Case of the Day: Franchise Tax Board of California v. Hyatt
Posted on May 20, 2019
The case of the day is Franchise Tax Board of California v. Hyatt (S. Ct. 2019). I think you might be interested even though it is a purely domestic case.
Gilbert Hyatt, an inventor who earned royalties from a patent on one of his inventions, moved from California to Nevada in 1991. California imposes an income tax on its residents; Nevada does not. The California Franchise Tax Board, which collects income tax in that state, suspected that Hyatt’s move was a sham meant to avoid taxation. It conducted an audit and determined that Hyatt did not really move to Nevada and owed millions of dollars in California tax. Hyatt’s appeal from the decision is still pending.
Hyatt sued the California Board in the Nevada state court, alleging torts during the audit. The Board sought a writ of mandamus from the Nevada Supreme Court, arguing that under the Full Faith and Credit Clause, the Nevada courts had to give effect to the California statute that gives the Board immunity from liability for injuries caused by its tax collection. The Nevada court disagreed, holding that the California tax authority was entitled only to the immunity that the Nevada tax authority would enjoy in the Nevada courts. The Supreme Court affirmed that decision.
On remand, the claims were tried in the Nevada state court, and the jury returned a verdict for Hyatt for nearly $500 million. Holy cow! On appeal, the Nevada Supreme Court reduced the damages to $1 million on one of the claims and remanded for a new trial on damages on the other claims. The court recognized that under Nevada law, the liability of a Nevada agency in the same situation would be capped at $50,000, but it held that Nevada public policy would not allow the court to apply the same cap to the California agency. The Supreme Court took the case again, this time reversing and holding that the Full Faith and Credit Clause required Nevada to give the California agency the same immunity it would give its own. The parties had argued to the Supreme Court about whether it should overrule its precedent in Nevada v. Hall, a case holding that one state was not absolutely immune from suit in the courts of other states. But the Court was equally divided on that question.
On remand, the district court entered judgment in the amount of the statutory cap, and the case wound up for a third time in the Supreme Court.
In a five-four decision, the Court (per Thomas, J.) held that Hall was wrongly decided and that “States retain their sovereign immunity from private suits brought in the courts of other States.” The decision prompted a strong dissent (per Breyer, J.), which focused both on the merits and on the lack of a reason to depart from the rule of stare decisis.
The subtext to a decision like this is the debate about Roe v. Wade, the case holding that there is a constitutional right to an abortion. Anytime the Court overrules its own precedent, abortion looms in the background.
To regular Letters Blogatory readers, the immediate question might be, “Why should one US state be absolutely immune from suit in the courts of another US state, when a foreign state is not absolutely immune from suit in a US court?” After all, the historical thesis of Justice Thomas’s opinion is that “After independence, the States considered themselves fully sovereign nations” and that an “integral component” of the States’ sovereignty was “their immunity from private suits.” Now, you may say that this could even possibly only apply to the thirteen original colonies, and that it is a legal fiction for all of the other states.1 I wrote about this in my post on Puerto Rico v. Sanches Valle, a case on the application of the “dual sovereignty” rule under the Double Jeopardy Clause to Puerto Rico. And you might say that the real reason one country is immune from suit in the courts of another is comity, because the alternative is to limit the sovereignty of the state in which the action is brought. In any event it makes little sense to say that sovereignty is so absolute that one state cannot be sued in the courts of another, since if sovereignty really is that absolute, why can’t the forum state decide for itself whether to hear the claim? And Justice Breyer made just this point:
At the time of the founding, nations granted other nations sovereign immunity in their courts not as a matter of legal obligation but as a matter of choice, i.e., of comity or grace or consent. Foreign sovereign immunity was a doctrine “of implied consent by the territorial sovereign … deriving from standards of public morality, fair dealing, reciprocal self-interest, and respect.” Since customary international law made the matter one of choice, a nation could withdraw that sovereign immunity if it so chose. …
The majority may believe that the distinction between permissive and absolute immunity was too nuanced for the Framers. The Framers might have understood that most nations did in fact allow other nations to assert sovereign immunity in their courts. And they might have stopped there, ignoring the fact that, under international law, a nation had the sovereign power to change its mind.
But there is simply nothing in the Constitution or its history to suggest that anyone reasoned in that way. No constitutional language supports that view. Chief Justice Marshall, Justice Story, and the Court itself took a somewhat contrary view without mentioning the matter. And there is no strong reason for treating States differently than foreign nations in this context. Why would the Framers, silently and without any evident reason, have transformed sovereign immunity from a permissive immunity predicated on comity and consent into an absolute immunity that States must accord one another? The Court in Hall could identify no such reason. Nor can I.
This seems exactly right to me.
I think it would be good for the Court to stop using the word “sovereignty” as a talisman. Cases involving sovereignty always or almost always involve a clash between two sovereigns (the sovereign whose courts are hearing the case and the sovereign who is being brought before the court), and pointing to the absolute nature of sovereignty to favor the sovereign who wants to avoid jurisdiction undercuts the sovereignty of the state being asked to exercise jurisdiction. And vice versa.