On Jan. 9, the United States Supreme Court heard oral argument in Franchise Tax Board v. Hyatt, a case addressing whether state agencies possess sovereign immunity from suit in sister state courts. Based on the oral argument, the justices are keenly aware that there is no textual grant of sovereign immunity, yet also think that a disconnect exists if the states do not have immunity, given that there is immunity for other sovereigns in state courts, plus the states enjoy sovereign immunity in the federal courts of sister states under the 11th Amendment. A summary of key points from the oral argument, along with a discussion of the potential state tax implications of the case, is provided below. 


The dispute in Franchise Tax Board v. Hyatt originates in a state tax residency audit. Hyatt was a long-standing California resident who moved to Nevada. The California Franchise Tax Board, or FTB, questioned when this residency change was effected. It launched a thorough audit of Hyatt, in which auditors rifled through Hyatt’s trash, peered in the windows of his homes, interviewed his estranged relatives and sent more than 100 letters and information requests to third parties, looking to build documentation that Hyatt was a California resident for longer than he claimed. The letters and information requests not only alerted third parties that Hyatt was under audit but in some cases also disclosed his social security number and other personal information. The actions of the FTB’s audit team were so egregious that Hyatt filed tort claims against the FTB in Nevada state court.

The FTB argued that because it would have full immunity from suit under California law and in California courts, the Nevada courts were required to extend the same immunity to the FTB under principles of comity, sovereign immunity and the full faith and credit clause of the United States Constitution. The Nevada Supreme Court disagreed, instead applying Nevada law, under which a state agency cannot be held responsible for negligence, but can be sued for intentional torts. This resulted in the negligence claims against the FTB being thrown out but the intentional torts claims being permitted to go forward. The United States Supreme Court reviewed the case and largely upheld the opinion of the Nevada Supreme Court, remanding the intentional torts claims all the way back to the Nevada trial court, known as “Hyatt 1.”[1]

The parties were evidently unable to settle and the intentional torts claims were argued before a Nevada jury, which awarded Hyatt over $400 million in damages and fees. On appeal, the Nevada Supreme Court significantly reduced these damages to approximately $1 million, and it remanded for a retrial on the question of damages for intentional infliction of emotional distress. The FTB petitioned the United States Supreme Court to review the case a second time, arguing that: (1) the Nevada courts were required to apply the same damages cap to the FTB that exists against Nevada state agencies in Nevada courts, under which damages would have been limited to $50,000; and (2) the FTB should have sovereign immunity from suit in Nevada state courts and the suit should not have been permitted in Nevada state courts at all. The court agreed to hear the case and ruled that the first proposition was correct but divided 4-4 on the second proposition, known as “Hyatt 2.”[2]

Eleventh Amendment Incongruity

The United States Supreme Court held in the late 18th century that states do not possess sovereign immunity from suits filed in the federal courts of sister states.[3] The 11th Amendment was quickly ratified to reverse this decision by granting the states immunity in the federal courts of sister states.

During oral argument in Franchise Tax Board v. Hyatt, the FTB’s attorney led off by highlighting an incongruity. The 11th Amendment was plainly ratified to prevent the states from having to respond to lawsuits in the federal courts of sister states. But the exact same concerns that led to ratification of the 11th Amendment also seemingly cut in favor of granting the states immunity from lawsuits in the state courts of sister states. The FTB’s counsel presented this as something perhaps so obvious and universally agreed upon that it was not even debated during the 11th Amendment ratification debates:

The participants in the ratification debates disagreed about whether the new constitution would or should subject states to suit in the new courts of the soon-to-be superior sovereign, but they were unanimous in their understanding that states could not be sued in the courts of the other states.[4]

Search for Textual Support 

At oral argument, several justices seemed skeptical of ruling in the FTB’s favor based on what the implicit understanding of the states and members of Congress may have been in 1794 and 1795 when the 11th Amendment was being debated.  As Justice Sonia Sotomayor said, leading off the questioning, “Counsel, it’s nice that they felt that way, but what we know is they didn’t put it in the Constitution.”[5]

This same sentiment was expressed this way by Justice Brett Kavanaugh: “Given how important this is, as you describe, why is it not in the text of the Constitution in your view, given that the Constitution is a document, in my view, of majestic specificity. It’s got a lot of specific details on very minute things, and this issue which you say rightly is so important, but then somehow was not mentioned in the text of the Constitution.” [6]

Most of the difficult questions directed at the FTB’s counsel were along similar lines. The questions either asked for a textual basis for the state sovereign immunity right or asked whether, in the absence of textual support, there existed a structural or historical basis, or a principle like comity, or something from common law or the general law of nations that would support granting the states a sovereign immunity right to be free from suit in the state courts of sister states. On the whole, it sounded like at least a few of the justices (particularly Justices Sotomayor, Stephen Breyer and Elena Kagan) might have been hesitant to vote in favor of granting an immunity right in the absence of clear supporting historical evidence. 

Impact of the States’ Amicus Brief

Hyatt faced equally difficult questioning. Several justices made the point that any sovereign desires wide latitude to run its own affairs, something made more difficult if it is subject to suit in other sovereign courts absent its consent. As support for the proposition that the states want to be able to run their own affairs free from suit in sister state courts, several justices pointed to an amicus brief submitted by the solicitors general of 44 states supporting the FTB. The amicus brief argues that the Constitution’s structure protects every state’s sovereign right to assert immunity in sister state courts. As Justice Kagan asked the question to Hyatt’s counsel, “How should we think about the fact that 44 states have joined in this amicus brief, indicating that they think that their sovereign immunity power is a good deal more important than the power that you’ve referenced to protect their own citizens in their own courts?”[7]

In an attempt to blunt the impact of the amicus brief, Hyatt’s counsel suggested that if the states were truly concerned they could push for a constitutional amendment to bar lawsuits in sister state courts, similar to what the states did in ratifying the 11th Amendment to prevent suits in the federal courts of sister states.[8] It is unclear what the justices thought of this suggestion. But overall, they seemed to give considerable weight to the amicus brief filed by the states.

Nevada v. Hall and Stare Decisis

The United States Supreme Court ruled in Nevada v. Hall that the states do not have immunity from suits in sister state courts. The Court wrote that “[i]t may be wise policy, as a matter of harmonious interstate relations, for states to accord each other immunity or to respect any established limits on liability. They are free to do so.”[9] But the court refused to itself grant such immunity. In Franchise Tax Board v. Hyatt, the court must decide whether to overturn its prior opinion in Nevada v. Hall and now grant states immunity from suit in sister state courts.

Anytime the court puts a prior precedent under the microscope with the potential for abrogation, it is to be expected that there will be considerable discussion of how, if at all, circumstances have changed since the earlier decision was issued and whether those circumstances justify reversal. Nevada v. Hall was decided in 1979. Several of the justices seemed to view subsequent case law as undercutting Nevada v. Hall’s vitality. Consider this question from Justice Kavanaugh: “Wouldn’t it be relevant, though, that the case law that’s developed subsequent to Nevada v. Hall seems quite inconsistent with the principles in the majority opinion and more consistent with the principles in Justice [William] Rehnquist’s dissent and the series of cases you describe?”[10]

Hyatt’s counsel argued that stare decisis is important and that the textual and historical arguments have not changed at all since Nevada v. Hall was decided in 1979. “There’s nothing that’s been argued today that couldn’t have been presented to this court and wasn’t in [prior cases, including Nevada v Hall].”[11]

Justice Samuel Alito asked an abstract question that, in context, suggests a view that Nevada v. Hall is wrongly decided and in need of fixing: “Do you think that the public would have greater respect for an institution that says we’re never going to admit we made a mistake, because we said it and we decided it ... or an institution that says, well, you know, we’re generally going to stick to what we’ve done, but we’re not perfect, and when we look back and we think we made a big mistake, we’re going to go back and correct it?”[12] 

Overall, Justices Kavanaugh and Alito seemed unconvinced that stare decisis provided a solid ground on its own for preserving Nevada v. Hall. And from the thrust of the oral argument it seemed that the majority of the justices think that Nevada v. Hall is problematic, while also seemingly acknowledging that there may not be a way of reversing it strictly using constitutional text.

Potential State Tax Implications

However the court decides the third iteration of Franchise Tax Board v. Hyatt, it is much more likely that the opinion will find its way into the next edition of federal courts casebooks than state and local taxation casebooks. But the opinion will surely have some state tax relevance.

Assuming the FTB wins, and states are granted immunity from suit in sister state courts, it might call into question the constitutionality of statutes that allow in-state taxpayers to obtain a declaratory judgment ruling that they do not have nexus in other states.[13] Defenders of the constitutionality of such statutes would likely argue that such statutes do not technically involve suing another state tax agency for damages, so Hyatt is not controlling. But state tax agency defendants would likely respond that these statutes lead to them being named defendants in sister state courts, so Hyatt controls. At the very least, the constitutionality of such statutes would seemingly be called into question if the FTB wins.

If Hyatt wins, and no sovereign immunity right for the states is granted, it would leave the door open for taxpayers to file tort claims in home state courts for particularly brutal audits conducted by out-of-state taxing agencies. But it is unclear, given Hyatt’s experience, how much appetite there would be for such litigation. Recall that under Hyatt 2, state damages caps apply, so in the bulk of cases taxpayers would be unlikely to recover material damages even if they ultimately prevail in litigation. Additionally, it would be expected that states would fight such lawsuits vigorously over many years if necessary (case in point: the Hyatt tort litigation has been ongoing since 2001). It seems unlikely that a taxpayer would want to initiate such a protracted fight with a state tax agency unless the taxpayer is more concerned with shining light on an egregious audit rather than coming out ahead economically. Whichever side wins in Franchise Tax Board v. Hyatt, the bigger implications are plainly outside the state tax area, as the opinion will govern whether a variety of state agencies and instrumentalities (not just state tax agencies) are subject to suit in the state courts of sister states.