Exxon Punitive Damages Case Has Broader Implications

Initial commentators of the U.S. Supreme Court’s ruling on punitive damages involving the Exxon Valdez oil spill (Exxon Shipping v. Baker, No. 07-219) claim that the ruling pertains only to federal maritime law. While the Supreme Court ultimately expressed its conclusion regarding maritime law, most of the ruling was a general discussion of the reality of punitive damages under both federal and state law. Under the rationale contained in the Exxon case, punitive damage amounts should fall within a narrower and smaller multiple of the related compensatory damages than what is now occurring. Consequently, while the Supreme Court’s ruling in a federal maritime case is not necessarily binding, at least some state judges will find it instructive and persuasive.

The specific result on the Exxon case

A jury decided in 1994 that Exxon should pay $5 billion in punitive damages for the Valdez oil spill. In 2006, a federal appeals court cut that verdict in half. Before punitive damages, Exxon already spent $3.4 billion to clean up the spill, pay civil fines, and compensate Native Alaskans, landowners, and commercial fishermen.

On the question of whether Exxon should pay punitive damages at all, the U.S. Supreme Court split 4-4, which leaves the Ninth Circuit opinion saying that Exxon is liable for punitives. Justice Alito reclused himself because he owns Exxon stock; he would have otherwise been the deciding vote on the question of whether any punitive damages were assessable at all.

The Supreme Court then addressed the amount of the punitive damages. The Court ruled that the multiple of punitive to compensatory damages should be limited to a one to one ratio, or a bit over $500 million. This translates to punitive damages that average $15,000 for each of the approximately 32,700 persons and businesses who filed a claim against the energy company.

How the Court arrived at the 1:1 ratio

The Court summarized the basis of how punitive damages are assessed, as follows:

“Under the umbrellas of punishment and its aim of deterrence, degrees of relative blameworthiness are apparent. Action taken or omitted in order to augment profit represents an enhanced degree of punishable culpability, as of course does willful or malicious action, taken with a purpose to injure. Regardless of culpability, however, heavier punitive awards have been thought to be justifiable when wrongdoing is hard to detect, or when the value of injury and the corresponding compensatory award are small (providing low incentives to sue). And, with a broadly analogous object, some regulatory schemes provide by statute for multiple recovery in order to induce private litigation to supplement official enforcement that might fall short if unaided.” (citations and parenthetical comments omitted)

The Court then addressed what it viewed as inequitable results obtained under the existing punitive damage limits (which are described at the end of this article), as follows:

“The real problem, it seems, is the stark unpredictability of punitive awards. Courts of law are concerned with fairness as consistency, and evidence that the median ratio of punitive to compensatory awards falls within a reasonable zone, or that punitive awards are infrequent, fails to tell us whether the spread between high and low individual awards is acceptable. The available data suggest it is not. A recent comprehensive study of punitive damages awarded by juries in state civil trials found a median ratio of punitive to compensatory awards of just 0.62:1, but a mean ratio of 2.90:1 and a standard deviation of 13.81. Even to those of us unsophisticated in statistics, the thrust of these figures is clear: the spread is great, and the outlier cases subject defendants to punitive damages that dwarf the corresponding compensatories. The distribution of awards is narrower, but still remarkable, among punitive damages assessed by judges: the median ratio is 0.66:1, the mean ratio is 1.60:1, and the standard deviation is 4.54. Other studies of some of the same data show that fully 14% of punitive awards in 2001 were greater than four times the compensatory damages, with 18% of punitives in the 1990s more than trebling the compensatory damages. And a study of “financial injury” cases using a different data set found that 34% of the punitive awards were greater than three times the corresponding compensatory damages.
Starting with the premise of a punitive-damages regime, these ranges of variation might be acceptable or even desirable if they resulted from judges’ and juries’ refining their judgments to reach a generally accepted optimal level of penalty and deterrence in cases involving a wide range of circumstances, while producing fairly consistent results in cases with similar facts. But anecdotal evidence suggests that nothing of that sort is going on” (citations and parenthetical comments omitted).

The Court then applied this statistical information to Exxon (and arguably to other cases with similar considerations) as follows:

“The more promising alternative is to peg punitive awards to compensatory damages using a ratio or maximum multiple. This is the model in many States and in analogous federal statutes allowing multiple damages. The question is what ratio is most appropriate. An acceptable standard can be found in the studies showing the median ratio of punitive to compensatory awards. Those studies reflect the judgments of juries and judges in thousands of cases as to what punitive awards were appropriate in circumstances reflecting the most down to the least blameworthy conduct, from malice and avarice to recklessness to gross negligence. The data in question put the median ratio for the entire gamut at less than 1:1, meaning that the compensatory award exceeds the punitive award in most cases. In a well-functioning system, awards at or below the median would roughly express jurors’ sense of reasonable penalties in cases like this one that have no earmarks of exceptional blameworthiness. Accordingly, the Court finds that a 1:1 ratio is a fair upper limit…”

Other punitive damages cases

The Exxon case follows a string of cases that have limited punitive damages. In 2003, in State Farm vs. Campbell, the Court ruled that a single-digit ratio (i.e., no more than nine-to-one) was appropriate as a matter of due process in all but the most exceptional cases. In cases where compensatory damages are substantial, the State Farm decision went on, “a lesser ratio, perhaps only equal to compensatory damages,” might be warranted.

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ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials, CPA, MBA, CMA and ASA.

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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.