Weighing power of state courts in bitter tax fight

By Sam Hananel

Associated Press
WASHINGTON (AP) — The Supreme Court this week struggled to resolve a bitter tax dispute between a Nevada inventor and California officials that has spanned more than two decades and raises broader questions about whether a state agency can be hauled into another state’s courts against its will.
The justices heard arguments Monday in a case involving Gilbert Hyatt, a former California resident who claims he moved to Las Vegas in 1991, just before collecting $40 million in patent fees for a computer microprocessor chip.

California officials say Hyatt didn’t actually move to Nevada, which has no income tax, until 1992. California has aggressively pursued Hyatt for millions in back taxes, but Hyatt sued California’s tax agency in Nevada, alleging overzealous officials invaded his privacy and committed fraud while pursuing him.

A Nevada state court jury awarded Hyatt nearly half a billion dollars in damages in 2008, but after appeals, the judgment was later reduced to about $1 million.

California officials say the state should not face costly court fights in other states, a position supported by at least 44 other states that filed a brief supporting California.

Paul Clement, a lawyer representing California, argued that such lawsuits violate the sovereign protections of states. He urged the justices to overturn a 36-year-old Supreme Court case that allows states to be sued in the courts of another states.

Clement said his argument goes back to the founding of the nation and the framing of the Constitution, when states entered the union with substantial war debts and did not expect to face lawsuits in other state courts that could potentially lead to bankruptcy.

Justice Ruth Bader Ginsburg said when the nation was founded, there was no guarantee of sovereign immunity for states, only the concept of “comity,” which dictated that states would be considerate of each other’s laws.

Justice Elena Kagan called it “a very hard case” but said Clement needed to show special justification for overturning established court precedent. She wondered whether the current system leads to a kind of “mutuality” where states are “on par with each other.”

“You can say ‘If you’re going to treat me like that, I’m going to treat you like that,’” Kagan said.

Hyatt’s attorney H. Bartow Farr argued that Nevada doesn’t have to give equal treatment to other states’ laws because states were not guaranteed the right of immunity at the time the nation was formed. He suggested states could reach an agreement among themselves to honor each other’s laws “without the intervention of this court.”

But Justice Anthony Kennedy said such an agreement would be “highly disruptive” and could purposely exclude other states.
“That’s not part of our constitutional tradition at all,” Kennedy said.

Justice Antonin Scalia said he was concerned about the Constitution’s Eleventh Amendment, which makes the states immune from lawsuits in federal court without their consent. He wondered why that shouldn’t also apply to lawsuits in state courts.

Clement also made a separate argument that Nevada courts should at least give California the same immunities that Nevada agencies are given. While the Nevada Supreme Court ruled that California was immune from punitive damages, it nevertheless declined to place a $50,000 cap on compensatory damages that applies to lawsuits against Nevada officials.

Justice Stephen Breyer said it bothered him that Nevada is willing to give immunity to its own state agencies, but not those in California.

It was the second time the case has made its way to the Supreme Court. The justices ruled in 2003 that Hyatt could sue California officials in Nevada court. The court said that Nevada courts did not unconstitutionally intrude on California’s sovereignty.

A decision in Franchise Tax Board of California v. Hyatt is expected by the end of June.

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