Ninth Circuit Finalizes Punitive Damages in Exxon Valdez Spill

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Ninth Circuit Finalizes Punitive Damages in Exxon Valdez Spill In re the Exxon Valdez, 2007 WL 1490455 (9th Cir. May 23, 2007). *Sarah Spigener, 3L, University of Mississippi School of Law* In the latest appeal of the punitive damages award for the Exxon Valdez oil spill, the Ninth Circuit has reduced the district court’s award from $4.5 billion to $2.5 billion. Background In 1989, the Exxon Valdez ran aground in the Prince William Sound causing a massive oil spill in Alaskan waters. The district court found that the sole cause of the accident was Exxon’s placement of a relapsed alcoholic as captain of the supertanker Exxon Valdez. The district court initially found the defendant, Exxon, liable for a $287 million verdict in compensatory damages, and the jury additionally assessed $5 billion in punitive damages. Exxon appealed. While the appeal was pending, the Supreme Court issued two relevant opinions that instructed the lower courts to consider, through a due process analysis, the ratio of punitive damages to compensatory harm when deciding if the award was excessive.1 Pursuant to this new analysis, the Court of Appeals held that the $5 billion punitive damages award was grossly excessive and remanded the case to the district court for a further analysis consistent with the due process analysis handed down by the Supreme Court. Upon remand, the district court concluded that the compensatory harm was just over $500 million (this amount included prior settlements between Exxon and other plaintiffs). The court further concluded that a ratio of 10 to 1 of punitive damages to harm was warranted by the circumstances of this case; nonetheless, the court reduced the award from $5 billion to $4 billion. Exxon again appealed. The Supreme Court issued another opinion, State Farm v. Campbell, while this appeal was pending.2 In State Farm, the Supreme Court indicated that “ratios in excess of single-digits would raise serious constitutional questions and that single-digit ratios were more likely to comport with due process.”3 As a result, the Ninth Circuit again remanded the case to the district court to reevaluate the punitive damages award consistent with State Farm. On its third remand, the district court calculated the harm at $513.1 million. Holding that Exxon’s conduct was highly reprehensible, the district court increased the award from $4 billion to $4.5 billion at a 9 to 1 ratio. Not surprisingly, Exxon appealed. Reprehensibility of Conduct The Court of Appeals decided this case based upon the Supreme Court cases that shaped the initial appeals: State Farm and BMW v. Gore.4 BMW v. Gore provided three guideposts for reviewing punitive damages: 1) the reprehensibility of the defendant’s misconduct; 2) the ratio of punitive damages to harm; and 3) comparable statutory penalties. State Farm stressed that of those factors, the most important is the reprehensibility of the conduct. This is because fair notice of the possible legal consequences of one’s misconduct is required by due process. To evaluate the reprehensibility of the harm, State Farm gave five sub-factors: 1) the type of harm; 2) whether there was reckless disregard for the health and safety of others; 3) whether there were financially vulnerable targets; 4) whether there was repeated misconduct; and 5) whether it involved intentional malice, trickery, or deceit, rather than mere accident. Mitigating factors must also be considered. In evaluating the sub-factors, the court held that Exxon’s misconduct fell in the middle of a continuum between accidental and intentional conduct. The first factor required the court to evaluate the type of harm, particularly whether the harm was economic or physical, noting that physical harm would result in a higher level of reprehensibility. Though the court found no actual physical harm to people, the combined economic and emotional harm was severe. Examining the second factor, the court determined that Exxon entrusted an incompetent captain to command the Exxon Valdez and that the potential harm of placing all people and businesses in the vicinity of the Prince William Sound in harm’s way was entirely predictable. Therefore, this factor indicated high reprehensibility because Exxon had shown reckless disregard for the health and safety of others. In examining the third factor, the court found that though Exxon’s conduct harmed financially vulnerable subsistence fishermen—arguably financially vulnerable targets—this conduct was not intentional and did not affect its assessment of reprehensibility. The court noted the fourth factor—whether there was repeated misconduct—pointed to higher reprehensibility, since for three years, the defendant allowed the incompetent captain onboard the Exxon Valdez. In examining the final factor, the court decided that Exxon’s misconduct was no mere accident, but neither was it intentional malice. The court stated that Exxon’s misconduct was highly reprehensible, but not in the highest realm. Here, Exxon’s response to the catastrophe, including its immediate cleanup and compensatory payments, was significant to mitigate the harm. Since Exxon’s efforts to mitigate the harm were significant, the court concluded that the reprehensibility should be mid-range. Turning to the ratio of harm to punitive damages, the court held that the proper numerator is the harm likely to result from the defendant’s conduct. The district court set this as $513.1 million, but the court decreased this amount by $9 million as a result of an overpayment by a liability fund, to $504.1 million. The court noted that in cases with significant economic damages and more egregious behavior, a single-digit ratio higher than 4 to 1 might be constitutional. The court recognized that this case falls into that category, but because only the most egregious forms of intentional misconduct, such as threats of violence and intentional racial discrimination, merit the highest ratios, the court set the ratio at 5 to 1. Finally, the last factor to consider was comparable penalties. This factor’s significance has been greatly diminished by State Farm and other Ninth Circuit cases. However, the fact that this particular factual situation–spilling oil in navigable waters–has been taken very seriously by Congress and the state legislature, further justified the court’s conclusion that a substantial punitive damage award should be assessed. Conclusion The appellate court concluded that Exxon’s reckless conduct in placing an incompetent captain in command of the Exxon Valdez warranted severe sanctions; however, the most severe sanctions were not necessary in light of Exxon’s mitigating efforts and considering that this misconduct was not intentional. Because the district court’s punitive damages award of $4.5 billion was not consistent with the Supreme Court’s State Farm decision, the Ninth Circuit reduced the award to $2.5 billion consistent with a 5 to 1 ratio. Endnotes 1. Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1993); TXO Prod. Corp. v. Alliance Res. Corp., 509 U.S. 443 (1993). 2. State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003). 3. Id. at 14. 4. B.M.W. of N. Am., Inc. v. Gore, 517 U.S. 559 (1996). SandBar 6.2
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Ninth Circuit Finalizes Punitive Damages in Exxon Valdez Spill

In re the Exxon Valdez, 2007 WL 1490455 (9th Cir. May 23, 2007).

Sarah Spigener, 3L, University of Mississippi School of Law

In the latest appeal of the punitive damages award for the Exxon Valdez oil spill, the Ninth Circuit has reduced the district court’s award from $4.5 billion to $2.5 billion.

Background
In 1989, the Exxon Valdez ran aground in the Prince William Sound causing a massive oil spill in Alaskan waters. The district court found that the sole cause of the accident was Exxon’s placement of a relapsed alcoholic as captain of the supertanker Exxon Valdez.

The district court initially found the defendant, Exxon, liable for a $287 million verdict in compensatory damages, and the jury additionally assessed $5 billion in punitive damages. Exxon appealed. While the appeal was pending, the Supreme Court issued two relevant opinions that instructed the lower courts to consider, through a due process analysis, the ratio of punitive damages to compensatory harm when deciding if the award was excessive.1 Pursuant to this new analysis, the Court of Appeals held that the $5 billion punitive damages award was grossly excessive and remanded the case to the district court for a further analysis consistent with the due process analysis handed down by the Supreme Court.

Upon remand, the district court concluded that the compensatory harm was just over $500 million (this amount included prior settlements between Exxon and other plaintiffs). The court further concluded that a ratio of 10 to 1 of punitive damages to harm was warranted by the circumstances of this case; nonetheless, the court reduced the award from $5 billion to $4 billion. Exxon again appealed. The Supreme Court issued another opinion, State Farm v. Campbell, while this appeal was pending.2 In State Farm, the Supreme Court indicated that “ratios in excess of single-digits would raise serious constitutional questions and that single-digit ratios were more likely to comport with due process.”3 As a result, the Ninth Circuit again remanded the case to the district court to reevaluate the punitive damages award consistent with State Farm.

On its third remand, the district court calculated the harm at $513.1 million. Holding that Exxon’s conduct was highly reprehensible, the district court increased the award from $4 billion to $4.5 billion at a 9 to 1 ratio. Not surprisingly, Exxon appealed.

Reprehensibility of Conduct
The Court of Appeals decided this case based upon the Supreme Court cases that shaped the initial appeals: State Farm and BMW v. Gore.4 BMW v. Gore provided three guideposts for reviewing punitive damages: 1) the reprehensibility of the defendant’s misconduct; 2) the ratio of punitive damages to harm; and 3) comparable statutory penalties.

State Farm stressed that of those factors, the most important is the reprehensibility of the conduct. This is because fair notice of the possible legal consequences of one’s misconduct is required by due process. To evaluate the reprehensibility of the harm, State Farm gave five sub-factors: 1) the type of harm; 2) whether there was reckless disregard for the health and safety of others; 3) whether there were financially vulnerable targets; 4) whether there was repeated misconduct; and 5) whether it involved intentional malice, trickery, or deceit, rather than mere accident. Mitigating factors must also be considered.

In evaluating the sub-factors, the court held that Exxon’s misconduct fell in the middle of a continuum between accidental and intentional conduct. The first factor required the court to evaluate the type of harm, particularly whether the harm was economic or physical, noting that physical harm would result in a higher level of reprehensibility. Though the court found no actual physical harm to people, the combined economic and emotional harm was severe. Examining the second factor, the court determined that Exxon entrusted an incompetent captain to command the Exxon Valdez and that the potential harm of placing all people and businesses in the vicinity of the Prince William Sound in harm’s way was entirely predictable. Therefore, this factor indicated high reprehensibility because Exxon had shown reckless disregard for the health and safety of others. In examining the third factor, the court found that though Exxon’s conduct harmed financially vulnerable subsistence fishermen—arguably financially vulnerable targets—this conduct was not intentional and did not affect its assessment of reprehensibility. The court noted the fourth factor—whether there was repeated misconduct—pointed to higher reprehensibility, since for three years, the defendant allowed the incompetent captain onboard the Exxon Valdez. In examining the final factor, the court decided that Exxon’s misconduct was no mere accident, but neither was it intentional malice. The court stated that Exxon’s misconduct was highly reprehensible, but not in the highest realm. Here, Exxon’s response to the catastrophe, including its immediate cleanup and compensatory payments, was significant to mitigate the harm. Since Exxon’s efforts to mitigate the harm were significant, the court concluded that the reprehensibility should be mid-range.

Turning to the ratio of harm to punitive damages, the court held that the proper numerator is the harm likely to result from the defendant’s conduct. The district court set this as $513.1 million, but the court decreased this amount by $9 million as a result of an overpayment by a liability fund, to $504.1 million. The court noted that in cases with significant economic damages and more egregious behavior, a single-digit ratio higher than 4 to 1 might be constitutional. The court recognized that this case falls into that category, but because only the most egregious forms of intentional misconduct, such as threats of violence and intentional racial discrimination, merit the highest ratios, the court set the ratio at 5 to 1.

Finally, the last factor to consider was comparable penalties. This factor’s significance has been greatly diminished by State Farm and other Ninth Circuit cases. However, the fact that this particular factual situation–spilling oil in navigable waters–has been taken very seriously by Congress and the state legislature, further justified the court’s conclusion that a substantial punitive damage award should be assessed.

Conclusion
The appellate court concluded that Exxon’s reckless conduct in placing an incompetent captain in command of the Exxon Valdez warranted severe sanctions; however, the most severe sanctions were not necessary in light of Exxon’s mitigating efforts and considering that this misconduct was not intentional. Because the district court’s punitive damages award of $4.5 billion was not consistent with the Supreme Court’s State Farm decision, the Ninth Circuit reduced the award to $2.5 billion consistent with a 5 to 1 ratio.

Endnotes
1. Pac. Mut. Life Ins. Co. v. Haslip, 499 U.S. 1 (1993); TXO Prod. Corp. v. Alliance Res. Corp., 509 U.S. 443 (1993).
2. State Farm Mut. Auto Ins. Co. v. Campbell, 538 U.S. 408 (2003).
3. Id. at 14.
4. B.M.W. of N. Am., Inc. v. Gore, 517 U.S. 559 (1996).

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