For the Third Time, U.S. Supreme Court Hears Franchise Tax Board’s Dispute With Inventor Gil Hyatt

The U.S. Supreme Court heard oral arguments January 9 for Franchise Tax Board of California v. Gilbert P. Hyatt, the decades-old dispute between the FTB and Nevada inventor Gilbert Hyatt over whether the agency and its auditors violated Hyatt’s rights and committed fraud during a residency audit. This is the third time the case has reached the Supreme Court, with both previous decisions granting relief to Hyatt.

The case arose from FTB audits focused on Hyatt’s residency for the tax years 1991 and 1992. During the course of the audits, an FTB agent visited Hyatt’s home in Nevada and rummaged through his garbage and personal mail. The FTB agent also disclosed Hyatt’s private information to various third parties, in violation of FTB's promise of confidentiality to Hyatt regarding the audit. In 1998, Hyatt sued in Nevada state court asserting that the FTB had engaged in fraudulent and tortious behavior.

Before the case went to trial, the Supreme Court was asked to weigh in on whether Hyatt had the right to sue in Nevada for torts that could not be litigated in California, due to the FTB’s immunity from such suits in its home state. The Supreme Court in 2003 unanimously rejected the FTB’s argument that the Full Faith and Credit Clause required Nevada courts to apply California’s immunity laws, and allowed Hyatt’s tort case to proceed in Nevada.

After a lengthy jury trial in Las Vegas that concluded in 2008, Hyatt was awarded $139 million in compensatory damages and $250 million in punitive damages. The FTB appealed, and the Nevada Supreme Court affirmed the portion of the judgment finding that the FTB committed fraud, but reduced the total award for the fraud claim to just over $1 million. The Nevada Supreme Court also affirmed the portion of the judgment finding the FTB was liable to Hyatt for intentional infliction of emotional distress, stating that Hyatt had “suffered extreme treatment” at the hands of the FTB, but ordered that the amount of damages for that claim be retried by the Nevada District Court.

The FTB appealed that decision to the U.S. Supreme Court, which ruled that “a state, when suing another state, is liable for no more than the forum state would be liable for.” Based on that decision, the damages were lowered to $100,000, which is the maximum amount that a Nevada agency would have been liable to pay.

This week’s argument focused solely on whether the FTB can be sued at all in another state’s courts. The FTB argued that the court should overturn Nevada v. Hall, the 1979 precedent that allows such suits.

Nevada v. Hall was decided in favor of California, as the court ruled that plaintiffs in a car accident in California could sue the state of Nevada (the employer of the driver who caused the accident) in California court and that the California court was not required as a matter of comity to limit the damages recoverable by the plaintiffs to the statutory limit in Nevada law. In 2016, the court deadlocked 4-4 on the issue of whether to overturn the precedent, thereby denying the FTB’s argument to dismiss the case on that basis. The impasse left the precedent in place. (Justice Antonin Scalia participated in oral arguments, but died before he could render an opinion.)

Former U.S. Solicitor General Seth Waxman, representing the FTB, argued that a state may not be sued in another state’s court, as it would violate the principle of sovereign immunity. Justices Sonia Sotomayor, Elena Kagan and Samuel Alito all questioned this argument, asking Waxman if he could point to any specific text in the Constitution to support his argument. Waxman stated that while there is no specific text in the Constitution, he believes that “the principle of state sovereign immunity was so fundamental that it is a postulate that underlies and gives meaning to other provisions of the Constitution.”

Sotomayor also seemed to doubt whether the Supreme Court was the proper entity to resolve the issue. She said the FTB is asking the court to do the states’ work for them, and said that if the states disliked the Supreme Court’s decision so much, they can simply amend the Constitution as they did previously by ratifying the 11th Amendment. She noted that if all the states that submitted amicus briefs in support of the FTB would also support such an amendment, it would be ratified.

Responding to Kagan’s challenge for “textual or historical evidence” for the constitutional rule limiting the power of a state to bring a claim against another state, Waxman said there was an inherent principle “that no state may regulate the government of another state.” Therefore, “just as one state’s governor can’t direct the bureaucracy of another and one state’s legislature can’t regulate the government actions of another, one state’s judiciary can’t call another state’s government to the bar of the court and sanction it for carrying out its own laws.” This argument appeared to be well received by Justice Sotomayor, as she would later ask Hyatt’s attorney Erwin Chemerinsky, dean of the University of California at Berkeley School of Law, to specifically respond to this “intuitive” argument.

Chemerinsky responded that comity, personal jurisdiction and constitutional provisions such as the full faith and credit clause, the fugitive slave clause and the privilege and immunities clause provide protections for the states. He emphasized that “there is no textual provision in the Constitution that limits the power of a state under the 10th Amendment to define its own jurisdiction to provide a remedy for others when they’re injured.” He repeatedly mentioned the Nevada v. Hall decision’s finding that “states may exercise their sovereign power under the 10th Amendment to define the jurisdiction of the courts to protect their citizens when they’re injured, including by other states.” Referring to the legal principle that cases should be decided according to precedent, he argued that there was “no compelling reason for overruling this precedent, discarding stare decisis.”

Justice Stephen Breyer appeared to agree with Chemerinsky regarding the importance of stare decisis. He expressed his belief that “every time we overrule a case, it’s like a little chink in an armor” that makes it harder for a lawyer to deny a client’s request to challenge established case law.

However, some of the other justices appeared to disagree. Alito questioned whether the public would have “greater respect for an institution” that would correct its perceived mistakes rather than sticking to decisions it later believes are incorrect.

Justice Brett Kavanaugh said strict adherence to precedent would have prevented the overruling of “a lot of cases that everyone agrees should be overruled.”

Chief Justice John Roberts asked Chemerinsky to respond to the FTB’s argument regarding the disparate immunity between states and Indian tribes. The FTB argued that it was incongruous that Indian tribes have immunity in state courts from tort claims, while states themselves do not. Chemerinsky reminded the court that this issue is unsettled, as there is a case pending before the court to address this specific issue. He also distinguished the two cases based on the fact that Congress has plenary power over Indian tribes. “Congress can limit state court jurisdiction with regard to Indian affairs in a way that Congress can’t limit state court jurisdiction under the 10th Amendment,” Chemerinsky said.

Although Justice Ruth Bader Ginsburg missed oral arguments, Roberts announced that she will participate in the case by reading the briefs and the oral argument transcript.

Ginsburg, Breyer and Justice Clarence Thomas are the only sitting justices who also were on the high court when the case was unanimously decided in Hyatt’s favor in 2003.

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