In 1989, the Exxon Valdez, a supertanker carrying 53 millions gallons of crude oil, set off from its port in Alaska into the Prince William Sound. Before departing, ship captain Joseph Hazelwood reportedly imbibed about "15 ounces of 80-proof alcohol, enough 'that a non-alcoholic would have passed out.'" (Exxon apparently knew Hazelwood was an alcoholic.)
Since the Sound was icy, Hazelwood decided to steer toward clearer waters and positioned the ship near a reef. Right before a necessary turn, Hazelwood left the bridge and went down to his cabin "to do paperwork." It just so happens the remaining officer on deck was unlicensed to navigate those waters, and when the tanker eventually ran into the reef, its hull tore open and 11 million gallons of crude spilled into Prince William Sound.
Even though Exxon expended $2.1 billion in its "cleanup efforts," the United States of America and the State of Alaska filed suit against the company and secured a $25 million fine, $100 million in restitution, $900 million toward "restoring natural resources," and $303 million in "voluntary settlements with fishermen, property owners, and other private parties." The remaining cases were consolidated into a class action consisting of "commercial fishermen, Native Alaskans, and landowners."
After a jury trial held before the District Court for the District of Alaska, punitive damages in the amount of $5,000 were issued against Hazelwood and $5 billion against Exxon. On appeal, the Ninth Circuit Court of Appeals reduced the punitives to $2.5 billion.
On appeal to our nation's highest court, Exxon argued it wasn't liable for punitive damages as a result of Hazelwood's wrongdoing because the company didn't "direct, countenance, or participate" in the misconduct. Exxon also alleged the Clean Water Act "preempted" punitive damages -- even though the company failed to previously raise that argument. Finally, Exxon argued if punitives were appropriate, the amount set by the Ninth Circuit was excessive.
Justice David Souter, writing the majority opinion for the United States Supreme Court, upheld Exxon's liability for the incident, but found the $2.5 billion excessive.
Punitive damages became "widely accepted in American courts by the middle of the 19th century," and were viewed as "exemplary" damages -- a form of "punishment for extraordinary wrongdoing." They are distinct from "compensatory" damages, which seek to restore injured parties to the position they were in prior to the misconduct.
While punitives are "higher and more frequent in the United States" than anywhere else in the world, such awards suffer from "stark unpredictability" and often dwarf the compensatory damages granted in a case. Although the U.S. Supremes thought a "hard dollar cap" would be the least "arbitrary" way to dispense such relief, they struggled over the formula to apply and ultimately decided a ratio of 0.65:1 -- punitive to compensatory damages -- with an "upper limit" of 1:1, was the way to go in maritime spill cases.
Based on such factors as the "exceptional blameworthiness" and the economic circumstances of the culpable party, the U.S. Supremes thought a 1:1 ratio appropriate in this case. And, since $507.5 million in compensatory damages had been awarded in the case, they directed an equal amount in punitive damages.
Justice John Paul Stevens disagreed with the majority's analysis and thought "the absence of any limitation on the punitives" suggested lawmakers didn't wish to limit the liability of wrongdoers.
Stevens would have preferred avoiding "rigid formulas," and would have applied an "abuse-of-discretion standard" in which case the court could then determine whether or not "Exxon's decision to permit a lapsed alcoholic to command a supertanker carrying tens of millions of gallons of crude oil through the treacherous water of Prince William Sound, thereby endangering all of the individuals who depended upon the sound for their livelihoods," justified the Ninth Circuit's award.
Justice Ruth Bader Ginsburg observed, "Congress is the better equipped decision maker," and doubted there was any "urgent need to break" from the common law (where punitive damages are determined by a jury, followed by trial court and appellate review). While a 1:1 ratio for punitive to compensatory damages might be appropriate when a party's "conduct ranked on the low end of the blameworthiness scale," Ginsburg questioned how the majority's formula would work with those who act "maliciously or in pursuit of financial gain[.]"
Finally, Justice Stephen Breyer also took issue with the majority's "absolute fixed numerical ratio," noting the District Court and the Ninth Circuit both found Exxon's conduct to be particularly "egregious," thereby justifying a "considerably higher ratio" than a 1:1 formula.
Anybody willing to go one-on-one with that?
To download a copy of the U.S. Supreme Court's decision, please use this link: Exxon Shipping Company v. Baker