A FEDERAL APPEALS COURT REVERSES A HUGE PUNITIVE DAMAGES AWARD IN THE EXXON VALDEZ CASE, AND DEALS A BLOW TO THE IDEA OF LEGALIZED REVENGE

One thing that the past few months have taught us is that the desire for revenge is not only irrepressible, it may be a necessary part of even the wealthiest and most coddled societies. Americans have been motivated to act decisively and effectively in the campaign against terror not only out of a sense of justice but a sense of revenge. This simple fact is not something we should regret, but something that we should recognize and use to our advantage when we design our political and legal institutions.

In fact, America, among all Western nations, has developed two of the most elaborate mechanisms of legal revenge--capital punishment and punitive damages. In both cases, randomly selected groups of citizens are asked to impose punishment on those found to have done wrong.

Like capital punishment, punitive damages have been the subject of intense debate among lawyers and political activists over the past fifteen years. And, as with capital punishment, the real debate is not over the abolition of the punitive damages, but over the minutely detailed rules that govern their applicability.

For activists on both sides of the debate, sometimes the courts generate a decision that, like tea leaves, help predict what juries and judges will do next. On November 7, three weeks after September 11, the Ninth Circuit delivered such an opinion. There, the court reversed one of the largest punitive damage awards ever awarded, and thereby handed the opponents of punitive damages (especially corporate America) a huge victory.

The case concerned the $5 billion punitive damages awarded against Exxon as a result of the Exxon Valdez spill in the Prince William Sound in 1989. The Ninth Circuit's opinion suggests that the thirst for revenge by civil juries will be tightly controlled by the federal courts.

The Exxon Valdez Jury Findings

The story of the Exxon Valdez is well known. On March 24, 1989, a 900-foot long supertanker ran aground in well-marked waters and spilled 11 million gallons of crude oil. The cause of the accident (as determined by a series of jury verdicts) was twofold. First, the tanker's captain, Joseph Hazelwood, left the bridge minutes before the tanker had to perform a difficult maneuver. To make matters worse, he put the tanker on autopilot and he left the helm in the hands of a fatigued third mate.

The second cause of the spill, the jury concluded, was Exxon's decision to employ Hazelwood, given that they had known that he was an alcoholic and that he had stopped attending a rehabilitation program. Hazelwood's conduct was found to be reckless, and found to have been caused by his drinking at least five doubles of hard alcohol in bars hours before the accident.

After the accident Exxon spent $2 billion to clean up the damage caused to the Sound. It paid out $300 million in settlements to various private parties. It faced civil and criminal complaints by the state of Alaska and the federal government, which it settled for $900 million, of which $125 million represented the settlement of the criminal complaints.

The Punitive Damages Awards, and the Appeal

Exxon and Captain Hazelwood were sued by a class of persons whose physical property (fishing boats, docks, etc.) were damaged by the oil. This suit went forward, and the jury awarded the class $287 million to compensate for economic losses. It also levied a $ 5 billion punitive damages award against Exxon and a $5000 punitive damage award against Hazelwood. The trial judge upheld these awards.

But Exxon and Hazelwood appealed the punitive damage awards. Exxon raised many of the typical arguments in an appeal like this: challenging the sufficiency of the evidence with regard to reckless indifference; saying that the doctrine of respondeat superior, which makes a company responsible for an employee's acts, did not apply; contending the jury's passion were unduly inflamed, etc.

The argument that worked with the Ninth Circuit, however, was this one: Since the jury handed down the verdict, the Supreme Court has clarified its test for the constitutionality of the a punitive damage award. According to Exxon, although the Constitution always prohibited the $5 billion award, now the Supreme Court had spoken in a way that the Ninth Circuit could not ignore.

The Supreme Court Cases That Clarified the Punitive Damages Standard

The two Supreme Court cases to which Exxon referred in its successful argument on appeal are BMW of North America v. Gore and Cooper Indus. v. Leatherman Tool Group.

The first case, Gore, which was decided in 1996, set out a three-part test for when a state punitive damage award violates the Due Process Clause of the Fourteenth Amendment.

The second case, Cooper, which was decided in 2001, states that because punitive damage awards are matters of "law" not "fact," punitive damage awards must be reviewed on appeal under a "de novo" standard, as opposed to the less demanding "abuse of discretion" standard.

Cooper's distinction is significant: An appeals court deciding a question de novo can virtually ignore the district court result if it likes, whereas an appeals court applying an abuse of discretion standard can reverse the district court judge's decision only by finding that he or she abused his or his discretion -- a high standard to meet.

The Reprehensibility Question

Using these two precedents, the Ninth Circuit went to work on the Alaska jury's $5 billion award. The first part of the Gore test is "reprehensibility"--just how bad was the act that caused the tort? The court applied that to Exxon's conduct with respect to the spill.

In Gore, the court pointed out that it makes a big difference whether the tort involved physical violence or injury. Exxon was not being sued for anyone's personal injuries (no one got sick from the spilled oil). Nor was it really being sued for injury to property (it cleaned up or replaced the things that were mucked up with oil). Rather, it was being sued only for lost profits--an interest which tort law looks upon with some suspicion.

Furthermore, although the jury found that Exxon had acted reprehensibly by failing to fire or demote Hazelwood, it did not find that it had used deceit or trickery. The Supreme Court recognizes that, as Woody Guthrie said, "some rob with you with a six shooter and some with a fountain pen," but even in the area of corporate wrongdoing, conscious indifference leading to economic loss (even on a massive scale) is different from intentional infliction of economic loss.

The Punitive/Compensatory Ratio

The second test set out by Gore concerns the "ratio" between the punitive damage award and the compensatory award. Since the Gore decision, many courts have been confused by what the Supreme Court wants them to do with the criteria of the ratio. The result has been that it has been mostly ignored, or used selectively.

The Ninth Circuit looked at the compensatory award and noted that, depending on how it was measured, the ratio of punitive to compensatory damages was between 12 to 1 and 17 to 1. This ratio, while high (the average punitive damage ratio is 3 to 1), is still nothing like the 500 to 1 ration knocked down in Gore.

Should Exxon's Voluntary Cleanup Matter To the Amount of Punitive Damages?

The Ninth Circuit then noted that Exxon had spent $2 billion before trial for a ‘voluntary' cleanup of the Sound. The court held that subsequent acts of repair should lessen the jury's final judgement about the reprehensibility of an act. This idea is novel, and could potentially have far-ranging effects.

On the one hand, it is not clear why a jury should care how much charity a wrongdoer gives to third parties after the wrongdoer causes an injury to the plaintiff. One might think that the cleanup by Exxon should have been held to be irrelevant for purposes of testing the constitutionality of the $5 billion award.

The court pointed out, however, that one purpose of punitive damages is to deter. If wrongdoers know that they will have to repair every harm they cause, then they will be more careful. But to add additional punishment to those who repair harms caused by reprehensible conduct even before an award is entered against them, does not improve deterrence and might be viewed as mere revenge.

Comparing Punitive Damages with Possible Alternative Punishments

Well, what is wrong with revenge? As the third part of the Gore test (after the reprehensibility part and the ratio part) teaches us, the Due Process Clause thinks revenge is fine, but only when carefully controlled by the state.

The last part of the Gore test requires the court to compare the punitive damage levied by the jury with the punishments that were or could have been imposed by state and federal criminal and administrative law. The point of this test is to constrain the anger of the average citizen by norming it against the penalties that experts--legislators and administrators--have determined are appropriate (presumably in moments of calm reflection).

In Exxon's case, the court noted that the $125 million combined penalty for its failure to exercise greater control over Hazelwood was viewed by both the U.S. Attorney for Alaska and the Alaska Attorney General's office as very high and very punitive.

The Larger Meaning of the Exxon Valdez Verdict

For years, the Exxon Valdez case has been a Rorschach test in the tort reform debate. Consumer groups and plaintiffs' attorneys have held it up as an example of why punitive damages are an appropriate form of "citizens' justice." When the $5 billion amount was announced, it set a new floor for punitive damages. It helped justify the argument--now used with great effectiveness around the nation in the tobacco litigation--that large corporations are different, and their punitive damages awards must reflect their wealth and the scale of the injuries they cause.

It seems to me that the reversal of the Exxon Valdez verdict may be as much of a harbinger as the verdict itself. Since 1994, the Supreme Court has been trying to express its discomfort with the way punitive damages have been argued and calculated in cases involving corporate wrongdoing, especially cases in which the main injury is economic (note that even the tobacco cases, in the end, have been brought as fraud cases).

What the court is saying is that even in the face of wrongdoing, unbridled revenge is not part of our legal culture. Revenge cannot be purged from the law of punitive damages, but that does not mean that the law should not treat revenge like any other legal concept. That is a good lesson to remember as we move forward from September 11.