Today in 1994: Jury returns $5 billion damages verdict against Exxon

September 16, 2011

Today in Legal HistoryToday in 1994, a federal jury returns a $5 billion punitive damages verdict against Exxon for its negligence in causing the Exxon Valdez oil spill in 1989.

The jury had found Exxon negligent for, among other things, halving the size of the crew from 12 years earlier (resulting in standard crew shifts of 12-14 hours), and appointing a man with a known drinking problem as captain (who was admittedly drunk when the tanker ran aground).

The award, an amount equal to one year’s profit for the corporation at the time, marked the start of a lengthy legal process that saw one appeal after another, and finally ended in 2008 with the U.S. Supreme Court.

The first wave of appeals numbered at 11, including several seeking a new trial or judgment as a matter of law, several on the grounds of the punitive damages award, all of which were denied.

After several more appeals were filed and denied, the 9th Circuit Court of Appeals finally heard an appeal from Exxon on the issue of the Clean Water Act’s penalty provisions preempting maritime common law punitive damage rules.

While holding that there was no preemption between the two bodies of law, the appeals court did find the $5 billion award excessive, and remanded the case to the original judge to determine a new amount.

The judge applied the Supreme Court’s factors for determining punitive damages as laid out in 1996’s BMW v. Gore, and found that the original amount wasn’t excessive; since he was directed to reduce the original amount, though, he reduced it to $4 billion.

After more appeals and a 2003 Supreme Court decision addressing punitive damages and due process, the appeals court vacated the $4 billion reduced award, and directed the same judge to again determine a new award amount in light of the 2003 decision.

Exxon Valdez SpillFinding that the ruling added no new guidance on the issue, the judge set the award amount at $4.5 billion in 2004.

Predictably, Exxon appealed again.

The 9th Circuit took the appeal and reduced the damage even further to $2.5 billion.

Exxon appealed again.

The 9th Circuit reheard the case, but declined to reduce the damages amount any further.

Exxon appealed to the Supreme Court, who granted their petition for cert in 2007.

After oral arguments were made in February 2008, the Supreme Court handed down its decision that June.

A major issue on appeal was Exxon’s contention that a ship’s owner isn’t subject to punitive damages under maritime law.

Exxon supported this assertion with an 1818 case that held a ship’s owner isn’t liable for a captain’s actions while the ship was out at sea, (since there was no way to communicate with the ship at the time and keep tabs on the captain).

With Justice Alito recusing himself because of his ownership of $150,000-$200,000 worth of Exxon-Mobil stock, the court was split 4-4 on the issue, so the appeals court’s decision remained (punitive damages could be assessed).

However, a 5-3 majority agreed that a 1-to-1 ratio of compensatory-to-punitive was appropriate.

Thus, the Court ruled the punitive damages amount to be $507.5 million plus interest (or about five days of profit for the corporation).

Officially, Exxon maintains that any amount above $25 million is excessive.

Nevertheless, the ruling was a monumental victory for the company.

Not only was the original amount reduced by 90% (not including inflation), but because Exxon didn’t have to pay that $500 million in 1994, it could invest it.

Since 1994, it was accruing between 13% and 26% in interest, netting Exxon over $4 billion.

What about its legal fees?  Mostly covered by insurance claims related to the accident.

So while punitive damages are designed to “teach a lesson” to malfeasors, the lesson Exxon learned here is to delay payment until its interest returns outweigh the damages.