$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 companys 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 Exxons reprehensible
conduct, was excessively greater than the compensatory damages awarded
by the jury, and was excessively greater than other fines for similar
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 Islands 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 Valdezs 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 areas 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
defendants 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, Hazelwoods
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 ships
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 Exxons 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 persons 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 courts
punitive damages determination.5 Because the BMW
and the Leatherman Tool cases were decided after the district courts
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
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 plaintiffs 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 Hazelwoods $5,000 in punitive damages and Exxons
$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
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 Exxons
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 defendants 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.
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 Alaskas 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.