April 19, 2016

Supreme Court Decides Franchise Tax Board of California v. Hyatt

On April 19, 2016, the Supreme Court decided Franchise Tax Board of California v. Hyatt, No. 14-1175, holding that under the Full Faith and Credit Clause, U.S. Const., Art. IV, § 1, a State may not decline to apply the law of a sister State in favor of a special rule that is hostile to the public Acts of that sister State.

In Nevada v. Hall, 440 U.S. 410 (1979), the Court held that a State may open its courts to a private citizen’s suit against another State without that State’s consent. Plaintiff Hyatt, a Nevada citizen, invoked Hall in filing suit in Nevada against the Franchise Tax Board of California. Hyatt alleged that the Board had engaged in abusive practices in investigating and auditing his taxes. California, which did not consent to the suit, asked the Nevada court to dismiss the action on the ground that California law immunizes California state agencies from lawsuits based on actions taken in the course of tax audits. The Nevada Supreme Court declined to dismiss, holding instead that Nevada’s courts, as a matter of comity, would immunize California’s agencies, but only to the extent that Nevada law would immunize its own agencies. Because Nevada law immunizes Nevada agencies for actions taken in the course of “discretionary” functions, but not actions taken in bad faith or intentional torts, the Nevada Supreme Court permitted Hyatt’s suit to proceed, and the United States Supreme Court affirmed. Franchise Tax Bd. of Cal. v. Hyatt, 538 U. S. 488 (2003).

On remand and following a trial, a jury awarded Hyatt nearly $500 million in compensatory and punitive damages and fees, including attorney’s fees. California appealed, arguing that the award violated the Full Faith and Credit Clause because Nevada law would cap damages at $50,000 in a similar suit against similar Nevada officials. The Nevada Supreme Court agreed as to the statutory damages limit under Nevada law, but reasoned that Nevada’s interest in providing “adequate redress” to its citizens outweighed its interest in capping damages awards against California under the guise of comity. The Nevada court therefore affirmed $1 million of the award as damages for Hyatt’s fraud claim and remanded for retrial of the issue of damages for Hyatt’s intentional infliction of emotional distress claim.

In its certiorari petition, California asked the Supreme Court to reconsider its holding in Hall, or, assuming it did not overrule Hall, to determine the constitutionality of the Nevada Supreme Court’s decision under the Full Faith and Credit Clause.

The Supreme Court split on revisiting Hall, resulting in a “4-to-4 affirmance of Nevada’s exercise of jurisdiction over California’s state agency.” On the merits, the Supreme Court reversed the Nevada Supreme Court’s decision. Citing Hall, the Court emphasized that the Full Faith and Credit Clause “does not require one State to apply another State’s law that violates its ‘own legitimate public policy,’” where the choice of law does not “exhibit a ‘policy of hostility to the public Acts’ of a sister State.” Although the Nevada Supreme Court’s choice to permit Hyatt’s case to proceed furthered these principles, its decision on damages represented a “critical departure” from them. The Court held that the special rule that the Nevada Supreme Court imposed was both “‘opposed’ to California law” and inconsistent with Nevada law, and dismissed Nevada’s proffered policy considerations as insufficient “to justify the application of a special rule of Nevada law that discriminates against its sister States.” Without returning to the “complex ‘balancing-of-interests approach to conflicts of law under the Full Faith and Credit Clause,’” the Court held that a State may not constitutionally disregard its own legal principles on the basis of conclusory denunciations of another State’s government.

Justice Breyer delivered the opinion of the Court, joined on the merits by Justices Ginsburg, Kagan, Kennedy, Sotomayer. Justice Alito concurred in the judgment. Chief Justice Roberts filed a dissenting opinion on the merits, joined by Justice Thomas. The Court did not identify the Justices’ respective positions on the 4-4 jurisdictional deadlock.

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