Franchise Tax Board of California v. Hyatt: Questions of Reciprocal Sovereign Immunity – and the Continued Force of Nevada v. Hall, by Jeffrey W. Stempel (Part I)

By Jeffrey Stempel
Hamilton and Griffin on Rights
Dec 28, 2015

The Hyatt Case

On December 7, the Supreme Court heard oral argument in Franchise Tax Board of California v. Hyatt, another episode in the continuing saga of inventor Gilbert Hyatt’s battle with California tax authorities. This is the second time the Court will hear the case, which has roots in Hyatt’s move to Nevada during 1991 (his version) or 1992 (California’s version) and deeper roots in Hyatt’s computer inventions twenty years earlier. SeeFranchise Tax Board v. Hyatt, 538 U.S. 488 (2003)(“Hyatt I”).

The controversy stems from Hyatt’s successful patent from which he has received millions in royalty payments. Hyatt, who had lived in California, maintains that he relocated to Nevada in November 1991 prior to receipt of the royalty payments. The California Tax Board takes the position that Hyatt was not a Nevada resident until April 1992, by which time he had received sufficient royalty payments to owe $4.5 million in California state income taxes for the 1991 tax year and $6 million in 1992 taxes. Hyatt has challenged the Board’s decision through the California administrative process and courts. Twenty years later, a final decision on his tax liability remains pending.

Apart from the tax issues, Hyatt in 1998 commenced separate tort litigation in Nevada state court, essentially alleging that the Tax Board was harassing him in a manner constituting fraud, invasion of privacy, and intentional infliction of emotional distress. The Board was precluded from removing the case to federal court because of the Eleventh Amendment. Confined to state court, the Board argued unsuccessfully before the Nevada trial court and Nevada Supreme Court that the Board should receive the benefit of California’s statutory immunity in Nevada just as it would in California. SeeFranchise Tax Board v. Hyatt, 2002 Nev. LEXIS 57 (Nev. April 4, 2002).

In Hyatt I, the Court upheld the Nevada Supreme Court’s refusal to apply California’s statute immunizing the tax collection authority from suit. The Hyatt I Court unanimously found no violation of the Article IV, §1 requirement that “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State” in this matter where the forum state court (Nevada) found that such an application would violate the forum state’s own

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legitimate public policy of providing its citizens a right to seek recompense for the allegedly tortious acts of a foreign state. SeeFranchise Tax Board v. Eighth Judicial Dist. Ct, 2002 Nev. LEXIS 57 (April 4, 2002)(denying Tax Board’s mandamus petition seeking immunity).

A Huge Award Dramatically Reduced by the Nevada Supreme Court – But Immunity Denied to California

The case proceeded to trial on remand, with a 2008 jury verdict in favor of Hyatt, awarding damages of $85 million for emotional distress, $52 million for invasion of privacy, $1.1 million for fraud, and $250 million in punitive damages. Hyatt was also awarded $2.5 million in costs, bringing the total trial court judgment to roughly $390 million.

Unsurprisingly, the Tax Board appealed to the Nevada Supreme Court – with some success. Although the Court upheld the fraud award, it overturned the invasion of privacy claim as a matter of law and remanded the emotional distress claim due to evidentiary and jury instruction errors below. The Court – as a matter of comity rather than constitutional requirement – also struck down the punitive damages award. Because of these changes, the cost award also accordingly was subject to remand. The Court also rejected Hyatt’s cross-appeal, contending that the trial court had incorrectly prevented him from seeking economic damages as part of his emotional distress claim. SeeFranchise Tax Board v. Hyatt, 335 P.3d 125 (Nev. 2014).

A $390 million judgment was thus realistically reduced by more than three-fourths in that a second trial on the emotional distress claim is unlikely to result in a verdict exceeding the initial verdict of $85 million in light of the Nevada Supreme Court’s directions for retrial. But a potential judgment of between $1 million and $85 million is still a lot of money, even for the largest state in the union. More important from a doctrinal and constitutional perspective, the Tax Board had argued that that even if it could be held liable for hassling Hyatt by the courts of another state, its liability should be capped at $50,000, the maximum amount that could be imposed upon a Nevada government agency at the time in question. See Nev. Rev. Stat. §41.035(1)(statutory maximum of $50,000 prior to 2007; $100,000 currently).

The Supreme Court Grants Review

The Nevada Supreme Court took the view that it was not required by the Full Faith and Credit Clause or principles of comity to give the Tax Board the benefit of Nevada’s own statutory cap because this would conflict with Nevada’s “state policy interest in providing adequate redress to Nevada citizens.” See 335 P.3d at 153. The Tax Board sought certiorari, which was granted as to the following questions:

Whether Nevada may refuse to extend to sister States haled into Nevada courts the same immunities Nevada enjoys in those courts.

Whether Nevada v. Hall, 440 U.S. 410 (1979), which permits a sovereign State to be haled into the courts of another State without its consent, should be overruled.

Nevada v. Hall Under Attack

Ironically (as noted by Justice Ginsburg during oral argument), Nevada v. Hall involved California’s own rejection of Nevada’s immunity. The case involved a badly injured California minor and his less injured mother suing Nevada in California state court after being negligently hit by a State of Nevada employee driving in California. The jury found negligence and awarded damages of $1.15 million (more than $7.8 million in 2015 dollars).

The Supreme Court in Nevada v. Hall rejected the argument that Nevada’s own limited waiver of sovereign immunity (then $25,000 pursuant to the same Nev. Rev. Stat. §41.035(1) at issue in the current Hyatt II) precluded greater recovery by the victims in California’s own courts, which imposed no bar to recovery and no cap on damages for this type of liability. As Tax Board counsel Paul Clement observed understatedly at the Hyatt II oral argument, California now has some “buyer’s remorse” about the decision.

The Hyatt v. Tax Board saga is complex factually and chronologically as well as legally. Just as one cannot readily recognize the players without a scorecard, the dispute involves difficult areas of law putting several values in tension that has never been clearly resolved by the judicial system. To borrow the analogy used by Hyatt counsel H. Bartow Farr at oral argument, the issue of state vulnerability to suit can be seen as a three-legged stool: One leg holds that a state may declare itself absolutely immune from suit in the state’s own courts. Another leg of the stool is provided by the Eleventh Amendment, which provides that a state may not be sued in federal court. At issue is the third leg of the stool – whether a state can be sued in the courts of another state. Beyond this there is the issue of whether – assuming that Nevada v. Hall (and Hyatt I for that matter) remain good law (more on this below) – the forum state willing to entertain a suit against a sister state can give that sister state less protection than the forum state’s own government would receive.

Regarding the configuration of the third leg of the stool, the Tax Board has more than a few allies. Forty-five states have submitted amicus support for California and the overruling of Nevada v. Hall, a perhaps unsurprising result in that most prospective defendants prefer more immunity to less immunity. Consequently, 46 states can be said to oppose Hyatt. Hyatt counsel, making the best of the adversity, argued that this clearly indicates that the states could easily work together to limit their respective liabilities and that there is no need to constitutionalize a nationwide sovereign immunity or national requirement of reciprocity. (In response to a question from Justice Scalia, Hyatt counsel argued that such inter-state arrangements would not require congressional approval because they would not be state compacts increasing the powers of the states vis-à-vis the national government).

Some Practical Factors Favoring Retention of Nevada v. Hall

Although the states are ganging up on him, precedent is in Hyatt’s favor. As Justice Kagan noted at oral argument, the case would be a “hard one” if being decided de novo. But Nevada v. Hall has been the law for more than 35 years, putting the burden on the Tax Board, which has attacked Hall as being “poorly reasoned” but has not (at least in my view) demonstrated any notable ill effects of the decision. The amicus brief of states supporting California argues that Hall is pernicious because it offends the “dignity” of the states if they must answer in another court for their activities and then lists a number of cases in which forum states or their citizens sued a foreign state over alleged foreign state negligence or intentional misconduct causing damages in the forum state. For example, Nevada has sued Wisconsin for purportedly improper discharge of a sex offender committing assault in Nevada and San Francisco sought damages from Nevada over a state hospital’s former practice of busing unwanted mentally ill patients to San Francisco (the matter has settled for $400,000).

But one doesn’t have to be a rabid consumer advocate to find this supposed parade of horribles unmoving. According to the immunity-craving states, since Nevada v. Hall, states have sometimes been sued for conduct causing injury in other states. But what’s wrong with that? Shouldn’t tortfeasors have to account for the injury they inflict – in at least some sort of judicial forum (where erroneously accused defendant states will presumably be accorded due process and vindicated through adjudication)? Overruling Nevada v. Hall would open the door to a situation in which states outside the forum state could inflict substantial intentional harm on forum state citizens – and even the forum states themselves — with the victims having essentially no recourse.

What if, for example, the Tax Board had dispatched an in-house SWAT team over the border to invade Hyatt’s home, conduct a strip search, trash the house, and shoot the family dog (the alleged misconduct in Leatherman v. Tarrant County Narcotics and Coordination Unit, 507 U.S. 163 (1993), but inflicted in the victims’ home state)? Should foreign state agency activity of that sort really be beyond the reach of not only the state’s own courts and the federal courts, but also the courts of the state in which the victim resides? If Nevada had been more generous to its own citizens victimized by intentional misconduct of its own state agencies (rather than implementing the $50,000 cap), the inequity of the situation would be even greater.

But regardless of the wisdom or fairness of permitting recourse for harms visited upon a person by a sovereign state acting outside its borders, there is a significant historical structural argument in favor of the sovereign immunity sought by California. As Tax Board counsel noted at oral argument, a ruling in favor of Hyatt creates the arguably bizarre situation in which a state is protected from suit in the arguably neutral federal court but subject to suit in a state in which the plaintiff may have a considerable home court advantage. Analogizing the issue to Chisholm v. Georgia, 2 U.S. (2 Dall.) 419 (1793) (in which a federal court judgment subjecting Georgia to repayment of Revolutionary War debts quickly begat the Eleventh Amendment), Tax Board counsel argued that the Nevada Supreme Court decision in Hyatt creates a situation in which South Carolinian Chisholm could sue Georgia in his home state even though Georgia was immune from the suit in federal court as well as its own courts.

Hyatt in turn has countered that the concerns about federal coercive power are reduced if not eliminated when states entertain suits against other states in that these roughly co-equal sovereigns have an implicit practical reason not to treat one another unfairly. Nevada’s own judicial conduct has arguably reflected this. The Nevada Supreme Court closely policed the evidentiary rulings, legal decisions, and jury instructions of the trial court. While not completely immunizing the Tax Board or capping its damages, Nevada’s judiciary protected it from punitive damages in a case where a jury found the Board’s conduct toward Hyatt sufficiently reprehensible to render a quarter-billion dollar punitive damages award.

One could perhaps characterize the jury’s large damages award as a large serving of “home cooking” to the Tax Board in famously tax-averse Nevada. But Hyatt is hardly a popular native son in the manner of an Andre Agassi or Paul Laxalt and is a multi-millionaire to boot. Under these circumstances, normal deference to jury decision-making would seem to suggest that the Tax Board engaged in troublesome misconduct and that the Nevada jurors were not simply sticking it to the Tax Board because it was a nonresident government entity.

Two other factors limit the ability of a state to unfairly impose civil liability upon another state. To perhaps state the obvious, the forum state’s law must provide for relief. The forum state cannot (at least without violating the Constitution) maintain a cause of action peculiar to foreign states. A resident plaintiff such as Hyatt must be able to fit his allegations of harm into an existing general legal construct in order to recover. This in turn means that the plaintiff’s claim against the foreign state must be one sufficiently within the legal mainstream to warrant relief under legal doctrine equally applicable to in-state defendants, governmental or private.

The forum state is unlikely to subject its own residents (individuals or entities) to unduly broad or bizarre liability schemes – which in turn means that foreign state defendants will not likely be subjected to unduly broad or bizarre liability regimes. The foreign state agency of course will wish it had absolute immunity or the protection of a damages cap. But this hardly means it is unfair for the forum state to subject the foreign state entity to liability – at least to the extent that similarly situated forum state entities face such liability for similar misconduct.

A second factor mitigating the risk that a forum state will unfairly persecute the foreign state entity defendant is the requirement that such a defendant be subject to the personal jurisdiction of the forum state. Without such personal jurisdiction, the forum state judgment against a foreign state entity lacks due process and any resulting judgment is not subject to enforcement in the foreign state pursuant to the Full Faith and Credit Clause. In Hyatt, the Tax Board was obviously subject to personal jurisdiction because it intentionally reached well into Nevada to pursue Mr. Hyatt, purportedly using its agents to surveil his home, rifle through his garbage, and contact neighbors about his activities.

If the Tax Board’s allegedly harassing activities had stopped at the California border, Hyatt could not have then moved to Nevada, subsequently sued the Tax Board in Nevada, and then obtained a judgment enforceable in California – or presumably in any other State applying the Supreme Court’s recent personal jurisdiction law as expressed in Walden v. Fiore, 134 S. Ct. 1115 (2014), which found mere knowledge of impact upon the plaintiff in the forum state (Nevada, once again) insufficient to sustain the exercise of personal jurisdiction consistent with due process.

On a doctrinal level, the Hyatt/Nevada Supreme Court position is also quite strong in that while the Full Faith and Credit Clause has historically been vigorously enforced to require states to honor the judgments of another state (so long as the judgment met the requirements of due process), the Clause has not enjoyed similarly vigorous enforcement regarding the laws of the states. So long as the forum state is competent to legislate in the area of law at issue, it need not displace its own law with the law of another state. Where the forum state’s own public policy would be violated by application of the law of another state, the forum state need not apply that law. Indeed, this is what the Court stated in Nevada v. Hall and reiterated in Hyatt I. See 538 U.S. at 497.

If the Tax Board prevails in Hyatt II, it would appear that a state can commit even barbarous acts against a resident of another state and never be civilly liable, so long as it has absolute immunity in the courts of the tortfeasor state. Although there are some practical political brakes on such a doomsday scenario in that the tortfeasor state’s body politic might not let such a regime stand for very long, I’m skeptical. Governments are pretty good at protecting their own interests on their own political turf even if this seems contrary to the public interest. Providing at least some forum in which the arguable misconduct of state entities can be called into account by the judiciary would seem the better public policy.

The Closer Historical/Structural Concerns Regarding Nevada v. Hall

Of course, even the best public policy can be thwarted by clear constitutional requirements. The Tax Board and its allies contend that an implicit assumption of the Constitution was that states retained their sovereign immunity that predated the Constitution and that, notwithstanding the lack of any express textual provision of the Constitution, was an implicit but clear part of the constitutional bargain to which the states agreed. The argument is not a bad one. See Ann Woolhandler, Interstate Sovereign Immunity, 2006 S. Ct. Rev. 249 (arguing that the better historical view is that states did indeed have broad sovereign immunity in all state courts at the time of the Founding and that Nevada v. Hall misconstrued this history).

But this argument was raised vociferously by the Nevada v. Hall dissenters and rejected by the Court’s then-majority. See 440 U.S. at 427 (Blackmun, J., dissenting, joined by Burger and Rehnquist)(“It is important to note that at the time of the Constitutional Convention, as the Court [majority] concedes, there was a ‘wide-spread acceptance of the view that a sovereign State is never amenable to suit without its consent’” and that immunity from suit was viewed as a core element of sovereignty); 440 U.S. at 433, 435 (Rehnquist, J., dissenting)(joined by Burger but not Blackmun)(nature of constitutional bargain as reflected in drafting and ratification history suggests Founders viewed state sovereign immunity as applicable in all courts, not merely courts of the particular sovereign, and that it is “established principles” that sovereign cannot be sued “‘in its own courts, or any other, without its consent and permission’”)(quoting Beers v. Arkansas, 20 How. 527, 529 (1858) and citing similar statements in Cunningham v. Macon & Brunswick R. Co., 109 U.S. 446, 451 (1883) and Western Union Telegraph Co. v. Pennsylvania, 368 U.S. 71 (1961)).

But the Hyatt position also enjoys historical support. First, despite the purported consensus embracing what might be terms “sovereign super-immunity” (not only in the sovereign’s courts but also wherever the sovereign may have arguably violated the laws of other states or the nation), no express language of the Constitution grants such immunity.

Second, as Hyatt counsel emphasized and Justice Stevens discussed in Nevada v. Hall, Schooner Exchange v. McFaddon, 11 U.S. (7 Cranch) 116 (1812), a decision by Justices much closer to the Founding, appears to have rejected the contention that sovereigns retain their absolute power outside their own courts. Rather, the foreign sovereign may be granted immunity as a matter of comity, as was France in Schooner Exchange. But as a foreign sovereign, France could not insist on obtaining immunity from an American court. See 440 U.S. at 416-18.

Third, there is Chisholm v. Georgia, 2 U.S. (2 Dall.) 419 (1793), which found no immunity from suit in federal courts of the new Republic in the absence of the subsequently enacted Eleventh Amendment, which is directed only to protecting states from suit in federal court. The Rehnquist dissent in Nevada v. Hall regards passage of the Amendment as conclusive evidence that the Chisholm Court misunderstood the Founders’ consensus regarding sovereign immunity and mistakenly rejected the views of James Madison, John Marshall, and Alexander Hamilton. See 440 U.S. at 436-37.

But one can as easily argue that the Justices of 1793 (including John Marshall, who authored the Schooner Exchange opinion) were in a better position to assess Founder sentiment about sovereign immunity and that passage of the Eleventh Amendment (which only confers immunity against federal court litigation) was an adaptation of the Constitution rather than a reaffirmation of an original understanding. To be sure, Justice Rehnquist, Professor Woolhandler, and others can point to writings of Madison and Hamilton that can be read as supporting absolute immunity and that clearly do not warn that states entering the union might be subject to suit in other member states. However, it must be remembered that the Founders, particularly the writers of the Federalist Papers, were trying to sell the ratification of the Constitution to some often reluctant state audiences. It is hardly surprising that these authors may have soft-pedaled some implications of union that may not have appealed to states’ rights advocates on the fence about whether to ratify.

Under these circumstances, the historical argument for the immunity sought by the Tax Board is mixed, though arguably favoring immunity. It may give pause but is not compelling – or at least does not seem to be compelling enough to warrant overturning Nevada v. Hall, which does not appear to be a problematic precedent, however much West Virginia and other states may complain in an amicus brief about the ravages of having to defend injury-causing conduct in court.

Further, the Court itself in Hyatt I expressed no reservations about the continued vitality of Hall. One might further argue that if the Tax Board were to challenge Hall, the time to have done so was during Hyatt I. Although perhaps not waiver or estoppel, the Tax Board’s attack on Hall now seems belated.

An amicus brief authored by Professor Stephen Vladeck and Attorney Lindsay Harrison argues (persuasively in my view) that Hall was correctly decided and should stand, essentially reading Schooner Exchange as does Hyatt and noting that it would be odd to read Article III of the Constitution as expanding state sovereign immunity. The amicus brief also makes the argument (again, compelling in my view) that overruling Hall would create an unwise de facto absolute immunity for state entities as a matter of constitutional law. The alternative, they suggest (unlikely in my view) is that such cases could become subject to the Court’s original jurisdiction if states were permitted to sue as parens patriae to vindicate the rights of their citizens vis-à-vis another state and were to do so with any frequency.

Tomorrow I’ll depart from prudent blogging practice and predict the outcome of the case.