Supreme Court slashes $2.5B Exxon Valdez award

June 25, 2008, 11:08 PM UTC

The U.S. Supreme Court’s decision Wednesday slashing the damages Exxon Mobil (XOM) must pay as a result of the 1989 Exxon Valdez oil spill could have unexpectedly wide-ranging consequences. An award to Alaskan fishermen and other residents was reduced from $2.5 billion to about $500 million.

In its ruling, the high court grapples once more with an issue that has long dogged corporate America and its adversaries: at what point is a verdict that’s meant to punish a defendant and deter future wrongdoing — rather than to compensate the plaintiff for his actual damages — excessive? In one the best-known cases, the Supreme Court in 1996 struck down a $2 million punitive-damages award over a $4,000 BMW paint job.

The decision in Exxon Shipping v. Baker arose in a different context than any of the previous punitive-damages cases decided by the Supreme Court — and in a context that many experts had thought might give the ruling somewhat less significance than usual. In earlier cases, the Court always decided whether the jury in a state court case had imposed an excessive punitive damages award. In such cases, the Supreme Court’s only justification for intervening was if it found that the federal Constitution barred the outcome — i.e., by ruling that the award was so outrageous as to violate due process.

The Exxon case, in contrast, was a federal maritime case, and the U.S. Supreme Court had the power to reduce the award on much narrower grounds: as a mere exercise of its so-called federal common-law jurisdiction. Since punitive damages awards in federal maritime cases are not a major source of anxiety for the business community, the case could easily have been decided in a way that would have had little significance for Chamber-of-Commerce types.

Nevertheless, Justice David Souter, writing for a 5-3 majority, seemed to go out of his way to hint that the rule he was announcing for federal maritime cases in the Exxon case – a rule that generally dictates a maximum 1:1 ratio between a punitive damages award and a jury’s compensatory award – might also reflect what the outcome would have been had it been decided on constitutional grounds. “In this case,” he wrote in the last footnote of the decision, “the constitutional outer limit may well be 1:1.” By cutting the Exxon Valdez verdict to $500 million, the high court set a 1:1 ratio with the $507.5 million compensatory damage portion of the jury’s award in the case.

“It can’t have been an accident,” says Evan Tager of Souter’s inclusion of Souter’s provocative footnote. Tager is a partner in the national law firm Mayer Brown, a specialist in punitive-damages cases (always on the pro-business side of the ledger, I should disclose), and worked on an amicus brief supporting Exxon’s position in this case. “They didn’t have to talk about constitutional issues at all. It seems like a signal to the lower courts that they intend to take this 1:1 line, which was first drawn in State Farm [v. Campbell], much more seriously than they have been in prior cases.”

In the State Farm case, decided in 2003, the Supreme Court court ruled that as a matter of constitutional law, it would be an extremely rare case in which punitive damages could constitutionally exceed compensatory damages by a more than 9:1 ratio, and added that “[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.” Souter argued in the footnote that the compensatory award of $507.5 million was “substantial,” especially in the sense that it was sufficient in itself to act as “encouragement” for wronged parties to bring suit.

Three justices from the more liberal wing of the court — John Paul Stevens, Ruth Bader Ginsberg, and Stephen Breyer — dissented from the ruling, arguing that the Court should let Congress fashion a 1:1 rule if it wants one, rather than taking the initiative and fashioning one of its own. (They tweaked the conservative majority for failing to exhibit “judicial restraint” – a principle conservative judges ordinarily champion.) The dissenters also rejected the majority’s apparent assumption that Exxon as a company was largely blameless for the criminal recklessness of the Exxon Valdez pilot, who, according to the court record, had downed five double vodkas before leaving port and, ultimately, running the tanker aground on a reef.

“The jury could reasonably have believed,” wrote Justice Stephen Breyer, “that Exxon knowingly allowed a relapsed alcoholic repeatedly to pilot a vessel filled with millions of gallons of oil through waters that provided the livelihood for the many plaintiffs in this case. Given that conduct, it was only a matter of time before a crash and spill like this occurred.”

The Exxon case also raised one side issue – an increasingly sore point among Supreme Court practitioners: the problem of justices recusing themselves from cases, usually because of stock-holdings. Justice Samuel Alito recused himself in the Exxon case (the justices do not state their reasons when they do so) and, as a result, one of the issues the Court had planned to decide in this case – whether federal maritime law permits punitive damages to be awarded against a corporate defendant solely based upon the reckless conduct of a “managerial employee” – resulted in a 4-4 tie vote. In such cases, the lower court’s ruling stands, but has no precedential weight.

Earlier this term an important preemption case, Warner-Lambert v. Kent, suffered a similar fate, while the Court last month was forced to decline review of a decision permitting a massive lawsuit against companies who did business with apartheid South Africa to go forward when four justices had to recuse themselves, leaving the court without a quorum.