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.
Perhaps not surprisingly, the Supreme Court has chosen not to wade once again into this due-process thicket. Instead, it will consider whether federal maritime law, a form of common law dealing with ships at sea, allows punitive damages in a case like this one and, if so, whether it imposes limits on them.
These questions illustrate the fundamental problem with punitive damages: They're not really damages at all; they're punishments. Like criminal penalties, they're supposed to serve the goals of deterrence and retribution. Exxon argues, plausibly enough, that the $3.4 billion it already has paid is "more than enough to deter and punish anyone for anything."
Given the impact that the Prince William Sound disaster had on Exxon's reputation as well as its finances, oil companies have a strong incentive to avoid anything like it in the future. As for retribution, it's a tough concept to understand when it's applied not to culpable individuals such as Joseph Hazelwood but to corporations owned by shareholders who are innocent of any wrongdoing.
In any event, Exxon was already punished, paying the U.S. government a criminal fine prescribed by statute. It should not be punished again for the same conduct under rules that allow fines to be pulled out of thin air.