The Lessons of the Supreme Court's Recent Decision Granting a Huge Victory to Exxon in the Exxon Valdez Oil Spill Case

Tuesday, Jul. 1, 2008

Last week, in Exxon Shipping Co. v. Grant Baker, et. al., the Supreme Court gave the defendants, Exxon, a huge victory. It reduced a $2.5 punitive damages award—the largest ever awarded in a federal court—to $507 million.

In this column, I will examine the lessons we can draw from the Court’s decision. The real import of the decision, I shall argue, may not lie in what the Court said, but rather in the peculiar voting bloc of Justices that produced the ruling in favor of Exxon.

The Relevant Facts, the Jury Verdict, and the Ninth Circuit Decision

The underlying facts behind the case are well known. In 1989, an Exxon supertanker spilled 11 million gallons of crude oil into the Prince William Sound in Alaska. Exxon spent $2.1 billion in a voluntary clean-up effort, and then settled or pled guilty to numerous civil and criminal actions brought against it by the State of Alaska and the federal government. The suit in question here, however, arose from a separate suit – a class action brought by commercial fishermen, Native Americans, and landowners whose livelihoods and property were damaged by the spill.

At the trial, the jury heard evidence concerning how the captain of the tanker, a “recovered” alcoholic, had relapsed, and was piloting the huge vessel drunk. The jury also heard evidence that management at Exxon knew about the captain’s relapse, yet had not stripped him of his duties. In the end, the district judge held that the evidence indicated that Exxon had caused approximately $507.5 million in damage (although the jury actually awarded a lesser sum to the plaintiffs to represent compensatory damages for the harm caused), and the jury awarded the plaintiffs $5 billion in punitive damages. This amount was later reduced to $2.5 billion by the Ninth Circuit.

The Three Grounds for Supreme Court Review

The Supreme Court then granted review. There were three grounds for Exxon’s challenging the $2.5 billion award of punitive damages. None of them involved the question whether the award violated the Due Process limitations on punitive damages created by the Court in earlier decisions. Instead, all three were based on the award’s permissibility under maritime law, which is one of the last areas of substantive federal common law left to the federal courts. (“Common law” is judge-made; in contrast, the lion’s share of federal law derives from interpretations of federal statutes or the U.S. Constitution.)

The first argument Exxon presented was that maritime common law does not permit the awarding of punitive damages against a principal or an employer for the recklessness of its agents or employees. The second argument was that maritime common law had been preempted by various federal statutes in this case -- statutes that did not authorize punitive damages in the event of civil actions based on their violation. I will not discuss these first two arguments.  The Court split evenly over the first question, thus leaving the Ninth Circuit's interpretation standing, albeit without establishing a holding.  The author of the Court's opinion, Justice Souter, thought that the second argument was pretty weak,  the portion of the opinion in which he refutes it was joined by all eight participating Justices. (Justice Alito did not participate in the decision).

The Argument that Convinced the Court to Dramatically Reduce the Verdict – and Why It is Not as Strange as It May Seem

The third argument Exxon presented was that, as a matter of common law, the $2.5 billion award was excessive. The Court’s participating Justices voted five-to-three to accept this argument. Before I review Souter’s opinion for the majority, it is important to acknowledge what is both strange and not-so-strange about Exxon’s winning argument.

To begin, it might seem strange that the United State Supreme Court was being asked to answer a question about substantive tort law. Ever since the landmark Supreme Court precedent Erie v. Pennsylvania, law students have been taught that the federal courts do not make law, but only apply law found in other sources (state common law, or state and federal statutes and constitutions). This view of Erie has always been overly simplistic, if not naïve. There is still lots of federal common law, and even a federal common law of torts. Maritime law is one of the purest examples of this point. So the question asked by Exxon was not that strange.

The Court’s Analysis: Looking to History and Policy, But Erroneously So

How did Souter answer that question? In my view, his answer was a little disappointing, especially since of all nine Justices on the Court, Souter is the one judge with decades of experience as a common law judge. He came to the Court from the New Hampshire Supreme Court, where he had been deciding cases about the common law of torts and contracts for years.

As Justice Oliver Wendell Holmes and Benjamin Cardozo taught us, common law adjudication requires, at the crudest level, a balancing of history (precedent) and policy (normative judgment). Souter attempted to take both these dimensions into account in the Exxon Valdez case, but his methodology is so flawed that it brings the Court’s result into question.

Let’s start with history. There is an active debate over whether, in the Eighteenth and Nineteenth Centuries, the main function of punitive damages was to provide “stealth” compensation for pain and suffering, since non-economic damages were allegedly not available in tort during that period. This view, which one might call the “crypto-compensation” position, was first embraced by the Court in Cooper Industries, Inc. v. Leatherman Tool Group, Inc. in 2001, and it is simply wrong. I have written a law review article about this error in “What Did Punitive Damages Do? Why Misunderstanding the History of Punitive Damages Matters Today,” 78 Chi-Kent L. Rev. 163 (2003), and I simply refer the reader to it.

Souter seems to back away from the Court’s error in Cooper Industries by saying that it really doesn’t matter who is right in this debate, since all that matters is that, today, there is a consensus that the purpose of punitive damages is to punish. But that statement proves exactly why the crypto-compensatory argument is dangerous.

Souter assumes that since the purpose of punitive damages is at least a “new” form of punishment, its present purpose is neither informed nor constrained by the past. Souter assumes that the current purpose of punitive damages is to extend the state’s power to punish from the criminal realm into the realm of private law – that is, civil cases such as this one. At one point, he notes that variability in punitive damages might be permitted if they allowed courts to reach “a generally accepted optimal level of penalty and deterrence.” At another point, he explicitly uses the evolution of the federal sentencing guidelines to justify his conclusion that the best way to be fair to all defendants facing punitive damages is to employ simple arithmetical ratios that do not depend on the vagaries of human judgment.

If one viewed the historical purpose of punitive damages as permitted a special form of compensation—that is, permitting compensation for dignitary harms, by allowing victims of private wrongs to punish those who violated their rights—then there would be no need to identify some great break in the history of punitive damages between the Nineteenth and Twentieth Centuries. And the search for mathematical equality—which seems to drive Souter’s opinion -- would not be placed at the center of the common law concept of punitive damages.

Souter’s mathematical argument is internally inconsistent as well. He begins by admitting that there is no evidence that, in the aggregate, punitive damages are awarded often, or in very high ratios relative to the compensatory awards that they accompany. The problem, Souter says, is the unpredictability of the very rare and very high blockbuster award. But it is not clear why, in fact, that is a problem from the point of view of deterrence, since the ex ante risk of a high-ratio award to any defendant is still quite small.

I can see why Souter might think that, from a fairness point of view, this is a problem (imagine if out of every 10,000 speeding tickets, one person is given a $1 million penalty), but the odd thing is that the Exxon case itself did not involve a “very rare and very high” award. The punitive damages awarded by the jury were within the “single digit ratio” (that is, a ratio of punitive to compensatory damages with a single-digit numerator) recommended by the Court in State Farm Mut. Automobile Co. v. Campbell, and the award approved by the Ninth Circuit was half that—that is, it was five times the estimated compensatory award, when even nine times would have fallen within the Court’s recommended ratio.

There may be good reasons for concluding that, as a matter of common law reasoning, the $5 billion punitive damages award should be reversed. The problem is that the reasons offered by the Court for objecting to the Ninth Circuit’s review of – and reduction of -- the trial jury’s award are ad hoc, as is the Court’s solution—to impose a 1:1 ratio.

The Interesting Voting Blocs This Case Created

Two important features of the five-member majority in this case are worth noting. Moreover, the weakness of the majority opinion may explain one feature about the voting pattern that produced it.

First, Justices Scalia and Thomas voted to reverse the award. This is important because it is the first time that these justices have voted with a majority to reverse a punitive damages award. Scalia, especially, has, in the past, been scathing in his criticism of the Court’s decision to enter into the thicket of evaluating punitive damages awarded by state juries.

Of course, this case is different from all the previous cases. Exxon did not involve the Constitution or the Due Process Clause. One might think that Scalia saw no reason to invoke the passive virtues (that is, the virtues of judicial restraint and especially Supreme Court restraint) in a case involving federal common law. However, this argument is too clever by half, I think. Frankly, I can’t tell the difference between the common law virtues of fairness that led Souter to impose a 1:1 ratio in this case, and the due process requirement of fairness that led the Court to impose a “single-digit” ratio in State Farm (which drives Scalia bonkers).

Second, the traditional coalition of moderates that has supported the Court’s evolving punitive damages jurisprudence since 1994, when it reversed its first punitive damages award in BMW of North America, Inc. v. Gore, broke apart in Exxon. BMW’s majority, led by Justice Stevens, included Justices Kennedy, Souter and Breyer. These four were part of the majority in State Farm. But now look at the majority in Exxon: Souter, Roberts, Kennedy, Scalia and Thomas. Stevens and Breyer joined the dissent.

To put it another way: It has to be a little embarrassing for Souter and Kennedy to now be forced to rely on Scalia and Thomas to cobble together a majority to reverse a punitive damages award. The last fifteen years of case law in this area suggests that the majority in Exxon may agree on only one thing: $5 billion, for whatever reason, is simply too much money to demand of any tortfeasor. On this point, at least, a majority of the Court agreed.

Anthony J. Sebok, a FindLaw columnist, is a Professor at Benjamin N. Cardozo School of Law in New York City. His other columns on tort issues may be found in the archive of his columns on this site.

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