Justices Flesh Out Federalism Using Full Faith & Credit

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By Nicholas Datlowe

April 18 — The U.S. Supreme Court fleshed out the meaning of federalism April 19 relying on the full faith and credit clause, but the justices split evenly on whether to overrule a 40 year-old case that allows states to be sued in the courts of other states.

Allowing higher damages against a California agency than would be allowed against a Nevada one “reflects a special, and constitutionally forbidden,” hostile policy against the public acts of another state, Justice Stephen G. Breyer wrote for a 6–2 court on the full faith and credit clause issue.

The 4-4 ruling on the issue of whether to overturn Nevada v. Hall, 440 U.S. 410 (1979), means that the lower court's exercise of jurisdiction over the California agency will stand.

The result introduces a concept of “equality of treatment” into suits between states, according to Quin M. Sorenson, a partner at Sidley Austin LLP, Washington.

“This is important, and hadn't been clear before this decision,” he told Bloomberg BNA in an April 19 call.

But the application of the full faith and credit clause by both the majority and the dissent left “more than a little to be desired,” Stephen I. Vladeck, a professor at American University Washington College of Law, Washington, told Bloomberg BNA in an April 19 e-mail.

The result is one of “great significance,” especially for agencies and officers who operate near state borders, according to Charles W. Thompson Jr., general counsel and executive director of the International Municipal Lawyers Association, Bethesda, Md.

The threat of an interstate suit is high for these actors, and the result here affords them significant protections, he told Bloomberg BNA in an April 19 call.

Sorenson also noted that the threat of unpredictable damages awards in interstate suits made budgeting and buying insurance difficult for some municipalities and localities. This decision “blunts that Sword of Damocles somewhat,” he said.

Sorenson filed a friend of the court brief on behalf of several municipal organizations, including the IMLA, arguing for the result here. Vladeck helped author an amicus brief on behalf of several professors of federal jurisdiction in support of Nevada taxpayer Gilbert Hyatt.

Torts & Taxes

Hyatt earned hundreds of millions of dollars by licensing technology patents—money on which California believed he owed state income taxes. Although Hyatt claimed to have moved to Nevada, the Franchise Tax Board of California—charged with collecting California income taxes—believed that he had falsified his residency to avoid the taxes.

After auditing, the FTB determined that Hyatt owed more than $10 million in back taxes, interest and penalties.

In the meantime, however, Hyatt also sued the FTB in Nevada, alleging several Nevada state law torts. He argued that the FTB went “well beyond legitimate bounds in their attempts to extract a tax settlement,” including allegations that one FTB auditor said, referring to Hyatt, that she was going to “‘get that Jew bastard.'”

The FTB argued that as a matter of state sovereignty, it couldn't be haled into Nevada's courts without its consent in the first place—or, if it could, that it's entitled, by full faith and credit, to at least the same immunity that Nevada would accord to its own state entities.

The Supreme Court divided evenly on the first question, leaving Nevada v. Hall's holding—that states may exercise jurisdiction over other states in their own courts without consent—intact. It therefore turned to the full faith and credit issue.

Although full faith and credit had taken up significantly less of the court's attention at oral argument, Sorenson said the decision on this basis was “not a surprise.”

The court prefers to decide cases narrowly, and this holding is narrower than one overruling Nevada v. Hall would have been, he said.

Avoiding ‘Chaotic Interference.'

Under Nevada law, damages awards against Nevada agencies are limited to $50,000. Here, however, the Nevada Supreme Court affirmed a $1 million award against the California agency.

In so doing, the “Nevada Supreme Court has ignored both Nevada's typical rules of immunity and California's immunity-related statutes,” and “applied a special rule of law that evinces a ‘policy of hostility' toward California,” the U.S. Supreme Court said.

This “special rule of law applicable only in lawsuits against its sister States” violated the full faith and credit clause, it decided.

The Nevada court attempted to justify this disparate treatment by noting that the FTB operates outside the systems of legislative control, administrative oversight and public accountability within which Nevada agencies operate, the Supreme Court said.

“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,” it said.

Such a justification would be “likely to cause chaotic interference by some States into the internal, legislative affairs of others,” it said.

This is “one of the first times in about 40 years that the court has put a significant restriction on haling a state into the courts of another state,” Sorenson said.

There was “a sentiment running through the majority opinion that Nevada had to be reined in—and that this was the best way to do it,” Vladeck said. The “real question” was whether the analysis would matter in any other case.

Justice Samuel A. Alito Jr. concurred in the result but, interestingly, didn't join the majority opinion and didn't write separately to explain his reasoning.

Presence in Absence

Sorenson had “no doubt” that the absence of the late Justice Antonin Scalia, who died after the case was argued, had an affect on the outcome. “One vote makes the difference” on the state sovereign immunity question, he noted.

It was “impossible” to determine how his absence affected the outcome, however, he said.

Vladeck agreed that Scalia's absence was important, but disagreed that it was impossible to predict how he would have ruled.

“Given his prior views on state sovereign immunity and his questions at oral argument, it's almost a certainty that he voted with the four other conservatives at Conference to strike down Nevada v. Hall,” he said.

Scalia's death meant the court “had to reach, however clumsily, the full faith and credit issue.”

The decision here appeared to be the first that the court had to redo from scratch in light of Scalia's death, Vladeck said.

He also suggested that Alito's concurrence-without-opinion is further evidence that the opinions were initially “all about” sovereign immunity and overruling Nevada v. Hall.

“The later in the process these opinions emerged, and the less they reflected what had been discussed at Conference, the more it makes sense that someone like Justice Alito would record such a concurrence,” he said.

‘Hybrid New Rule.'

Chief Justice John G. Roberts Jr., joined only by Justice Clarence Thomas, dissented.

The court's result “seems fair,” he said. “But, for better or worse, the word ‘fair' does not appear in the Full Faith and Credit Clause.”

Roberts disagreed that Nevada's justifications for not applying its own damages cap were insufficient. “The majority may think that Nevada is being unfair, but it cannot be said that the State failed to articulate a sufficient policy explanation,” he said.

He also argued that the court's result turned the full faith and credit clause into a “choose-your-own-law” provision, requiring the Nevada court to apply neither Nevada law—which would hold the FTB fully liable—nor California law—which would hold it fully immune—but a “hybrid new rule.”

“Roberts certainly seems to be onto something when he suggests that it's odd for the court to decide for itself the legitimacy of Nevada's justifications,” Vladeck said.

But Roberts's “all-or-nothing” stance was based on a “false supposition” that full faith and credit had to either fully apply, or fully not, Sorenson said.

Future Challenges?

Sorenson also suspected that the challenges to Nevada v. Hall weren't over, either.

“It's an issue of prominence which has been raised in the courts below,” he said. There are already challenges to it bubbling up through the lower courts, he said.

“The question is whether the court will feel the need to deal with it,” he said. This case created “new protections for state actors, but it may be less important to give additional protections within the next few years,” he suggested.

Paul D. Clement of Bancroft PLLC, Washington, argued for the FTB.

H. Bartow Farr of Washington argued for Hyatt.

To contact the reporter on this story: Nicholas Datlowe in Washington at ndatlowe@bna.com

To contact the editor responsible for this story: Jeffrey D. Koelemay at jkoelemay@bna.com