Nevada v. Hall – and California — Dodge Bullets: The Supreme Court Rules that the Full Faith and Credit Clause Requires a Regime of Sovereign Immunity Symmetry Between the States in Franchise Tax Board of California v. Hyatt, by Jeffrey W. Stempel

The Latest Chapter in the Continuing Hyatt Saga

Franchise Tax Board of California v. Hyatt, discussed in two December 2015 postings, involves inventor Gilbert Hyatt’s battle with California tax authorities, which has roots in Hyatt’s move to Nevada and deeper roots in Hyatt’s computer inventions twenty years earlier. 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 that the state sought more than $10 million in taxes, a figure that, according to the state, has grown to more than $50 million with penalties and interest.

Hyatt challenged the Board’s decision through the California administrative process and courts. Twenty years later, a final decision remains pending. Hyatt also 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 the Nevada Supreme Court that the Board should receive the benefit of California’s statutory immunity in Nevada just as it would in California. See Franchise Tax Board v. Hyatt, 2002 Nev. LEXIS 57 (Nev. April 4, 2002).

In Franchise Tax Board v. Hyatt, 538 U.S. 488 (2003) (“Hyatt I”), the U.S. Supreme 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” where the forum state court (Nevada) had found that such an application would violate the forum state’s own legitimate public policy of providing its citizens a right to seek recompense for the allegedly tortious acts of a foreign state.

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. The Nevada Supreme Court upheld the fraud award but 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. See Franchise Tax Board v. Hyatt, 335 P.3d 125 (Nev. 2014). Although the judgment had been drastically reduced, California still faced liability of between $1 million and $85 million, prompting the state’s successful cert petition and the Court’s decision largely favoring the state. See Franchise Tax Board v. Hyatt, __ U.S. __, 2016 U.S. LEXIS 2796 (April 19, 2016).

The Nevada Supreme Court had taken 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 on its own governmental liability 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 argued that even if it could be held liable 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 Board also argue for the overruling of 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.

Nevada v. Hall Survives — Barely

Regarding Hall, the Court was “equally divided on this question” and “consequently affirm[s] the Nevada courts’ exercise of jurisdiction over California.” See id. at *4 (citations omitted). In the two months since Justice Scalia’s death, Courtologists have made great sport of speculating as to the consequences, noting two other instances of 4-4 divisions. Hyatt II is no exception. One observer noted that the opinion as originally released identified the majority opinion as the “Opinion of Breyer, J.” rather than the corrected version’s “Breyer, J., delivered the opinion of the Court.” He read this glitch as suggesting that “it was initially either a concurrence or a dissent” (or both) in that it would not have been so initially identified had it always been intended to be the Court’s opinion. See Nicholas Datlowe, Minor Error, Major Effect, US Law Week Blog (April 21, 2016) (“Scalia’s missing vote would have been the deciding one on whether to overrule Nevada v. Hall.”).

Datlowe reasons, correctly in my view, that if Justices Scalia and Breyer had both wanted to overrule Nevada v. Hall, there would have been no need to address the full faith and credit aspects of the case. “This means that, had Scalia lived, the Franchise Tax Board would have won, 5-4 on the initial question of overruling Nevada v. Hall.” American University law professor Stephen Vladek, who co-authored an amicus brief favoring retention of the Hall precedent, takes a similar view.

Although Justice Scalia appears not to have formally urged the overturning of Nevada v. Hall in his prior judicial opinions, he is widely viewed as regarding the case as an affront to federalism that would never have been permitted by the founders or the Republic’s early judges. That Hall did not arrive until 200 years after the founding bolsters this assessment. State governments largely feel the same way. Forty-five states submitted amicus support for California and the overruling of Nevada v. Hall.

But, as Justice Stevens discussed in his Hall opinion, 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 demand and automatically receive immunity from an American court. See 440 U.S. at 416-18. Further, the Court itself in Hyatt I expressed no reservations about the continued vitality of Hall.

If one is not an originalist, Hall can be well defended on grounds of constitutional structure and simple fairness. In Hall itself, as Justice Ginsburg observed at oral argument, the case involved a badly injured California minor and his less injured mother (the jury verdict was nearly $8 million in today’s dollars) suing Nevada in California state court after being negligently hit by a State of Nevada employee driving in California. In addition to rejecting the argument that Nevada did not have to answer for its alleged tortious conduct in the courts of another state, the Hall court 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) that was at issue in 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.

According to the Nevada v. Hall critics, states have sometimes been sued for conduct causing injury in other states, placing legal and financial pressure on the states. But the empirical burden of such litigation is far from clear and hardly seems oppressive. Further, the “wrongfulness” of such a situation is hardly self-evident. One can make at least as compelling a case that barring redress to a victim in the courts of the victim’s own state (assuming the tortfeasor state has sufficient minimum contacts with the forum state) is equally or more troubling.

On the merits, my own view remains that 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. Consequently, I was surprised that the Court came so close to overruling Hall.

Hall Hinging on the Next Justice

Because the Hall precedent remains in controversy, this presents yet another area of law where the manner of filling the Scalia vacancy will obviously have an impact absent other personnel changes at the Court. Nominee Merrick Garland appears not to have expressed a view on Nevada v. Hall in any of his judicial writings. But he is perceived by conservatives as likely to join the Court’s four moderate-liberals (Ginsburg, Breyer, Sotomayor, Kagan) on most issues. See Carrie Severino, The `Moderates’ Are Not So Moderate: Merrick Garland, National Review Bench Memos (March 11, 2016) (counsel for conservative group Judicial Crisis Network portrays Garland as liberal but focuses largely on gun regulatory issues).

Absence of a clear paper trail makes prediction of the impact of a Garland confirmation uncertain – as is the exact division of the Justices in the current equally divided Court. Because the Scalia absence saved Hall and because judicial liberals generally are less smitten with sovereign immunity than their conservative peers, one’s first reaction may be to assume a sharp ideological split regarding overturning Hall (Roberts-Kennedy-Thomas-Alito in favor and Ginsburg-Breyer-Sotomayor-Kagan against). But, as discussed below, dissenting Justices Roberts and Thomas would have affirmed the Nevada Supreme Court’s imposition of seven-figure liability against California, which may mean they are not dead-set against Hall (as well as taking a different view of Full Faith and Credit than their peers).

The prospect of one state exercising judicial power over another is a sufficiently serious federalism concern that one can imagine a Democratic president’s nominee striking down Hall far more readily than casting a vote against Roe v. Wade or upholding state voter suppression laws. Nevada v. Hall is thus at risk in even the most optimistic (for Hall fans) circumstances. And if the Garland nomination is thwarted (which seems likely at this juncture) and the position filled by a Republican nominee, Hall remains in danger. But a GOP nominee might either agree with the Stevens rationale in Hall or, like Justice Stevens, have sufficient regard for stare decisis to resist overruling.

Forced to Decide the Question of Whether Forum State Sovereign Immunity Inures to the Benefit of a Defendant Foreign State, The Court Demands Symmetry

In a moment of prognosticating hubris when writing about Hyatt in December, I ventured that Hall would survive on a 6 (Roberts, Kennedy, Ginsburg, Breyer, Sotomayor, Kagan) to 3 (Scalia, Thomas, Alito) vote. I was obviously wrong about Justices Roberts and Kennedy. On the issue of whether Nevada could enter a judgment against a foreign state in an amount higher than statutory damage cape on the forum state’s own liability, I was more accurate in predicting that the Court would not permit the arguable double standard of the Nevada Supreme Court’s opinion. But my canvasing was abysmal, predicting 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. Because of Justice Scalia’s death, the actual vote was 6-2 but with (to my surprise) Justices Roberts and Thomas in dissent.

The Court ruled that Nevada’s refusal to limit California’s liability as it would the forum state’s own reflected a “policy of hostility” to the statutes of another sovereign. See 2016 U.S. LEXIS at *4.

The Nevada Supreme Court has ignored both Nevada’s typical rules of immunity and California’s immunity-related statutes (insofar as California’s statutes would prohibit a monetary recovery that is greater in amount than the maximum recovery that Nevada law would permit in similar circumstance). Instead, it has applied a special rule of law that evidences a “policy of hostility” toward California. Doing so violates the Constitution’s requirement that “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other State.”

Id. at *8 (citations omitted). The Court noted that in Hyatt I,

Nevada’s courts recognized that California’s law of complete immunity would prevent any recovery in this case. The Nevada Supreme Court consequently did not apply California law. It applied Nevada law instead [permitting suit against a state entity]. We upheld that decision as consistent with the Full Faith and Credit Clause. But in doing so, we emphasized both that (1) the Clause does not require one State to apply another State’s law that violates its “own legitimate public policy,” and (2) Nevada’s choice of law did not “exhibit[] a ‘policy of hostility to the public Acts’ of a sister State.”

*          *          *

The Nevada decision before us embodies a critical departure from its earlier approach. Nevada has not applied the principles of Nevada law ordinarily applicable to suits against Nevada’s own agencies. Rather, it has applied a special rule of law applicable only in lawsuits against its sister States, such as California.

The Nevada Supreme Court explained its departure from those general principles by describing California’s system of controlling its own agencies as failing to provide “adequate” recourse to Nevada’s citizens. It expressed concerns about the fact that California’s agencies “operat[e] outside” the systems of “legislative control, administrative oversight, and public accountability” that Nevada applies to its own agencies. Such an explanation, which amounts to little more than a conclusory statement disparaging California’s own legislative, judicial, and administrative controls, cannot justify the application of a special and discriminatory rule. Rather, viewed through a full faith and credit lens, a State that disregards its own ordinary legal principles on this ground is hostile to another State. A constitutional rule that would permit this kind of discriminatory hostility is likely to cause chaotic interference by some States in the internal legislative affairs of others. In our view, Nevada’s rule lacks the “healthy regard for California’s sovereign status” that was the hallmark of its earlier decision . . . .

Id. at *11-*13 (citations omitted)(emphasis in original).

Justice Alito concurred without opinion. Justice Roberts, joined by Justice Thomas, dissented. Noting that the differential treatment (of Nevada courts capping damages against the forum state at $50,000 but permitting seven-figure judgments against a neighboring state) was seemingly unfair, the dissent took the position that

for better or worse, the word “fair” does not appear in the Full Faith and Credit Clause. The Court’s decision is contrary to our precedent holding that the Clause does not block a State from applying its own law to redress an injury within its own borders. The opinion also departs from the text of the Clause which – when it applies – requires a State to give full faith and credit to another State’s laws. The Court instead permits partial credit. To comply with the Full Faith and Credit Clause [if it were applicable], the Nevada Supreme Court need only afford the Board the same limited immunity that Nevada agencies enjoy.

Id. at *16.

The dissent acknowledged that the full faith and credit clause is more difficult to apply to state laws as opposed to its “straightforward” application to state judgments, which “must be respected in another [state] provided that the first State had jurisdiction over the parties and the subject matter.” See id. at 19. Citing Carroll v. Lanza, 349 U.S. 408, 413 (1955), Chief Justice Roberts took the view that:

where a State chooses a different rule from a sister State in order “to give affirmative relief for an action arising within its borders,” the State has a sufficient policy reason for applying its own law, and the Full Faith and Credit Clause is satisfied.

Id. at *22-*23. Focusing on California’s misconduct, Justice Roberts noted that:

Hyatt alleges that the Board committed multiple torts, including fraud and intentional infliction of emotional distress [and that] there is no doubt that Nevada has a “sufficient” policy interest in protecting Nevada residents from such injuries.

Id. at *23. The dissenters found it sufficient that a state outside of the forum state as a matter of course is not subject to controls on its behavior by the forum state’s legislative and executive branches, justifying the availability of the forum state judiciary to state residents seeking recompense from a sister State.

The majority may think that Nevada is being unfair, but it cannot be said that the State failed to articulate a sufficient policy explanation for its decision to apply a damages cap to Nevada state agencies, but not to the agencies of other States.

Id. at * 24. Further, the dissent noted that far from ignoring California’s sovereignty,

The Nevada court adhered to its policy of sensitivity to comity concerns this time around as well [as in Hyatt I]. In deference to the Board’s sovereignty, the court threw out a $250 million punitive damages award, on top of its previous decision that the Board was not liable at all for its negligent acts. That is more than a “healthy regard” for California’s sovereign status.

Id. at 25.

The dissent also criticized the majority for creating a “new hybrid rule” of partial sovereign immunity that is “nowhere to be found” in the full faith and credit clause.

The Court does not require the Nevada Supreme Court to apply either Nevada law (no immunity for the Board) or California law (complete immunity for the Board) . . . . [But if] the majority is correct that Nevada has no sufficient policy justification for applying Nevada immunity law, then California law applies. And under California law, the Board is entitled to full immunity. Or, if Nevada has a sufficient policy reason to apply its own law, then Nevada law applies, and the Board is subject to full liability.

Id. at *26.

The well-written Roberts dissent is almost enough to rehabilitate the Nevada Supreme Court’s disparate treatment of states – almost. There is a certain logic to treating a foreign state as either immune or fully liable rather than subject to hybridized liability using forum state liability as a measuring stick. But it remains unsettling to think that one state can refuse to give another the same benefits of a cap on liability that the forum state’s own state agencies enjoy. The Nevada damages cap may be unwise public policy but the cap is nonetheless the law. And even if the word “fair” does not appear in the Full Faith and Credit Clause, the Clause is arguably quite about requiring fairness by the states as well as protecting their sovereignty.

If Nevada taxing authorities treat a taxpayer in the manner alleged in Hyatt, their liability is capped even if not completely immunized as in California. There is an appealing consistency to applying the state’s own judgment about capping government liability to a similarly situated foreign state even if the text of the Clause does not include the word “fair” and even if the forum state has strong interest in protecting its citizens. One might rhetorically ask why Nevada, if it is so concerned about its citizens, protects itself with a damages cap when it is the tortfeasor but finds such a cap an insufficient protection when the Nevadan is injured by the torts of a foreign state.

Jeff Stempel

Professor Stempel is a 1981 graduate of Yale Law School, where he was an editor of the Yale Law Journal and co-founder of the Yale Law and Policy Review. He spent two years as a law clerk to a federal district court judge in Philadelphia and three years in private practice with a firm in Minneapolis before entering the teaching profession. Professor Stempel served on the faculty at Brooklyn Law School and the Florida State University College of Law. Professor Stempel has numerous publications to his credit, including books, treatise chapters and supplements, and law review articles. He is a member of the American Law Institute, the State Bar of Nevada, and the Minnesota Bar. Professor Stempel teaches Civil Procedure/Alternative Dispute Resolution, Evidence, Professional Responsibility, and Insurance Law.