FTB Was Immune From Nevada Inventor's Suit, Divided U.S. Supreme Court Rules

In its 5-4 decision in Franchise Tax Board of California v. Hyatt, the high court said the FTB committed “egregious conduct,” but found that a state may assert sovereign immunity as a defense against suits filed in another state’s courts. This decision overrules a 40-year-old precedent set in Nevada v. Hall.

This case arose from an FTB audit focused on Hyatt’s residency for tax years 1991 and 1992. During the course of the audit, an agent for the FTB visited Hyatt’s home in Nevada and rummaged through his garbage and personal mail. In 1998, Hyatt sued in Nevada state court asserting that the FTB had defamed him and violated both his property and privacy rights.

After a lengthy trial, a Nevada jury ruled in favor of Hyatt and ordered the FTB to pay punitive damages of $250 million based on its employees’ tortious conduct. The FTB appealed that decision to the U.S. Supreme Court, which ruled in 2016 that a state, when sued in another state, is liable for no more than the forum state would be liable for. Based on that decision, the damages were reduced to $100,000, which is the maximum Nevada would have been liable for if the case was brought against its tax agency.

Prior to the jury trial, the U.S. Supreme Court was asked to rule on whether Hyatt had the right to sue. In a 2003 opinion authored by Justice Sandra Day O’Connor (who retired in 2006), the court cited Nevada v. Hall as precedent in allowing taxpayer Hyatt to sue and placing a limit on the damages he could recover if he won. At that time, the Nevada v. Hall precedent specified “that the Constitution does not bar private suits against a State in the courts of another State.”

This week’s ruling, delivered 16 years later, took the opposite view: “States retain their sovereign immunity from private suits brought in the courts of other States.”

Hyatt was represented in the Supreme Court arguments by Dean Erwin Chemerinsky of the University of California at Berkeley School of Law. Chemerinsky said he was “obviously disappointed at the decision,” and added: “The Supreme Court overruled a 40-year-old precedent and made it much more difficult to hold state governments accountable.”

Chemerinsky said he is disappointed that “the Franchise Tax Board violated Mr. Hyatt’s rights in an egregious manner, but now cannot be held accountable.”

While Justice Clarence Thomas, who authored the majority opinion, expressed remorse over the negative impact the ruling will have on Hyatt, he said the impact is not sufficient to “persuade us to adhere to an incorrect resolution of an important constitutional question.”

“Some plaintiffs, such as Hyatt, have relied on Hall by suing sovereign States,” the court wrote. “Because of our decision to overrule Hall, Hyatt unfortunately will suffer the loss of two decades of litigation expenses and a final judgment against the Board for its egregious conduct.”

Referring to the legal doctrine of following precedent, Thomas’ opinion states that “stare decisis is ‘not an inexorable command.’”

Justice Stephen Breyer authored the dissenting opinion, in which he questioned the majority’s reasoning and voiced concern about the possibility of overruling other precedents. “Today’s decision can only cause one to wonder which cases the Court will overrule next,” Breyer wrote, adding that decisions such as this undermine the legal system.

“Each time the Court overrules a case, the Court produces increased uncertainty,” Breyer wrote. “To overrule a sound decision like Hall is to encourage litigants to seek to overrule other cases; it is to make it more difficult for lawyers to refrain from challenging settled law; and it is to cause the public to become increasingly uncertain about which cases the Court will overrule and which cases are here to stay.”

The court’s decision – and Breyer’s dissent – caused many observers to speculate about other longstanding precedents, most notably Roe v. Wade, which was decided in 1973.

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