The Supreme Court Establishes A New Standard For The Computation Of Punitive Damages Under Maritime Law: The Ratio Of Punitive to Compensatory Damages May Not Exceed 1:1
July, 2008
by Kimbley A. Kearney and Daniel R. Bryer
In Exxon Shipping Co., et al., v. Grant Baker, No. 07-219, 2008 U.S. LEXIS 5263 (June 25, 2008), the Supreme Court, addressed the appropriate measure of punitive damages under general maritime law and held that, in order to promote predictability and consistency in the computation of punitive damages, the ratio of punitive to compensatory damages should never exceed 1:1.
Facts
On March 24, 1989, the supertanker Exxon Valdez ran aground on Bligh Reef off the Alaskan coast, spilling millions of gallons of crude oil into Prince William Sound. The tanker was owned by Exxon Shipping Co. The captain of the Valdez was Joseph Hazelwood, who had completed a
28-day alcohol treatment program while employed by Exxon, but dropped out of a prescribed follow-up program and continued to drink excessively. There was evidence that Exxon officials and management had knowledge of his relapse and took no steps to monitor him after his return to work or give him a shoreside assignment. Witnesses testified that before the Valdez left port on the night of the disaster, Hazelwood drank about 15 ounces of 80-proof alcohol in the waterfront bars of Valdez.
As the tanker proceeded through the Valdez Narrows, it became necessary for it to make a turn to avoid an underwater reef off Bligh Island. Two minutes before the required turn, Hazelwood put the tanker on autopilot, left the bridge and went down to his cabin in order, he said, to do paperwork. The evidence was that there should have been two officers on the bridge at all times and his departure left only one. Hazelwood was also the only person onboard licensed to navigate this part of Prince William Sound. For reasons that remain a mystery, the crew failed to carry out Hazelwood’s instructions for the turn and made an emergency maneuver that came too late. The tanker ran aground on Bligh Reef, tearing the hull open and spilling 11 million gallons of crude oil. Eleven hours after the spill, Hazelwood had a blood-alcohol level of .061. Experts testified that, at the time of the accident, Hazelwood must have had a blood-alcohol level of about three times the legal limit for driving in most States.
In the aftermath of the disaster, Exxon spent approximately $ 2.1 billion in cleanup efforts, and paid over $130 million in restitution, fines and settlements with the United States, Alaska and private parties. The case before the Supreme Court was brought by a group of commercial fishermen and native Alaskans dependent on Prince William Sound for their livelihoods to recover against Exxon and Hazlehurst for economic losses.
At trial, Exxon stipulated to its negligence in the Valdez disaster and its ensuing liability for compensatory damages. As to liability for punitive damages, the court instructed the jury that “[a] corporation is responsible for the reckless acts of those employees who are employed in a managerial capacity while acting in the scope of their employment.” The jury found Exxon liable for the reckless acts of Hazelwood and awarded punitive damages in excess of $5 billion. On appeal, the Ninth Circuit upheld the jury instruction on corporate liability for acts of managerial agents under Circuit precedent, but remanded the case twice for adjustment of the punitive damages award on due process grounds. Eventually, the Ninth Circuit remitted the award to $ 2.5 billion. The Supreme Court granted certiorari to consider (1) whether maritime law allows corporate liability for punitive damages on the basis of the acts of managerial agents; and (2) whether the Clean Water Act forecloses the award of punitive damages in maritime spill cases; and (3) whether the punitive damages awarded against Exxon were excessive as a matter of maritime common law.
Analysis
Exxon argued that it was error to instruct the jury that a corporation “is responsible for the reckless acts of . . . employees . . . in a managerial capacity while acting in the scope of their employment.” Conversely, plaintiffs argued that the general maritime law should conform to modern land-based common law, where a majority of States allow punitive damages for the conduct of any employee, and most others follow the Restatement, imposing liability for managerial agents. The Court, equally divided on the issue, ruled that “[i]f the judges are divided, the reversal cannot be had, for no order can be made.” It therefore left the Ninth Circuit’s opinion undisturbed in this respect, but noted that the disposition of the case is not precedential on the issue of derivative liability.
Next, the Court definitively held that punitive damages are not precluded by the Clean Water Act. The Court reasoned that there is no clear indication of congressional intent to occupy the entire field of pollution remedies, nor is there an indication that private harms will have any frustrating effect on the Clean Water Act’s remedial scheme. Accordingly, the Court upheld the Ninth Circuit’s decision that punitive damages were available.
Finally, as to the appropriate measure of punitive damages for malicious conduct, the Court began its analysis by tracing the history of punitive damages and discussed at length prior damage decisions by various courts throughout the county. The Court was careful to note that the common law maritime inquiry in the instant case regarding whether punitive damages were excessive was distinct from previous decisions where a due process standard was applied in reviewing state court damage awards. See TXO Production Corp. v. Alliance Resources Corp., 509 U.S. 443 (1993) (reviewing state court punitive damages award under a due process standard); BMW of North America Inc. v. Gore, 517 U.S. 559 (1996) (applying due process review in determining whether state court punitive damages award was excessive). The Court reasoned that the computation of punitive damages under maritime law should be based on detailed guidelines, and stated that in the absence of such guidelines, “it is inevitable that the specific amount of punitive damages awarded whether by a judge or by a jury will be arbitrary.”
With this concept in mind, the Court looked to the punitive computation schemes and ratios of other states for guidance, but concluded that most of them “suffer from features that stand in the way of borrowing them as paradigms of reasonable limitations suited for application to this case.” The Court stated that “[t]here is better evidence of an accepted limit of reasonable civil penalty . . . in several studies . . . , showing the median ratio of punitive to compensatory verdicts, reflecting what juries and judges have considered reasonable across many hundreds of punitive awards. The Court further stated that, “[t]hese studies cover cases of the most as well as the least blameworthy conduct triggering punitive liability, from malice and avarice, down to recklessness, and even gross negligence in some jurisdictions . . . [and] put the median ratio for the entire gamut of circumstances at less than 1:1.” The Court held that “given the need to protect against the possibility (and the disruptive cost to the legal system) of awards that are unpredictable and unnecessary, either for deterrence or for measured retribution, we consider that a 1:1 ratio, which is above the median award, is a fair upper limit” for punitive damages.
The Supreme Court’s holding will result in Exxon’s liability for punitive damages being reduced from $2.5 billion to no more than about $500 million.
Learning Point
Although the Supreme Court’s punitive damages analysis and holding in Exxon Valdez is strictly applicable only to cases governed by the general maritime law (and not those governed by the due process standard), defense counsel in a wide variety of cases will likely rely upon it heavily in an effort to keep down punitive damage awards. The Court’s emphasis on the need for consistency and specific guidelines in determining the fair measure of such awards lends itself to an argument that punitive damage awards exceeding the award for compensatory damages are unreasonably high.
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