Kennedy Key in Interstate Suit Spat

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By Nicholas Datlowe

Nov. 30 — Next week the U.S. Supreme Court will take up, for the second time, a fight between a Nevada taxpayer and California's income tax collection authority.

According to one constitutional scholar, the case boils down to a fundamental constitutional question: What is federalism? (Franchise Tax Bd. of Cal. v. Hyatt, U.S., No. 14-1175, oral argument scheduled 12/7/15).

Put another way, the question is whether federalism “protects states from the federal government, or from each other,” Stephen I. Vladeck, a professor at American University Washington College of Law, Washington, told Bloomberg BNA Nov. 24.

Vladeck helped author an amicus brief, on behalf of several professors of federal jurisdiction, in support of Nevada taxpayer Gilbert Hyatt.

“How much one is at risk when one travels to another state, and how much the other state can harass them when they leave” is the “real question” beyond the abstract federalism inquiry, Vladeck said.

Kennedy at Center Stage?

Charles W. Thompson Jr., general counsel and executive director of the International Municipal Lawyers Association, Bethesda, Md., agreed, but framed the issue differently.

It is “relatively frequent” that representatives of local governments near state borders have to cross state lines, such as police in hot pursuit, or as emergency responders, he said. “Even if they don't get the protection they would have in their home state, they should get the protection of the host state,” he told Bloomberg BNA Nov. 19.

It's a “very significant” issue for municipalities, he added.

IMLA submitted an amicus brief, along with a number of intergovernmental associations, in support of the Franchise Tax Board of California.

Vladeck agreed, saying that the decision here involves “as important a constitutional principle” as the same-sex marriage cases decided last term in Obergefell v. Hodges, 83 U.S.L.W. 4592, 2015 BL 204916 (U.S. June 26, 2015) (83 U.S.L.W. 1989, 6/30/15).

He also suggested that, as in the same-sex marriage cases, Justice Anthony M. Kennedy would supply the deciding vote and write the majority opinion.

A Tax and Attacks

According to the parties' briefs, Hyatt earned hundreds of millions of dollars by licensing technology patents—money on which California believed he owed state income taxes. Hyatt claimed to have moved to Nevada, but the FTB—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. Hyatt's administrative challenges to those decisions are still pending, more than 25 years later.

In the meantime, 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 she was going to “‘get that Jew bastard,'” referring to Hyatt.

In a previous trip to the Supreme Court, the justices held that the FTB wasn't entitled under the full faith and credit clause to the absolute immunity that it would have had in a California court, in Franchise Tax Bd. of Calif. v. Hyatt, 538 U.S. 488 (2003) (71 U.S.L.W. 1661, 4/29/03).

This time around, the FTB argues that as a matter of state sovereignty, it can't be haled into Nevada's courts without its consent in the first place—or, if it can, that it's entitled to at least the same immunity that Nevada would accord to its own state entities.

‘Frontal Assault.'

The problem with the first argument is that it's what Vladeck called a “frontal assault” on Nevada v. Hall, 440 U.S. 410 (1979), where the Supreme Court said—in another battle between Nevada and California—that state entities can be haled into the courts of other states without their consent.

Vladeck said that case wasn't unique when it was decided, but subsequent decisions appear to have taken it over.

In a series of decisions, the Rehnquist court made it harder for states to be sued by individuals under any law, Vladeck said. “But it never answered the question of what would happen if one state was haled into the courts of another state, and it was never asked to revisit Nevada v. Hall,” he said.

William J. Rehnquist was Chief Justice of the United States from 1986 to 2005. He dissented in Nevada v. Hall while an associate justice.

“One of the real hallmarks of the Rehnquist court was a renewed devotion to sovereignty, and especially state sovereignty,” he said.

Vladeck said it was “indeterminate” which way the Rehnquist court would have gone if asked to revisit the case. It pits “one competing understanding of the federalist project” against another, he said.

He also said that on the Rehnquist court both Kennedy and Justice Sandra Day O'Connor could have been potential swing votes. With O'Connor gone, however, it all hinges on Kennedy, he said.

Thompson suggested that Nevada, which is not directly involved in this case, might actually support the FTB in this argument, however. He pointed to a recently-settled case where San Francisco sued Nevada in California court over alleged “patient-dumping”—busing the mentally ill across state lines without providing for their proper care.

Good for the Goose?

The FTB's second argument—that it should be entitled to the same immunities Nevada entities get in Nevada courts—faces difficulties as well, because although state sovereign immunity is a constitutional principle, it's not actually written in the Constitution, Vladeck said.

“The conservatives on the court are doing exactly what they accuse the liberals of doing—finding rights in the Constitution that are not specifically explicated,” he said.

He also said that the equities of the situation are unclear, even for pro-federalist justices, because there are state interests on both sides of the case.

That said, the states seem to have decided where their interests lie—44 states have joined in an amicus brief supporting the FTB, but none has joined Hyatt.

Vladeck said he was “not surprised,” because “states will be more worried about being dragged into another state's courts than their citizens being able to sue in their courts.”

He called this view “myopic,” however.

Overruling Nevada v. Hall would leave individuals with no recourse against nonconsenting states that act outside their borders, unless the individual's state could sue on his behalf. But this raises questions of standing—whether states can sue based on harms to their citizens—and could put pressure on the Supreme Court's original jurisdiction docket, he said.

Thompson said that in border areas like the Washington metropolitan area, police, fire and transportation workers are constantly moving across state lines, and the protections and immunities afforded in each jurisdiction can vary greatly. Those individuals should be afforded the immunities of either the host or the home state, he said. “Pick one, but at least one,” he added.

‘Fool's Errand.'

Thompson declined to predict how the Supreme Court would decide the case. “I'm not a good handicapper,” he said.

Vladeck said that trying to predict how Kennedy will vote is a “fool's errand,” but “gun to my head, I think he'll likely vote for California, because it's hard to see the long-term harm to states from denying relief to their citizens, given the short-term harms.”

Still, “I hope our brief will give him pause,” he said.

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