Energy Law

U.S. Supreme Court Rules that Punitive Damages Must Equal Compensatory Damages in Federal Maritime Law

By:  April Rolen-Ogden

Exxon Shipping Co., et al. v. Baker, et al. involved a class action that was filed by commercial fisherman and native Alaskans against Exxon and its tanker captain for economic losses suffered as a result of the now infamous Exxon Valdez oil spill that occurred in 1989. 

On the night of the spill, the supertanker was carrying 53 million gallons of crude oil, which translates to just over a million barrels.  The tanker captain, Joseph Hazelwood, was seen downing at least five double vodkas in the waterfront bars of Valdez just before leaving port on the evening of the spill.  This converts to approximately 15 ounces of 80-proof alcohol, which experts testified would be enough to cause a non-alcoholic to pass out.  The tanker ran aground as a result of Hazelwood’s “inexplicable” decision to leave the bridge two minutes before a tricky course correction was required. 

When the tanker crashed, the hull was torn open and 11 million gallons of crude oil spilled into Prince William Sound.  Exxon spent $2.1 billion in cleaning up the spill; settled a civil action by the United States and Alaska for $900 million; and paid another $303 million in voluntary payments to private parties.

The Court granted certiorari to determine three issues.  The first issue was whether federal maritime law allowed acts of managerial agents to be the basis for corporate liability for punitive damages.  Second, the Court considered whether the Clean Water Act (CWA), 86 Stat. 816, 33 U.S.C. Sec. 1251 et seq. (2000 ed. And Supp. V) preempts punitive damages awards in maritime spill cases.  Finally, the Court analyzed whether the punitive damages awarded against Exxon were excessive as a matter of maritime common law.

The Court was equally divided on the first issue of corporate liability for punitive damages.  Exxon argued that punitive damages were barred against shipowners for actions taken by underlings, which were not directed by the owners.  In response, the plaintiffs relied on the fact that the Restatement imposes liability for “managerial agents.”  The decision to uphold corporate liability for punitive damages for the reckless acts of managerial employees is not precedential given the Court’s equal division on this issue.

 On the CWA preemption issue, the Court held that there is no congressional intent in the CWA to occupy the field of pollution remedies.  Exxon admitted that the CWA does not displace compensatory damages for water pollution.  There is nothing in the statute that indicates a congressional intent to preempt punitive damages, but not compensatory damages, for economic loss.

Finally, and most importantly for the future of maritime claims, the Court held that the punitive damages award against Exxon of $2.5 billion was excessive as a matter of maritime common law.  The Court decided that a 1:1 ratio of punitive damages to compensatory damages was appropriate in maritime cases.  Specifically, the Court concluded that a 1:1 ratio is a fair upper limit.  The Court reasoned that the prevailing American consensus today is that punitive damages are aimed at retribution and deterrence of harmful activity.  The stark unpredictability of high punitive awards was found to be in tension with their punitive function due to an implication of unfairness from an unusually high punitive award.  A penalty should be reasonably predictable.  The Court, thus, limited the punitive damages award to an amount equal to the compensatory damages awarded, which was $507.5 million. 

Full post as published by The Energy Law Blog on July 09, 2008 (boomark / email).