Supreme Court Weighs Exxon Valdez Damages
Nineteen years ago, the supertanker Exxon Valdez, loaded with millions of gallons of crude oil, ran aground in Alaskan waters, resulting in the most notorious oil spill in modern times. After a five-month trial and two appeals, Exxon was ordered to pay $2.5 billion in punitive damages.
On Wednesday, the Supreme Court hears Exxon Mobil Corp.'s claim that it should pay no punitive damages at all.
The accident occurred March 24, 1989, when the ship, traveling in the dead of night, struck Bligh Reef in Prince William Sound, Alaska. Capt. Joseph Hazelwood, who had abandoned the bridge during the treacherous crossing, first reported the accident to the Coast Guard. His sleepy voice is recorded for posterity, as he tells the Coast Guard the Valdez has "fetched up hard aground," and is "leaking some oil."
The oil spill in fact turned out to be the largest on record in North America: 11 million gallons of crude oil, spread across 600 linear miles — larger than the distance between Washington, D.C., and Atlanta.
For Alaska and its citizens, the spill was an ecological and economic disaster of huge proportions. And for Exxon, it was a public relations nightmare, as evidence mounted that the captain had been drunk, and not for the first time.
A week after the disaster, Exxon CEO Lawrence Rawl said the captain had been drunk. And Rawl acknowledged that the corporation had known about Hazelwood's drinking, had ordered him into rehab, and then had allowed him back at the helm despite numerous reports that he relapsed into drinking. As Rawl would put it at the time, "The judgment to put him back on the ship ... was a bad judgment."
The federal government indicted Exxon on five criminal charges, with potential penalties totaling $5 billion. The company soon agreed to plead guilty to three counts with a fine of $25 million, or less than 1 percent of the total potential criminal fine, plus $900 million in civil fines to be paid over a 10-year period. In addition, the company paid $2.1 billion in cleanup costs, and several hundred million dollars more to fishermen for their lost summer catch. In all, the company would pay $3.4 billion.
But the fishing industry, plus businesses affected by the spill, and the native Alaskans whose very way of life had been ruined, contended that Exxon had not paid enough.
At Exxon's request, the federal court in Alaska certified about 32,000 individuals with potentially valid claims to sue as a single group. In closing arguments, their lawyer asked for between $5 billion and $20 billion in punitive damages meant to deter such conduct in the future. Exxon, in closing arguments, said there should be no punitive damages. The jury awarded $5 billion, which, after two appeals, was reduced to $2.5 billion, or roughly $75,000 per person.
When the U.S. Supreme Court agreed to review that lowered judgment, Alaska's Republican Gov. Sarah Palin said it was a "kick in Alaska's collective gut, " and called Exxon's lengthy appeals "a case of justice delayed being justice denied."
On Wednesday, Exxon gets its day in the Supreme Court. The case represents the latest twist in a two-decade campaign by the business community to get the courts to eliminate punitive damages altogether.
In recent decades, corporate America has won a series of cases challenging punitive damages, but has not succeeded in getting rid of them completely because punitive damages are largely a matter of state law.
The Supreme Court, however, has by and large reduced punitive damages, most recently laying down a general rule that they cannot be more than nine times the actual damages. In this case, the courts have said they are only five times the actual damages. But Exxon contends that because this accident occurred at sea and is governed by maritime law, which is the sole province of the federal courts, there should be no punitive damages at all.
Exxon's lawyer, Walter Dellinger, will tell the justices that punishments for oil spills like this were set out in the Clean Water Act and preempt punitive damages in a private lawsuit. The Alaskans dismiss that argument, contending that Congress passed the Clean Water Act to protect the environment, not to outlaw individual damage suits for bad conduct.
Most importantly, Exxon contends that under maritime law, a ship owner is not subject to punitive damages for the conduct of the ship's captain unless the conduct was directed by the ship's owners.
"No court has ever upheld an award of punitive damages for either the intentional or unintentional discharge of hazardous substances," Dellinger says.
Stanford law professor Jeffrey Fisher, representing the Alaskan plaintiffs, counters that punitive damages have been available for hundreds of years in maritime law, "basically under the same circumstances they are available in tort law, when a defendant acts egregiously or in callous disregard for the rights of others."
Exxon contends that it didn't do that. It now contends that Hazelwood wasn't legally drunk, and that it couldn't remove him from his job because it didn't know he had relapsed into drinking on the job after his initial period of rehabilitation.
The plaintiffs counter by pointing to the federal court finding that Exxon management knew for three years that Hazelwood had resumed drinking aboard company ships.
Exxon concedes that its behavior in allowing Hazelwood to remain at the helm of the ship could have been an issue in the punitive damages phase of the trial, but it claims that it wasn't. The company says Hazelwood's leaving the bridge on the night of the accident was reckless, but it contends that Exxon's failure to remove Hazelwood was not an issue.
"The idea that it was proven or determined that they knowingly put a lapsed alcoholic who they knew was drinking on the job in charge of a ship was not even a question the jury was told they needed to resolve," Dellinger says.
Not so, Fisher responds. "The entire Phase Three of trial was all about Exxon's corporate knowledge of Hazelwood's drinking."
Indeed, Fisher says, Hazelwood dropped out of the post-rehabilitation program that he had been forced to enroll in; Exxon management knew that Hazelwood had subsequently had his license to drive a car revoked because of a drunken-driving charge; 15 witnesses testified at trial about his drinking, often with Exxon personnel; and Exxon supervisors were informed of his drinking, including by report to the president of Exxon Shipping.
Exxon notes that punitive damages are not meant to make any individual whole. The company contends that the plaintiffs had their chance to get compensatory damages, and that in all it paid $500 million to the fishermen. The company argues that punitive damages simply are not appropriate in the case, because the company didn't profit from the accident and lost its own ship and cargo.
Dellinger argues that where a company is seeking to make big profits from reckless behavior, then big punitive damages are a response to that. But here, he says, "there was no profit made, no profit sought, by any of the wrongful acts that are charged to the company."
Fisher counters that the very irrationality of Exxon's actions is what justifies punitive damages. "An alcoholic culture pervaded the company," he says. "Officials didn't want to blow the whistle on a friend. This is precisely what makes Exxon's conduct so egregious." The company deserves this kind of punishment, he adds, precisely because it "showed utter disregard for the environment and for tens of thousands of Alaskans that depended on the bounty of Prince William Sound."
Fisher argues that the punitive damages are just barely enough to punish and deter, since the $2.5 billion represents only three weeks of Exxon's current net profits. Exxon, on the other hand, says the award amounts to more money than all the punitive damage awards ever upheld by the federal courts combined.
A Supreme Court decision is expected by summer.
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