Exxon Saved From the Rocks: The Supreme Court Limits Punitive Damages

In a divided 5-3 decision, a conservative majority of the Supreme Court in an opinion by Justice Souter found the $2.5 billion in punitive damages awarded against Exxon for the worst oil spill in history to be excessive and reduced the award to $500 million, an amount worth about four days of Exxon’s profits.         

The U.S. Supreme Court in Exxon Corporation v. Baker dealt with the ramifications of the oil spill disaster in Alaska over 20 years ago.  The Exxon Valdez ran aground a reef when the alcoholic captain Exxon had put behind the wheel abandoned the deck and the steering of the ship.  The oil spill destroyed the Alaska coastline, wiped out species of birds and marine life, and destroyed the livelihoods of fishermen, cannery workers, and Native Americans.  The Court’s ruling gives $30,000 to each of the 32,000 plaintiffs, $15,000 for their economic and emotional losses, and $15,000 in punitive damages to punish Exxon for its conduct. 

Exxon had tried to avoid any responsibility for punitive damages under a 200-year-old case in which a ship owner was exempted from liability for pirate attacks.  The Supreme Court tied 4 to 4 on that question.  However, it is likely that Justice Alito, who did not hear the case because of his Exxon stock ownership, would have made 5 justices in favor of corporate exemption.

Instead, the Court agreed to limit the amount of Exxon’s punitive damages.  Justice Souter, who has joined the majority in all of the recent cases limiting punitive damages, said that the problem with these damages is their “stark unpredictability” and their “inconsistency.”  The Court found that a “quantitative remedy” was required and adopted a rule that punitive damages should be measured by a 1:1 ratio with compensatory damages (money for the plaintiffs’ proven economic and intangible losses). This 1:1 standard, the Court said, was the common measure seen in similar maritime cases of recklessness where there was no intent to harm or deliberate action for financial gain. 

The Court’s 1:1 standard, while technically limited to cases involved the sea, creates a precedent for other federal and state cases suggesting that punitive damages should not exceed compensatory damages.  This is a significant departure from the Court’s prior decisions.  In a 2003 decision, State Farm v. Campbell, the Court upheld a “single-digit” ratio of somewhere between 3 and 9 to 1 as a measure of constitutionally valid punitive damages.  Justice Souter suggested in a footnote in Exxon that the decision emphasizes a point made in State Farm that the one-to-one ratio is appropriate when compensatory damages are extremely large.  Yet, it is questionable whether compensatory damages of only $15,000 per plaintiff are a large amount for someone who has lost a year of more of his or her economic livelihood.

The Court’s apparent objective standard of reasonableness masks the underlying judicial activism of the Court.  As I have written about before, activism by the conservative justices is prevalent in the Court’s cases of remedies, including punitive damages, injunctions, and civil rights remedies.  A close look at these cases shows a Court that is biased against what it sees as greedy plaintiffs overreaching the intentions of the law.  Instead, the Court is overly concerned about fairness and protection of corporate defendants.   Thus, the U.S. Chamber of Commerce is right to hail this decision as “good news” for companies.  In past punitive damages cases, the Court has been concerned with so-called “runaway juries” who were allegedly awarding outrageous amounts of punitive damages in lots of cases.  Justice Souter admitted in the Exxon case that scientific studies have subsequently proven this concern wrong, as punitive damages are neither increasing in size nor frequency. 

What the Court’s ruling means in Ohio is that those injured from environmental harms or shipping accidents on Lake Erie will have limited ability to punish intentional or reckless conduct with punitive damages.  For most other common tort injuries in Ohio, a different law applies and caps punitive damages at two times compensatory damages.  This double-damages rule came out of the recent tort reform efforts by the Ohio legislature that were upheld as constitutional by the Ohio Supreme Court in December 2007.  Several previous attempts at similar efforts at tort reform in Ohio to limit punitive damages had been declared unconstitutional by the highest court in the state.  

Tagged as: punitive damages; Supreme Court; tort reform