SCOTUS Victory for Cities Sued Out-of-State

If your city gets sued out-of-state it might not be as bad as you think thanks to the Supreme Court’s decision in Franchise Tax Board of California v. Hyatt.

In this case the Supreme Court held 6-2 that the Constitution’s Full Faith and Credit Clause requires state courts to apply a damages cap, which applies to the state, to  foreign states and local governments sued in its court.

The State and Local Legal Center filed an amicus brief in this case asking the Court to reach this result. State and local governments are frequently sued out-of-state and will benefit if other states’ immunities apply to them. 

Gilbert Hyatt says that he moved to Nevada in September 1991. But the California’s Franchise Tax Board (CFTB) claimed that Hyatt moved to Nevada in April 1992 and therefore owed California more than $10 million in taxes, penalties, and interest. Hyatt sued CFTB in Nevada state court alleging invasion of privacy, fraud, and intentional infliction of emotional distress, among other claims, related to what he described as abusive audit and investigation practices.

In 2003 in Franchise Tax Board of California v. Hyatt the Supreme Court held that the Full Faith and Credit Clause does not require Nevada to offer CFTB the full immunity that California law provides.

A Nevada jury ultimately awarded Hyatt nearly $500 million in damages and fees. The Nevada Supreme Court refused to apply Nevada’s $50,000 statutory cap, which applies to Nevada state and local governments, to damages related to Hyatt’s fraud claim. CFTB claimed this refusal violates the Full Faith and Credit Clause.

Per the Constitution, “Full Faith and Credit” must be “given in each State to the public Acts . . . of every other State.” The Court concluded that the Full Faith and Credit Clause requires Nevada state courts to apply the damages cap that it would apply to Nevada to CFTB. The Full Faith and Credit Clause prohibits a state from adopting a “policy of hostility to the public Acts” of another state. According to Justice Breyer, writing for the majority, Nevada’s rule allowing damages awards of over $50,000 against foreign states and local governments is “not only ‘opposed’ to California law [which provides total immunity], it is also inconsistent with the general principles of Nevada immunity law” [which grants the state immunity over $50,000].

The Nevada Supreme Court explained it didn’t apply the damages cap to CFTB because California’s agencies “‘operat[e] outside’” the systems of “‘legislative control, administrative oversight, and public accountability’” that Nevada applies to its own agencies. The Court was not persuaded by this argument. “Such an explanation, which amounts to little more than a conclusory statement disparaging California’s own legislative, judicial, and administrative controls, cannot justify the application of a special and discriminatory rule. Rather, 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.”

Interestingly, the Court was divided 4-4 over the question of whether to overrule Nevada v. Hall (1979), holding that a state may be sued in another state’s courts without consent.  So that case remains the law of the land. Had the Court overruled Nevada v. Hall the issue it decided in this case would have been moot. The SLLC amicus brief took no position on Nevada v. Hall.

Quin Sorenson and Spencer DriscollSidley Austin, Washington D.C. wrote the SLLC amicus brief which was joined by the Council of State Governments, the National Association of Counties, the National League of Cities, the United States Conference of Mayors, the International City/County Management Association, and the International Municipal Lawyers Association