Limiting Damages

THIS SUMMER, the Supreme Court threw out a $2.5 billion punitive damage award over the Exxon Valdez disaster 19 years ago, the largest judgment of its kind in U.S. history. The decision is raising hope among chemical manufacturers and other businesses that state courts will be less likely to allow eye-popping judgments against corporations in future liability lawsuits.

"We've been interested in this issue for a long time. Our members have a deep concern about unpredictable, excessive punitive damage awards," says Donald D. Evans, deputy general counsel at the American Chemistry Council (ACC), a trade association that represents 134 major chemical manufacturers.

Under tort law, punitive damages are awarded to both punish defendants and deter similar bad behavior by others. They are awarded on top of compensatory damages, which are paid to the plaintiff to compensate for the actual economic loss, injury, or harm suffered because of the defendant's actions.

Industry fears punitive damages, which are a matter of state law and therefore differ in application around the U.S. In the 28 states where there are no limits on the amount of damages that may be awarded, there are no rules in place to guide juries in determining a just and reasonable figure to award a plaintiff. In these states, industry attorneys argue, skillful trial lawyers can manipulate juries into delivering big-dollar verdicts that are arbitrary and unjustified.

"Is it going to be $1 million, $100 million, or no punitive damages at all? You never know what the jury is going to decide," Evans remarks.

In addition to working to persuade state legislatures to pass tort reform measures, Evans says, the chemical industry has played a major role in corporate America's efforts over the past 15 years to get the Supreme Court to curtail "excessive" punitive damage awards. "If you pay a stunning amount of compensatory damages, why do you need to pay an even more stunning amount of punitive damages? That is what the Supreme Court has started to explore," Evans says.

Last month, ACC filed a legal brief urging the justices to review two cases in which West Virginia juries imposed a combined $370 million in punitive damages against NiSource, a natural gas distributor, and Massey Energy, a large coal producer. Chemical manufacturing is big business in West Virginia, contributing $14 billion dollars to the state's economy in 2007. "As such, ACC members are unfortunately all too familiar with excessive punitive damage awards in West Virginia," the brief states.

Of the seven largest damage awards in the U.S. last year, three were imposed by West Virginia juries: the two nine-digit awards in the NiSource and Massey Energy cases and a $196 million award assessed against DuPont for failing to clean up pollution at the company's former zinc smelter near the town of Spelter. The West Virginia Supreme Court of Appeals refused to review the NiSource and Massey Energy verdicts and is currently considering whether it will hear an appeal by DuPont.

"Chemical companies are no more or no less exposed than others in the business community," Evans says. "We get hit and have the same concerns about these large awards." Sometimes, the ACC attorney adds, the mere threat of a large punitive damage award is enough to force a company to settle a case it would otherwise contest.

"It's very difficult to try one of these cases because of the fear that you might get hit with a substantial judgment, even be forced into bankruptcy if it's large enough," Evans asserts. "So it's a major incentive for companies to settle these cases rather than take the risk of getting hammered with an unpredictable damage award."

ON JUNE 25, the industrial sector scored a substantial victory when the Supreme Court slashed what had originally been a record $5 billion punitive damages award against Exxon (now ExxonMobil) for its role in the 1989 Exxon Valdez oil spill to slightly more than $500 million (Exxon Shipping v. Baker).

The original award had been assessed in 1994 by an Anchorage, Alaska, jury as punishment for grounding the nearly 1,000-foot Exxon Valdez oil tanker on Bligh Reef in Prince William Sound and spilling 258,000 barrels of crude oil into the pristine Alaskan fishing waters. The $5 billion assessment was equal to a single year's profit by Exxon at that time.

In 2006, the San Francisco-based 9th U.S. Circuit Court of Appeals cut the original award in half to $2.5 billion, still the costliest punitive damages judgment ever affirmed by a federal appeals court. Exxon appealed that decision to the Supreme Court, and oral arguments were heard in the case last February.

The company claimed that punitive damages were unwarranted because it had already paid more than $3.4 billion in cleanup costs and other penalties for the oil spill, which polluted 1,200 miles of Alaskan coastline. Specifically after the accident, Exxon spent an estimated $2.1 billion on cleanup. It paid $125 million in criminal fines and $900 million to Alaska and the federal government for environmental restoration. Exxon also paid $300 million in out-of-court settlements to parties claiming economic injuries caused by the spill. Those expenditures, the company argued in its petition to the court, are "more than enough to deter and punish anyone for anything."

Exxon's appeal was supported by a broad array of business organizations, including ACC. "If any case is a poster child for gratuitous punitive damages, it is this one," the groups asserted in a joint friend-of-the-court brief. "Tempting though it is to demonize Exxon because of the devastating damage that befell Prince William Sound, Exxon did not deliberately contaminate that ecosystem; nor did it knowingly put the ecosystem at risk in a callous effort to save money," the businesses argued.

Writing for the majority in a 5-3 decision, Justice David H. Souter said that the nearly 33,000 commercial fishermen, landowners, and others that filed the initial class-action lawsuit over the environmental disaster could collect punitive damages from Exxon, but not as much as the federal appeals court had determined.

Souter said the damages could not exceed what the company had already paid to compensate victims for their economic losses—$507.5 million. "The punitive damages award against Exxon was excessive as a matter of maritime common law," he wrote. "The award should be limited to an amount equal to compensatory damages."

Acknowledging that blockbuster awards "have been the target of audible criticism in recent decades," Souter asserted that "the real problem, it seems, is the stark unpredictability" of punitive damages. A penalty should be "reasonably predictable" in its severity, he added. "In many instances," Souter observed, "a high ratio of punitive to compensatory damages is substantially greater than necessary to punish or deter."

Joining Souter in the majority were Chief Justice John G. Roberts and Justices Antonin Scalia, Clarence Thomas, and Anthony M. Kennedy. Justice Samuel A. Alito Jr. did not take part in the decision because he owns Exxon stock.

IN A DISSENTING OPINION, Justice Stephen G. Breyer said the 1-to-1 ratio was too rigid for the reckless and reprehensible nature of Exxon's conduct. "The punitive damages award before us already represents a 50% reduction from the amount that the District Court strongly believed was appropriate. I would uphold it," Breyer wrote. Justices Ruth Bader Ginsburg and John Paul Stevens also disagreed with reducing the punitive award and said Congress, not the Supreme Court, is in a better position to set limits on damages.

Lawyers for the plaintiffs had argued that the big payout was necessary to punish Exxon for its extreme misconduct and to properly compensate fishermen and others for virtually wiping out their ability to earn a living from the sea.

Because the Supreme Court decided the case on the basis of federal maritime law—a form of common law dealing with ships at sea—and not constitutional principles, the ruling appears to be limited in scope. But business groups believe the 1-to-1 maximum ratio the high court set—punitive damages can equal but not surpass compensatory damages—could become the standard in other types of cases, too.

The ruling is "good news for companies concerned about reining in excessive punitive damages," says Thomas J. Donohue, president and chief executive officer of the U.S. Chamber of Commerce. "For years, the chamber has argued that punitive damages are too unpredictable and unfair, and the court agreed," he adds.

The decision could have an effect far beyond federal maritime law, says Robin S. Conrad, executive vice president of the chamber's national litigation center. "Limiting punitive damages to no more than the amount of a compensatory award will go a long way in cabining unpredictable punitive damages," she says.

Quentin Riegel, vice president for litigation and deputy general counsel at the National Association of Manufacturers, says the Supreme Court is continuing its recent trend of clarifying the limits of punitive damages. "By settling on a 1-to-1 standard, they provided a standard that other courts can turn to," he says. "Future defendants can point to that standard as a means of eliminating the 'stark unpredictability' of punitive damages the court was so concerned about."

In the Exxon Valdez case, the Supreme Court examined the reasonableness of the punitive award under the common law—the legal system created and refined by judges' decisions—rather than determining whether the award was so grossly disproportionate to actual damages that it violated constitutional due process protections. Over the years, the Supreme Court has ruled that the due process clause of the U.S. Constitution places limits on punitive damages, but the justices have not clarified what those limits are.

In 2003, the court ruled in State Farm v. Campbell that punitive damages should bear some reasonable relationship to the harm involved. Although the justices did not set a specific limit, the court said that the ratio of punitive to compensatory damages should rarely exceed single digits (that is, no more than 9 to 1) and that in many cases punitive damages should not exceed compensatory damages at all.

"Single-digit multipliers are more likely to comport with due process, while achieving the state's goals of deterrence and retribution," the court said. In cases where compensatory damages are substantial, "a lesser ratio, perhaps only equal to compensatory damages" might be warranted," the justices added.

In a footnote in his majority opinion in the Exxon case, Souter affirmed the notion that in cases with large compensatory awards, "the constitutional outer limit may well be one-to-one." And in her dissenting opinion, Ginsburg asks, "On the next opportunity, will the court rule definitively that one-to-one is the ceiling due process requires in all of the states, and for all federal claims?"

ACC's Evans says future litigation will establish whether the 1-to-1 ratio has become the new bright-line test for excessive punitive damages. "We were very excited about the court's decision in the Exxon Valdez case," the ACC attorney remarks. "It's clear that the opinion applies only to maritime cases. But it opens the door for arguing that the constitutional outer limit is indeed 1-to-1. In fact, in the brief we filed in the two West Virginia cases, we ask the court to think in those terms."

TRIAL LAWYERS, however, insist the Exxon decision will have little impact on the overall legal landscape. "The court said that punitive damages may be capped through a ratio only in maritime cases that do not involve extraordinary misconduct by the corporation itself," says Kathleen Flynn Peterson, a partner at Robins, Kaplan, Miller & Ciresi L.L.P. in Minneapolis. "Those in the business community who claim this decision stands for a generalized punitive damage limit are wrong."

The Supreme Court's ruling has been sharply criticized by environmental activists and some members of Congress. "For the court to require a company that recorded a 2007 profit of $40.6 billion to pay a mere $500 million in punitive damages to the affected Alaskans makes a mockery of justice," says John Passacantando, executive director of Greenpeace USA.

Democrats on the Senate Judiciary Committee have also questioned the wisdom of the court's decision. "If Congress had wanted to cap punitive damages for disasters that impact thousands of Americans, of course it could have, but it did not," Sen. Patrick J. Leahy (D-Vt.), committee chairman, said at a hearing in July that looked at the fairness of several recent Supreme Court decisions.

"This ruling is another in a line of cases where this Supreme Court has misconstrued congressional intent to benefit large corporations," Leahy charged. "These recent decisions will do nothing to deter future corporate misconduct. I expect they will encourage it by taking away the one incentive that big corporations tend to understand—significant financial consequences."

Tort reform advocates say it is unlikely that Congress will try to overturn the Exxon Valdez ruling. "Whether punitive damages should be assessed and in what amount is an important issue, particularly in a case where the fines and actual damages have been so substantial," Riegel says. "But whether the issue cries out for congressional intervention is debatable since the courts were able to resolve the case and establish guidance for future cases. That reduces the need for Congress to step in when there are so many other pressing matters."