Franchise Tax Bd. vs. Hyatt (Nev. Supreme Ct. – Sep. 14, 2017)
In 1998, inventor Gilbert Hyatt sued the Franchise Tax Board of the State of California (FTB) seeking damages for intentional torts and bad-faith conduct committed by FTB auditors during tax audits of Hyatt’s 1991 and 1992 state tax returns. After years of litigation, a jury awarded Hyatt $139 million in damages on his tort claims and $250 million in punitive damages. In this appeal, the Supreme Court of Nevada determined, among numerous other issues, whether medical records are mandatory in order to establish a claim for intentional infliction of emotional distress (IIED).
In 1993, after reading a newspaper article regarding Hyatt’s lucrative computer-chip patent and the large sums of money that Hyatt was making from the patent, a tax auditor for FTB decided to review Hyatt’s 1991 state income tax return. The return revealed that Hyatt did not report, as taxable income, the money that he had earned from the patent’s licensing payments and that he had only reported 3.5 percent of his total taxable income for 1991. Hyatt’s tax return showed that he had lived in California for nine months in 1991 before relocating to Las Vegas, Nevada, but Hyatt claimed no moving expenses on his 1991 tax return. Based on these discrepancies, FTB opened an audit on Hyatt’s 1991 state income tax return.
The 1991 audit began when Hyatt was sent notice that he was being audited. This notification included an information request form that required Hyatt to provide certain information concerning his connections to California and Nevada and the facts surrounding his move to Nevada. A portion of the information request form contained a privacy notice, which stated in relevant part that “The Information Practices Act of 1977 and the federal Privacy Act require the Franchise Tax Board to tell you why we ask you for information. The Operations and Compliance Divisions ask for tax return information to carry out the Personal Income Tax Law of the State of California.” Also included with the notification was a document containing a list of what the taxpayer could expect from FTB: “Courteous treatment by FTB employees[,] Clear and concise requests for information from the auditor assigned to your case l,] Confidential treatment of any personal and financial information that you provide to us[,] Completion of the audit within a reasonable amount of time[.]”
The audit involved written communications and interviews. FTB sent over 100 letters and demands for information to third parties including banks, utility companies, newspapers (to learn if Hyatt had subscriptions), medical providers, Hyatt’s attorneys, two Japanese companies that held licenses to Hyatt’s patent (inquiring about payments to Hyatt), and other individuals and entities that Hyatt had identified as contacts. Many, but not all, of the letters and demands for information contained Hyatt’s social security number or home address or both. FTB also requested information and documents directly from Hyatt. Interviews were conducted and signed statements were obtained from three of Hyatt’s relatives—his ex-wife, his brother, and his daughter—all of whom were estranged from Hyatt during the relevant period in question, except for a short time when Hyatt and his daughter attempted to reconcile their relationship. No relatives with whom Hyatt had good relations, including his son, were ever interviewed even though Hyatt had identified them as contacts. FTB sent auditors to Hyatt’s neighborhood in California and to various locations in Las Vegas in search of information.
Upon completion of the 1991 audit, FTB concluded that Hyatt did not move from California to Las Vegas in September 1991, as he had stated, but rather, that Hyatt had moved in April 1992. FTB further concluded that Hyatt had staged the earlier move to Nevada by renting an apartment, obtaining a driver’s license, insurance, bank account, and registering to vote, all in an effort to avoid state income tax liability on his patent licensing. FTB further determined that the sale of Hyatt’s California home to his work assistant was a sham. A detailed explanation of what factors FTB considered in reaching its conclusions was provided, which in addition to the above, included comparing contacts between Nevada and California, banking activity in the two states, evidence of Hyatt’s location in the two states during the relevant period, and professionals whom he employed in the two states. Based on these findings, FTB determined that Hyatt owed the state of California approximately $1.8 million in additional state income taxes and that penalties against Hyatt in the amount of $1.4 million were warranted. These amounts, coupled with $1.2 million in interest, resulted in a total assessment of $4.5 million.
The 1991 audit’s finding that Hyatt did not move to Las Vegas until April 1992 prompted FTB to commence a second audit of Hyatt’s 1992 California state taxes. Because he maintained that he lived in Nevada that tax year, Hyatt did not file a California tax return for 1992, and he opposed the audit. Relying in large part on the 1991 audit’s findings and a single request for information sent to Hyatt regarding patent-licensing payments received in 1992, FTB found that Hyatt owed the state of California over $6 million in taxes and interest for 1992. Moreover, penalties similar to those imposed by the 1991 audit were later assessed.
Hyatt formally challenged the audits’ conclusions by filing two protests with FTB that were handled concurrently. Under a protest, an audit is reviewed by FTB for accuracy, or the need for any changes, or both. The protests lasted over 11 years and involved 3 different FTB auditors. In the end, the FTB upheld the audits, and Hyatt went on to challenge them in the California courts.
During the protests, Hyatt filed a Nevada lawsuit in January 1998. His complaint included a claim for declaratory relief concerning the timing of his move from California to Nevada and a claim for negligence. The complaint also identified seven intentional tort causes of action allegedly committed by FTB during the 1991 and 1992 audits: invasion of privacy—intrusion upon seclusion, invasion of privacy—publicity of private facts, invasion of privacy—false light, intentional infliction of emotional distress, fraud, breach of confidential relationship, and abuse of process. Hyatt’s lawsuit was grounded on his allegations that FTB conducted unfair audits that amounted to FTB “seeking to trump up a tax claim against him or attempt[ing] to extort him,” that FTB’s audits were “goal-oriented,” that the audits were conducted to improve FTB’s tax assessment numbers, and that the penalties FTB imposed against Hyatt were intended “to better bargain for and position the case to settle.”
Ultimately, Hyatt’s case went to trial before a jury. The trial lasted approximately four months. The jury found in favor of Hyatt on all intentional tort causes of action and returned special verdicts awarding him damages in the amount of $85 million for emotional distress, $52 million for invasion of privacy, $1,085,281.56 as special damages for fraud, and $250 million in punitive damages. Following the trial, Hyatt sought prejudgment interest and moved the district court for costs. The district court assigned the motion to a special master who, after 15 months of discovery and further motion practice, issued a recommendation that Hyatt be awarded approximately $2.5 million in costs. The district court adopted the master’s recommendation. FTB appealed from the district court’s final judgment and the post-judgment award of costs.
Intentional Infliction of Emotional Distress
During discovery in the underlying case, Hyatt refused to disclose his medical records. As a result, he was precluded at trial from presenting any medical evidence of severe emotional distress. Nevertheless, at trial, Hyatt presented evidence designed to demonstrate his emotional distress in the form of his own testimony regarding the emotional distress he experienced, along with testimony from his son and friends detailing their observation of changes in Hyatt’s behavior and health during the audits. Based on this testimony, the jury found in Hyatt’s favor on his intentional infliction of emotional distress (IIED) claim and awarded him $82 million for emotional distress damages.
To recover on a claim for IIED, a plaintiff must prove “(1) extreme and outrageous conduct on the part of the defendant; (2) intent to cause emotional distress or reckless disregard for causing emotional distress; (3) that the plaintiff actually suffered extreme or severe emotional distress; and (4) causation.” Miller v. Jones, 114 Nev. 1291, 1299-1300, 970 P.2d 571, 577 (1998); see also Barmettler v. Reno Air, Inc., 114 Nev. 441, 447, 956 P.2d 1382, 1386 (1998). A plaintiff must set forth “objectively verifiable indicia” to establish that the plaintiff “actually suffered extreme or severe emotional distress.” Miller, 114 Nev. at 1300, 970 P.2d at 577.
On appeal, FTB argued that Hyatt failed to establish that he actually suffered severe emotional distress because he failed to provide any medical evidence or other objectively verifiable evidence to establish such a claim. In response, Hyatt contended that the testimony provided by his family and other acquaintances sufficiently established objective proof of the severe and extreme emotional distress he suffered, particularly in light of the facts of this case demonstrating the intentional harmful treatment he endured from FTB. Hyatt asserted that the more severe the harm, the lower the amount of proof necessary to establish that he suffered severe emotional distress. The Court noted that while it has held that objectively verifiable evidence is necessary in order to establish an IIED claim, Id., it has not specifically addressed whether this necessarily requires medical evidence or if other objective evidence is sufficient.
The Court explained that the Restatement (Second) of Torts § 46 (1977), in comments j and k, provide for a sliding-scale approach in which the increased severity of the conduct will require less in the way of proof that emotional distress was suffered in order to establish an IIED claim. Restatement (Second) of Torts § 46 cmt. j (1977) (“The intensity and the duration of the distress are factors to be considered in determining its severity. Severe distress must be proved; but in many cases the extreme and outrageous character of the defendant’s conduct is in itself important evidence that the distress has existed.”); Restatement (Second) of Torts § 46 cmt. k (1977) (stating that “if the enormity of the outrage carries conviction that there has in fact been severe emotional distress, bodily harm is not required”). The Court has also impliedly recognized this sliding-scale approach, although stated in the reverse. Nelson v. City of Las Vegas, 99 Nev. 548, 665 P.2d 1141 (1983), In Nelson, the Court explained that “[t]he less extreme the outrage, the more appropriate it is to require evidence of physical injury or illness from the emotional distress.” Id. at 555, 665 P.2d at 1145.
The Court further noted that other jurisdictions that require objectively verifiable evidence have determined that such a mandate does not always require medical evidence. See Lyman v. Huber, 10 A.3d 707 (Me. 2010) (stating that medical testimony is not mandatory to establish an IIED claim, although only in rare, extreme circumstances); Buckman-Peirson v. Brannon, 822 N.E.2d 830, 840-41 (Ohio Ct. App. 2004) (stating that medical evidence is not required, but also holding that something more than just the plaintiff’s own testimony was necessary); see also Dixon v. Denny’s, Inc., 957 F. Supp. 792, 796 (E.D. Va. 1996) (stating that plaintiff failed to establish an IIED claim because plaintiff did not provide objective evidence, such as medical bills “or even the testimony of friends or family”).
Additionally, in Farmers Home Mutual Insurance Co. v. Fiscus, 102 Nev. 371, 725 P.2d 234 (1986), the Supreme Court of Nevada upheld an award for mental and emotional distress even though the plaintiffs’ evidence did not include medical evidence or testimony. While not specifically addressing an IIED claim, the Fiscus court addressed the recovery of damages for mental and emotional distress that arose from an insurance company’s unfair settlement practices when the insurance company denied plaintiffs’ insurance claim after their home had flooded. In support of the claim for emotional and mental distress damages, the husband plaintiff testified that he and his wife lost the majority of their personal possessions and that their house was uninhabitable, that because the claim had been rejected they lacked the money needed to repair their home and the house was condemned, and after meeting with the insurance company’s representative the wife had an emotional breakdown. The Fiscus court upheld the award of damages, concluding that the above evidence was sufficient to prove that plaintiffs had suffered mental and emotional distress. In so holding, the Fiscus court rejected the insurance company’s argument that there was insufficient proof of mental and emotional distress because there was no medical evidence or independent witness testimony.
Based on the foregoing, the Court in Hyatt’s case specifically adopted the sliding-scale approach to proving a claim for IIED. Under this sliding-scale approach, while medical evidence is one acceptable manner in establishing that severe emotional distress was suffered for purposes of an IIED claim, other objectively verifiable evidence may suffice to establish a claim when the defendant’s conduct is more extreme, and thus, requires less evidence of the physical injury suffered.
The Court went on to examine the facts in Hyatt’s case. The Court noted that Hyatt suffered extreme treatment from FTB. FTB disclosed personal information that it promised to keep confidential and delayed resolution of Hyatt’s protests for 11 years, resulting in a daily interest charge of $8,000. Further, Hyatt presented testimony that the auditor who conducted the majority of his two audits made disparaging remarks about Hyatt and his religion, was determined to impose tax assessments against him, and that FTB fostered an environment in which the imposition of tax assessments was the objective whenever an audit was undertaken. The Court believed that these facts support the conclusion that this case was at the more extreme end of the scale, and therefore less in the way of proof as to emotional distress suffered by Hyatt was necessary.
In support of his IIED claim, Hyatt presented testimony from three different people as to the how the treatment from FTB caused Hyatt emotional distress and physically affected him. This included testimony of how Hyatt’s mood changed dramatically, that he became distant and much less involved in various activities, started drinking heavily, suffered severe migraines and had stomach problems, and became obsessed with the legal issues involving FTB. Thus, the Court concluded that this evidence, in connection with the severe treatment experienced by Hyatt, provided sufficient evidence from which a jury could reasonably determine that Hyatt suffered severe emotional distress.