Full Faith and Credit Clause Prohibits Nevada Court’s Damage Award Against California

The state of Nevada cannot apply Nevada law to award damages against the California Franchise Tax Board that are greater than it could award against a Nevada state agency in similar circumstances, the U.S. Supreme Court held on Wednesday (Franchise Tax Board of California v. Hyatt, No. 14-1175 (U.S. 4/19/16)). The Court said that Nevada, by disregarding its own legal principles, was employing a constitutionally impermissible “policy of hostility to the public Acts of a sister State.” The case involved a former California resident, who, after he moved to Nevada, was subject to an abusive investigation by the California Franchise Tax Board, which was trying to establish that he had not moved from California when he said he had.

The 6–2 decision was written by Justice Stephen Breyer and joined by Justices Anthony Kennedy, Ruth Bader Ginsburg, Sonia Sotomayor, and Elena Kagan. Justice Samuel Alito concurred in the judgment, and Chief Justice John Roberts and Justice Clarence Thomas dissented.

Facts

Gilbert Hyatt moved from California to Nevada, which does not have an income tax, in the early 1990s. He claims he moved in September 1991, but the California taxing authorities claimed it was in April 1992 and that as a result he owed $10 million in taxes, penalties, and interest. In the course of their investigation, the California authorities allegedly went through Hyatt’s garbage, peered through his windows, and contacted his estranged relatives, among other things.

Hyatt sued the California Franchise Tax Board in Nevada state court, at least in part to get around California’s sovereign immunity statute. This action against California in Nevada’s state courts is permitted under a Supreme Court decision that held that one state can allow a private citizen’s lawsuit against a second state to proceed in its courts without the second state’s consent (Nevada v. Hall, 440 U.S. 410 (1979)). That decision was challenged in this lawsuit, but the Court was divided on the question of whether that decision should be overruled and declined to reverse the prior holding.

A jury originally awarded Hyatt $500 million, which included compensatory and punitive damages and attorneys’ fees. California appealed, arguing that Nevada’s law limiting damages in similar suits against Nevada agencies to $50,000 required a similar cap under the Full Faith and Credit Clause. But the Nevada Supreme Court, while lowering the damage award significantly to the $1 million awarded for fraud and remanding the case to determine damages for intentional infliction of emotional distress, found that the limit did not apply to California when Nevada was seeking to protect its citizens from another state’s actions.

Holding

The U.S. Supreme Court found that the Nevada court’s imposition of a large damage award against a California agency, when awards against its own agencies are capped at $50,000, reflected a constitutionally impermissible policy of hostility to the public acts of a sister state (slip op. at 7, citations omitted). In the Court’s view, Nevada’s holding allowing damages in excess of the cap to protect its citizens from other states is contrary to the doctrine that principles of comity be applied “with a healthy regard for California’s sovereign status” (slip op. at 8, citations omitted). The Court characterized the Nevada holding as a “special rule of law applicable only in lawsuits against its sister States” (slip op. at 6) and inconsistent with general principles of Nevada immunity law, capping awards at $50,000.

The Court therefore held the Nevada Supreme Court’s decision to be unconstitutional and remanded the case for further proceedings.

Dissent

In their dissent, Roberts and Thomas point out that this is the second time this case has been before the Court and that the earlier decision permitted Nevada to impose damages in excess of the cap. They reiterated their belief that the Full Faith and Credit Clause allows Nevada to adopt a different damage scheme when it is attempting to protect its residents from the actions of out-of-state agencies that are beyond Nevada’s control and that “the Clause does not block a State from applying its own law to redress an injury within its own borders” (Roberts, C.J., dissenting, slip op. at 2).

—Sally P. Schreiber (sschreiber@aicpa.org) is a Tax Adviser senior editor.