Christmas For Exxon: How a Federal Appeals Court Reduced the Punitive Damage Award in the Exxon Valdez Case by $2 Billion, and Why It Appears Arbitrary

This decision illustrates how appellate court efforts to apply the unclear, generalized and malleable punitive damages jurisprudence unleashed by the U.S. Supreme Court can seem arbitrary or even unprincipled, as Justice Antonin Scalia has suggested.

Legal Background Of The Exxon Valdez Case

This legal odyssey began in 1989 when Exxon's supertanker, named the "Exxon Valdez," ran aground and spilled 11 million barrels of crude oil. The court found Exxon liable for reprehensible behavior warranting imposition of punitive damages: Exxon knew the ship captain was an alcoholic, who had not maintained his treatment regime and had resumed drinking, yet allowed him to continue commanding the vessel through Prince William Sound's icy and treacherous waters.

Exxon's third attempt to lower the award, as the Supreme Court articulated its evolving punitive damages jurisprudence, proved the charm. The Justices' 1996 BMW of North America, Inc. v. Gore ruling and their 2003 opinion in State Farm Mut. Auto Ins. Co. v. Campbell designated three guideposts for reviewing punitive damage awards: the reprehensibility of defendant's misbehavior, the ratio of punitive damages to the harm caused, and comparable statutory penalties.

How The Appellate Court Evaluated The Punitive Damage Award

The appellate panel in the Exxon Valdez case admonished that courts should not apply the guideposts rigidly or exclusively but must assess them in the context of a specific case.

The most critical guidepost for the panel was the misconduct's reprehensibility. In assessing this factor, the panel applied five subfactors from the State Farm case:

First, the court analyzed the type of harm, finding it entirely foreseeable that the misbehavior -- the spilling of 11 million gallons of crude oil into Prince William Sound and Lower Cook Inlet -- would disrupt thousands of lives for years to come.

Second, Exxon showed reckless disregard for others' health and safety -- by entrusting an incompetent officer with the command of the Exxon Valdez -- thus pointing "toward greater reprehensibility."

Third, the panel assessed whether Exxon intended to harm plaintiffs, financially vulnerable fishermen, determining that "Exxon did not intentionally target subsistence fishermen."

Fourth, the district court's finding of repetitive misconduct, -- in that Exxon repeatedly allowed Captain Hazelwood, ship's captain for the Exxon Valdez, to command its supertankers for years after it learned he was drinking again -- was not clearly erroneous, and weighed in favor of finding "clear reprehensibility."

And, fifth, scrutiny of Exxon's behavior revealed it engaged in "knowing and reckless misconduct [that] was not mere accident" but also "acted with no intentional malice towards the plaintiffs," militating against high reprehensibility.

The panel emphasized that the reprehensibility analysis must also include Exxon's mitigation -- that is, taking steps to lessen or repair -- of the harm caused, so as to encourage socially beneficial conduct, and thought significant that Exxon voluntarily compensated plaintiffs and promptly cleaned up. The panel summarized by finding Exxon's behavior in a higher reprehensible range, but not the highest, while mitigation efforts materially reduced the original misconduct's reprehensibility "to, at most, a mid range."

The court then invoked the second guidepost: the reasonableness of the ratio between harm and the punitive damages award.

The panel stated that the record supported harm of $504 million, but that a 9 to 1 ratio -- resulting in the $4.5 billion punitive damage award determined by the district court -- bordered on a "presumption of constitutional questionability."

The panel found Exxon's behavior "particularly egregious [but not intentional] and involved significant economic damages," yet Exxon expeditiously ameliorated the harm, so the panel concluded any "ratio of more than 5 to 1 would violate due process standards under" its own and Supreme Court precedent.

The panel briefly addressed the third guidepost, comparable statutory penalties, ascertaining that provision of significant penalties for oil spills in navigable waters supported its determination that "Exxon's reckless conduct merits substantial punitive damages."

The court concluded that Exxon's behavior was "reckless and warrants severe sanctions [but not] at the highest range allowable under the [Supreme Court's] due process analysis," so a 5 to 1 ratio was proper.

The panel relied on the standard of review articulated in the Supreme Court's 2001 Cooper Industries Inc. v. Leatherman Tool Group, Inc. decision to find the exact ratio the panel selected appropriate, thus obviating the need to send the case back down to the U.S. District Court, yet again, and declared "it is time for this protracted litigation to end."

Arbitrariness Of Punitive Damages Jurisprudence

The Exxon Valdez opinion shows how arbitrary punitive damages jurisprudence can appear. Illustrative is the reprehensibility guidepost's application. The court first recognized that it must not rigidly or exclusively use the guideposts, but then proceeded to do just that.

The panel determined that most subfactors "militated" toward high reprehensibility, yet, undercut those findings when it fashioned out of whole cloth the mitigation notion. Mitigation is simply irrelevant because deterrence is punitive damages' major purpose, not measures taken after the fact.

The court next basically elided the second guidepost with the first and tersely assessed the third. It ultimately reached the unpersuasive conclusion that only a 5 to 1 ratio satisfies due process as enunciated by the Supreme Court, although the Justices have strenuously resisted assigning very specific ratios, which have no basis in the due process clause.

Moreover, the panel invoked Cooper Industries to say that the appeals court - not the district judge who lived with the case for 15 years - can best divine the precise ratio, and proclaimed that the case must end.

This litigation has obviously been prolonged; however, much delay resulted from the Supreme Court's evolving jurisprudence and concerted appellate panel and district court efforts to apply it.

Perhaps the Ninth Circuit should have awaited the Justices' imminent punitive damages ruling in Philip Morris v. Williams, a case argued last October. Suggestions for rehearing might permit the en banc Ninth Circuit to apply felicitously the concededly unclear Supreme Court jurisprudence and its latest pronouncement.

In the end, Justice Scalia's State Farm observation that the new punitive damages jurisprudence is "insusceptible of principled application" may be prescient.