Nevada Must Treat California Agency Like a Nevada Agency in Damages Claim

The Supreme Court affirmed the Nevada Supreme Court’s holding that Nevada courts had jurisdiction over a California state agency. However, the Court further held that a Nevada court could not apply Nevada law to award damages against California greater than it could award against Nevada in similar circumstances.

Background

Gilbert Hyatt moved from California to Nevada in the early 1990s. He claimed he sold his house in California and rented an apartment, registered to vote, and opened a bank account in Nevada in September 1991. Thus, he claimed Nevada as his place of residence on his 1991 and 1992 tax returns. Nevada has no state income tax, and California has an income tax with high rates, so Hyatt, who was receiving large amounts of income from licensing patents he owned (including a patent on single-chip integrated computer circuit architecture that is integral to microprocessors), saved millions of dollars of tax as a Nevada resident.

California’s Franchise Tax Board, however, believed that Hyatt had not moved to Nevada until 1992, and it initiated an investigation and tax audit of Hyatt. During this audit, the board’s employees allegedly did not behave well. According to Hyatt, among other things, they traveled to Nevada and allegedly peered through his windows, rummaged around in his garbage, contacted his estranged family members, and shared his personal information not only with newspapers but also with his business contacts and even his place of worship. As a result of the audit, the board determined that Hyatt was a resident of California for 1991 and part of 1992, and that he accordingly owed over $10 million in unpaid state income taxes, penalties, and interest.

In 1998, Hyatt filed suit against the board in Nevada state court. In that suit, he alleged that the board committed a variety of torts, including fraud, intentional infliction of emotional distress, and invasion of privacy. California claimed that under California law the board was immune from suit and that Nevada was required to enforce California’s immunity law. The Nevada Supreme Court found that Nevada’s immunity law, under which a state agency has immunity for negligent but not intentional torts, applied. The board appealed this decision to the U.S. Supreme Court, which held that Nevada was not prohibited from applying its own immunity law in the case.

The case was remanded for trial, and a jury awarded Hyatt almost $400 million in compensatory and punitive damages, including $1 million for fraud. The board appealed the award to the Nevada Supreme Court, which reduced the award to $1 million for the fraud judgment. Although Nevada law capped tort liability for Nevada state agencies at $50,000, the court held that it was against Nevada’s public policy to apply that cap to the board’s liability for the fraud and emotional distress claims. The Nevada Supreme Court maintained that a cap was justified for Nevada agencies because Nevada has legislative control and administrative oversight over its own agencies and employees, but it was not justified for agencies and employees of other states because Nevada had no control over them.

The board appealed this second decision to the U.S. Supreme Court, making two arguments. First, it argued that the Court should overrule its earlier holding in Nevada v. Hall, 440 U.S. 410 (1979), in which it held that a state is not constitutionally immune from suit in the courts of another state; this would make the board immune from suit in Nevada. In the alternative, if the Court chose not to overrule its precedent, the board argued that it was constitutionally impermissible for a Nevada court to award Hyatt damages against the board, a California state agency, greater than the Nevada court would award in a similar suit against a Nevada state agency.

The Supreme Court’s Decision

Regarding the question of whether the Court should overrule the Hall decision and deprive Nevada of jurisdiction over a California state agency, the Court split 4-4, so the Court affirmed the Nevada Supreme Court’s decision that Nevada did have jurisdiction over the board without comment. However, on the second issue, the Court overturned the Nevada Supreme Court’s decision, holding that the Full Faith and Credit Clause of the U.S. Constitution does not permit Nevada to award damages against California agencies under Nevada law that are greater than it could award against Nevada agencies in similar circumstances.

The Court explained, citing Carroll v. Lanza, 349 U.S. 408 (1955), that under the Full Faith and Credit Clause, while a state is not required to replace its own statute with the statute of another state reflecting a conflicting and opposed policy, a state’s refusal to apply another state’s statute cannot embody a policy of hostility to the public acts (which include the statutes) of the other state. The Court stated that it had followed this approach in determining that Nevada could apply Nevada law when the case was before the Court previously.

The Court, however, found that the Nevada Supreme Court had made a critical departure from the approach it took in the earlier decision of simply applying Nevada law. Instead of applying the Nevada immunity law, the Court found that the Nevada Supreme Court had applied a special rule of law applicable only in lawsuits against its sister states. The Court found that this rule allowing for damages in excess of $50,000 not only was opposed to California law, it was also inconsistent with the general principles of Nevada immunity law. The Court stated that:

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 into the internal, legislative affairs of others. [Slip op. at 7 (emphasis in the original)]

The court further asserted that the reasons the Nevada Supreme Court offered for its actions were not sufficient policy considerations to justify applying a special rule of Nevada law that discriminated against other states. The Court remanded the case to the Nevada Supreme Court for “further proceedings not inconsistent with this opinion.”

Reflections

It now looks as if Hyatt will not receive a large damage award based on the deplorable conduct on the part of the employees of the California Franchise Tax Board. However, his fight against paying the tax, penalties, and interest arising out of the board’s audits for 1991 and 1992 rages on in California’s courts.

Chief Justice John Roberts, in his dissenting opinion, noted that prior Supreme Court precedent allows a state to apply rules different from another state’s where it is giving “affirmative relief for an action arising within its borders” (Roberts, C.J., dissenting, slip op. at 6, citing Carroll, 349 U.S. at 413). The fact that the actions arise within its borders gives the state a sufficient policy reason for applying its own law, thus satisfying the Full Faith and Credit Clause. He criticized the majority for attempting to enforce fairness, because, as he noted, “the word ‘fair’ does not appear in the Full Faith and Credit Clause” (id. at 1).

Franchise Tax Board of California v. Hyatt, No. 14-1175 (U.S. 4/19/16)