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Monday, December 07, 2015

Franchise Tax Bd. v. Hyatt: State Sovereign Immunity, Our Federalism, and Jerry Springer, by Jessica Berch and Chad DeVeaux

Today the Supreme Court heard oral arguments in a case that tackles fundamental aspects of Our Federalism, while addressing a set of facts seemingly torn from a Jerry Springer episode.

The case, Franchise Tax Bd. v. Hyatt, involves a tort suit brought by Gilbert Hyatt, a Nevada resident, who became the target of an audit by California’s Franchise Tax Board (FTB) alleging that he failed to report income earned in California. Hyatt alleges (in his brief) that the FTB auditor assigned to his case became “obsessed” with it. She allegedly went to Hyatt’s “Nevada home, peer[ed] through his window, examin[ed] his mail and trash,” and later “returned to his home to take trophy-like pictures.” The suit also alleges that she breached confidentiality rules by discussing “personal information” about Hyatt with her coworkers and that she unlawfully “enlisted [Hyatt’s] ex-wife and estranged members of [his] family.” Hyatt filed his suit in Nevada state court. California moved for summary judgment because California law immunizes the FTB from liability.

Interestingly, the case involves a role-reversal of the Court’s seminal opinion in Nevada v. Hall, 440 U.S. 410 (1979). Hall (as I explained in a prior article) “involved a tort action brought by California plaintiffs against the state of Nevada. A Nevada employee who had entered California on state business caused a traffic accident, which severely injured the plaintiffs. Nevada law strictly limited the state’s financial liability in negligence actions brought against it. Conversely, California law dictated that state actors enjoyed no greater protection from judgments than ordinary litigants. California’s Supreme Court affirmed a judgment against Nevada that exceeded the liability limits of Nevada law.”

The U.S. Supreme Court affirmed the California court’s judgment, concluding that the State’s courts were not obligated to apply Nevada’s liability limits: “If a federal court were to hold, by inference from the structure of our Constitution and nothing else, that California is not free in this case to enforce its policy of full compensation, that holding would constitute [a] real intrusion on the sovereignty of the States — and the power of the people — in our Union.”

The Hyatt case calls for the Court to reassess (and potentially overrule) Hall. Stephen Vladeck coauthored an amicus brief for Professors of Federal Jurisdiction contending that Hall should be reaffirmed. Professor Vladeck argues that the sovereign-immunity doctrine does not prevent a State “from being haled into the courts of another State.”  

Jessica and I agree with Professor Vladeck, but Hyatt sparked our interest for another reason. It could have some (admittedly tangential) ramifications for our ongoing debate over horizontal federalism and the power of states to regulate conduct beyond their borders. 

While Jessica and I reach the same conclusion — Hall should not be overruled — we (of course) wish to spin the case to support own views of state extraterritorial power.

I believe that Hall should be read as a statement of territoriality as well as a sovereign-immunity decision. In my view, in Hall, Nevada — “by metaphorically entering the state of California in the guise of its agent — subjected itself to California’s full sovereign jurisdiction. In short, while Nevada was a guest in California’s proverbial house, it had to live by California’s rules.” A contrary ruling would allow Nevada to project a law into California that the State’s voters had no voice in enacting (admittedly the all-too-common result of modern choice-of-law rules). As Hall noted: “In this nation, each sovereign governs only with the consent of the governed. The people of Nevada have consented to a system in which their state is subject only to limited liability in tort. But the people of California, who have had no voice in Nevada’s decision, have adopted a different system. Each of these decisions is equally entitled to our respect.”

If my interpretation were adopted (which it probably won’t), it would have significant ramifications for the present case. In Hyatt, the auditor’s allegedly tortious actions appear to have taken place both in California (breaching confidentiality) and in Nevada (trespassing). In my view, California’s immunity rules should apply to its agent’s alleged actions in California, but she and the FTB should enjoy no immunity for tortious acts committed in Nevada.  

Jessica reads Hall's extraterritoriality analysis as a straightforward application of conflicts law. Because (to borrow the language of Allstate Ins. Co. v. Hague, which was decided two years after Hall) “significant contacts” existed between California and the underlying tort, the State’s courts could constitutionally apply California law in the suit — which included California’s uncapped-liability rule. She further posits that Hall’s statement on state sovereignty reflects the Court’s judgment that the sovereign-immunity doctrine does not limit a state court’s choice-of-law options concerning the liability of state actors.

She also points out that my view unnecessary complicates matters by forcing courts to confront the “classic” conflicts problem of determining where a multi-jurisdictional tort occurred.

Needless to say, we are very excited for the Hyatt decision and look forward to listening to oral arguments when we get a reprieve from grading.

Posted by Chad DeVeaux on December 7, 2015 at 07:35 PM | Permalink


Prof. Pfander thank for your thoughtful question.

With regard to the facts of Hyatt,we have not reviewed the record to determine precisely what the jury’s findings were. The amount of the award suggests that many or all of Hyatt’s allegations were substantiated. We merely used the descriptor “alleged” out of caution.

With regard to Justice Stevens’s position, we have a couple comments. First, we applaud his view that the FFC and DP Clause serve independent functions and ought to be evaluated separately — though a majority rejected this in Shutts. Second, with regard to his views on sovereignty, he believes that the FCC “does not . . . rigidly require the forum State to apply foreign law whenever another State has a valid interest in the litigation.” Rather, the forum, as “a sovereign in its own right” may choose to apply its own law “unless that choice threatens the federal interest in national unity by unjustifiably infringing upon the legitimate interests of another State.” In Hague, he posits that Minnesota’s refusal to apply Wisconsin’s “stacking” rule “pose[d] no ... threat to Wisconsin’s sovereignty” because the policy covered “accidents that might occur in other States”; thus, Wisconsin’s interest in applying its own law was weak.

One might argue that California’s refusal to respect Nevada’s sovereign immunity in Hall did constitute a threat to its sovereignty. In his Hague concurrence, Justice Stevens notes Hall and contends that California’s application of its own rules in that case did not pose such a threat to Nevada. We do not view these positions as inconsistent, but rather see them as varying applications of the same rule. We believe Stevens’s concurrence would have been stronger if he better explained why exactly California’s disregard for Nevada’s interest in its immunity rule did not intrude upon its sovereignty. Arguably, Hall answered this by concluding that forcing California to disregard its own liability rule would equally offend its own sovereignty. Jessica agrees with Stevens’s view of state sovereignty. I believe it does not adequately protect a state’s sovereign interest. This is a debate we will continue in this blog.

Third, we think Stevens’s greater emphasis on the foreign state’s interest in the litigation in Hague is likely a product of the fact that he wrote that opinion for himself alone, rather than attempting to coalesce a majority as he did in Hall.

Thanks again, Chad and Jessica

Posted by: Chad DeVeaux | Dec 8, 2015 5:28:59 PM

Two quick questions: Is there some reason to think that the facts, now embedded in a jury verdict and partially upheld upon appeal, were mistakenly found? I suppose California would continue to contest them. What do you make of gap between Justice Stevens' view of state sovereignty as a factor in his FFC analysis in Allstate and his view in Nevada?

Posted by: Jim Pfander | Dec 8, 2015 10:55:41 AM

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