Machines Fight Back: Federal Lawsuit Challenges Hill County Data Center Moratorium, Seeks US$100 Million in Takings-Based Claim.

As anti-data center sentiment grows nationwide, the legal strategies to protect project investments are taking shape. We wrote here about a construction moratorium on new data centers enacted in Hill County, Texas, observing that Texas was emblematic of a nationwide public backlash against data center development. The Hill County moratorium is now the subject of a federal lawsuit filed in the US District Court for the Western District of Texas. With the rise of direct regulatory action aimed at halting data center development, project stakeholders should stay apprised of the legal strategies for recovering and protecting project investments.

The Hill County Moratorium Is Part of a Larger Trend 

In early May, by a 3–2 margin, Hill County officials enacted a one year moratorium on new data center construction in unincorporated areas. The measure followed significant public opposition to the rapid influx of proposed data center projects. Residents expressed concern about the potential impacts on water use, electricity demand, infrastructure, and quality of life. The Hill County moratorium is part of a broader pattern of organized and official resistance to data center development. In our prior coverage, we identified several ways that public opposition is manifesting itself, in Texas and nationally, as a major risk factor for data center development. 

The Industry Pushes Back

The Hill County moratorium is predictably facing legal challenges. The first significant challenge comes in the form of a federal lawsuit by a company that claims its once valuable purchase rights to acquire 800 acres in Hill County have been rendered valueless by the moratorium. The plaintiff is challenging the county’s authority to enact the measure and seeking compensation for an alleged taking in violation of the US Constitution, among other claims. 

The suit is captioned RCM Hill LLC v. Hill County.¹  The complaint asserts a multipronged constitutional and state-law challenge to the moratorium, combining (i) federal and state declaratory judgment claims that the moratorium is ultra vires and void, including parallel claims for prospective injunctive relief against the county and its officials; (ii) federal regulatory takings and inverse condemnation claims under the Fifth Amendment and Fourteenth Amendment (via 42 U.S,c § 1983), alleging that the moratorium effects both a per se taking and, alternatively, a Penn Central taking by eliminating economically viable use and destroying investment-backed expectations; (iii) a § 1983 due process claim (procedural and substantive) premised on arbitrary, unauthorized government action that allegedly alters property and entitlement rights without lawful authority or adequate process; and (iv) parallel Texas constitutional claims including inverse condemnation under Article I, § 17, denial of due course of law and arbitrary and capricious government conduct under Article I, § 19, and impairment of contracts/retroactivity under Article I, § 16, all tied to the alleged retroactive imposition of a new approval regime that frustrates pre-existing contractual and development rights.

The takings claims may garner the most attention for their potential national application as a compensation mechanism for categorical data center prohibitions. However, in Texas specifically, whether a Texas county has the authority to impose such sweeping regulations will be the principal and perhaps the strongest line of attack by developers against county-level regulation. The complaint against Hill County alleges that Texas counties are creatures of statute with no inherent police power, and therefore, they may act only when authority is expressly granted or necessarily implied by statute or the state constitution—and no such authority exists for a data center (or any) development moratorium. The outcome of this argument will have broad implications within the state of Texas.

Practical Takeaways

Project participants, including developers, purchasers, investors, equipment suppliers, and contractors, need to anticipate prolonged risks from community opposition. Project participants should understand the prospects for recouping investments through litigation in jurisdictions where the risk of regulatory restrictions is high. Including contractual provisions that clearly indicate which party owns and controls claims for government compensation should also be considered. Force majeure and material adverse change clauses should be tailored to reflect the regulatory risk environment. 

Spotlight on Foreign Equity Investors 

Data center regulation increasingly sits at the intersection of land use law and national security because both federal and state regimes now treat data centers—and the land they occupy—as critical infrastructure tied to sensitive data, energy grids, and strategic assets. Laws like Texas SB 17 illustrate this shift by regulating not just how land is used but who is allowed to own or finance it, aligning with federal frameworks like the Committee on Foreign Investment in the United States, which scrutinize foreign investment in infrastructure for national security risks—meaning modern data center restrictions are as much about capital origin and geopolitical risk as traditional zoning or environmental concerns. As data center opposition evolves, expect more focus on the extent to which foreign participants could face restrictions in the space. 

Foreign stakeholders should also take care to investigate whether their investments qualify for investment treaty protections. Where applicable, investment treaties may offer stronger protection than domestic law for compensation for government interference in data center projects. Companies that operate in jurisdictions that have investment treaties with the United States should examine their deal structures to maximize treaty protections. Critically, once the dispute arises, it will be difficult to restructure an investment for the purpose of obtaining treaty protections. The key period for structuring investments for treaty protections is ideally prior to the investment being made but, in any case, before a dispute becomes reasonably foreseeable. 

The firm is positioned to assist clients in navigating the evolving risk profile for data center development. In addition to its capabilities across the public policy, regulatory, environmental, and transactional sectors, our US and international dispute resolution attorneys are adept at evaluating, structuring, and executing dispute strategies aimed at preserving project value and mitigating risk.