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Punitive Damages Class Action Defense Cases–Exxon v. Baker: Supreme Court Reduces Class Action Punitive Award In Exxon Valdez Case Holding Punitive Damages Under Federal Maritime Law Should Be Limited To Amount Of Compensatory Damages

$2.5 Billion Punitive Damage Award in Class Action Against Exxon Arising out of Valdez Oil Spill Excessive because Considerations of Predictability Warranted 1:1 Ratio Cap on Punitive Damages Awarded under Federal Maritime Law Supreme Court Holds, Resulting in Reduction of Class Action Punitive Damage Award to $500 Million and, as Modified, Class Action Judgment Affirmed Bringing end to 20-year Lawsuit

Almost 20 years ago, in March 1989, Exxon’s supertanker, the Valdez, ran aground off the coast of Alaska and spilled millions of gallons of crude oil into Prince William Sound. Plaintiffs, commercial fishermen and Native Alaskans, filed a class action against Exxon seeking compensatory and punitive damages. Exxon Shipping Co. v. Baker, 554 U.S. ___ (June 25, 2008) [Slip Opn., at 1-2]. (More accurately, various individual civil cases were consolidated into one lawsuit against Exxon and others, and at Exxon’s request the federal court “certified a mandatory class of all plaintiffs seeking punitive damages, whose number topped 32,000.” Id., at 5.) Exxon stipulated to its negligence and a jury trial was held to determine compensatory damages and fix punitive damages, id. The jury awarded plaintiffs $5 billion in punitive damages against Exxon. Id., at 7. The Ninth Circuit affirmed the judgment but reduced the punitive damage award to $2.5 billion, id. The Supreme Court granted certiorari to address three questions of maritime law: “whether a shipowner may be liable for punitive damages without acquiescence in the actions causing harm, whether punitive damages have been barred implicitly by federal statutory law making no provision for them, and whether the award of $2.5 billion in this case is greater than maritime law should allow in the circumstances.” Id., at 1. The High Court held that federal law did not preclude an award of punitive damages against Exxon, but that the award “should be limited to an amount equal to compensatory damages.” Id. The Supreme Court vacated the judgment and remanded the class action. Id., at 7. The Court held that the punitive damages awarded in the class action should not have exceeded the compensatory damage award and, accordingly, must be reduced to $500 million.

We do not here recount the factual history of the Valdez oil spill, or the evidence presented concerning Exxon’s culpability in allowing its employee, Captain Joseph Hazelwood, to serve as captain of the Valdez on the fateful night. That history may be found at pages 2 to 4 of the Court’s opinion. Exxon spent approximately $2.1 billion to clean up the oil spill. Exxon Shipping, at 4. The federal government brought criminal charges against Exxon for violating several federal laws; Exxon pleaded guilty to violating various federal laws and ultimately paid a $25 million fine and $100 million in restitution. Id., at 4-5. The federal government also filed a civil action against Exxon, along with the State of Alaska, and obtained a consent decree requiring Exxon to pay another $900 million toward restoring natural resources. Id., at 5. Exxon additionally paid approximately $300 million to settle claims with fishermen, property owners and others. Id.

With respect to whether a corporation can be responsible for the reckless acts of its managerial employees committed while acting within the course and scope of their employment, the Supreme Court was even divided and therefore affirmed the Ninth Circuit. See Exxon Shipping, at 7-10. Put simply, “‘[i]f the judges are divided, the reversal cannot be had, for no order can be made,’” id., at 10 (quoting Durant v. Essex Co., 7 Wall. 107, 112 (1869)), but the Court’s opinion is therefore of no precedential value with respect to the derivative liability issue, id. (citations omitted). We also do not discuss the High Court’s conclusion that the availability of maritime punitive damages at common law is not preempted by the federal Clean Water Act. See Exxon Shipping, at 10-15. The focus of the Court’s opinion was whether the $2.5 billion punitive damage award in the class action could stand, and it is to that question that we turn.

The Supreme Court noted that defense attorneys raised “an issue of first impression about punitive damages in maritime law, which falls within a federal court’s jurisdiction to decide in the manner of a common law court, subject to the authority of Congress to legislate otherwise if it disagrees with the judicial result.” Exxon Shipping, at 16 (citations omitted). The thrust of Exxon’s argument was that the punitive damage award was excessive because it “exceeds the bounds justified by the punitive damages goal of deterring reckless (or worse) behavior and the consequently heightened threat of harm.” Id. The Court began by summarizing the history of punitive damages, as well as recent criticism of such awards. See id., at 16-27. With respect to the latter, the Supreme Court observed at page 26, “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.” (Citation and footnote omitted.)

With respect to its consideration of the constitutionality of “outlier punitive damages awards,” the Supreme Court noted that “our cases have announced due process standards that every award must pass” and that while those opinions “‘have consistently rejected the notion that the constitutional line is marked by a simple mathematical formula,’” the Court has suggested that “‘[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.’” Exxon Shipping, at 28 (citations omitted). Exxon’s petition, however, presented a slightly different situation because rather than focusing on due process of state punitive damage awards under the federal Constitution the inquiry involved a question of federal maritime law. Id. The Court explained at page 29, “Our review of punitive damages today, then, considers not their intersection with the Constitution, but the desirability of regulating them as a common law remedy for which responsibility lies with this Court as a source of judge-made law in the absence of statute. Whatever maybe the constitutional significance of the unpredictability of high punitive awards, this feature of happenstance is in tension with the function of the awards as punitive, just because of the implication of unfairness that an eccentrically high punitive verdict carries in a system whose commonly held notion of law rests on a sense of fairness in dealing with one another. Thus, a penalty should be reasonably predictable in its severity, so that even Justice Holmes’s ‘bad man’ can look ahead with some ability to know what the stakes are in choosing one course of action or another.” (Citation omitted.)

After finding that punitive damages and criminal laws serve the same purposes of punishment and deterrence, see Exxon Shipping, at 29-32, the Court stated, “This is why our better judgment is that eliminating unpredictable outlying punitive awards by more rigorous standards than the constitutional limit will probably have to take the form adopted in those States that have looked to the criminal-law pattern of quantified limits,” id., at 33. It noted, however, that the situation presented by the Exxon Shipping case involved an additional important element: the punitive damage award in this class action was imposed for conduct “where the tortious action was worse than negligent but less than malicious.” Baker Shipping, at 37. Put another way, the situation presented here is “a case of reckless action, profitless to the tortfeasor, resulting in substantial [compensatory damage] recovery for substantial injury.” Id., at 38. Because data suggests that the median punitive damage award is less than 1:1, and that it is the “outlier” punitive damage awards that are far above the median, the Supreme Court ultimately concluded that “given the need to protect against the possibility (and the disruptive cost to the legal system) of awards that are unpredictable and unnecessary, either for deterrence or for measured retribution, we consider that a 1:1 ratio, which is above the median award, is a fair upper limit in such maritime cases.” Id., at 40. “Applying this standard to the present case, we take for granted the District Court’s calculation of the total relevant compensatory damages at $507.5 million…. A punitive-to-compensatory ratio of 1:1 thus yields maximum punitive damages in that amount. We therefore vacate the judgment and remand the case for the Court of Appeals to remit the punitive damages award accordingly.” Id., at 42 (citation omitted).

The Court recognized that its holding is subject to the criticism that it “smacks too much of policy and too little of principle.” Exxon Shipping, at 34 (citation omitted). The High Court defended itself by explaining at page 34, “But the answer rests on the fact that we are acting here in the position of a common law court of last review, faced with a perceived defect in a common law remedy. Traditionally, courts have accepted primary responsibility for reviewing punitive damages and thus for their evolution, and if, in the absence of legislation, judicially derived standards leave the door open to outlier punitive-damages awards, it is hard to see how the judiciary can wash its hands of a problem it created, simply by calling quantified standards legislative.” (Citations omitted.)

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