In a major victory for business interests involved in maritime operations and what many commentators say is a harbinger of things to come, the United States Supreme Court recently struck down the $2.5 billion punitive damage award against ExxonMobil in a case involving claims for individual economic damages filed by landowners, native Alaskans and commercial fisherman following the 1989 grounding of the Exxon Valdez. See Exxon Shipping Company, et al v. Grant Baker, et al, 554 U.S. ____(June 25, 2008).  The Court determined that the upper limit for punitive damages in maritime cases was a 1:1 ratio to compensatory damages and sent the case back to the appellate court to reduce the punitive damage award to $507.5 million which was the amount of compensatory damages (those agreed upon in settlement and those awarded following trial) that the trial court determined were relevant for purposes of determining punitive damages.

In the aftermath of the oil spill, ExxonMobil paid over $3 billion for cleanup, fines, restoration costs and voluntary settlements to private parties. The remaining civil case filed by Baker went to trial in three phases, involving whether punitive damages were warranted, the amount of compensatory damages and the amount of punitive damages. The jury awarded $287 million in compensatory damages to the plaintiffs whose claims went to trial and $5 billion in punitive damages. Following numerous appeals, the U.S. Court of Appeals for the Ninth Circuit reduced the punitive damage award to $2.5 million. The Supreme Court agreed to decide whether the punitive damage award was excessive under maritime common law.[1]

After deciding that punitive damages were available under maritime law against corporations and that the Clean Water Act does not prohibit punitive damages in maritime oil spill cases, the Court launched a 28-page discussion of the history of punitive damages, the purpose of punitive damages, predictability of punitive damage awards and finally, the amount of punitive damage awards available in maritime cases.[2]

In reviewing the history of punitive damages, the Court noted that the concept of punitive damages is found in ancient times, in the Code of Hammurabi, in which a tenfold penalty was available for stealing a goat. The modern concept of punitive damages dates back to at least 1763 when damages “for more than the injury received” were awarded.  However, the Court recognized that punitive damages are not universally accepted with some states prohibiting them entirely and others (including Louisiana) limiting the availability of punitive damages to only those cases in which statute specifically authorize them.  The Court also noted that historically, the purpose of punitive damages was to punish certain, extraordinary, harmful conduct and to deter others from that same harmful conduct.

The Court, in coming to a decision, analyzed punitive damage awards in other cases from the perspective of whether they were fair and predictable. The court reasoned that the law is based on a basic premise of fairness (thus punitive damages should be fair) and that penalties should be reasonably predictable so that even the “bad man” has some ability to predict the consequences when choosing how to act.

The Court concluded that in deciding whether the punitive damage award against ExxonMobil met these two criteria, it could pick from three approaches. The first involved a “verbal” approach that established criteria for judicial review of punitive damage awards to determine whether they were excessive. This approach was rejected because this criterion would not provide the predictability that the court was seeking. The second approach was a quantitative approach that would set a dollar cap on punitive damage awards similar to the maximum sentences in criminal law. This was also rejected because there are no “standard” torts or contract injuries that would allow the court to set an across the board maximum.

The third approach, and the one the court adopted, was to use a ratio or maximum multiple. Again, referring to studies of previous punitive damage awards, the court determined that setting a maximum ratio of punitive damages to compensatory damages of 1:1 satisfied the goals of preventing unpredictable and excessive awards, retribution and deterring future misconduct.

This approach was consistent with the Court’s decisions relating to its due process analysis in determining whether punitive damage awards rendered under state law meet constitutional muster. In State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. 408 (2003), the Court rejected a mathematical formula for determining whether a punitive damage award violated constitutional notions of due process, but did find that “few awards exceeding a single-digit ratio between punitive and compensatory damages, to a significant degree, will satisfy due process.” State Farm, 538 U.S. at 425. The Court went on to say in State Farm  that “[w]hen compensatory damages are substantial, then a lesser ratio, perhaps only equal to compensatory damages, can reach the outermost limit of the due process guarantee.”

The dissenting opinions focused on the Court’s decision to make maritime law rather than use traditional judicial review standards like “abuse-of-discretion” until Congress determines whether to impose specific rules on punitive damages in maritime cases.

The ExxonMobil decision sends a clear signal that this Court is willing to limit punitive damages to accomplish the goals of fairness and predictability and may be willing to consider additional limits on punitive damage awards under the constitutional due process standards.