Supreme Court Decides Exxon’s Appeal of $2.5 billion Punitive Award from Valdez Spill

June 27, 2008

In a much anticipated decision, the U.S. Supreme Court on June 25, 2008, decided Exxon’s appeal of the $2.5 billion punitive damage award growing out of the EXXON VALDEZ spill in March 1989.  Over Exxon’s objection, the court upheld the principle that the court exercising its admiralty jurisdiction could award punitive damages, but reduced the lower court’s judgment to $500 million.  In doing so the court established the rule that in all but the most extraordinary cases, the admiralty court  cannot award as punitives a sum in excess of 100 per cent of the compensatory damages.

The Decision

Exxon first challenged the court’s authority to award punitive damages against the corporate owner where the ship’s master, as a managerial employee, and not the company, acted recklessly.  On procedural grounds, the court declined to address the question and thus let stand the lower court’s decision holding that the company was indeed responsible in these circumstances.

Exxon in this pre ISM matter dating from 1989, based its argument that as owner it could not be liable for the reckless acts of its master on several old cases.  These decisions recognized the reality of the times that once a ship sailed, the company had little, if indeed, any control over the master.  In today’s environment of instantaneous communications, and more importantly, mandatory ISM systems designed precisely for the purpose of monitoring ship board activity, these old decisions may well not survive Supreme Court review in a future case.

Exxon then claimed punitive damages could not be awarded because the federal Clean Water Act, under which the case was prosecuted, implicitly did not allow the award of such damages.  Finding that Congress did not explicitly preclude the award of punitive damages, the court rejected this claim.

Cases falling under the Oil Pollution Act of 1990 may produce a contrary result.  While OPA-90 is also silent on the issue, Congress filled the legislative history with statements that OPA-90 is the “comprehensive” response to issues spills pose.  This language may be taken to mean the Congress intended that punitive damages not be available in OPA-90 cases.  At least one lower court has so ruled.  See Southport Marine LLC v. Gulf Oil Limited Partnership, 234 F.3d 58 (1st Cir. 2000).  Of course, whether the Supreme Court will follow this reasoning remains to be seen.

But in cases involving spills of hazardous substances other than oil and oil from vessels other than those carrying oil as cargo, (which are not covered by OPA-90), the Clean Water Act ruling may still apply.  The question also remains open under CERCLA, state statutes, and common law claims for pollution losses.

Finally, the court, concerned with the wildly varying ratios courts have approved in punitive damage cases, decided that the dual purposes of punitive damages -punishment and deterrence – were served if punitive damages did not exceed, except in the most extraordinary cases, 100 per cent of the compensatory damages.  This ruling resulted in a reduction of the lower court award from $2.5 billion to $500 million.

The case attracted much attention not only because it is a very high profile maritime matter, but also because the Supreme Court over the last 20 years or so has issued a series of cases dealing with punitive damages and the appropriate relationship between punitives and compensatory damages.  Despite repeated decisions on the issue, the court has not really developed a workable formula producing predictable results on the question; hence the broad interest in the case. 

At first blush, the court’s ruling may be considered a disappointing effort to bring closure to the issue.  The court distinguished between this case as one dealing with judge-made federal maritime law and its prior decisions addressing constitutionally circumscribed state law cases.  Whether the VALDEZ decision ultimately governs in the latter circumstances or is limited to maritime matters remains to be seen.  In any event, expect the Supreme Court to address punitive damages at least once more to reconcile the VALDEZ decision with its earlier rulings.

The ultimate importance of the decision as precedent in the maritime context must be questioned.  In our judicial history, only a handful of maritime cases have produced punitive damage awards.  The VALDEZ decision should not alter that history going forward.  Also, tanker spills now fall under OPA-90 and not the Clean Water Act.  As discussed above, the legislative history of OPA-90 lends support to the view that Congress precluded punitive damages as remedy for those injured in an oil spill.  If that view prevails, the VALDEZ decision will be a “one off ” result for the oil tanker industry.

Only time will tell whether the VALDEZ decision will have any real influence in the ongoing development of the law on punitive damages.

In the court of public opinion, however, vocal voices are making themselves heard.  An editorial in the June 26 edition of The New York Times said:

  “The problem with the rule [the court’s holding] is not that it is judge-made, but rather that it subverts the purpose of punitive damages, which have a venerable place in the law.  They are meant to punish and deter. 
A $500 million award for what the appeals court called ‘egregious’ conduct, against a company that earned more than $40 billion last year, is unlikely to do either.”

The battle remains joined.