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Supreme Court Cuts Exxon Valdez Punitive Damages Award, Setting the Stage for New Common Law Limits

Beveridge & Diamond, P.C., June 30, 2008

The United States Supreme Court concluded its 2007 term with a landmark ruling limiting punitive damages that may provide new tools for defense counsel in all civil cases.  In writing the latest chapter in the long-running Exxon Valdez saga, the Supreme Court overturned a $2.5 billion punitive damages award assessed against Exxon for the 1989 Valdez oil spill, holding that the award is excessive under maritime common law.  Exxon Shipping Co. v. Baker, 554 U.S. ___ , No. 07-219, 2008 U.S. LEXIS 5263 (2008).  Justice Souter announced for the 5-3 majority that, under maritime law, the upper limit for punitive damages is a 1:1 ratio to compensatory damages.  Based on this holding, Exxon’s punitive damages for the Valdez oil spill, which were previously reduced from $5 billion to $2.5 billion by the United States Court of Appeals for the Ninth Circuit, will now be a maximum of $507.5 million, the amount of compensatory damages awarded by the jury.  The Court’s rationale regarding excessive and unpredictable punitive damages was not unique to maritime common law, making it likely that other courts will follow the high court’s lead in limiting punitive damages in other areas of the law to an amount equal to or lesser than compensatory damages.

The facts of this case are well-known and began in March 1989 when the supertanker Exxon Valdez ran aground in Alaska’s Prince William Sound, resulting in a spill of more than 11 million gallons of oil over 1,200 miles of coastline.  The accident occurred after the ship’s captain gave unlicensed subordinates responsibility for navigating the Valdez through the treacherous waters of the Sound.  Evidence later demonstrated the captain to be a relapsed alcoholic who had visited “several dockside bars” where he drank large quantities of vodka immediately prior to the ship’s launch.  Exxon spent approximately $2.1 billion in cleanup efforts; pled guilty to criminal violations of the Clean Water Act (CWA), the Refuse Act, and the Migratory Bird Treaty Act and ultimately paid $125 million in criminal fines and restitution and an additional $900 million to settle federal and state civil claims; and paid $303 million in voluntary settlements with private parties.

Civil cases brought by private parties who did not settle were consolidated and tried to a jury, resulting in an award of $5 billion in punitive damages in addition to compensatory damages.  Over the next 14 years, the case followed a tortuous path among the lower federal courts, culminating in the Ninth Circuit’s decision in May 2007 to cut the punitive damage award in half.  On appeal from that decision, three questions were presented to the Supreme Court: (1) whether Exxon may be held derivatively liable for punitive damages based on the actions of its employee, Captain Hazelwood, as to which the Court was divided and thus left undisturbed the 9th Circuit’s ruling; (2) whether the CWA preempts an award of punitive damages under maritime common law, and (3) whether the award of $2.5 billion is greater than allowed under maritime law.

Regarding the CWA, the Court quickly rejected Exxon’s argument that the statutory penalties it paid under the Act for violations resulting from the oil spill preempted common law punitive damages.  Exxon conceded that the CWA did not preempt compensatory damages for water pollution and the Court concluded that nothing in the Act suggests that punitive damages should be treated differently than compensatory damages.  Moreover, the Court noted that it saw “no clear indication of congressional intent to occupy the entire field of pollution remedies,” nor did it find that punitive damages for private harms would undermine the Clean Water Act’s remedial plan.  Preemption of state tort claims under the Clean Water Act is still possible in the wake of the Exxon decision, particularly where the remedy sought “will have [a] frustrating effect on the CWA remedial scheme, which would point to preemption.” 

The opinion’s key holding is the new limit on punitive damages.  Unlike previous decisions in which the Court examined punitive damage awards in light of constitutional due process standards, here the Court considered the issue under federal maritime jurisdiction.  Justice Souter acknowledged that by using its maritime powers broadly to limit punitive damage awards, “some will murmur that this smacks too much of policy and too little of principle.”  But he defended the Court’s analysis because “we are acting here in the position of a common law court of last review faced with a perceived defect in a common law remedy.”  According to Souter, punitive damage awards created by judges, along with a lack of legislative standards and runaway juries have led to unpredictable outcomes and outlier awards.  The Court found that the best way to cure that defect was to impose a 1:1 ratio of punitive to compensatory damages as the upper limit for punitive damages.

Notably, although the Court styled the opinion as explicitly addressing “questions of maritime law,” the punitive/compensatory damages ratio adopted by the Court is based on a  broad rationale derived from state common law and statutory precedents that aim to ensure fairness and consistency for such awards with respect to all types of legal disputes.  Though clothed as a narrow holding of maritime law, the Court’s underlying rationale provides compelling arguments that the new 1:1 common law ratio should govern any common law claim for punitive damages.

For further information, please contact Karen Hansen (khansen@bdlaw.com), James Slaughter (jslaughter@bdlaw.com), Nessa Horewitch (nhorewitch@bdlaw.com) or William Sinclair (wsinclair@bdlaw.com).