Jacob Sullum

When does oil cost $13,000 a barrel? When you spill it in Prince William Sound. That's how much Exxon paid after one of its tankers ran aground on Bligh Reef near the southern coast of Alaska in 1989, spilling 258,000 barrels of oil.

The company spent more than $3.4 billion on clean-up costs, fines and compensation payments. Yet, in 1994, a federal jury in Anchorage said Exxon should cough up another $5 billion in punitive damages, a number that an appeals court eventually cut in half.

Now the U.S. Supreme Court has agreed to decide whether that punitive damage award, by far the largest ever upheld by an appeals court, is consistent with maritime law. In addition to raising that question, the gargantuan judgment casts doubt on the very concept of punitive damages.

The case was a class action brought on behalf of some 33,000 fishermen and other individuals who argued that they had not been adequately compensated by Exxon's voluntary payments after the accident. The jury put their compensatory damages at $287 million, an award that came to about $20 million after the earlier payments were subtracted. The $5 billion punitive award was 250 times as high.

The legal wrangling that followed the trial focused on whether that eye-popping award was so disproportionate that it violated the constitutional right to due process. The litigation took 13 years, mainly because the Supreme Court was simultaneously issuing rulings that said the Due Process Clause places limits on punitive damages but did not clarify what those limits are.

The U.S. Court of Appeals for the 9th Circuit said Exxon's employment of Joseph Hazelwood, the tanker captain who precipitated the accident by leaving the bridge during a crucial maneuver, was "reckless" since management knew he was "a relapsed alcoholic." Yet the court also emphasized that the damage caused by the crash was not intentional and that Exxon acted quickly to mitigate and repair it.

Finding that the "reprehensibility" of Exxon's conduct was neither low nor high, the 9th Circuit figured a middling ratio of punitive to actual damages was appropriate. Based on a 5-to-1 ratio and a damage estimate of $500 million (almost twice the compensatory award), it calculated that $2.5 billion was an appropriate number.

The Supreme Court has said ratios in the single digits are "more likely to comport with due process." But it also has said that "when compensatory damages are substantial" even a 1-to-1 ratio "can reach the outermost limit of the due process guarantee." Combine this ambiguity with the various possible interpretations of what should count as actual damages, and a court can rationalize just about any number.

Jacob Sullum

Jacob Sullum is a senior editor at Reason magazine and a contributing columnist on Townhall.com.
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