Constitutional Law

Punitive Damages Run Aground Before the Supreme Court

by Alexandra B. Klass, Associate Professor at the University of Minnesota Law School and Member Scholar at the Center for Progressive Reform. She is the author of Punitive Damages and Valuing Harm, which discusses awards of punitive damages in environmental cases.

In its decision in Exxon Shipping Co. v. Baker, the Supreme Court finally put its mark on the 19-year litigation over the grounding of the Exxon Valdez oil tanker in Prince William Sound, Alaska, and the resulting oil spill. In reducing the punitive damages award against Exxon from $2.5 billion to $500 million, the Court created federal common law on punitive damages in maritime cases and undermined the punitive and deterrent purposes of these kinds of awards. The punitive award will exactly match the compensatory award of $15,000 per plaintiff.

The case framed three specific issues for the Court. First, whether Exxon could be held liable in its corporate capacity for punitive damages based on the actions of its employee, ship’s captain Joseph Hazelwood. Second, whether federal fines imposed on Exxon under the Clean Water Act preempted individual tort claims for punitive damages. Third, whether the $2.5 billion punitive damages award imposed by the lower court was excessive.

The Court split 4-4 on whether Exxon could be held liable in its corporate capacity for punitive damages for the actions of Hazelwood, who was known to Exxon to be a relapsed alcoholic and was drunk while captaining the ship. (Justice Samuel Alito recused himself). This split meant the lower court’s decision imposing liability stands. 

The Court found that the federal Clean Water Act did not foreclose punitive damages under common law, thus reaffirming the important role that common law claims for damages — including punitive damages — can and should play in addressing water pollution and other environmental harms.

The Court decided upon the $500 punitive award under the novel theory that a 1:1 ratio of compensatory to punitive damages was appropriate under federal maritime law. The decision, authored by Justice Souter, shows the Court struggling to create rational standards to govern the lower courts’ review of punitive damages awards. At the end of the opinion, one is left with the sense that the Court has created a bright-line rule that ignores the nuances of the case while providing little guidance for future courts.

What is particularly striking is the Court’s continuing commitment to its questionable journey, begun only in 1996, to place firm federal judicial limits on punitive damages — whether under the due process clause of the 14th amendment or, in this case, federal maritime law. The Court recognized that empirical studies refute the unfounded claims that punitive damages have skyrocketed in recent years and that juries are abusing their authority. The Court also notes that many state legislatures have placed strict limits on punitive damages — such as blanket bans, maximum dollar caps, or maximum ratios between punitive damages and compensatory damages of 2:1, 3:1, etc. Three dissenting justices (Stevens, Ginsburg, Breyer) concluded from this evidence that state legislatures and state courts are doing their jobs in policing jury awards

The majority, however, cited “outlier” multi-million and multi-billion dollar awards and concluded that punitive damages are unpredictable — and thus unfair to defendants. Adding more “predictability” to the punitive damage equation, particularly in the form of a 2:1 or a 1:1 ratio, may well be helpful to would-be malefactors contemplating whether a risk is worthwhile before doing wrong, but it undercuts the punitive and deterrent purposes of punitive damages. Moreover, it prevents juries and lower courts from fully considering the circumstances and nuances of each individual case with their own individual facts. 

Ultimately, the Court adopted a straightjacket ratio approach, and settled on a 1:1 ratio of punitive damages to compensatory damages in this case because of the large compensatory damage award ($500 million) and the lack of intentional conduct by the defendant. The Court dismissed adding standards to guide juries and lower courts as insufficiently specific. It also rejected maximum penalty amounts because of the high variability of types of tort and contract injuries that can support punitive damages.. 

It is disappointing that the Court feels the need to continue to police punitive damage awards when all evidence shows that juries, lower courts, and state legislatures have already put strong measures in place to do just that. Moreover, punitive damages are intended to punish and deter misconduct and thus must be tied to the magnitude of the misconduct as well as the financial condition of the defendant. 

The grounding of the Exxon Valdez resulted in the discharge of 11 millions gallons of oil into Prince William Sound, causing one of the largest and most damaging oil spills in history. Exxon officials knew Hazelwood was a relapsed alcoholic who was drinking at sea but let him pilot the Valdez nevertheless. Exxon is the biggest company in the world, with profits this year of $39 billion, the largest in U.S. history, and reportedly the largest in the history of the planet. At trial, Exxon testified that the original punitive damage award of $5 billion “would not have a material impact on the corporation or its credit quality.” 

In refusing to allow juries and courts to engage in this important, fact-specific exercise, the Court’s decision results in a quasi-legislative, one-size-fits-all solution that does not do justice to our tort system, those who administer it, and those who rely on it for important forms of redress. 

Full post as published by ACS Blog on June 26, 2008 (boomark / email).