Exxon Discussion Board: Policing Punitive Damages

The following is part of our ongoing Exxon Discussion Board series. Alexandra B. Klass is an Associate Professor at the University of Minnesota Law School and a Member Scholar of the Center for Progressive Reform. She is the author of “Punitive Damages and Valuing Harm,” published in the Minnesota Law Review, which discusses awards of punitive damages in environmental cases. She has also blogged on the case for the American Constitution Society.

In its decision this week in Exxon Shipping Co. v. Baker, the Supreme Court finally put its mark on the 19-year litigation over the grounding of the Exxon Valdez oil tanker in Prince William Sound, Alaska and the resulting oil spill of monumental proportions. The case framed a number of specific issues for the Court: first, whether Exxon could be held liable in its corporate capacity for punitive damages based on the actions of its employee, ship’s captain Joseph Hazelwood; second, whether federal fines imposed on Exxon under the Clean Water Act preempted subsequent tort claims by individuals harmed by the company’s actions; and third whether the $2.5 billion punitive damages award imposed by the lower court was excessive.

In its decision, the Court, acting with eight members because Justice Samuel Alito recused himself as an Exxon stockholder, divided equally on the issue of whether Exxon could be held liable in its corporate capacity for punitive damages based on the actions of Hazelwood, who was known to Exxon to be a relapsed alcoholic and was drunk while captaining the ship. This meant the lower court’s decision imposing such liability stands. The Court also found that the federal Clean Water Act’s pollution penalty framework did not foreclose the imposition of punitive damages under common law, thus reaffirming the important role common law claims for damages, including punitive damages, can and should play in addressing water pollution and other environmental harms.

The bulk of the opinion was devoted to a review of the amount of the punitive damage award, which began at $5 billion and was later reduced by the Ninth Circuit to $2.5 billion. In its decision, the Court reduced it further to $500 million, based on the theory that a one-to-one ratio in this case between punitive and compensatory damages was appropriate under federal maritime law. The decision, authored by Justice Souter, shows the Court struggling to create rational standards to govern the lower courts’ review of punitive damages awards. At the end of the opinion, one is left with the sense that the Court has created a bright-line rule that ignores the nuances of the case while providing little guidance for future courts.

What is particularly striking about the opinion is the Court’s continuing commitment to its questionable journey, begun only in 1996, to place firm federal judicial limits on punitive damages whether under the due process clause of the 14^th amendment or, in this case, under federal maritime law. The Court recognizes in the opinion that empirical studies refute the constant refrain from the business world and their interest groups that punitive damages have skyrocketed in recent years and that juries are abusing their authority in this area. The Court also notes that many state legislatures have placed strict limits on punitive damages such as banning them entirely, making them subject to maximum dollar caps, or setting maximum ratios between punitive damages and compensatory damages of two-to-one, three-to-one, or the like. From this discussion one could conclude (as did Justices Stevens, Ginsburg, and Breyer in dissent) that state legislatures and state courts are doing their jobs and are policing jury awards of punitive damages as they should.

Instead, however, citing instances of “outlier” multi-million and multi-billion dollar awards in some cases, the Court concludes that punitive damages are unpredictable and thus unfair to defendants. The Court then entertains various options. It rejects the idea of additional verbal formulations of standards to guide juries and lower courts as insufficiently specific to reach an appropriate penalty. It also rejects maximum penalty amounts (that would be similar to maximum criminal penalties) because of the high variability in the types of tort and contract injuries that support punitive damages. It then looks to its prior punitive damages jurisprudence in the due process area, and settles on the idea of setting a maximum ratio between punitive damages and compensatory damages which, this case, because of the large compensatory damages and the lack of intentional misconduct, should be one-to-one.

It is disappointing that the Court feels the need to continue to police punitive damage awards when all evidence shows that juries, lower courts, and state legislatures have already put strong measures in place to do just that. Moreover, punitive damages are intended to punish and deter misconduct and thus must be tied to the magnitude of the misconduct as well as the financial condition of the defendant. The grounding of the Exxon Valdez resulted in the discharge of 11 millions gallons of oil into Prince William Sound, causing one of the largest and most damaging oil spills in history. Exxon officials knew Hazelwood was a relapsed alcoholic who was drinking at sea but let him pilot the Valdez through Prince William Sound nevertheless. Moreover, Exxon is the biggest company in the world, with profits this year of $39 billion, the largest in U.S. history, and reportedly the largest in the history of the planet. Indeed, Exxon testified at trial that the original punitive damage award of $5 billion “would not have a material impact on the corporation or its credit quality.” Adding more “predictability” to the punitive damage equation, particularly in the form of a two-to-one or a one-to-one ratio, may well be helpful to would-be malefactors contemplating whether a risk is worthwhile before doing wrong, but it undercuts the punitive and deterrent purposes of punitive damages. Moreover, it prevents juries and lower courts from fully considering the circumstances and nuances of each individual case with their own individual facts. In refusing to allow juries and courts to engage in this important, fact-specific exercise, the Court’s decision results in a quasi-legislative, one-size-fits-all solution that does not do justice to our tort system, those who administer it, and those who rely on it for important forms of redress.