It is constitutional to challenge the reasonableness of a punitive award but not a compensatory award. The goal of punitive damages is retribution or punishment and deterrence while compensatory damages are used to make a plaintiff whole or put them in the position they were before they met the defendant. According to the Supreme Court of the United States, the “Due Process Clause prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeaser.” Furthermore, the Court noted “it should be presumed that a plaintiff has been made whole by compensatory damages, so punitive damages should be awarded only if the defendant’s culpability is so reprehensible to warrant the imposition of further sanctions to achieve punishment or deterrence.”

In State Farm the U.S. Supreme Court determined that “few awards exceeding a single-digit ratio between punitive and compensatory damages will satisfy due process.” As a result, single-digit multipliers or anything under 9:1 will reflect the State’s goals to punish and deter while corresponding with due process. However, the more reprehensible and malicious the conduct the greater the award can be. The relationship of punitive damages to compensatory damages acts as a guidepost only. As a result, double-digit multipliers are not impossible. The Court returned to the question of punitive damages in Exxon Shipping Co. v. Baker.

In Exxon Shipping Co. v. Baker the Court was divided 4-4 (Justice Samuel Alito did not participate in the decision because he owns stock in Exxon) on whether “maritime law allows corporate liability for punitive damages based on the acts of managerial agents”, so the Court left the Ninth Circuit’s opinion “undisturbed.” The Court also held that the Clean Water Act’s water pollution penalties “do not preempt punitive-damages awards in maritime spill cases”, and that the “punitive damages award against Exxon was excessive as a matter of maritime common law [and]…the award should be limited to an amount equal to compensatory damages.”

Regarding the third holding the question in Exxon Shipping Co. v. Baker was what ratio between punitive and compensatory damages would be appropriate or reasonable. The Court did not use a constitutional analysis or argue whether the state-court award violated due process, because Exxon Shipping Co. v. Baker took place under federal maritime jurisdiction. As a result, the Court applied judge-made federal common law, because federal question jurisdiction exists in maritime actions so federal law is applied. Over the years, where federal courts have subject matter jurisdiction they have developed their own federal common law.

Furthermore, the Court went through an interesting history of damages and investigative analysis of the role of punitive awards. The Court looked at how different states use punitive awards, and (some states do not allow punitive awards) the Court even compared the United States’s use of punitive awards with other countries. Apparently, the use of punitive damages in the United States is more robust. The Court performed a summary analysis on punitive damages, because it wanted to emphasize that punitive awards do not compensate. This emphasis was important for the holding.

The Court argued that if the $2.5 billion award would be allowed then the punitive to compensatory damage ratio would be an outlier. Additionally, a higher amount would fly in the face of how lower courts have traditionally applied punitive damages. The Court was seeking reasonableness. To do this, the Court examined data across all types of cases that awarded damages. The Court was looking for a median ratio that would give an indicator of what a reasonable ratio between punitive and compensatory damages looked like.

However, the Exxon Valdez disaster itself was an outlier. It was the worst anthropogenically-caused environmental disaster in America’s history and one of the worst anthropogenically-caused environmental catastrophes in the world. The affects from the oil spill are still being observed in the ecosystems and fisheries of the spill area in Alaska.

Why should Exxon pay out a $2.5 billion punitive award? First, Exxon knew of Captain Joseph Hazelwood’s drinking habits. In fact, the Captain was still drunk many hours after the accident. The Captain stopped going to Alcoholics Anonymous meetings. He drank all over Alaska including with Exxon officials. Furthermore, management knew of his problem. Witness testimony noted that before “the Valdez left port on the night of the disaster, Hazelwood downed at least five double vodkas in the waterfront bars of Valdez, an intake of about 15 ounces of 80-proof alcohol, enough ‘that a non-alcoholic would have passed out.’”  Second, Exxon’s profits in 2007 were $40.6 billion.

The Court justified a lower punitive award, because punitive damages are to punish and not to compensate the plaintiff for their loss. However, given Exxon’s reprehensible behavior and record profits the Court should have used a higher number to send the message that such conduct will not be tolerated. A few million dollars is not going to send the proper message to a multibillion-dollar company that continues to make record profits amongst high fuel prices. The Court scrambled to find reasonableness but it failed.

On the Net: Fishers argue that lawyer’s fees in the Exxon case were not excessive and worth it – scroll down and see comments
On the Net: Environmental Punitive Damages Awards and Due Process: Lessons Learned from the Exxon Valdez Oil Spill
On the Net: A letter to the California Court of Appeal regarding damages
On the Net: Exxon Valdez oil spill lingers in Alaska
On the Net: ENVIRONMENTAL LAW: A rough guide to understanding the damages awarded and reduced in the Exxon Valdez case

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