‘Unfair’ Nevada Ruling Against California Nixed

WASHINGTON (CN) — The U.S. Supreme Court found it unconstitutional Tuesday that a defrauded inventor won a $389 million verdict in Nevada against California's Franchise Tax Board.

The dispute stems from the investigation California opened on Gilbert Hyatt after one of its auditors read a newspaper article in 1993 that described the fortune Hyatt was making from a computer-chip patent he owns.

A review of Hyatt's tax returns showed that he had reported just 3.5 percent of his taxable income for 1991. The board sent Hyatt a $1.8 million tax bill for that year, plus it demanded a $1.4 million penalty and $1.2 million in interest.

Hyatt had been living in Nevada by this point, but the board found that Hyatt owed $6 million for 1992 because he did not move to Nevada until April that year.

The inventor sued in Nevada, and a Clark County jury ordered the board to pay him $389 million in compensatory and punitive damages.

Though the Nevada Supreme Court reduced the award dramatically, the court did hold the board responsible for a $1 million fraud judgment, even though Nevada law caps tort liability for its own state agencies at $50,000.

The U.S. Supreme Court vacated this holding 6-2 Monday, finding the special rule that allowed such damages unduly hostile to Nevada's sister states.

"Nevada has not applied the principles of Nevada law ordinarily applicable to suits against Nevada's own agencies," Justice Stephen Breyer wrote for the majority. "Rather, it has applied a special rule of law applicable only in lawsuits against its sister states, such as California. With respect to damages awards greater than $50,000, the ordinary principles of Nevada law do not 'conflict' with California law, for both laws would grant immunity. Similarly, in respect to such amounts, the 'policies' underlying California law and Nevada's usual approach are not 'opposed'; they are consistent. But that is not so in respect to Nevada's special rule. That rule, allowing damages awards greater than $50,000, is not only 'opposed' to California law, it is also inconsistent with the general principles of Nevada immunity law."

In trying to justify its actions, the Nevada Supreme Court complained that California fails to provide "adequate" recourse to Nevada's citizens.

But Breyer said this explanation "amounts to little more than a conclusory statement disparaging California's own legislative, judicial, and administrative controls."

It "cannot justify the application of a special and discriminatory rule," the opinion continues.

"A constitutional rule that would permit this kind of discriminatory hostility is likely to cause chaotic interference by some states into the internal, legislative affairs of others," Breyer added.

After offering a hypothetical situation where each states had its own discriminatory, special laws, Breyer said "Nevada has not offered 'sufficient policy considerations' to justify the application of a special rule of Nevada law that discriminates against its sister states.

"In our view, Nevada's rule lacks the 'healthy regard for California's sovereign status' that was the hallmark of its earlier decision, and it reflects a constitutionally impermissible '"policy of hostility to the public Acts" of a sister state,'" the ruling continues.

California's tax board had also wanted the court to hold that the Nevada courts lack jurisdiction to hear Hyatt's lawsuit.

One vote short of a full court after the death in February of Justice Antonin Scalia, the jurists were equally divided on this question Monday and thus affirmed the Nevada courts' exercise of jurisdiction over California. Scalia had championed state immunity at oral arguments in December.

Justice Samuel Alito concurred in the judgment, but Justice Clarence Thomas joined a dissent by Chief Justice John Roberts.

"Even if the court is correct that Nevada violated the Full Faith and Credit Clause, ... it is wrong about the remedy," Roberts wrote. "The majority concludes that in the sovereign immunity context, the Full Faith and Credit Clause is not a choice of law provision, but a create-your-own-law provision: The court does not require the Nevada Supreme Court to apply either Nevada law (no immunity for the board) or California law (complete immunity for the board), but instead requires a new hybrid rule, under which the board enjoys partial immunity.

"The majority's approach is nowhere to be found in the Full Faith and Credit Clause. Where the clause applies, it expressly requires a state to give full faith and credit to another state's laws. If the majority is correct that Nevada has no sufficient policy justification for applying Nevada immunity law, then California law applies. And under California law, the board is entitled to full immunity. Or, if Nevada has a sufficient policy reason to apply its own law, then Nevada law applies, and the board is subject to full liability." (Parentheses and italics in original.)

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit