WASHINGTON -- The Supreme Court yesterday ruled by 5 to 4 that a bistate railroad authority can be sued in federal court, even though the authority's founding states supported granting immunity from such suits.
While the states lost the case, Hess v. Port Authority Trans-Hudson Corp., the opinion does not preclude states from seeking immunity in the future for other interstate entities they create, an attorney for state and local interests said.
Writing for the majority, Justice Ruth Bader Ginsburg said sovereign immunity under the Constitution's 11th Amendment does not apply to the Port Authority Trans-Hudson Corp., known as PATH, a subsidiary of the Port Authority of New York and New Jersey.
New Jersey and New York created the port authority in 1921 through a compact that was approved by Congress.
The ruling continues a 25-year period of split decisions in sovereign immunity cases, according to Robert Fippinger, a public finance attorney with - Orrick, Herrington & Sutcliffe in New York who has written extensively about sovereign immunity.
The high court's opinions on sovereign immunity substantially affect public finance because of the increasing number of lawsuits filed under federal securities law against public corporations, Fippinger said. "Fundamental to this litigation is whether a state, an authority, a district, city, county or other public corporation is immune from liability under the securities laws," he said.
Yesterday's port authority decision shows that the "exposure of a state's general revenues to the payment of a securities law claim is likely to be the most significant factor" among a complex assortment of factors when the immunity issue arises under the 11th Amendment, Fippinger said.
The high court's decision turned on whether PATH is financially independent from New Jersey and New York State, and whether the states and Congress specifically designed PATH to be immune, Ginsburg said.
PATH "is financially self-sufficient; it generates its own revenues, and it pays its own debts," the court said. The parent port authority has about $4.5 billion of consolidated bonds outstanding that are backed with its own revenues.
Moreover, neither New York, New Jersey, nor Congress expressly conferred immunity when they formed the parent port authority, the court said.
The authority thus should answer in federal court to lawsuits filed under federal laws, because any federal court judgments would not harm the treasuries of the founding states, the court said.
Hugh Welsh, the port authority's deputy general counsel who argued the case, said the ruling would have "minimal if any impact" on the port authority. The high court has permitted lawsuits in federal court against the authority since 1990, but the court considered the Hess case separately because of a procedural problem, Welsh said. The opinion is more important for other agencies, he said.
In its reasoning in the Hess case, the court said that not only would the states' treasuries be protected against adverse judgments, but the states' "dignity" would be unharmed.
The case arose from injury claims made by employees of PATH who alleged negligence by the railroad in 1986 and 1987 under the Federal Employers Liability Act. The cases were decided in different federal courts whose opinions conflicted. The U.S. Court of Appeals for the Second Circuit held that PATH is not immune from suit in federal court, while the Third Circuit tribunal held that sovereign immunity applies.
The State and Local Legal Center on behalf of state and local governmental interests, and a group of 29 states led by New Jersey and New York, intervened in the case in support of granting immunity.
The ruling is favorable to states because under the principles of federalism, it "properly gives due respect" to states as sovereigns, said Richard Ruda, chief counsel to the State and Local Legal Center.
Ruda said the ruling is "very narrow," because it applies specifically to bi-state entities formed by state compacts that are approved by Congress. The court took "a great deal of care" in focusing its opinion on those types of entities, rather than other types such as authorities created by a single state, he said.
Ruda said the ruling also is favorable to states because it did not adopt a flat rule for determining the immunity of interstate entities.
But Justice Sandra Day O'Connor dissented on that and other points, saying the majority presumes that an interstate entity is not entitled to immunity and appears to create a per se rule that the 11th Amendment "never applies when states act in concert."
O'Connor said the majority replaced factors the court had spelled out in a 1979 decision, Lake Country Estates v. Tahoe Regional Planning Agency, for determining whether an entity is an arm of a state "with a single overriding criterion, vulnerability of the state treasury."
O' Connor said the crucial test for immunity should be whether states have control over an entity, not whether states are liable for an entity's debts and losses.
In the PATH case, New Jersey and New York exerted enough control to warrant immunity for PATH, because, among other things, the states each select and can remove six of the parent port authority's 12 commissioners, who also serve as PATH's' directors, O'Connor said.
Also, the governors of each state can veto commissioners' actions, and the port authority must make annual reports to the state legislatures, which must approve changes in the authority's rules and new projects, O'Connor said. O'Connor was joined by Chief Justice William Rehnquist and justices Antonin Scalia and Clarence Thomas.
The majority and minority views both noted that New York and New Jersey can use surplus revenues to finance state projects.
But the majority said that the proper focus for determining immunity "is not on the use of profits or surplus, but rather is on losses and debts." When states, as in the case of PATH, are not legally or practically liable for indebtedness of an entity whose expenditures exceed receipts, "then the 11th Amendment's core concern is not implicated," the court said.
In other action yesterday, the high court let stand a Kentucky "provider tax" imposed on physicians to finance expansion of the state's Medicaid program.
In Yeoman v. Kentucky Revenue Cabinet, physicians challenged a decision by the Kentucky Supreme Court upholding the tax because they said three special justices appointed by the governor to hear the case were partial to the governor's position. The physicians said they were thus denied due process of law.
The Kentucky law at issue imposes a 2% tax on the gross revenues of non-hospital health care providers. The physicians said the tax illegally discriminates against them, because the state law permits pharmacies to pass the tax on to customers but specifically prohibits doctors from doing so.