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ABA Section of Litigation

Supreme Court Curbs Punitive Damages Again

By Douglas E. Motzenbecker, Litigation News Contributing Editor – August 13, 2008

In the latest chapter of its jurisprudence restricting the availability of punitive damages, the U.S. Supreme Court has held, as a matter of federal maritime common law, that courts must apply a 1:1 ratio between punitive and compensatory damages. Exxon Shipping Co. v. Baker. [PDF] However, the opinion suggests that such a ratio might also have been the constitutional limit on the punitive damages that could have been awarded on the facts presented.

“The Court has taken another step toward a 1:1 ratio between punitive and compensatory damages, but it has not drawn any bright lines. The opinion has something in it for both plaintiffs and defendants,” notes Lamont Jefferson, San Antonio, cochair of the Section of Litigation’s Commercial and Business Litigation Committee.

Exxon represents the fifth consecutive case in which the Court has found a punitive damage award excessive, unconstitutional, or both. The decision is particularly significant because it arose under primarily federal maritime law and gave the Court the opportunity to not only survey the law of punitive damages in general but also to fashion a specific rule in the maritime context.

“There is little doubt from the Court’s punitive damage decisions that it has resolved to reign in arbitrary, excessive, and irrational punitive damage awards. However, while the justices do not want to be seen as having legislated a solution to this problem, an implicit 1:1 ratio would come close to exactly that,” says Bart L. Greenwald, Louisville, cochair of the Section of Litigation’s Business Torts Litigation Committee.

The punitive damage award in Exxon arose out of the devastating Exxon Valdez oil spill. The evidence showed that the captain of the Valdez was a confirmed alcoholic whose superiors apparently knew he had suffered a relapse after undergoing rehabilitation but took no steps to monitor or reassign him.

Exxon subsequently incurred about $2.1 billion in cleanup costs, agreed to pay a $150 million fine (which was later reduced to $25 million), and paid $100 million in restitution. Exxon entered into a consent order requiring it to pay $900 million to restore the immediate environment, together with $303 million in settlements with private parties.

Following a multiphase class action trial brought by nonsettling plaintiffs, the jury awarded compensatory damages against Exxon totaling $507 million. The jury also awarded the class $5 billion in punitive damages, or roughly 10 times the compensatory damages. The U.S. Court of Appeals for the Ninth Circuit, however, remitted the award to $2.5 billion.

The Supreme Court held that the Clean Water Act does not preempt punitive damage awards and that the federal courts are authorized to develop federal maritime common law, including rules on punitive damages. The majority cited comprehensive surveys of punitive damage awards that have found that the median ratio of punitive damages to compensatory damages in the United States has remained less than 1:1, or about 0.65:1.

The Court concluded “that a 1:1 ratio, which is above the median award, is a fair upper limit in such maritime cases.” Although the majority opinion insists that it was deciding the Exxon case strictly as a matter of federal maritime law and that Congress was free to adopt legislation on punitive damages in this area, the opinion included a footnote that, on the record before it, “the constitutional outer limit may well be 1:1.”

The Supreme Court remitted the punitive damage award from $2.5 billion (as modified by the Ninth Circuit) to $507 million, the amount of compensatory damages ordered at trial.

“The majority of the Court concluded that the traditional vague verbal formulations that require jurors to use their subjective judgment about what amount is, for example, sufficient ‘to deter the defendant’ or ‘proportionate to the wrongfulness of [the] defendant’s conduct,’ even when coupled with appellate review under equally vague standards such as ‘shock the conscience,’ have proven ineffective, time and again, at preventing extreme and unnecessary punitive damage awards,” maintains Peter L. Simmons, New York City, a Section Commercial and Business Litigation Committee member.

“Instead, the Court has opted for the more concrete direction of using single-digit ratios as a method more likely to yield results that comport with due process and the need for predictability,” Simmons says. However, “the Court has left the door open to higher punitive damage ratios than 1:1 when the compensatory damages awarded are relatively small but the defendant has engaged in fraud or other intentional misconduct,” he notes.

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