single harm.”76
One circumstance where a breach claim clearly should not void the taking claim is when the
taking claim is based on a property right existing independently of the contract, even if created by
it.77
Substantive Due Process and Borrowing Clause
The Fifth Amendment Due Process Clause is worded solely as a procedural guarantee78 but is
read to impose substantive constraints on federal legislation also. However, for so-called
economic legislation, substantive due process constraints generally are minimal. The Supreme
Court requires only that economic legislation not be arbitrary and capricious—that is, that there
68 Hughes Communications Galaxy, 271 F.3d at 1070.
69 An example is Janicki Logging Co. v. United States, 36 Fed. Cl. 338 (1996), aff’d, 124 F.3d 226 (Fed. Cir. 1997). In
contrast, in Scott Timber Co. v. United States, 44 Fed. Cl. 170 (1999), a plaintiff alleging breach of a timber contract by
the United States was allowed to plead a taking claim because, unlike in Janicki, the government appeared to have
“suspended plaintiff’s timber contracts by virtue of a sovereign act, for the public good.”
70 Castle v. United States, 301 F.3d 1328, 1342 (Fed. Cir. 2002).
71 See, e.g., Century Exploration New Orleans, Inc. v. United States, 103 Fed. Cl. 70 (2012).
72 See, e.g., Castle, 301 F.3d at 1342; Hughes Communications Galaxy, 271 F.3d at 1070.
73 See, e.g., Consolidated Edison Co. of New York v. United States, 67 Fed. Cl. 285, 291 (2005). Compare Henry
Housing Limited Partnership v. United States, 95 Fed. Cl. 250 (2010) (proprietary/sovereign distinction blurs where
government targets contract, so both breach and takings claims may be pleaded and considered, though doctrine of
avoiding constitutional claims suggests that breach claim should be adjudicated first, which may make it unnecessary to
reach taking claim).
74 See, e.g., PG&E v. United States, 70 Fed. Cl. 766, 780 n.14 (2006).
75 See, e.g., Stockton East Water Dist. v. United States, 583 F.3d 1344, 1368-1369 (Fed. Cir. 2009); Century
Exploration, 103 Fed. Cl. 70.
76 Stockton East, 583 F.3d at 1369.
77 Allegra Villa v. United States, 60 Fed. Cl. 11, 18 (2004). See also Integrated Logistics Support Systems Int’l v.
United States, 42 Fed. Cl. 30, 34-35 (1998) (refusing to dismiss taking claim because unclear whether contract
conferred rights at issue).
78 U.S. Const. amend. V: “No person shall … be deprived of life, liberty, or property, without due process of law ….”
Contract rights are deemed to be “property” under this clause, just as this report earlier noted the property status of
contract rights under the Takings Clause.
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be some minimum rational basis connecting the means employed by the legislation and a
legitimate government end (not necessarily the one the legislature had in mind).79 Plainly, this
review standard is highly deferential. Note, though, that the justification for the prospective
aspects of a piece of legislation may not suffice for the retroactive aspects—such as its
application to existing contracts.80
Despite the famously lax nature of the substantive due process test for economic legislation, two
Supreme Court decisions from the Depression indicate that when the United States abrogates its
own contracts in order to enhance federal revenues, even in dire economic times, a much more
searching scrutiny, and invalidation, will likely follow. In Lynch v. United States, a 1933 statute
withdrawing the consent of the United States to be sued under contracts of war risk insurance
from World War I was held to violate due process.81 And in Perry v. United States, a 1933 joint
resolution purporting to abrogate a clause in government war bonds calling for payment in “gold
coin of the present standard of value” was held invalid.82 Instead, the resolution allowed payment
in dollars of the bond’s face amount. Though bond holders alleged a due process violation, the
Court based its decision on Congress’s power “[t]o borrow Money on the credit of the United
States.”83 To say that Congress can withdraw that pledge of credit, said the Court, “is to assume
that the Constitution contemplates a vain promise ….”84
Federal Actions Interfering with
Private Contract Rights
Introduction
As noted, no breach of contract action can be filed against the United States when it interferes
with an existing private contract. A breach action by definition would assert that the United States
failed to honor a contractual duty, clearly impossible if the United States is not even a contract
party. Thus, the chief legal constraints on congressional interference with existing private
contracts flow from the Constitution—in particular, from the Takings Clause and Due Process
Clause. The one constitutional provision specifically aimed at protecting contract rights from
government action, the Impairment of Contracts Clause, applies only to the states.85
79 As discussed infra in note 85, the Fifth Amendment Due Process Clause is held not to apply principles to the United
States akin to those applied to the states under the Impairment of Contracts Clause.
80 See, e.g., Pension Benefit Guaranty Corp. v. R.A. Gray & Co., 467 U.S. 717, 730 (1984) (“It does not follow … that
what Congress can legislate prospectively it can legislate retrospectively. The retroactive aspects of legislation, as well
as the prospective aspects, must meet the test of due process, and the justifications for the latter may not suffice for the
former.”), quoting Usery v. Turner Elkhorn Mining Co., 428 U.S. 1, 16-17 (1976).
81 292 U.S. 571 (1934).
82 294 U.S. 330 (1935).
83 U.S. Const. art. I, §8, cl. 2.
84 294 U.S. at 351.
85 The non-applicability of the Impairment of Contracts Clause to the federal government stems first from the Clause’s
textual reference solely to “State”: “No State shall … pass any … Law impairing the Obligation of Contracts.” U.S.
Const. art. I, §10 (emphasis added). The adjacent constitutional section, setting out limits on congressional power,
conspicuously lacks any such bar on impairment of contracts. U.S. Const. art. I, §9. Non-applicability of the
impairment clause to the United States stems second from the Supreme Court’s holding that the Fifth Amendment Due
(continued...)
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Court decisions regarding federal interference with contracts between private parties reveal two
overarching precepts. First, Congress has greater constitutional freedom to impair private contract
rights than contractual obligations of the federal government. This is unsurprising, since with
private contracts there is no governmental self-interest to skew the government’s decision
making. That being so, it can more readily be assumed that the government is acting as a neutral
arbiter of competing societal interests whose decisions warrant deference. Second, within the
realm of private contracts, Congress has greater freedom to impair contract rights than do the
states. As the Supreme Court has said, the United States is subject to “less searching standards”
than are the states under the Impairment of Contracts Clause.86 The combination of these two
principles has meant that successful constitutional challenges to federal interference with existing
private contracts are rare.
Takings
Congressional interference with existing private contracts raises takings issues for the same
reason that such interference with existing public contracts does: contract rights generally are
deemed property under the Takings Clause.87 Still, the Supreme Court says that “Congress has
considerable leeway to fashion economic legislation, including the power to affect contractual
commitments between private parties.”88 As the following sections show, a pivotal question in the
case law is whether the interference with the contract right is merely an incidental byproduct of
the congressional legislation, or is instead its targeted purpose.
Omnia Rule for Incidental Interference
In Omnia Commercial Co. v. United States,89 the Supreme Court handed the federal government a
powerful, broadly applicable defense against takings actions based on interference with existing
contracts. The Court held that government actions that only incidentally interfere with
performance of private contracts—rather than targeting them directly—constitute but a
“frustration,” not a taking, of those contract rights.
Omnia involved a plaintiff company with a contract to buy steel plates from a manufacturer at an
under-market price. Plaintiff’s plans were thwarted when the United States requisitioned the
manufacturer’s entire production of steel plate for 1918, during World War I, and directed it not to
comply with its contract with Omnia. Omnia alleged an appropriation of its contract right to the
steel plates, but the Supreme Court saw it otherwise. The government’s requisition, it explained,
did not appropriate the company’s contract right; rather, it rendered performance under the
(...continued)
Process Clause, which expressly applies to the United States, does not incorporate “principles … coextensive with
provisions existing against state impairments of pre-existing contracts.” Pension Benefit Guaranty Corp., 467 U.S. at
733. Indeed, said the Court, “we have contrasted the limitations imposed on States by the Contract Clause with the less
searching standards imposed on economic legislation by the Due Process Clauses.” Id. Accord, Concrete Pipe & Prods.
Inc. v. Construction Laborers Pension Trust, 508 U.S. 602, 640-641 (1993); United States v. Winstar Corp., 518 U.S.
839, 875-876 (1996).
86 Pension Benefit Guaranty Corp., 467 U.S. at 733.
87 See note 62 supra and accompanying text.
88 Eastern Enterprises v. Apfel, 524 U.S. 498, 528 (1998) (plurality).
89 261 U.S. 502 (1923).
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contract impossible. “Frustration and appropriation are essentially different things,” it said.90 The
government, reasoned the Court, acquired the steel, not the contract right; one must not confuse
the contract (the promise of steel delivery) with its subject matter (the steel). The company’s
losses due to contract nonperformance are thus only a consequential loss, for which takings law
affords no remedy.
Uses of Omnia to defeat takings claims against the United States are legion. In one case,
Congress, after the 9/11 attacks, determined that airport security could better be handled by
federal personnel than by the system then in place using private security services under contract
to the airlines. So Congress enacted the Aviation and Transportation Security Act,91 which
transferred airport security responsibilities to a newly created federal agency. The effect of
Congress’s action was to eliminate the value of the security services’ contracts. The Federal
Circuit rebuffed the security services’ takings challenge, however.92 As in Omnia, it said, the
losses suffered by the disappointed contract parties were caused indirectly; the United States only
“frustrated,” in Omnia’s words, the economic expectations of the security services. Such
frustration, Omnia establishes, falls short of a taking.
In another case, a landlord asserted a taking of its lease contracts with Yugoslavia, after that
country’s offices in New York City were closed by the United States.93 No taking was found, in
part because of the Omnia rule: no taking occurs when a contract is frustrated by government
action not directed at the takings claimant. The United States’ action was seen by the court to be
directed at the lessee, Yugoslavia, not the landlord. In yet a third case, a nuclear waste transporter
claimed a taking of its contract to deliver waste to a reprocessing facility, based on a federal
moratorium on the reprocessor’s operating license application.94 Again, no taking by the United
States was found. The moratorium had as its target the reprocessor, not the plaintiff-transporter, so
the latter’s loss was viewed as only a consequential, hence noncompensable, loss.
Omnia Limits
At least three limits to the Omnia rule exist.
First, and as the statement of the rule implies, Omnia does not apply when congressional
legislation expressly “targets” an existing contract right—rather than affecting contract rights
only incidentally.95 In targeting cases, the impact on the contract is assessed for a taking instead
under the ubiquitous “Penn Central test,” a multifactor balancing framework applied to
regulatory interferences with property rights.96 The Penn Central factors are three: (1) the
economic impact of the government action on the property owner; (2) the degree of interference
with the property owner’s investment-backed expectations; and (3) the “character” of the
government action.97 The precise meaning of these ill-defined factors is only now, 34 years after
90 Id. at 513.
91 P.L. 107-171 (codified in scattered sections of 5 U.S.C. and 49 U.S.C.).
92 Huntleigh USA Corp. v. United States, 525 F.3d 1370 (Fed. Cir. 2008).
93 767 Third Avenue Assocs. v. United States, 48 F.3d 1575 (Fed. Cir. 1995).
94 NL Industries, Inc. v. United States, 839 F.2d 1578 (Fed. Cir. 1988).
95 See, e.g., Cienega Gardens, 331 F.3d at 1335 (“Omnia refers to legislation targeted at some public benefit, which
incidentally affects contract rights, not … legislation aimed at the contract rights themselves in order to nullify them.”).
96 The test was announced by the Supreme Court in Penn Central Transp. Co. v. New York City, 438 U.S. 104 (1978).
97 Id. at 124.
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their debut, beginning to become clear, with the benefit of hundreds of lower court decisions
construing them. Suffice it to say here that the Penn Central test is not an easy test to satisfy.
Thus, even when the United States is divested of its Omnia liability shield, plaintiffs asserting
takings claims based on targeted legislation usually lose under Penn Central.98
A few examples of this uphill climb for parties to private contracts make the point. In one
Supreme Court case, a federal statute required employers quitting a multi-employer pension plan
to make certain contributions to the plan, despite a pre-existing collective bargaining agreement
setting out the employers’ entire liability to the plan.99 Applying the Penn Central factors, the
Court found no taking of the rights under the collective bargaining agreement: the economic
impact on the employer was not deemed out of proportion to its experience with the pension plan;
the employer could have little expectation of congressional non-interference because pensions are
a heavily regulated field; and the character of the government action was not an invasion or
appropriation, nor did the United States take anything for its own use. In another case, a federal
statute explicitly relieved Conrail of its contract duty to state and local agencies to operate
commuter lines.100 No taking of the agencies’ contract rights, held the court. Under Penn Central,
the economic benefit of the government action is softened by benefits conferred on the agencies
by the same statute; as above, the agencies could have little expectation of congressional non-
interference because railroad labor disputes are a heavily regulated field; and the character of the
government action was non-physical, suggesting the absence of a taking.
Still, Congress should not be lulled into thinking that federal legislation can never effect a taking
of an existing private contract right. In one of the very few decisions where such a taking was
found, the court was troubled by what it saw as Congress’s going back on its word.101 Owners of
apartment buildings were federally required to maintain them for low-income tenants, at low
rents, as long as the owners held federally subsidized mortgages. The owners had a right, stated in
their mortgage agreements with the lenders, to prepay after 20 years and thereby end the low-
income and low rent restrictions. As the 20-year period drew to a close for many apartment
building owners, however, Congress perceived a continuing low-income housing shortage. It
therefore enacted statutes extending the no-prepayment period, and thus the regulatory
restrictions keeping rents low. Held, that under Penn Central, the owners’ contractual right of
prepayment after 20 years was taken. It was reasonable of the owners, said the court, to expect the
prepayment period to remain unchanged, because it was a material inducement by the
government to plaintiffs’ signing the mortgage agreements. The court also relied on United States
v. Winstar,102 a public contract case involving breach of contract rather than takings—but in
which Congress also was seen by the court to have gone back on a regulatory deal it made.
Second, Omnia does not apply where the United States takes over the contract right, rather than
merely affecting it. Taking over a contract right means putting oneself in the shoes of the
98 See, e.g., Burlington Northern Rd. v. United Transp. Union, 822 F. Supp. 797, 802 (D.D.C. 1991) (“In considering
[the Penn Central factors], it should be noted that economic legislation that affects private contracts to which the
United States is not a party has not been considered a taking.”), aff’d on other grounds, 987 F.2d 784 (D.C. Cir. 1993).
99 Concrete Pipe & Prods., Inc. v. Construction Laborers Pension Trust, 508 U.S. 602 (1993). Concrete Pipe was an as-
applied takings challenge. In a companion decision involving a facial challenge to the very same statutory requirement,
the Court years earlier had also found no taking of any contract right, on similar reasoning. Connolly v. PBGC, 475
U.S. 211 (1986).
100 Consolidated Rail Corp. v. Metro-North Commuter Railroad, 638 F. Supp. 350 (Sp. Ct. Reg. Rail Reorg. Act 1986).
101 Cienega Gardens v. United States, 331 F.3d 1319 (Fed. Cir. 2003).
102 518 U.S. 839 (1996).
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contracting party—taking over its rights and responsibilities under the contract. That was not
involved, Omnia noted, on the facts presented: “there was no acquisition [by the United States] of
the obligation …” of the steel manufacturer to deliver. If the steel company had failed to deliver
to the United States, the remedy, the Court pointed out, would have been on the statute, not on the
contract.103 Omnia’s inapplicability to direct take-over of contract rights by the United States was
underscored soon after it was decided. The following year, the Court rejected Omnia’s relevance
and found a taking when the United States “put itself in the shoes of the claimant and
appropriated to the use of the United States all the rights and advantages that an assignee of the
contract would have had.”104
A third situation not reached by Omnia is where only one party to the contract has performed,
then a government action directly blocks transfer of the bargained-for consideration. In one case,
U.S. sanctions against Libya explicitly barred Americans from working for Libyan enterprises.105
The sanctions thus required plaintiffs to terminate their previously entered into employment
contracts with a Libyan oil company. There was no taking of the employment contract, said the
court. Among other reasons it cited: the economic impact on plaintiffs was slight, since the
employment period had yet to begin. The court cautioned, however, that its conclusion would
likely have been different had plaintiffs partly or completely performed and “the sanctions
resulted in a loss of income for services previously provided but not yet paid for.”106
Substantive Due Process
As noted earlier, substantive due process constraints on economic legislation are minimal,
requiring only that such legislation not be arbitrary and capricious. This review standard is highly
deferential. Moreover, when it comes to government interference with existing contracts, the
interference has to be substantial. As summarized by the Supreme Court,
If an impairment [of contract] is found, the reviewing court next determines whether the
impairment is of constitutional dimension. If the alteration of contractual obligations is
minimal, the inquiry may end at this stage. If the impairment is substantial, a court must look
more closely at the legislation. When the contract is a private one, and when the impairing
statute is a federal one, this next inquiry is especially limited, and the judicial scrutiny quite
minimal. The party asserting a Fifth Amendment due process violation must overcome a
presumption of constitutionality and establish that the legislature has acted in an arbitrary
and irrational way.107
Substantive due process review is minimal in the private contracts context in part because the
concerns triggered by government abrogation of its own contracts are seen by the Supreme Court
not to be present.108
103 261 U.S. at 510-511.
104 Brooks-Scanlon Corp. v. United States, 265 U.S. 106, 120 (1924). Accord, Cienega Gardens v. United States, 331
F.3d 1319, 1334 (Fed. Cir. 2003) (describing Omnia rationale as “The government took steel from the steel company,
but did not succeed to the plaintiff’s rights under the contract.”).
105 Chang v. United States, 859 F.2d 893 (Fed. Cir. 1988).
106 Id. at 898.
107 National Railroad Passenger Corp. v. Atchison, Topeka and Santa Fe Ry. Co., 470 U.S. 451, 472 (1985) (emphasis
added).
108 Id.
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Probably due to the highly deferential nature of the substantive due process review standard for
economic legislation impairing existing private contracts, CRS is unable to find any successful
substantive due process challenges to such legislation.
Author Contact Information
Robert Meltz
Legislative Attorney
rmeltz@crs.loc.gov, 7-7891
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