WASHINGTON DC (CN) - State sovereignty and immunity from lawsuits in other states will hinge on a U.S. Supreme Court decision regarding a $389 million Nevada ruling against California's Franchise Tax Board.
The high court heard oral arguments Monday on behalf of the Franchise Tax Board of California, which a Nevada court ordered to pay $389 million to Gilbert P. Hyatt for misrepresenting an audit process that led to a $10.5 million tax assessment against Hyatt.
Nevada's Supreme Court in September 2014 threw out the $389 million judgment against the board, but did not grant it the immunity it sought, leading to Monday's oral arguments.
Attorney Paul D. Clement, arguing for the Franchise Tax Board, said the 11th Amendment gives states immunity against lawsuits filed in other states to prevent courts in one state from issuing financially devastating judgments impacting another, but states can agree to waive immunity.
"Nevada and California could decide that they have sufficient comity and respect for each other that it's perfectly fine for California to be sued in Nevada court," Clement said. "But conversely, they could come and make a contrary decision because of their sovereign immunity and say, no, if you want to sue us, come into our courts."
Justice Sonia Sotomayor asked Clement why he thought states gave up their sovereignty with respect to one another. Clement said states didn't give up the right of one state to haul another into its courts, because that right never existed.
"This court has a whole host of state sovereign-immunity cases dealing with the federal courts. Every one of those cases is a case that's applying sovereign immunity as of comity. Because the new federal court system is a foreign court system," Clement said.
"So when this court says, well, the states had sovereign immunity and they didn't sacrifice it in the Constitution, they're not talking in those cases about sovereign immunity as of right; they're talking about sovereign immunity as of comity. So, too, in the tribal immunity cases," he added.
Clement also argued that the Nevada court improperly applied Nevada law by treating the Franchise Tax Board as an individual instead of a state agency.
"When they start to apply Nevada's law of sovereign immunity, they get to the point where there's a $50,000 damage cap and they say - unbelievably in my view - but they say, oh, well, this statute only applies to Nevada's government agencies. And you're not a Nevada agency, so you don't get the benefit of it," Clement argued.
On rebuttal, H. Barton Farr said the notion of state sovereign rights amounts to a "chicken-or-egg problem" in that states only were created in the late 1700s and only existed for about a decade when they ratified the Constitution.
Farr said it wasn't until the Supreme Court's 1979 decision in Nevada v. Hall that the matter of state sovereign immunity rose to the federal court level, and the court held that a state does not have constitutional immunity.
And an 1812 decision in Schooner Exchange v. M'Faddon established the absolute sovereign authority of states within their territories in regard to other states, Farr said.
"What Schooner Exchange says is that each sovereign within its own territory has exclusive and absolute authority. And, therefore, if another sovereign is going to come into that territory and act contrary to the laws of the sovereign, it can only do so with the consent of the home sovereign. That's the principle on which all of this is based," Farr argued.
Justice Antonin Scalia said "there's an assumption behind the 11th Amendment that the states cannot be sued without their consent" and asked Farr why that would only apply to lawsuits filed in federal courts and not lawsuits filed in state courts.
"What the court really just needs to do now is put the third leg on the immunity triangle," Farr responded.
"It's already made clear that states have immunity in their own courts, which is the English tradition, and that states have immunity in federal courts. That's the 11th Amendment. So, all, really, the court should be doing now is to draw the last part of that and say they have immunity in the courts of other states," Farr said.
Scalia said the framers of the Constitution gave assurances to states that they have immunity from lawsuits in other states based upon the assumption that no state can be pulled into the courts of another without its consent.
"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 countered.
He said the Foreign Sovereign Immunities Act allows for nations to be sued within the United States without their consent, and the Republic of Austria previously was denied immunity in a matter before the Supreme Court.
The only immunity given states when they ratified the Constitution, Farr argued, is immunity against cases brought by individuals in Federal Court.
"If you accept that deal and then you look at the language of the 11th Amendment, the language doesn't capture that deal because it leaves aside suits by citizens of your own state," Farr said.
While Clement argued states would not agree to sovereign immunity in Federal Court but forgo immunity within state courts, Farr said that argument "doesn't give proper weight to the balance of power between the federal government and state governments and between the state governments horizontally."
"There is no principle that is any clearer than the fact that a superior sovereign cannot be brought to answer in the courts of inferior sovereigns," Farr said. "With respect to other states, however, there is inequality. They could subject other states to suit in their courts, but if they did, then they might be subject to suit because comity breaks down."
Skeptical, Justice Stephen Breyer suggested Nevada is not giving "'full faith and credit'" to California's public acts, as required by the Constitution.
"I really don't see how Nevada can say we're going to give immunity to our own state, but we won't accept California's similar immunity," Breyer said. "California has a public act, which gives immunity. Nevada is not giving full faith and credit to that."
Farr responded that, applying prior court standards, "Nevada is competent to legislate, it can apply its own law. It doesn't have to apply California law at all."
On rebuttal, Clement agreed with Farr that states were concerned about being yanked in front of federal courts and that they were given immunity in order to ratify the Constitution, but many Supreme Court decisions since have applied that same immunity in numerous cases involving state courts.
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