FRANCHISE TAX BOARD OF CALIFORNIA V. HYATT, ___ U.S. ___, No. 17-1299 (13 May 2019).

Although this case does not concern a dispute over a will, this long and costly litigation resembles the fictional Court of Chancery case of Jarndyce and Jarndyce conjured by Charles Dickens in his novel Bleak House.

Prologue: Supreme Court’s decision in Hall v. Nevada, 440 U.S. 410 (1979)

Before discussing the instant case, it is necessary to say a few words about the Supreme Court’s 1979 decision in Hall v. Nevada, which was the controlling U.S. Supreme Court decision during Mr. Hyatt’s prolonged dispute with the Franchise Tax Board of California (“the Board”).

Hall held that the Constitution does not bar private suits against a State in the courts of another State.  According to Hall, before ratification of the Constitution, state sovereign immunity was governed by principles of comity derived from common law sovereign immunity and law of nations sovereign immunity.  Under principles of comity, a State had discretion to grant or deny other States immunity from suit in the courts of the home state.  Hall rests primarily on the view that the States maintained sovereign immunity vis-à-vis each other the same way that foreign nations do: that is, voluntarily.  The Constitution does not expressly provide for state sovereign immunity, and the Constitution did not implicitly alter the relationship among the States on the matter of sovereign immunity.  Comity remained the rule and States could grant or deny immunity as they saw fit.

Relevant facts

Gilbert Hyatt was inventive.  In the early 1990s, he earned substantial income from a patent for a computer formed on a single integrated computer chip.   Mr. Hyatt was smart in other ways.  Around the time that the money started rolling in from his patent, he moved from California to Nevada.  He sold his house in California, rented a home in Nevada, registered to vote in Nevada, opened a bank account in Nevada, and acquired a Nevada driver’s license.  When he filed his 1991 and 1992 tax returns, he claimed Nevada as his State of residence.  By now, the astute reader has guessed that California had an income tax and Nevada had none.  The reader may also have guessed that the Board, the California state agency responsible for assessing personal income tax, suspected that Hyatt’s move was a sham designed to evade California’s income tax.

The Board commenced an audit.  In the course of the audit, employees of the Board traveled to Nevada and interviewed many people and shared Hyatt’s personal information with Hyatt’s business contacts.  The Board sent more than 100 letters and demands for information to third parties.  Ultimately, the Board concluded that Hyatt had not moved to Nevada until April 1992 and owed California more than $10 million in back taxes, interest and penalties.  Hyatt protested the audit before the Board, and the Board upheld the audit after an 11-year proceeding.  Hyatt’s appeal of that decision is still pending before California’s Office of Tax Appeals.

In 1998, Hyatt sued the Board in Nevada state court for torts allegedly committed during the audit, and that led to many years of litigation.

The Board petitioned the Nevada Supreme Court for a writ of mandamus ordering dismissal of Hyatt’s lawsuit on the ground that the Board, as an agency of the State of California, was immune from suit.  The Board argued that under the Constitution’s Full Faith and Credit Clause, see Constitution, Art. IV. §1, Nevada courts must apply California’s law immunizing the Board from liability for all injuries caused by tax collection.  The Nevada Supreme Court rejected the argument and held that the Board was entitled to the same immunity as Nevada agencies – immunity for negligent but not intentional torts.  The U.S. Supreme Court granted certiorari and affirmed that the Full Faith and Credit Clause does not prohibit Nevada from applying its own immunity law.

On remand, the Nevada trial court conducted a 4-month jury trial that resulted in a verdict for Hyatt in the amount of $490 million.  Under Nevada law, tort liability for Nevada state agencies was capped at $50,000, but Nevada’s Supreme Court refused to apply the cap to the Board in this case.  That resulted in second trip to the U.S. Supreme Court.  The Board argued that the Full Faith and Credit Clause required Nevada’s courts to apply Nevada’s $50,000 cap on damages, and in addition the Board asked the Court to overrule Hall v. Nevada.  This time the Court held that Full Faith and Credit requires Nevada courts to apply Nevada’s $50,000 cap on damages.  The Court was equally divided on whether to overrule Hall.  Therefore, Nevada v. Hall remained the law, and the Board could have immunity only as a matter of comity.

The case was remanded, and the Nevada Supreme Court ordered the trial court to apply Nevada’s $50,000 statutory cap.  However, that did not satisfy the Board, and there was a third trip to the U.S. Supreme Court in which the Board again asked the Court to overrule Hall.  The Court granted certiorari on the sole question of whether the Court should overrule Hall v. Nevada.

The Court’s decision

The Constitution does not expressly mention state sovereign immunity.  It does not say that the States have immunity from suit in the courts of other states, nor does it say the contrary.  If the States have immunity, that immunity must be inferred from the text of the Constitution, amplified by historical evidence of the Founders’ understanding and intent.  It is legitimate to make such inferences.  Inferences can be drawn from the Constitution’s ordering relationships within the federal system necessary to make the Constitution a workable document.  After all, the Founders did not state every postulate on which they formed the Republic. McCulloch v. Maryland, 4 Wheat. 316, 407 (1819).

The Court said that before the adoption of the Constitution it was generally understood that the States under the Articles of Confederation had sovereign immunity.  At the time of the founding, it was well settled that the States were immune under both common law principles of sovereign immunity and law of nations principles of sovereign immunity.  The founding generation took as given that States could not be haled involuntarily before each other courts, and States retained their sovereign immunity, except as altered by the Constitution.

Although the Constitution assumes that the States retain their pre-existing sovereign immunity except as otherwise expressly provided, the Constitution fundamentally adjusts the States’ relationship with each other and curtails their ability, as sovereigns, to decline to recognize each other’s immunity.    For example, Article III, §2, altered traditional immunity by providing a federal forum in which the States agreed to be amenable to suits brought by other States.  The only forum in which the States have consented to suits by one another or by the Federal Government are Article III courts. (Slip op., page 10).

The natural inference from the adoption of the 11th Amendment is that the Constitution was understood to preserve the States’ traditional immunity from private suits.  The Constitution was not meant to expose the States to any suits that were “anomalous and unheard of when the Constitution was adopted.”  Hans v. Louisiana, 134 U.S. 1, 18 (1890).  The “sovereign immunity of the States . . . neither derives from, nor is limited by, the terms of the Eleventh Amendment.”  Alden v. Maine, 527 U.S. 706, 713 (1999).

The Court rejected Hyatt’s comity argument based on the law of nations.  The defect in Hyatt’s argument is that the “Constitution affirmatively altered relations between the States so that they no longer relate to each other solely as foreign sovereigns. . . . The Constitution does not merely allow States to afford each other immunity as a matter of comity; it embeds interstate sovereign immunity within the constitutional design.” (Slip op., at page 13).  For example, Article I divests the States of the traditional diplomatic and military power that foreign sovereigns possess.  Article IV imposes duties on the States not required by international law, such as the Full Faith and Credit Clause and the Privileges and Immunities Clause.  Furthermore, States may not supply rules of decision governing disputes implicating their conflicting rights.  Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 641 (1981).  All of these provisions of the Constitution are inconsistent with Hyatt’s comity argument and the rationale of Nevada v. Hall.

The Court held that Nevada v. Hall is irreconcilable with our constitutional structure and with historical evidence that States retained immunity from private suits both in their own courts and in other courts.  Therefore, the Court overruled Nevada v. Hall and held that the Board is immune from Hyatt’s lawsuit in Nevada’s courts.

The dissent and stare decisis

By overruling Nevada v. Hall, the Court necessarily declined to apply stare decisis.  There is no strict, bright line rule governing the application of the doctrine of stare decisis.  Courts generally look to four factors when deciding whether to overrule an existing precedent: the quality of the decision’s reasoning; its consistency with related decisions; legal developments since the decision; and reliance on the decision. (Slip op., at page 17).  The Court said that the first three factors supported overruling Hall.  As for the fourth factor, the case-specific costs incurred by Hyatt in reliance on Hall are not the type of reliance interests that persuade the Court to adhere to an incorrect resolution of an important constitutional question.

The dissent saw it differently.  Justice Breyer dissented, joined by Justices Ginsburg, Sotomayor and Kagan.  Although the dissent strenuously defended the comity rationale of the Hall decision, in the end the dissent retreated behind the barricade of stare decisis.  The dissent said that “[i]n any event stare decisis requires us to follow Hall, not overrule it.” (Dissent, slip op., at page 10). That is, whatever the weakness of Hall’s rationale, it should be followed as precedent in the interest of preserving stability in the law.

The Court’s majority opinion (written by Justice Thomas) said that stare decisis is “not an inexorable command” and that it is “at its weakest when we interpret the Constitution because our interpretation can be altered only by constitutional amendment, Agostini v. Felton, 521 U.S. 203, 235 (1997).” (Slip op., at pages 16-17).  Pronouncements like that send a cold chill up the backs of pro-abortion advocates, especially because Roe v. Wade stands on a weak constitutional foundation.  I suspect that Justice Breyer felt the cold chill when he wrote in the penultimate sentence of his dissent: “Today’s decision can only cause one to wonder which cases the Court will overrule next.” (Dissent, slip op., at page 13).

John Polk is a Special Counsel at Berenzweig Leonard, LLP. John can be reached at [email protected].