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 II)

Yesterday I provided background to the Hyatt saga, which pits Gilbert Hyatt against the Franchise Tax Board of California and calls into question the Court’s ruling in Nevada v. Hall(1979). Today I assess what the Court might do in Hyatt II.

Hyatt II as a Jurisprudential Battleground

Hyatt II is a hard case that may or may not result in bad law – depending on what one views as bad law. Judicial assessments of the interstate sovereign immunity question almost certainly vary according to the jurisprudence of the beholder. If one thinks the ability of any person or entity to be “above the law” should be limited or eliminated, resolution is clear: states should not be able to avoid answering for their conduct in other states to which they are subject to personal jurisdiction unless they can convince the forum state court that comity is required. Already, a state unwilling to be responsible for inflicting injury is immune in its own courts and in federal courts.

If one is a pragmatist, Hall should be preserved because overturning Hall would drastically reduce the incentive of state agencies to behave properly or at least confine misbehavior to within their home state borders. If one supports the concept of a living, evolving Constitution, one also presumably will leave Hall in place in that Hall better reflects modern attitudes critical of sovereign immunity. If one sees law as a vehicle for vindicating rights and achieving corrective justice, Hall also makes sense.

Alternatively, if one sees law as a vehicle for preserving order and hierarchy, Hall is problematic, perhaps sufficiently problematic to warrant overruling in that it makes states more vulnerable to suit, with less predictable results than if the state is permitted to control its exposure through decreeing itself absolutely immune or limiting its exposure through damage caps or other legislative devices. And if one is an originalist, there is substantial (even if not necessarily compelling) evidence supporting the view that absolute sovereign immunity was a background assumption of the Founders.

The Court relied upon Nevada v. Hall (unanimously) in deciding Hyatt I but is now considering whether to overturn Hall. What has prompted this shift? Perhaps concern that things have gotten out of hand, with Nevada rendering a huge award to a resident multi-millionaire against another state for misconduct that the jury found serious but in which no one died or lost a life savings. But an observer might also suspect that the Court’s originalists and the Justices favoring authority over individual rights to seek recompense are now in a stronger position to reconsider Hall than was the case in 2003, particularly with the replacement of Hyatt I author Justice O’Connor with Justice Alito, who appears to favor the Tax Board position.

In light of what may be a fundamental jurisprudential fissure in the frequently divided Court, prognostication is probably more dangerous than usual. But departing from prudent blogging practice, my prediction is that Nevada v. Hall will be upheld in a close decision. Oral argument questioning suggests that Justices Scalia and Alito dislike Hall. The consistently quiet Justice Thomas said nothing at oral argument but has shown enthusiasm for sovereign immunity in the past and is likely to join the Hall critics.

Commenting in a BloombergBNA U.S. Law Weekarticle, Professor Vladeck sees Justice Kennedy as the swing vote regarding the fate of Hall. But Justice Kennedy’s comments during oral argument suggest some skepticism about Hall, which could in turn make a 5-4 decision on Hall’s fate hinge on Justice Roberts.

Alternatively, the Court might determine that Hall has been in place sufficiently long to warrant significant stare decisis deference, which could make the vote as high as 7-2 in favor of retaining Hall. My best (but perhaps over-optimistic) guess: Hall survives on a 6 (Roberts, Kennedy, Ginsburg, Breyer, Sotomayor, Kagan) to 3 (Scalia, Thomas, Alito) vote.

The Court’s decisions in Alden v. Maine, 527 U.S. 706 (1999) and Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996), arguably reflect doctrinal shift in that Alden held that the national government did not have Article I constitutional power to require that state courts entertain a suit to enforce a federal cause of action (wage and hour provisions of the Fair Labor Standards Act) while Seminole Tribe found no Article I congressional power to abrogate state sovereign immunity in federal court. But both cases are distinguishable as Article I or Eleventh Amendment cases rather than Full Faith and Credit Clause cases. And Alden was a 5-4 decision in which Justices Ginsburg and Breyer dissented. But the author of Alden was Justice Kennedy. To the extent Alden reflects his views on constitutional structure, this may bode ill for Nevada v. Hall even though there was no Kennedy dissent in Hyatt I.

The Question of Whether Forum State Sovereign Immunity Inures to the Benefit of a Defendant Foreign State

The first question on which the Court granted certiorari addresses the real Achilles’ Heel of the Nevada Supreme Court’s 2014 decision — its refusal to give California’s Tax Board the same benefits of the cap on liability that Nevada’s own state agencies enjoy. The Nevada damages cap may be unwise public policy (it applies, for example, to malpractice claims against the University Medical Center, which has in turn created a longstanding local “joke” that cautious Las Vegas drivers should wear a name tag instructing ambulance drivers to avoid UMC in responding to a call) but the cap is nonetheless the law. If Nevada taxing authorities hound a taxpayer in the manner alleged in Hyatt v. Tax Board, their liability is capped. It is a little hard to see how applying this cap to a similarly situated foreign state entity defendant can be repugnant to forum state public policy, notwithstanding the forum state’s strong interest in protecting its citizens.

This disparate treatment clearly bothered Justice Breyer at oral argument. It also is in tension with Hyatt I, in which the Court per Justice O’Connor found the matter not to present a case of a “‘policy of hostility to the public Acts’ of a sister State” because the “Nevada Supreme Court [in its 2002 decision] sensitively applied principles of comity with a healthy regard for California’s sovereign status, relying on the contours of Nevada’s own sovereign immunity from suit as a benchmark for its analysis.” 538 U.S. at 499.

The Nevada Supreme Court’s arguable 2014 departure from this consistency (by a factor of more than 20 in light of the size of Hyatt’s fraud award alone) will probably result in a Hyatt II decision requiring that forum state courts give foreign state entity defendants the same treatment their own agencies would receive in the forum state’s courts in order to comply with the Full Faith and Credit Clause. Recall that in Nevada v. Hall, California was not only willing to impose million-dollar liability upon Nevada but also upon itself as well, at least for auto accidents.

Continuing the fool’s errand of prognostication, I expect a 6 (Roberts, Kennedy, Breyer, Scalia, Thomas, Alito) to 3 (Ginsburg, Sotomayor, Kagan) decision striking down this aspect of the Nevada Supreme Court’s decision. This would be a victory for consistent treatment but regrettable in light of the unduly low damages cap in Nevada (now $100,000 no matter how severe the injuries inflicted by the state), at least if one thinks that state actors should be as responsible for the injuries they inflict as are similarly situated private entities. In a world where the public-private distinction has become increasingly blurred, damage caps are intellectually infirm and morally troublesome when set at levels far below the actual amount of injury inflicted by the state entity.

But a Hyatt II ruling requiring Nevada to give the Tax Board the benefit of the forum state caps might have a silver lining of prompting reconsideration of the caps. One cannot help but think back to John Hall, the California boy badly brain-damaged in 1968 due to the negligent driving of a Nevada employee (who, compounding the tragedy, died from the collision). Even the million-dollar judgment in Hall’s favor may have been insufficient compensation for such severe injury that would be with the victim for decades. An award of $25,000, $50,000, or even $100,000 for such injuries should trouble a “civilized society” (Justice Taney’s words in Beers v. Arkansas quoted in Justice Rehnquist’s Hall dissent) at least as much as the prospect of one state having to endure the “indignity” of answering for such injuries in the court of another.

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