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Justices Question Extent of Tax Agency’s Sovereign Immunity

Eric Kroh of Law 360

Law360, New York (December 7, 2015, 6:22 PM EST) — Members of the U.S. Supreme Court on Monday delved into arguments that they should overturn their own precedent that states are not immune from being sued in one another’s courts in a dispute between a Nevada inventor and California tax collectors.

The California Franchise Tax Board is asking the court to overrule its 36-year-old precedent in Nevada v. Hall that said states can be brought before the courts of another state against their will. The agency says it should be protected from a lawsuit by inventor Gilbert Hyatt, who is suing the FTB in Nevada over its actions in pursuing some $10 million in back taxes.

Paul D. Clement of Bancroft PLLC, representing the FTB, argued before the high court that states’ immunity from being sued in the courts of another state is implicit in the Constitution.

For example, the 11th Amendment stands for the principle that states cannot be sued by the residents of another state even in the most neutral forums, the federal courts, Clement said. At the time of the nation’s founding, the states entered the Union saddled with substantial war debts, and they willingly gave up the right to sue other states in federal courts in order to avoid potentially bankrupting judgments, he said.

Some of the justices responded, however, that while the 11th Amendment may bar states from being sued in federal court, the Constitution’s protection does not extend to the level of the state courts.

“I can understand why they thought they needed the 11th Amendment, but what makes you think that they gave up their sovereignty with each other with respect to these kinds of issues?” Justice Sonia Sotomayor said. “It’s not in the Constitution.”

Justice Elena Kagan pointed out that there is a significant difference between a state being sued in federal court and being sued in the courts of another state. States are on par with one another and can retaliate in kind if another state takes action against them, she said.

Justice Ruth Bader Ginsburg said that in Nevada v. Hall, the court distinguished between sovereignty on the federal and state level. Two states are equally sovereign, and neither has to respect the sovereign immunity of the other unless they make an agreement to do so, she said.

Justice Antonin Scalia, however, questioned whether the 11th Amendment should apply only at the federal level. There’s an assumption behind the 11th Amendment that the states cannot be sued without their consent, he said. He asked H. Bartow Farr of H. Bartow Farr Law Office, who is representing Hyatt, why that should not apply to suits in the courts of other states.

Farr said the FTB’s argument doesn’t give proper weight to the difference of power between the federal government and state governments. Between equal sovereigns, there is no expectation that there is a mutual immunity from lawsuits, he said. For example, in international law, nations can be sued in the courts of another, he said.

“If sovereign immunity is what the board says it was or is, that a sovereign can never be sued without its consent in the courts of another state, then the entire international world is operating on an incorrect premise,” Farr said.

The justices spent less time on the question of whether states should enjoy the same immunity rights in the courts of another state as those other states enjoy in their courts. The FTB is arguing that it should be protected by a $50,000 cap on damages that applies to decisions against Nevada agencies in Nevada courts.

Justice Stephen Breyer said that it makes some intuitive sense that a state should not be able to give less sovereign immunity to another state than it enjoys in its own courts, but that he struggled to come up with a legal justification for why that should be the case.

Hyatt’s dispute with the FTB stemmed from the agency’s attempt to collect $10 million in taxes on patent licensing fees Hyatt earned in the early 1990s.

Hyatt sued the FTB in Nevada state court, alleging that the investigation had cost him business partnerships and inflicted emotional distress. Hyatt was awarded a judgment against the FTB of more than $490 million, but the Nevada Supreme Court upheld just $1 million in damages for fraud and remanded the case for a retrial to determine the emotional distress damages.

The case has come before the U.S. Supreme Court once before, in 2003, when the high court decided that the Constitution does not require Nevada’s courts to apply the laws of California in the case.

The Franchise Tax Board is represented by Paul D. Clement, George W. Hicks, Jr., Stephen V. Potenza and Michael D. Lieberman of Bancroft PLLC, Pat Lundvall and Debbie Leonard of McDonald Carano Wilson LLP, and Scott W. DePeel.

Gilbert Hyatt is represented by H. Bartow Farr of H. Bartow Farr Law Office.

The case is Franchise Tax Board of the State of California v. Gilbert P. Hyatt, case number 14-1175, in the U.S. Supreme Court.

–Editing by Catherine Sum.

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