$5 Billion Punitive Damages Against Exxon Deemed Excessive
In re Exxon Valdez, 270 F.3d 1215 (9th Cir. 2001).

Jason Dare, 2L

Following the guidance of recent Supreme Court cases, the Ninth Circuit has ruled that $5 billion in punitive damages levied against Exxon for the 1989 Valdez oil spill was unconstitutionally excessive. The court noted that while punitive damages were deemed appropriate, due to the company’s reckless conduct in giving command of an oil tanker to a known alcoholic, the $5 billion amount awarded was unjust. The court explained that it was not a fair apportionment of Exxon’s reprehensible conduct, was excessively greater than the compensatory damages awarded by the jury, and was excessively greater than other fines for similar misconduct.

Background
During the evening of March 24, 1989, an inebriated Captain Joseph Hazelwood boarded the 900-foot oil tanker Exxon Valdez and embarked on a now infamous journey into Prince William Sound. The tanker headed out of port, toward a difficult turn at Busby Island, and Hazelwood instructed a third mate to turn the ship west once the Island’s navigation light was visible. Two minutes before the turn commenced, Hazelwood, the only person aboard the vessel with a special license required to navigate that part of Prince William Sound, exited the bridge and went to his cabin in order to do paperwork. Moments later, the Valdez’s hull was ripped open by Bligh Reef and 11 million gallons of oil were deposited into Prince William Sound.

Following the wreck, Exxon spent an estimated $2.1 billion removing oil from the water and surrounding shorelines. It was fined $125 million for environmental crimes and was ordered to pay $900 million by the State of Alaska and the U.S. for restoration of the natural environment, pursuant to the Clean Water Act. Furthermore, Exxon paid $300 million in out-of-court settlements to entities whose economic interests were damaged by the spill. Added to the approximately $46 million value of the vessel and cargo lost in the wreck, Exxon spent over $3.8 billion on the spill before the commencement of this case. However, the prior settlements and environmental damage awards failed to compensate the area’s commercial fishing industry for damages it sustained, leading commercial fishermen to file this suit.

The action was brought before the U.S. District Court for the District of Alaska, which created a multi-class action suit consisting of a compensatory damages class, who could receive actual damages for proven injury or loss, and a punitive damages class, whose damages were awarded to deter the defendant’s reckless conduct. The district court noted that the punitive damages class was mandatory in order to avoid future punitive damage litigations by commercial fishermen and to allow the jury to include all punitive damages it considered proper. In order to simplify the case for the jury, the court tried it in three phases. During phase one, Hazelwood’s actions were deemed reckless, a requirement for punitive damages, because he commanded the vessel while “so drunk that a non-alcoholic would have passed out,”1 increased the ship’s speed, by engaging its autopilot, while traveling towards a known reef, and left a third mate with the tricky task of maneuvering the vessel away from the reef. Furthermore, the jury viewed Exxon’s actions as reckless in phase one because of evidence that the company knew Hazelwood dropped out of meetings for alcoholism and drank before taking command of its vessel. Phase two of the trial consisted of the jury awarding $287 million in compensatory damages to the commercial fishermen. Previous settlements and other payments by Exxon prior to this case were deducted from the jury total by the district court, thus allowing for $19.6 million in compensatory damages. Finally, jury rulings from phase three provided that Hazelwood owed $5,000 in punitive damages and Exxon owed $5 billion in punitive damages, which “at the time . . . was the largest punitive damages award in American history.”2

Proper Review of Punitive Damages
Exxon appealed to the Ninth Circuit and claimed that punitive damages were not appropriate in this case and that, even if the punitive damages were appropriate, the amount awarded was unconstitutionally excessive.3 In its claim that punitive damages were not appropriate, Exxon contended that maritime law traditionally prohibits punitive damages in general, the legal doctrine of res judicata bars punitive damages in this case, and the jury lacked sufficient evidence to award punitive damages.

First, the Ninth Circuit noted that even though maritime law typically forbids punitive damages, defendants such as Exxon may be subject to them because their conduct was found to be willful and wanton. Although the State of Alaska and the U.S. previously sued Exxon for damage to the environment, res judicata, the legal doctrine that provides that parties cannot litigate a particular issue twice, did not prevent the claimants’ present suit. According to the Ninth Circuit, this suit differed from the previous litigation because it involved commercial fishing, rather than environmental, damages. Finally, the court decided that substantial evidence existed to support the jury findings in this case, affirming that punitive damages were available to the commercial fishermen and were not barred by other laws or legal doctrines.

Exxon next argued that, even if punitive damages were appropriate, the $5 billion amount calculated by the jury was unconstitutionally excessive. Ordinarily, appellate courts show great deference toward jury decisions concerning damages. The Supreme Court, however, recently decided that appellate review of punitive damages constitutionally requires stricter scrutiny. In BMW v. Gore, the Supreme Court handed down three factors courts should consider when analyzing punitive damages. The three “guideposts” are: “(1) the degree of reprehensibility of the person’s conduct; (2) the disparity between the harm . . . suffered by the victim and his punitive damages award; and (3) the difference between the punitive damage award and the civil penalties . . . imposed in comparable cases.”4 In Cooper Industries v. Leatherman Tool Group, the Supreme Court further explained that “courts of appeal should apply a de novo standard,” literally meaning to try the case anew, when reviewing a district court’s punitive damages determination.5 Because the BMW and the Leatherman Tool cases were decided after the district court’s decision in the present action, the district court was not able to apply the appropriate review standards. Therefore, for the following reasons, the Ninth Circuit vacated the $5 billion punitive damages award against Exxon, and remanded the case “so that the district court could set a lower amount in light of [these] standards.”6

Reprehensible Conduct
Reprehensibility, according to the Supreme Court, is analogous to criminal cases in that “nonviolent crimes are less serious than crimes marked by violence.”7 The Ninth Circuit agreed with the plaintiff’s assertion that Exxon exhibited reprehensible conduct by instructing an oil tanker to navigate the dangerous waters of Prince William Sound and by giving control over the navigational tasks to an alcoholic. However, the Ninth Circuit noted that Exxon had not intentionally deposited 11 million gallons of oil into Prince William Sound and had not tried to fraudulently conceal the accident. The court distinguished the damages to the fisheries from damage to the environment, finding that the majority of damages sustained were to the environment. In addition, inequality between Hazelwood’s $5,000 in punitive damages and Exxon’s $5 billion in punitive damages, despite Hazelwood being the direct cause of the accident, made the court suspicious as to whether the jury correctly evaluated reprehensibility. Finally, the court noted that reprehensibility should be discounted when the defendant promptly attempts to mitigate the harm.

Relation to Compensatory Damages
The next step in evaluating a punitive damage award is to determine whether the punitive damages are “reasonably related” to compensatory damages.8 The court pointed to a Supreme Court case that a 4 to 1 punitive damages to compensatory damages ratio was “close to the line” of excessiveness.9 In the present case, the jury awarded $5 billion in punitive damages and $287 million in compensatory damages, a ratio of 17 to 1. The district court established that compensatory damages could have been as high as $418 million, giving a ratio of approximately 12 to 1. Either way, the two ratios greatly surpassed the borderline 4 to 1 ratio cited by the Supreme Court. Moreover, in calculating the harm done to the plaintiff, the Ninth Circuit refused to add Exxon’s cleanup costs to the compensatory damages award. Even though those costs were indicative of the harm suffered by the plaintiff, the court found that adding the figures would discourage defendant’s voluntary cleanup efforts and would overly deter the harmful action.

Relation to Fines for Similar Conduct
The final step in appellate review of punitive damages is to compare the punitive damages awarded to penalties or fines for similar actions. For this step, the Ninth Circuit listed various comparable penalties that could be levied against Exxon. First, in some cases, federal law provides that fines of not more than twice the pecuniary loss of victims of the misconduct should be awarded.10 The district court determined the plaintiffs in question suffered up to $516.7 million in pecuniary loss, which doubled equals $1.03 billion, or 1/5 of the punitive damages. Second, the Trans-Alaska Pipeline Act holds a defendant strictly liable for any discharge of oil that has traveled through the trans-Alaskan pipeline, and fines the individual no more than $100 million per incident, or 1/50 of the punitive damages.11 Finally, the Oil Pollution Act, enacted in response to the Exxon Valdez spill, calls for a fine not in excess of $3,000 per barrel of oil discharged.12 The Exxon Valdez spilled the equivalent of 261,905 barrels of oil, resulting in a necessary fine of $786 million, or 1/6 of the punitive damages. Hence, the fines and penalties from the District of Alaska were far from an optimal one-to-one ratio to punitive damages for oil spills mentioned by the Ninth Circuit.

Following its review of the $5 billion punitive damage award by using the 3-prong test laid out by the Supreme Court, the Ninth Circuit determined that the award was “too high” and “must be reduced” by the district court.13 Therefore, it vacated the decision and remanded the case back to the district court in order for the award to be lowered in light of these considerations.

ENDNOTES
1. In re Exxon Valdez, 270 F.3d 1215, 1236 (9th Cir. 2001).
2. Id. at 1238.
3. The punitive damage class also appealed alleging that claims by those who suffered purely economic injury was allowable. Even though economic recovery is typically unavailable in admiralty cases minus a showing of physical harm, the court held that Alaska’s statute concerning hazardous substance spills was not pre-empted by maritime law and remanded the case for these claims.
4. 270 F.3d at 1240-41.
5. Cooper Indus., Inc. v. Leatherman Tool Group, Inc., 121 S. Ct. 1678, 1685-86 (2001).
6. 270 F.3d at 1246-47.
7. BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 575-76 (1996) (quoting Solem v. Helm, 463 U.S. 277, 292-93 (1983)).
8. 517 U.S. at 580.
9. Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1, 23 (1991).
10. 18 U.S.C. § 3571(d) (2001).
11. 43 U.S.C. § 1653(c)(3) (2001).
12. 33 U.S.C. § 1321(b)(7) (2001).
13. 270 F.3d at 1246.