The Federal Appeals Court Decision Setting the Final Damages Amount for the Exxon Valdez Oil Spill

It was in 2003 that the Supreme Court issued its last major punitive damages decision, State Farm Mut. Auto Ins. Co. v. Campbell. Ever since then, plaintiffs and defendants have been struggling over the decision's meaning.

As I will explain, the latest decision from the Ninth Circuit in the Exxon Valdez case perfectly illustrates the limitations of the approach that the Court adopted in State Farm - and the need for the Court to revisit, and revise, that approach.

The Series of Decisions on the Damages Award in the Exxon Valdez Case

As readers may recall, in 1989, a tanker owned by Exxon spilled eleven million gallons of oil into the Prince William Sound, off the coast of Alaska. In 1994, a jury found that Exxon had acted recklessly by allowing the ship's captain, Joseph Hazelwood, to helm a supertanker, when they knew that he was an alcoholic and might have started drinking again. Hazelwood had been drinking on the day of the accident, and his drinking caused him to be absent on the bridge when the accident occurred.

The jury assessed $287 million dollars in compensatory damages on behalf of the landowners, fisherman and natives whose property and livelihood were affected by the spill. The jury also awarded $5 billion in punitive damages against Exxon, for what it deemed its high level of culpability in the spill.

In 1996, however, the Supreme Court decided BMW of North America, Inc. v. Gore. In light of that decision, the U.S. Court of Appeals for the Ninth Circuit remanded the case back to the district court for a recalculation of punitive damages in light of BMW v. Gore.

The district court determined that a punitive damages award of $4 billion would conform to the Due Process Clause of the Constitution. Exxon appealed.

In 2003, after State Farm was issued, the Ninth Circuit once again remanded the case to the district court. This time, the district court blessed an award of $4.5 billion. Again, Exxon appealed.

The Final Ninth Circuit Decision: How Did the Court Arrive at the $2.5 Billion Award?

On December 22, 2006, the Ninth Circuit issued its final decision regarding punitive. This decision simply orders the district court to enter an award of $2.5 billion -much lower than the district court's initial awards.

How did the Ninth Circuit arrive at this number?

First, the Ninth Circuit consulted Supreme Court precedent. Under BMW v. Gore, the court must look to (1) the reprehensibility of the defendant's misconduct; (2) the ratio of the punitive damages to the actual harm; and (3) comparable statutory penalties. Moreover, under State Farm the ratio mentioned in (2) will rarely be higher than a "single digit." (In other words, a 9:1 ratio is okay, but a 10:1 ratio, or anything greater, is suspect.)

The first factor, once again, was reprehensibility. The Ninth Circuit reasoned that Exxon's decision to allow Hazelwood to work as a supertanker captain fell "in the middle of a continuum between accidental and intentional conduct." (Intentional conduct had been at issue in both BMW v. Gore and State Farm.)

Obviously, Exxon did actually want Hazelwood to destroy the tanker--costing them the valuable ship and cargo. Nor was not it trying to "get away" with anything when it failed to stop Hazelwood.

In addition, Exxon immediately accepted responsibility for the spill and spent hundreds of millions of dollars trying to clean it up. And in other toxic tort cases involving government fines of polluters, a willingness to mitigate the spill's consequences has always been taken into account in the calculation of the final penalty.

The second factor, again, was the ratio of punitive damages to actual harm. The Ninth Circuit (and the district court) found the actual harm to be the total of the $287 million compensatory damages verdict, plus an amount from Exxon's pre-trial settlements with many parties - for a total of at least $513 million.

Thus, the district court's punitive damages award of $4-4.5 billion would have resulted in roughly an 8:1 or 9:1 ratio. In contrast, the Ninth Circuit's award of $2.5 million represented a roughly 5:1 ratio.

Both ratios were within the Court's "single digit" guideline. What accounted for the difference between them? In the main, it was the Ninth's Circuit's judgment that Exxon acted recklessly, but not intentionally.

Finally, the Ninth Circuit looked to the various comparable civil and criminal penalties that could have been imposed against Exxon, and concluded Exxon could have been hit with up to $1 billion in fines. But the Ninth Circuit felt that this guidepost was the weakest of all -- even though, as it had noted in an earlier decision, Exxon had settled all of the state and federal governments' outstanding claims against it for $900 million, suggesting the $1 billion estimate was entirely fair.

A Reasonable Result from the Ninth Circuit - But One that Shows the Weakness of State Farm

The Ninth Circuit's conclusion--that Exxon should pay $2.5 billion in punitive damages--seems like a decent result, given both the scale of the damages caused by the Exxon Valdez and the wealth of Exxon. However, the way that the Ninth Circuit slavishly tried to apply State Farm's ratio analysis shows the weakness of State Farm's three-factor test, at least as applied in a case that - like Exxon, and unlike BMW v. Gore and State Farm - does not involve intentional misconduct.

Other than a brief discussion of comparable civil penalties, there is no discussion in the Ninth Circuit opinion about what penalty would actually serve the purposes of punitive damages.

If the most significant purpose of punitive damages is to deter, than one might ask why the total costs of the accident alone would not be enough to deter Exxon in the future, and to deter all similarly-situated companies, as well. After all, in an earlier decision, the Ninth Circuit had noted that:

Exxon's casualty losses for the vessel and cargo (approximately $46 million), the costs of clean up (approximately $2.1 billion), the fine and restitution (approximately $125 million), settlement with the government entities (approximately $900 million), settlements with private parties (approximately $300 million), and the net compensatory damages (approximately $19.6 million) totaled over $3.4 billion. Whether cost of cleanup and compensatory damages, damage to the vessel, and lost oil deters bad future acts depends on whether it greatly exceeds the expense of avoiding such accidents, not whether the amounts are compensatory or punitive.

The Supreme Court in State Farm pointed out the same thing: It suggested that "when compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee."

A Special Case: Recklessness that Does Not Injure Persons, but the Environment, Wildlife, and Property

On the other hand, if the goal of punitive damages is retribution, than perhaps a penalty based on some multiple of the compensatory award would be in order. But the Exxon Valdez case raises a question not discussed State Farm---how does the Due Process Clause view punishment for acts of recklessness that do not actually cause injury to persons?

Because that is, in the end, what the Exxon Valdez case is about. The dissent in the Ninth Circuit decision, by Judge Browning, justifies punitive damages in the case by equating Exxon's decision to send Hazelwood back out, with an act of intentional wrongdoing. However, the majority rejects that analysis, and I can see its point. Still, does it really make sense to have a multibillion dollar tort penalty for an act of gross negligence even after state and federal fines were already settled for a total of $900 million, and a compensatory award had been granted that, together with pre-trial settlements, totaled $513 million?

These are the issues left unanswered by the Exxon Valdez decision. The case is finally over, but the constitutional issues it raises are still open -- and it is not clear how the Supreme Court's recent cases can resolve them. It would thus be very helpful to practitioners, and in the interests of justice, if the Supreme Court were to revisit the punitive damages issue in the near future.