Analysis

Reminding the states that the Constitution requires them to be good neighbors to each other, the Supreme Court on Tuesday told Nevada not to give its own citizens special protection against the actions of another state, when it would not provide the same shield for them against its own actions.   The result in Franchise Tax Board of California v. Hyatt appeared to have cut down from $1 million to about $50,000 a damages verdict that a Nevada man had won from a jury in his own state courts against the taxing authorities in California, where he formerly lived.

But the ruling did not go as far as California and forty other states had wanted.  They asked the Court to declare that one state cannot be haled into the courts of another state to answer for its official actions back home.  The Court could have done that by overruling its 1979 decision in Nevada v. Hall.  But the Court split four to four on that issue, which means that the precedent stands — at least until the Court might reconsider in a later case after it has a ninth Justice.  (This marked the third time since the death of Justice Antonin Scalia in February that the Court has wound up in a tie on a case.)

Although the Court majority insisted it was merely applying a series of former rulings, the outcome appeared to be a new interpretation of the Constitution’s Full Faith and Credit Clause that states are not free to discriminate against neighboring states when they enforce their own laws against another state.

The clause, spelled out in Article IV, requires the states to respect the “public acts, records, and judicial proceedings of every other state.”  Nevada violated that mandate, the Court ruled, when its state supreme court upheld a Nevada jury verdict for Las Vegas resident Gilbert P. Hyatt of $1 million against the California Franchise Tax Board for allegedly violating his legal rights by the way it pursued a claim of back taxes that the board contended Hyatt owed from the time when he was a California resident.

Under Nevada law, the Court noted, a state agency in Nevada could be assessed no more than $50,000 in damages for similar wrongs against a Nevada resident.  In failing to give the California agency the benefit of the same treatment, according to the decision, Nevada “applied a special rule of law that evinces a ‘policy of hostility’ toward California.”

Hyatt, a wealthy inventor who once claimed to have made the initial discovery of the microprocessor chip for computers, has been in a long-running feud with California taxing officials over how much state taxes he owes there.  The dispute concerns when he left the state to live in Nevada, and thus how much taxable income he earned in California while a resident of LaPalma.  In fact, that part of the controversy is still unfolding in California courts.

Meanwhile, Hyatt filed a damages lawsuit in Nevada state court against the California agency, contending that its tax audit led it to a series of actions — some of which happened at his home in Nevada — that violated his personal rights.  He asserted that tax agents had rifled through his mail and combed through his garbage looking for clues about his income.

Under the Supreme Court’s ruling in the Nevada v. Hall case, which had nothing to do directly with Hyatt’s dispute with the California board, the board had no specific protection against the Hyatt lawsuit in a Nevada court.  But it sought to have the case dismissed for other reasons, including an argument under the Full Faith and Credit Clause.

Because California law provides state agencies with immunity from being sued over tax-collection disputes in California courts, the taxing board argued, Nevada was obliged to respect that immunity in the Hyatt lawsuit.  That was rejected by the Nevada Supreme Court in a ruling that the Supreme Court itself upheld in a 2003 decision in an earlier stage of the Hyatt tax controversy.

The Hyatt case then went to trial in the Nevada court, resulting in a verdict for him totaling close to $500 million.  When the case went back up to the Nevada Supreme Court, in an appeal by the tax board, the state tribunal cut down the main part of the jury verdict to $1 million.  But the state court also rejected the tax board’s argument that Nevada courts were obliged to limit the damages verdict to $50,000, because that was the cap that a Nevada law put on damage verdicts in favor of Nevadans when they sued state officials in similar circumstances.

The state supreme court said that Nevada did not have to apply the $50,000 cap in Hyatt’s case, because California law did not protect taxpayers in the same way that Nevada law did.  Nevada, it thus concluded, had a sufficient policy interest to leave intact the $1 million verdict.

That is the result that the Supreme Court voted down on Tuesday.  Nevada had no duty under the Full Faith and Credit Clause to give the California board the same immunity from a tax lawsuit that it would have back home, the Court said, but the clause did impose on Nevada a duty not to provide greater protection for its own citizens against the tax board’s actions than it would have provided for its own citizens when pursuing similar claims against Nevada agencies or officials.

Justice Stephen G. Breyer wrote the majority opinion.  It was joined in full by Justices Ruth Bader Ginsburg, Anthony M. Kennedy, Elena Kagan, and Sonia Sotomayor.  Justice Samuel A. Alito, Jr., filed a one-sentence note that he supported the result, but he provided no explanation of his own views.   Chief Justice John G. Roberts, Jr., filed a dissenting opinion, joined by Justice Clarence Thomas.  The result thus was six to two.

Click for vote alignment by ideology.

Posted in Franchise Tax Board of California v. Hyatt, Analysis, Featured, Merits Cases

Recommended Citation: Lyle Denniston, Opinion analysis: States need to be good neighbors, SCOTUSblog (Apr. 19, 2016, 3:09 PM), http://www.scotusblog.com/2016/04/opinion-analysis-states-need-to-be-good-neighbors/